The Core Limbs
Section 2(76) defines a related party with reference to a company as: 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 or his relative is a member or director; a public company in which a director or manager is a director and holds along with relatives more than two per cent of its paid-up share capital; a body corporate whose board, managing director, or manager is accustomed to act in accordance with the directions of the company’s board or director; a holding, subsidiary, or associate company; and a subsidiary of a holding company to which the company is also a subsidiary.
The Relative Map
“Relative” is defined by reference to the Companies Act and includes members of a Hindu Undivided Family, spouse, father (including step-father), mother (including step-mother), son (including step-son), son’s wife, daughter, daughter’s husband, brother (including step-brother), and sister (including step-sister). The relative map must be applied to every director and every KMP, not only to the promoter directors. A transaction with a sibling of an independent director is a related-party transaction if the sibling falls within the relative definition and the transaction meets the Section 188 description.
The Entity Limbs and the Control Test
The body-corporate limbs are where most mapping exercises fail. A private company in which a director is a member is a related party even if the director holds a minority stake. A public company is a related party if the director is a director there and holds more than two per cent of its paid-up capital together with relatives. A body corporate accustomed to act on the directions of the board or a director is a related party regardless of shareholding. The mapping must trace these relationships through the group structure, not merely across the immediate counterparty.
The LODR Overlay
For listed entities, the LODR definition is broader. It includes any person or entity forming part of the promoter or promoter group holding twenty per cent or more, and any person or entity holding twenty per cent or more of the listed entity. The Section 2(76) map and the LODR map should be maintained as separate registers because the approval consequences differ.
Refresh Triggers
The related-party map must be refreshed on every director or KMP appointment, every change in a director’s other directorships or shareholdings, every group restructuring, and every new subsidiary or associate. A static map prepared at the start of the year and not updated after a board change is a recurring source of Section 188 violations.
Documentation for the Auditor
The auditor will request the related-party questionnaire completed by each director and KMP, the group structure chart, and the mapping matrix. The questionnaire should be signed and dated, and the matrix should cross-reference each limb of Section 2(76) to the identified party. A matrix that lists parties without the statutory limb they fall under is difficult to defend in adjudication.
Call to Action: For a Section 2(76) related-party mapping exercise or annual refresh, contact office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.