A related party transaction refers to a business deal or arrangement between two parties who have a pre-existing relationship due to their close ties, such as family, ownership, or significant influence. These transactions can occur in various business contexts, including corporations, partnerships, or other organizations. The purpose of identifying and disclosing related party transactions is to ensure transparency, prevent conflicts of interest, and maintain fair and equitable treatment of all stakeholders.
Identify all related parties as per the definition provided by the Companies Act, 2013, and applicable accounting standards. Related parties can include directors, key managerial personnel, relatives of key managerial personnel, and entities under significant influence of the company.
2. Maintain Records:
Maintain detailed records of all related party transactions throughout the financial year. This should include transaction amounts, terms, and any other relevant details.
3. Accounting Standards:
Ensure that the transactions are accounted for in accordance with the applicable accounting standards (usually Ind AS or AS). Properly classify and value these transactions.
4. Board Approval:
Obtain approval from the board of directors or the audit committee for these transactions. This approval should be obtained before the transactions occur or are ratified if they occurred without prior approval.
5. Disclosure in Financial Statements:
In the financial statements, such as the annual balance sheet and profit and loss account, provide disclosure notes detailing related party transactions. These notes should include:
- Names of related parties.
- Nature of the relationship.
- Description of the transactions.
- Transaction amounts for the year.
- Outstanding balances at the end of the year.
- Any terms and conditions of the transactions.
- Any provision for doubtful debts related to these transactions.
6. Disclosure in Director's Report:
Include information about related party transactions in the Director's Report as required by the Companies Act, 2013.
7. File with MCA:
Include these disclosures when preparing your annual financial statements, and then file these statements along with other required documents with the MCA within the stipulated timeframe (usually within 30 days of the Annual General Meeting).
8. Compliance with Regulation:
Ensure that your related party transactions comply with the regulatory limits and thresholds set by the Companies Act and relevant regulations. Transactions exceeding these thresholds may require shareholder approval.
9. Audit:
Have these disclosures audited by your statutory auditor to ensure compliance with accounting standards and regulatory requirements.
10. Continuous Monitoring:
Continue to monitor and disclose related party transactions in subsequent financial years.
Remember that compliance requirements can change, and it's essential to stay up-to-date with the latest regulations and guidelines issued by the MCA.