TREATMENT OF RELATED PARTY

TRANSACTIONS IN INDIA: A CRITICAL

ANALYSIS

Presented by: Barasha Borthakur

UID: SF0114010
Related Party Transactions in India: The Regulatory Framework
Related Party Transactions: An Overview
Companies Act
The Companies Act, 1956
The Companies Act, 2013
Accounting Standards
The Income Tax Act, 1961
SEBI Circular
Analysis of Related Party Transactions in India
Company Law and Listing Requirements
Rights of Minority Shareholders in Companies Act
Director’s Duties
The Indian “Corporate Governance Code”
The Enforcement Record
Assessment
Case Study: Satyam-Maytas
Facts
Global Outrage of the Scam
Auditor’s Role in the Fraud
Aftermath of the Scam
Suggestions and Recommendations
 INTRODUCTION
• A related-party transaction (RPT) refers to a transaction
between two parties who are joined by a special
relationship prior to the transaction; the transaction could
be a business deal, a single or a series of financial
contracts, or an arrangement.
• The control on a related party may be exercised either
directly or indirectly through one or more intermediaries
or other entities that are controlled by its key
management personnel or their relatives.
• Accounting frauds in Enron, Tyco, Parmalat and Satyam
are glaring examples of the same.
• Existing law does not prohibit RPTs in India. Instead, the
law puts into place a system of checks and balances.
• Aim
To understand the corporate governance
framework that manages related party
transactions with the aim to protect minority
investors and to build consensus around the
objectives and suggest implementation steps.

• Objectives
The objective of this research paper is to review
the regulations and treatment of Related Party
Transactions in India.
 REGULATORY FRAMEWORK
• The Companies Act, 1956
– The Companies Act 1956 imposes certain conditions
when a company is entering into any transaction in
which directors have an interest.
– Section 297
– Section 299
– Section 300
• The Companies Act, 2013
– Section 2 (76)
“Related party”, with reference to a company, means
a director or his relative;
a key managerial personnel or his relative;
a firm, in which a director, manager or his relative is a partner;
a private company in which a director or manager is a member or
director;
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;
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;
any person on whose advice, directions or instructions a director or
manager is accustomed to act:
“Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions
or instructions given in a professional capacity;
viii. 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;
ix. such other person as may be prescribed.”
• Accounting Standards
To enhance disclosure of related party transactions, the
Institute of Chartered Accountants of India (ICAI) introduced
Accounting Standard 18- Related-Party Disclosures, which
requires companies to disclose RPTs in their financial
statements.
Under Accounting Standard 18-Related Party Disclosures (AS
18), “parties are considered to be related if at any time during
the reporting period one party has the ability to control the
other party or exercise significant influence over the other
party in making financial and/or operating decisions.”
A related party transaction means “a transfer of resources or
obligations between related parties, regardless of whether or
not a price is charged.”
• IAS 24, which deals with related party
transactions, has a wider definition and coverage
of related party transactions. The definition of
related party under IAS 24 is: “A related party is a
person or entity that is related to the entity that is
preparing its financial statements.”
• The term “related” has further been defined to
include persons having the ability to exercise
control/joint control or significant influence over
the reporting entity. Further, members of the
family and entities under common control are
covered under this definition.
• The Income Tax Act, 1961
– Section 40A (2)

• SEBI Circular

• Equity Listing Agreement

– Clause 49 of the Equity Listing Agreement
 Analysis of Related Party Transactions in India

Company Law and Listing Requirements

Rights of Minority Shareholders in Companies
Act
Director’s Duties
The Indian “Corporate Governance Code”
The Enforcement Record
Case Study: Satyam-Maytas
SUGGESTIONS AND RECCOMENDATIONS

• Defining Related Party Transactions

• Pre-approval by the audit committee and third
party evaluation of the RPTs
• Approval of managerial remuneration by
disinterested shareholders
• Improving selection mechanism for independent
directors
• Providing training to the independent directors on
the business of the company
• Establishment of specialised courts