What are the disclosure requirements for a company regarding related party transactions under Section 188 of the Companies Act, 2013, and the relevant thresholds?

Detailed Legal Analysis

Under the Companies Act, 2013, Section 188 lays down specific disclosure requirements for related party transactions (RPTs). A related party transaction refers to any transaction between a company and its related parties, which may include directors, their relatives, key managerial personnel (KMP), and entities in which these persons have significant control. The Act aims to ensure transparency and fairness in transactions that might otherwise lead to conflicts of interest or potential exploitation.

According to Section 188(1), a company must obtain the approval of its Board of Directors before entering into any related party transaction. However, if the transaction exceeds certain thresholds specified in Rule 15 of the Companies (Meeting of Board and its Powers) Rules, 2014, then shareholder approval by way of a special resolution is also required. The thresholds include selling, purchasing, or leasing property amounting to 10% or more of the company’s total turnover, or transactions involving amounts exceeding ₹1,000,000 (ten lakh) with related parties. It is essential for companies to assess their annual turnover or net worth to determine the applicability of these thresholds.

To ensure compliance, companies are required to disclose details of related party transactions in their annual reports. Specifically, Section 188(3) mandates that such disclosures must include the name of the related party, nature of the relationship, nature of the transaction, duration, and the maximum amount involved. Furthermore, under Section 134(3) of the Companies Act, the Board’s report must include the details of these transactions, their approvals, and any violations that may have occurred.

Practically, companies should establish a robust internal policy for identifying and approving related party transactions. This policy should include a process for periodic disclosures to the Board and shareholders, as well as clear documentation of decisions made regarding RPTs. Regular training for employees and directors about these requirements can further mitigate risks associated with non-compliance. Consulting with legal counsel when drafting related party agreements is also advisable to ensure that all statutory requirements are met and to avoid potential penalties under Section 188, which can include fines and disqualification of directors for breaches of the Act.