Tuesday, 6 May 2014

Related Party Transactions under Companies Act, 2013

The new Companies Act, 2013 has a strong emphasis on investor protection and related party transactions. As per the provision under Section 177 of the Act, all related party transactions are mandatorily required to be approved by the audit committee. Further, Section 188 of the Companies Act, 2013, which has come into effect from 1 April 2014, requires the Board and the shareholders’ pre-approval for all Related Party Transactions (RPTs) that are not in the ordinary course of business or not at arm's length, where companies either have paid share capital in excess of INR 100 million or the transactions meet certain monetary thresholds.

Our Transfer Pricing team has put together a checklist, which shall enable you to evaluate the likelihood of any impact of these provisions onto your business. Further, it is noteworthy to mention the following:
Penal consequences on non-compliance can include a fine in case of all categories of companies and a possibility of prosecution in case of listed companies;

While there is no specific guidance under the Company Law regulations for determining the arm's length price, reference could be drawn from the detailed guidelines provided under the Transfer Pricing Provisions (Chapter X) of the Indian Income Tax Laws for determining the arm's length price of RPTs in such scenarios, while at the same time respecting the independence of the conflicting areas in the two legislation.

You may also note that SEBI has also incorporated RPTs in the listing agreement through its press release dated 13 February 2014.

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