Who is a Related Party and Who is a Relative?

Who is a Related Party and Who is a Relative?

Companies Act, 2013 — Section 2(76) & 2(77)

Who is a Related Party? — Section 2(76)

1. A director or his relative.
2. A Key Managerial Personnel (KMP) or his relative.
3. A firm where a director, manager, or his relative is a partner.
4. A private company where a director, manager, or his relative is a member or director.
5. A public company where a director or manager together with his relatives holds more than 2% of paid-up share capital.
6. Any body corporate whose Board, MD, or manager acts on the instructions of a director or manager.
7. Any person on whose instructions a director or manager is accustomed to act.
8. A holding, subsidiary, or associate company; a co-subsidiary; or an investing company or venturer.
9. Any person prescribed by rules — includes a non-independent director or KMP of the holding company, or his relative.

Points 6 and 7 do not apply when advice is given in a professional capacity (e.g. a lawyer or auditor).

Who is a Relative? — Section 2(77)

• Members of a Hindu Undivided Family (HUF)
• Husband and wife
• Father (including step-father)
• Mother (including step-mother)
• Son (including step-son)
• Son's wife
• Daughter
• Daughter's husband
• Brother (including step-brother)
• Sister (including step-sister)

This list is exhaustive. Cousins, uncles, aunts, grandparents are not covered.

1. Is a director himself a related party?

Yes. A director is directly covered under clause (i).

2. Is an independent director a related party?

Yes, as a director under clause (i). But for clause (ix) — which covers holding company directors — independent directors are excluded.

3. Is the wife of a director a related party?

Yes. Wife is a relative under Section 2(77), so she is a related party under clause (i).

4. Is the son of a KMP a related party?

Yes. Son is a relative under Section 2(77), making him a related party under clause (ii).

5. Is a cousin of a director a related party?

No. Cousins are not in the prescribed list under Section 2(77). Not a relative, not a related party.

6. Is a firm where the director's brother is a partner a related party?

Yes. Brother is a relative, and clause (iii) covers firms where a director's relative is a partner.

7. What if a director holds only 1% in a public company?

Add up the director's holding plus all his relatives' holdings. If the total crosses 2%, that public company is a related party.

8. Is a subsidiary company a related party?

Yes. Clause (viii)(A) directly covers subsidiary companies.

9. Are two subsidiaries of the same holding company related parties to each other?

Yes. Clause (viii)(B) covers co-subsidiaries — both are related parties to each other.

10. Is an associate company a related party?

Yes. Associate companies are covered under clause (viii)(A).

11. What is an investing company or venturer?

A body corporate whose investment in the company would result in the company becoming its associate. That investor is a related party.

12. Does a professional advisor become a related party?

No. The proviso to clauses (vi) and (vii) says advice given in a professional capacity does not create a related party relationship.

13. Is the CFO of a holding company a related party of the subsidiary?

Yes. Under clause (ix), a KMP of the holding company is deemed a related party of the subsidiary.

14. Is the daughter-in-law of a director a relative?

Yes. "Son's wife" is listed in Section 2(77), so she is a relative and a related party.

15. Is the son-in-law of a director a relative?

Yes. "Daughter's husband" is listed in Section 2(77).

16. Is a step-sister a relative?

Yes. Section 2(77) explicitly includes step-sister within the definition of "sister."

17. Are HUF members relatives?

Yes. Members of a Hindu Undivided Family are the first category listed under Section 2(77).

18. Is a private company where the director's sister is a shareholder a related party?

Yes. Sister is a relative, and clause (iv) covers private companies where a director's relative is a member.

19. Can a company be a related party to itself?

No. The definition refers to external parties only.

20. Is a promoter who is not a director a related party?

If the board habitually acts on that promoter's instructions, yes — under clause (vii). Otherwise, not automatically.

21. Is a manager treated the same as a director?

Not the same role, but clauses (iii), (iv), (v), (vi), and (vii) give managers similar treatment for related party purposes.

22. Is a firm where the director's mother is a partner a related party?

Yes. Mother is a relative under Section 2(77), and clause (iii) covers firms where a relative is a partner.

23. Does "relative" include an adopted child?

The Act mentions step-children but not adopted children expressly. Under Indian personal law, an adopted child has the same status as a biological child, so they would generally be treated as a relative. Seek legal advice for specific cases.

24. If a director resigns, does his spouse remain a related party?

No. Once the person is no longer a director, the related party connection based on his directorship ends.

25. Is a body corporate whose manager follows a director's instructions a related party?

Yes. Clause (vi) covers exactly this — any body corporate whose manager habitually acts on a director's instructions.

26. Is a LLP where the director's father is a designated partner a related party?

Yes. A LLP is treated as a firm, father is a relative, and clause (iii) covers firms where a relative is a partner.

27. Is a public company where the director holds exactly 2% a related party?

No. Clause (v) requires more than 2%. Exactly 2% does not cross the threshold.

28. Is a holding company a related party of its own subsidiary?

Yes. The relationship works both ways — holding company and subsidiary are related parties to each other.

29. Is a Company Secretary (CS) a KMP for related party purposes?

Yes. A CS is defined as a KMP under Section 2(51), so he and his relatives are related parties under clause (ii).

30. If a director's brother runs a sole proprietorship, is it a related party?

The brother himself is a related party as a relative under clause (i). Any transaction with his sole proprietorship is effectively a transaction with a related party and should be treated as such.