Related party transaction
This query is : Resolved
29 December 2015
Dear Sir/Madame,
Please clarify me regarding the following points for a private limited company.
1. Does Managerial Remuneration given to Directors covers under related party transaction
2. Salary paid to relatives of a Director is a related party transaction or not.
3.As per the provisions the interested directors can not vote on meetings where the decisions are taken regarding the contracts where such directors are interested. If all the directors are interested parties to the contract how the contract will be entered and decisions regarding it will be taken.? If it is a public company what is the procedure.
Please clarify me regarding the following points for a private limited company.
1. Does Managerial Remuneration given to Directors covers under related party transaction
2. Salary paid to relatives of a Director is a related party transaction or not.
3.As per the provisions the interested directors can not vote on meetings where the decisions are taken regarding the contracts where such directors are interested. If all the directors are interested parties to the contract how the contract will be entered and decisions regarding it will be taken.? If it is a public company what is the procedure.
29 December 2015
Managerial remuneration does not come under the purview of 188. However, salary to relative is related party transaction.
01 June 2016
Please answer my question
21 July 2025
Here's a clear explanation for each of your queries regarding related party transactions in a private limited company context:
1. Is Managerial Remuneration paid to Directors a related party transaction?
Yes.
Under Accounting Standard (AS) 18 and the Companies Act, managerial remuneration paid to directors is considered a related party transaction because directors are related parties to the company.
2. Is Salary paid to relatives of a Director a related party transaction?
Yes.
Relatives of directors are also classified as related parties under AS-18 and company law.
So, salary paid to relatives of a director is a related party transaction.
3. If all directors are interested in a contract, how is the contract approved?
This is a tricky situation. Here's what generally applies:
As per Section 184 and Section 188 of the Companies Act, 2013, directors who are interested in a contract cannot participate in the discussion or vote on that contract.
If all directors are interested parties, it creates a conflict because no one can approve it by voting.
For a private limited company:
Such matters may require approval by shareholders instead of the board.
A general meeting can be called where shareholders (other than interested directors if they are shareholders) can approve the transaction.
If all shareholders are also interested, then the company may require approval from the National Company Law Tribunal (NCLT) or follow any procedure prescribed under the Articles of Association.
For a public company:
The contract will require approval of the shareholders through a special resolution in a general meeting.
Related parties and interested directors should abstain from voting.
Proper disclosures and notices must be sent to shareholders about the nature of the related party transaction.
1. Is Managerial Remuneration paid to Directors a related party transaction?
Yes.
Under Accounting Standard (AS) 18 and the Companies Act, managerial remuneration paid to directors is considered a related party transaction because directors are related parties to the company.
2. Is Salary paid to relatives of a Director a related party transaction?
Yes.
Relatives of directors are also classified as related parties under AS-18 and company law.
So, salary paid to relatives of a director is a related party transaction.
3. If all directors are interested in a contract, how is the contract approved?
This is a tricky situation. Here's what generally applies:
As per Section 184 and Section 188 of the Companies Act, 2013, directors who are interested in a contract cannot participate in the discussion or vote on that contract.
If all directors are interested parties, it creates a conflict because no one can approve it by voting.
For a private limited company:
Such matters may require approval by shareholders instead of the board.
A general meeting can be called where shareholders (other than interested directors if they are shareholders) can approve the transaction.
If all shareholders are also interested, then the company may require approval from the National Company Law Tribunal (NCLT) or follow any procedure prescribed under the Articles of Association.
For a public company:
The contract will require approval of the shareholders through a special resolution in a general meeting.
Related parties and interested directors should abstain from voting.
Proper disclosures and notices must be sent to shareholders about the nature of the related party transaction.
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