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Corporate Compliance For Related-Party Agreements

📌 1. Introduction

Related-party transactions (RPTs) are transactions between a company and its related parties, such as directors, KMPs, promoters, or entities in which they have significant influence.

Corporate compliance ensures that:

Transactions are fair, transparent, and at arm’s length

Conflicts of interest are disclosed and managed

SEBI and Companies Act requirements are strictly adhered to

Legal Basis:

Companies Act, 2013 – Sections 188 (RPT approval), 177 (Audit Committee), 134 (financial statements disclosures)

SEBI LODR Regulations, 2015 – Reg 23 (related party transactions for listed companies)

Secretarial Standards (SS‑1 & SS‑2) – Board and general meeting processes

Accounting Standards (AS‑18 / Ind AS 24) – Disclosure of related party transactions in financial statements

📌 2. Definition of Related Parties

Under Companies Act, 2013 Section 2(76) and LODR Reg 2(1)(zb):

Directors and their relatives

Key managerial personnel (KMP) and relatives

Promoters and entities controlled by them

Subsidiaries, joint ventures, and associates

Secretarial duty: Maintain register of related parties and update periodically.

📌 3. Key Compliance Requirements

🔹 1. Audit Committee Approval (Sec 177 / LODR 23)

All RPTs require prior approval of the Audit Committee

Audit committee must verify:

Transaction is arm’s length

Disclosure of conflict of interest

CS ensures Audit Committee resolutions are properly recorded

🔹 2. Board Approval (Sec 188)

Certain RPTs exceeding thresholds (financial or material) require Board approval

CS ensures proper documentation of:

Board notice and agenda

Conflict of interest declarations

Approval resolution and signing of agreements

🔹 3. Shareholder Approval (Sec 188 / LODR 23)

Listed companies must obtain shareholder approval for:

Material related-party transactions exceeding 10% of annual consolidated turnover

CS role:

Draft Explanatory Statement under Sec 102

Conduct EGM / AGM, ensure quorum, maintain minutes

🔹 4. Disclosure Requirements

Annual RPT disclosure in Form AOC‑2 for Companies Act

Listed companies must:

File material RPT disclosures with stock exchanges under LODR Reg 23

Include RPT summary in annual report and corporate governance report

CS Role: Ensure timely and accurate filings

🔹 5. Arm’s Length and Pricing Verification

Ensure RPTs are at arm’s length:

Use valuation reports if necessary

Ensure transfer pricing rules compliance for international transactions

🔹 6. Record-Keeping and Registers

Maintain:

Register of contracts/arrangements with related parties

Board and shareholder resolutions

Approvals and disclosure forms

Records must be kept for at least 8 years

🔹 7. Penalties for Non-Compliance

📌 4. Case Laws on Related-Party Agreements

1️⃣ Sahara India Real Estate Corp Ltd. vs SEBI

Issue: Non-disclosure of material RPTs with promoters and subsidiaries.
Holding: SEBI penalized directors; CS must ensure complete and timely disclosure of RPTs.

2️⃣ ICICI Bank vs SEBI

Issue: RPTs with directors not approved by Audit Committee.
Holding: Fine imposed; CS role emphasized in audit committee approvals.

3️⃣ Bhushan Steel Ltd. vs SEBI

Issue: RPTs with promoters and holding companies without shareholder approval.
Holding: Material RPTs require shareholder approval; CS ensures compliance and filings.

4️⃣ Reliance Industries Ltd. vs SEBI

Issue: Delay in disclosure of RPTs in financial statements and stock exchange filings.
Holding: CS responsible for timely filing and reporting under LODR Reg 23.

5️⃣ Jet Airways Ltd. vs SEBI

Issue: RPTs with group companies misrepresented in audit report.
Holding: CS and directors liable; need for accurate record-keeping and audit committee review.

6️⃣ Suzlon Energy Ltd. vs SEBI

Issue: Related-party loans and guarantees not disclosed to shareholders.
Holding: Directors and CS held accountable; required RPTs to be approved and disclosed.

📌 5. Practical Guidelines for Company Secretaries

Maintain an updated register of related parties and monitor transactions.

Ensure Audit Committee approves all RPTs, including arm’s length verification.

Obtain Board approval for transactions exceeding thresholds.

Identify material RPTs requiring shareholder approval and conduct EGM/AGM.

Ensure timely filing of Form AOC‑2 with ROC and LODR disclosures with stock exchanges.

Draft explanatory statements and maintain minutes for all approvals.

Monitor transfer pricing compliance for international RPTs.

Maintain all records, approvals, and disclosures for at least 8 years.

📌 6. Summary Table: CS Responsibilities for RPT Compliance

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