One of the most discussed and confusing provision of The Companies Act, 2013 is related party transaction. From time to time, a company avails the services or gives services to the persons who are at management of company.
To protect members and stakeholders of the company, the companies Act, 2013 governs the related party transaction from the undue advantage of their position and control in company, which can be taken by the persons operating a company. Afterall, a company is face but its operators are humans.
Lets go through its provision in a simple question and answer steps, in which I have tried the most common question related to related party transaction.
A company entering into contracts and arrangements with related party as follows:
A related party as per section 2(76) of The Companies Act, 2013, in reference to a company is:-
a. a holding, subsidiary or an associate company of such company;
b. a subsidiary of a holding company to which it is also a subsidiary; or
Now, you must be thinking what is Key Managerial personnel, they are as following officers of the company:-
Note relative here means:- related to Director and Key Managerial Personnel as a member of the same HUF, husband, wife, father, step father, mother, step mother, son, step son, son’s wife, daughter, daughter’s husband, brother, step brother, sister, step sister.
As covered in first question it covers, A company entering into contracts and arrangements with related party as follows:
As per the Companies Act, 2013, all the related party transactions are covered under the section 188 and read with Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014.
Which companies are covered in the related party transaction?
All companies are covered under this section, whether: –
However, note that as per vide notification No. G.S.R. 464(E) dated: 5th June, 2015 a member who is related party with whom a company is going to enter into contract or arrangement can vote in the voting of such resolution.
The Compliances are very simple, its entering into contract lawfully and filling of E-form MGT-14 along with relevant attachment with the Ministry of Corporate Affairs within a period of thirty days from the date of passing Board Resolution or Special Resolution, as the case may be.
What are steps when a related party transaction has been done or about to take place in company?
We can divide related party transaction approval in two parts broadly:-
1. Requirement to pass Board Resolution Only
2. Requirement to take Approval from Members of the Company apart from Board of Company.
Lets us understand this in below simple manner, if transaction amount/value is within the limit then only Board Resolution and if exceeds the limits then take prior approval from members of the company by passing of Ordinary Resolution:-
|1||Sale, purchase or supply of any goods or material, directly or through appointment of agent||Ten (10) percent or more of the turnover of the company|
|2||selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent||Ten (10) percent or more] of net worth of the company|
|3||leasing of property any kind||Ten (10) per cent or more of the turnover of the company|
|4||availing or rendering of any services, directly or through appointment of agent||Ten (10) percent or more] of the turnover of the company|
|5||for appointment to any office or place of profit in the company, its subsidiary company or associate company||Monthly remuneration two and a half lakh rupees.|
|6||for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company||One (1) percent of the net worth|
* The turnover or net worth referred in the above sub-rules shall be computed on the basis of the audited financial statement of the preceding financial year.
Related Party Transactions the Institute of Chartered Accountants of India Introduced Accounting Standard 18- ‘Related Party Disclosures’ and made it mandatory for companies to disclose related party transactions in the financial statements.
International Financial Reporting Standards (IFRS) has IAS 24 Related Party Disclosures requires disclosures about transactions and outstanding balances with an entity’s related parties. The standard defines various classes of entities and people as related parties and sets out the disclosures required in respect of those parties, including the compensation of key management personnel. Auditor of the Company needs to follow the provision as described.
These Ind AS are applicable to specified category of as discussed below:
Companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India;
1. Unlisted companies having net worth of Rs. 250 crore or more; and
2. Holding, subsidiary, joint venture or associate companies of companies covered in point (1) and (2) above.
3. Voluntary applicability: Company may voluntarily apply Indian accounting standards (Ind AS).
Disclaimer: – The above article is prepared keeping in mind all the important and basic question as well as provision of section 188 of the Companies Act, 2013 which comes in mind of a professional or other stakeholder while company entering into related party transaction. The author has tried to cover all the important and basic question. Under no circumstance, the author shall not liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.
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