Before understanding Related party Transaction, First of all we have to understand Related Party.
Who is Related Party?
Section 2(76) of Companies Act, Related party with reference to Company means:
IMPORTANT Note: Nothing in the last 2 clauses shall apply to the advice, directions or instructions given in a professional capacity
Important note: The last 2 points mentioned above shall not apply with respect to Related Party Transactions to a Private Company vide Notification dated 5 June 2015
WE also need to understand the definition of Relative as per section 2(77)
Most Important Points: person as may be prescribed is defined under Rule 4 of Companies specification of definition rule
Related Party Transactions useful Points
♠ A Company shall enter into any contract or arrangement with a Related Party only after taking consent of Board of Directors BY PASSING Board Resolution at Board Meeting with Respect to :
Interpretation:kindly refer Rule 15 of Meeting of Board and Power Rule
Sale, purchase or supply of goods or materials directly or through appointment of agent exceeding 10% of total turnover of company or 100 crore rupees whichever is lower
Such Contract arrangement shall be entered by the Company by passing resolution in general meeting.
Point to be noted:The word special resolution shall BE AMENDED WITH THE WORD RESOLUTION VIDE Notification dated 29th May 2015
Point to be considered:Property includes securities also.
Interpretation:Kindly refer Rule 15 of Meeting of Board and Power Rules
Kindly Read section 180 with this point to co- relate this point.
Selling or otherwise disposing of or buying property of any kind directly or through appointment of agent exceeding 10% of net worth of Company or rupees 100 crores whichever is lower.
Such Contract or arrangement shall be entered by Company by passing resolution in general meeting
Interpretation:Kindly refer Rule 15 of Meeting of Board and Power Rule
Kindly Read Section 180 with this point to Co-relate the point
Leasing of property of any kind exceeding10% of the net worth of the Company or 10% of turnover of Company or 100 crore rupees whichever is lower.
Interpretation: Now, here question arises weather loan given by Holding Company to wholly owned Subsidiary Company comes under purview of Related Party transaction?
The Answer is No,
Reason– if Holding Company primary business is giving loan and accepting deposit from the public, then such transactions are covered under Related Party Transaction because here holding Company’s primary function is giving loans.
For Example: Banks accepts and provides Loan to Customers on daily basis.
Other than this, No Related Party Transaction will be attracted.
Limits: availing or rendering of any services, directly or through appointment of agent exceeding 10% of Turnover or 50 crores Rupees whichever is lower.
POINT TO BE NOTED: LIMITS SPECIFIED IN ABOVE CLAUSES SHALL APPLY TO TRANSACTION OR TRANSACTIONS TO BE ENTERED INDIVISUALLY OR TAKEN TOGETHER WITH THE PREVIOUS TRANSACTION DURING A FINANCIAL YEAR
⇒ Interpretation– Kindly refer Rule 15 of Meeting of Board and Power Rules
Appointment of any office or a place of profit in a Company, its subsidiary company or associate company at a monthly remuneration exceeding 2.5 Lakhs Rupees.
Important Note: No member of the Company shall vote on such resolution to approve any contract or arrangement which may be entered by the Company if such member is a related party.
Points to be noted:
Important Note: Nothing in section 188(1) shall apply to the transactions entered by the Company in its ordinary course of business and transactions which are at Arm length basis.
What is ordinary Course of Business?
The activities that are normal, necessary and incidental to business are covered under ordinary course of business.
Example: A contractor works with financial institution to secure a loan to continue the project.
What are arm length Transactions?
Arm Length transaction is transaction between two related party without any pressure and they are conducted as they are unrelated so that there is no conflict of interest.
Each of the independent parties are expected to get best possible deal done.
For example: if Company is selling machine to other company at Rupees 25000, but fair market value is 50,000. Then such Transaction is not at arm length price as there is conflict of interest.
New Amendment: for approving related party transaction under section 188(1), the requirement of passing the resolution shall not be applicable for transactions entered between holding Company and wholly Owned Subsidiary Company whose accounts are consolidated with Holding Company and placed before the shareholders at General Meeting for approval.
Important points for omnibus approval
Point to be noted- Before approval of Audit Committee to grant omnibus approval, prior approval of Board is required
The Audit Committee shall consider the following factors while granting Omnibus approval:
Factors specifying the Omnibus approval
Important Note: Omnibus approval without fulfilling the above criteria
Audit Committee may grant omnibus approval for a transaction not exceeding 1 crore rupees per transaction
Point to be noted: Omnibus approval shall be valid for a period of 1 year and after expiry of 1 year, fresh approval is required.
Important Note: The word omnibus is used to approve two or more matters independently.
Omnibus approval shall be made for transactions for selling or buying of undertakings of the Company
Any other item as it may deem fit
Important Note: The omnibus approval shall expire at the end of financial year of company. For approving related party transactions, a fresh approval is required after commencement of new financial year but not before that period.
Point to be noted: The word omnibus approval is given under section 177(4)(iv) proviso which states that for approving related party transaction, omnibus approval of audit Committee is required.
Point to be noted: A related party transaction which is not repetitive in nature may not get omnibus approval even if such transaction takes placed more than one time.
Some important points of related party transactions given under Rule 15 of (Meeting of Board and power Rules)