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Threshold limits for Related Party Transactions Amended

December 27, 2019

By Vikram Narula and Nishtha Das

The Ministry of Corporate Affairs (hereinafter referred to as ‘MCA’) issued a notification on November 18, 2019 for an amendment to Rule 15 of Companies (Meeting of Board and its Powers) Rules, 2014. This amendment removes existing monetary threshold for various transactions with related parties listed under Section 188 of Companies Act, 2013 (hereinafter referred to as ‘Act’). Previously, the threshold was fixed at Rs. 100/50 crores which was exhausted by companies with larger capital. The threshold has now been fixed based on the turnover and net worth of the company.

Section 2(76) of the Act defines a related party, with reference to a company, to mean:

  • director or a key managerial person or their relatives or
  • a firm, private company in which the partner, director/ manager or his relative is a partner or
  • a private company or a public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid-up share capital.

The definition also includes

  1. anybody corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager, and
  2. any person on whose advice, directions or instructions a director or manager is accustomed to act as ‘related party transactions’.

A related party is a party related to a body corporate/ company in any way other than by the companies’ own transactions. This implies that a special relationship persists between the parties even before the transaction takes place. Related Party transactions are regulated by certain conditions prescribed in Section 188 of the Act. This provision facilitates disclosure of related party transactions to the Board and shareholders for their ratification. The Board needs to be given a justification in support of these transactions.

If the transactions are beyond the threshold limits mentioned in the table below, they need to be disclosed in the General Meeting for approval by special resolution.

Comparative analysis

Rule 15 (3) (a) Clause Previous Rule Revised Rule
(i) sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to ten per cent. or more of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188; sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to ten per cent or more of the turnover of the company, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;
(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten per cent. or more of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188; selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten per cent. or more of net worth of the company as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;
(iii) leasing of property of any kind amounting to ten per cent or more of the net worth of the company or ten per cent. or more of turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (c) of sub-section (1) of section 188; leasing of property of any kind amounting to ten percent or more of the turnover of the company as mentioned in clause (c) of sub-section (1) of section 188;
(iv) availing or rendering of any services, directly or through appointment of agent, amounting to ten per cent or more of turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188: availing or rendering of any services, directly or through appointment of agent, amounting to ten per cent or more of turnover of the company as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:

While most of the transactions are based on the turnover of the company, transactions related to selling, or in any way disposing of, or buying of property is based upon the net worth of the company. These changes expand the related party transaction threshold limit for companies as they can now facilitate transactions of larger amounts depending upon the needs and size of the company.

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