RELATED PARTIES UNDER NEW COMPANY LAW

Meaning of Related Party [Section 2(76)]

'Related party' has been defined in Section 2(76) of the Companies Act, 2013 to include the following persons / entities / parties:

'Related party' with reference to a company means -

1. a director or his relative
2. a key managerial personnel or his relative
3. a firm, in which a director, manager or his relative is a partner
4. a private company in which a director or manager is a member or director
5. a public company in which a director or manager is a director or holds along with his relatives, more than two per cent of its paid-up share capital
6. 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
7. any person under whose advice, directions or instructions a director or manager is accustomed to act (except the advice, directions or instructions given in a professional capacity)
8. any company which is - (a) a holding, subsidiary or an associate company of such company; or (b) a subsidiary of a holding company to which it is also a subsidiary
9. such other person as may be prescribed (not yet prescribed)

Direction and Control

Accordingly, if Board of Directors, managing director, or manager of a body corporate is accustomed to act in accordance with the advice, directions or instructions of a director or manager of other body corporate, then that body corporate shall be treated as related party. There are no specific criteria or parameters to identify or to establish or to prove that Board of Directors of any company is accustomed to act on the directions or instructions of the directors/ officer of the other company. It is a matter of subjectivity and requires judgmental skills.

However, to establish that Board of Directors of any company is accustomed to act on the directions or instructions of the directors/ manager of the other company, it may be necessary to establish control. 'Control' has been defined under section 2(27) of the Companies Act, 2013 and mean to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

What is Control

As per Accounting Standard- 18 (Related Party Disclosures), 'control' means :

1. ownership, directly or indirectly, of more than one half of the voting power  of an enterprise, or
2. control of the composition of the board of director in the case of a company or of the composition of the corresponding governing body in case of any other enterprise, or
3. a substantial interest in voting power and the power to direct, by statute or agreement, the financial and / or operating policies of the enterprise.

For the purpose of AS-18, an enterprise is considered to control the composition of the board of directors of a company, if it has the power, without the consent or concurrence of any other person, to appoint or remove all or a majority of directors of that company. An enterprise is deemed to have the power to appoint a director if any of the following conditions is satisfied:

1. a person cannot be appointed as director without the exercise in his favour by that enterprise of such a power as aforesaid, or
2. a person’s appointment as director follows necessarily from his appointment to a position held by him in that enterprise, or
3. the director is nominated by that enterprise/ company

Therefore, if a director of a company is having controlling shareholding in other company or is in a position to control the decision making power of the board of the other company or has the power to appoint or remove all or a majority of directors of the other company, then that body corporate shall be termed as a related party entity. One company should have control or significant influence over another for being considered as related party.

To establish or prove that Board of Directors of any company is accustomed to act on the directions or instructions of the directors/ manager of the other company, it may be necessary to establish control or there must be a significant influence over other company. Significant influence can be exercised in many ways, for example by way of :

1. Representation of Board of Directors
2. Participation in policy-making process
3. Inter-change of managerial personnel
4. Dependence on technical information, etc.

Therefore, if a director of a company is having controlling shareholding in other  company or is in a position to control the decision making power of the board of the other company, then that body corporate shall be a termed as related party.

* Practicing Chartered Accountant and also member of Secretarial Standards Board of ICSI, New Delhi