Companies Act, 2013: Related Party Transaction under Company Law

Introduction:

Some of the recent amendments have brought significant changes in law pertaining to the related party transaction. Section 188 of the Companies Act, 2013 deals with the related party transactions which inter alia incorporate various provisions and requirements including disclosure requirement for related party transaction. Through this article an attempt has been made to analyze the present law pertaining to related party transaction as per Companies Act, 2013.

Meaning of Related Party :

“related party”, with reference to a company, means—

i. a director or his relative;

ii. a key managerial personnel or his relative;

iii. a firm, in which a director, manager or his relative is a partner;

iv. a private company in which a director or manager is a member or director;

v. a public company in which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up share capital;

vi. any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

vii. any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;

viii. any company which is—

a. a holding, subsidiary or an associate company of such company; or

b. a subsidiary of a holding company to which it is also a subsidiary;

ix. a director or key managerial personnel of the holding company or his relative

If, any Company enters into any transaction with related party then the Company is required to comply with the provisions of section 188 of the Companies Act, 2013 and the Rules made thereunder. As per the provisions of section 188 of Companies Act, 2013, for every related party transaction approval of Board is required and if the transaction is over and above the threshold limits provided under the Companies (Meetings of Board and its Powers) Rules, 2014, the approval of members by way of Ordinary resolution would be required.

Below is the table showing the transaction covered under section 188 and the nature of approval required:

Board Approval	Shareholders’ Approval
any contract or arrangement with a related party with respect to—	any contract or arrangement with a related party with respect to—
• sale, purchase or supply of any goods or materials	• sale, purchase or supply of any goods or materials, directly or through appointment of agent, exceeding ten per cent. of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188
• selling or otherwise disposing of, or buying, property of any kind	• selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, exceeding ten per cent. of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188
• leasing of property of any kind	• leasing of property of any kind exceeding ten per cent. of the net worth of the company or ten per cent. of turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (c) of sub-section (1) of section 188
• availing or rendering of any services	• availing or rendering of any services, directly or through appointment of agent, exceeding ten per cent. of the turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188
• appointment of any agent for purchase or sale of goods, materials, services or property	• appointment of any agent for purchase or sale of goods, materials, services or property in excess of the limits prescribed in clause (a) and clause (d) respectively of sub-section (1) of section 188
• such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company	• is for appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and half lakh rupees as mentioned in clause (f) of subsection (1) of section 188
• underwriting the subscription of any securities or derivatives thereof, of the company	• is for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding one per cent. of the net worth as mentioned in clause (g) of sub-section (1) of section 188

Here, the expression “office or place of profit” means any office or place:

(i) where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(ii) where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

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.

Other Requirements:

It is pertinent to note that no Board resolution sanctioning, related party transactions which are not in the ordinary course of business or which are not on arm’s length basis shall be passed by way of circulation.

Further, the requirement of passing the shareholders resolution shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

In case of a wholly owned subsidiary, the resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between the wholly owned subsidiary and the holding company.

Further, if the Company has constituted Audit Committee then prior approval of the Committee shall be required for entering into related party transaction or any modification thereof.

However, the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to the following conditions, namely:-

The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include the following, namely:

• maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year
• the maximum value per transaction which can be allowed
• extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval
• review, at such intervals as the Audit Committee may deem fit, related party transaction entered into by the company pursuant to each of the omnibus approval made
• transactions which cannot be subject to the omnibus approval by the Audit Committee.

The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely:

• repetitiveness of the transactions (in past or in future)
• justification for the need of omnibus approval.

However, omnibus approval shall be valid for a period not exceeding one financial year and shall require fresh approval after the expiry of such financial year.

The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section 101 shall contain the following particulars, namely:

• name of the related party ;
• name of the director or key managerial personnel who is related, if any;
• nature of relationship;
• nature, material terms, monetary value and particulars of the contract or arrangement;
• any other information relevant or important for the members to take a decision on the proposed resolution.”

It is pertinent to note here that, no member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party, however, as per the exemption notification to private Companies dated 05.06.2015, now related party can also vote on such resolution in case of private Company.

Exemption:

The above provisions of section 188(1) shall not apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.

Here, the expression “arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest

Disclosure:

Every contract or arrangement entered into shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.

Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into:

(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be, shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.

Contract entered without approval of Board/Shareholder:

Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a resolution in the general meeting under sub-section (1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

Register of contracts or arrangements in which directors are interested:

Every company shall keep one or more registers giving separately the particulars of all contracts or arrangements to which sub-section (2) of section 184 or section 188 applies, in MBP-4 and after entering the particulars, such register or registers shall be placed before the next meeting of the Board and signed by all the directors present at the meeting. The register shall also be produced at the commencement of every annual general meeting of the company and shall remain open and accessible during the continuance of the meeting to any person having the right to attend the meeting.

The above provision pertaining to register of contracts or arrangements shall not apply in following cases:

(a) for the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed five lakh rupees in the aggregate in any year; or

(b) by a banking company for the collection of bills in the ordinary course of its business.

Penal Provisions:

Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall:

• in case of listed company, be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both; and

• in case of any other company, be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

(The author is the Company Secretary from Delhi and can be contacted at prempyaratiwari1@gmail.com/ 08430645653)