Who is a related party under section 2(76)?

Who does section 2(76) name?

Section 2(76) of the Companies Act, 2013 defines "related party" with reference to a company. It is a closed list, plus anyone the rules add. A director or that director's relative is on it. A key managerial personnel or that person's relative is on it. A firm in which a director, manager or relative is a partner is on it. So is a private company in which a director, manager or relative is a member or director. A public company is on it only when a separate 2 percent test, set out below, is met.

Two further clauses catch influence rather than a shareholding. Any body corporate whose Board, managing director or manager is accustomed to act on the advice, directions or instructions of a director or manager is a related party. So is any person on whose advice, directions or instructions a director or manager is accustomed to act. Nothing in those two clauses applies to advice, directions or instructions given in a professional capacity.

"Relative" is not every family member. Section 2(77) covers members of a Hindu undivided family, husband and wife, and anyone related in the manner rule 4 prescribes. Use that list. A cousin who is not on it, and is not in the same Hindu undivided family, is not a relative under this clause.

When is another company related?

Clause (viii), as substituted by the Companies (Amendment) Act, 2017, covers a body corporate. That is wider than a company. Three links qualify. The body corporate is a holding, subsidiary or associate company of your company. Or it is a subsidiary of a holding company of which your company is also a subsidiary, which is the fellow-subsidiary case. Or it is an investing company or the venturer of your company.

The explanation to clause (viii) defines that investor. It is a body corporate whose investment in your company would result in your company becoming an associate company of that body corporate. Section 2(6) says an associate is a company in which another company has significant influence, but which is not a subsidiary, and it includes a joint venture. Significant influence means control of at least 20 percent of total voting power, or control of or participation in business decisions under an agreement. At least 20 percent means 20 percent counts. A joint venture is a joint arrangement in which the parties with joint control have rights to the net assets.

A subsidiary is related because it is a subsidiary, under clause (viii)(A). You do not also need the 20 percent associate test. Section 2(87) decides who is a subsidiary. Voting power, not share capital, is the control test there.

Does the 2 percent test apply?

The 2 percent test applies only to a public company, and only under section 2(76)(v). That public company is a related party if a director or manager of your company is a director of it and holds, along with relatives, more than 2 percent of its paid-up share capital. Both limbs are required. More than 2 percent means exactly 2 percent does not qualify. A holding without the directorship does not qualify. A directorship with a 1 percent holding does not qualify.

Do not carry that 2 percent floor over to a private company. Section 2(76)(iv) has no percentage. Membership or a directorship, held by a director, a manager, or a relative, is enough. One share is a membership.

Who does rule 3 add?

Rule 3 of the Companies (Specification of definitions details) Rules, 2014 is the prescription under section 2(76)(ix). Inserted by G.S.R. 507(E), dated 17 July 2014, it deems a director, other than an independent director, or a key managerial personnel of the holding company, or that person's relative, to be a related party of your company. The exclusion is narrow. It removes the holding company's independent director. It does not remove a whole-time director, a managing director, or a key managerial personnel of the holding company, and it does not remove their relatives.

Rule 3 does not replace section 2(76). It adds a class the section left to the rules. A person already covered by clause (i) or (ii) does not need rule 3 to be related.

Is a private company exempt?

Not from the definition in general. G.S.R. 464(E), dated 5 June 2015, says section 2(76) does not apply to a private company with respect to section 188. A notification dated 13 June 2017 limits that exemption to a private company which has not committed a default in filing its financial statements under section 137 or its annual return under section 92. Miss either filing and the exemption for section 188 does not apply.

Read the exemption as written. It is "with respect to section 188". It does not say a private company has no related parties for any other purpose. A specified IFSC public company has a separate exemption: G.S.R. 8(E) says this clause shall not apply with respect to section 188. Check that notification against the company's actual IFSC status before relying on it.

How do sections 2(76) and 188 connect?

Section 2(76) answers who is related. Section 188 answers which contracts with that person need a particular approval. A person can be related and the contract can still fall outside the section 188(1) list, or inside it but in the ordinary course of business and on arm's-length terms. Those are later questions. They do not change the definition.

Start with the clause list, then rule 3, then the private-company filing condition if you are about to skip section 188. A listed company also has a related-party definition in SEBI's LODR regulations. That definition is not section 2(76). Read the regulation before treating a Companies Act conclusion as the listed-company answer. MCA notifications that move this definition land on the MCA updates feed.