A company that prepares its financial statements under Ind AS is subject to two related party transaction regimes that are similar in purpose but different in scope, definition, and consequence. Section 188 of the Companies Act, 2013 governs the approval and disclosure of specified transactions. Ind AS 24 governs the disclosure of related party relationships and transactions in the financial statements. The two regimes are not co-extensive, and a transaction that is outside Section 188 may still require Ind AS 24 disclosure, while a transaction that is within Section 188 may not require the same level of disclosure under Ind AS 24.
The Definitional Divergence
Section 188 read with Section 2(76) defines a related party by reference to a closed list: directors, key managerial personnel, their relatives, a firm in which a director or relative is a partner, a private company in which a director or member is a director or member, a public company in which a director or manager is a director and holds more than two per cent of the paid-up capital, and the holding, subsidiary, and associate companies.
Ind AS 24 defines a related party more broadly. It includes entities that control, are controlled by, or are under common control with the reporting entity; associates; joint ventures; key management personnel; and close family members. The definition is principles-based, and it captures relationships that the Companies Act's closed list does not expressly address.
The Transactional Divergence
Section 188 applies to a specific list of transactions: the sale, purchase, or supply of goods or materials; the selling or otherwise disposing of property; the leasing of property; the availing or rendering of services; the appointment of an agent; the appointment to any office or place of profit; and the underwriting of securities. Ind AS 24 applies to any transfer of resources, services, or obligations between the reporting entity and a related party, regardless of whether a price is charged.
A transaction that is not in the Section 188 list—for example, a loan or a guarantee—may still be a related party transaction for Ind AS 24 purposes. Conversely, a transaction that is in the Section 188 list but is at arm's length and in the ordinary course of business may not require the same detailed disclosure under Ind AS 24, although the relationship itself must still be disclosed.
The Approval and Disclosure Consequences
Section 188 requires the approval of the board or, where the thresholds are exceeded, the shareholders by an ordinary resolution. The audit committee's approval is required for listed companies and for companies covered by Section 177. The disclosure is made in the board's report in Form AOC-2.
Ind AS 24 requires disclosure in the notes to the financial statements of the related party relationships, the transactions, the outstanding balances, and the terms and conditions. The disclosure is not subject to a shareholder vote; it is an accounting disclosure that is audited by the statutory auditor.
A company that is Ind AS-compliant must maintain two separate compliance tracks. The Section 188 analysis determines whether the approval is required; the Ind AS 24 analysis determines whether the disclosure is required. A transaction that satisfies Section 188 may still require Ind AS 24 disclosure, and a transaction that is outside Section 188 may still be a related party transaction for Ind AS 24 purposes.
Call to Action
Anuj Desai & Associates advises companies on the dual related party transaction regime—from the Section 188 approval analysis and the Form AOC-2 disclosure to the Ind AS 24 identification and the financial statement notes. If your company is Ind AS-compliant and has complex related party relationships, we can help you map the two regimes and ensure compliance with both.
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