CS Deepak Banga

This article examines the relevant provisions of the Companies Act, 2013 (CA, 2013), as amended till date, relating to Related Party Transactions (RPT) and list out the compliances to be done by UNLISTED COMPANIES while dealing with RPT.

Relevant provisions pertaining to RPT

  • Section 177(4)(iv), 188, 189 and Schedule III of the CA, 2013 read with the Rules framed thereunder;
  • AS-18 issued by ICAI, wherever applicable (compliance pertains to disclosure requirement only);

Process for dealing with Related Party Transactions

STEP I : Identification of ‘Related Party’

Check whether the party to the proposed transaction is a ‘Related Party’ in terms of the CA, 2013

‘Related Party’ with reference to a company has been defined in Section 2(76) of the CA, 2013 read with the Rules framed thereunder.

Sub-clause (viii) of clause 76 of Section 2 is, however, not applicable to Private companies. Thus, for a Private company, its holding, associate, subsidiary and fellow subsidiary company will not be considered as related party while entering any transaction with them. Accordingly, Section 188 of the CA, 2013 will not be applicable to Private companies while entering into transactions with these parties.

STEP II: What is considered as a ‘Transaction’ with a Related Party Check whether the proposed transaction can be deemed as a ‘Transaction’ with a Related Party

‘Transactions’ specified under clause (a) to (g) of sub section (1) of section 188 of the CA, 2013

only are considered as transactions with Related Party.

STEP III: Detailed scrutiny of the proposed RPT

Examine the RPT in detail including the parties to the proposed contract or arrangement

Check whether the proposed transaction is being done in:

(i) ordinary course of business

and

(ii) at arm’s length

OR

  • RPT is between two government companies

OR

  • RPT is 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

STEP IV: Approvals required/ Compliances to be done

(i) Approval of Audit Committee (AC)

All transactions with related parties [fresh or modification], WHETHER COVERED UNDER SECTION 188 OF THE CA, 2013 OR NOT, require approval of AC. The approval of AC can be obtained by way of passing of resolution at a meeting or by circulation. However, AC may grant omnibus approval for RPT subject to such conditions as may be prescribed*.

* not yet prescribed by Central Government.

(2) Approval of Board at a Board Meeting (in certain cases)

If answer in Step III is Yes, then irrespective of the value of transaction, Section 188 of CA, 2013 is not applicable, whereby approval of the Board is not required.

If answer in Step III is No, then irrespective of value of transaction, PRIOR approval of the Board at a meeting is required.

(3) Approval by Shareholders (in certain cases)

If answer in Step III is Yes, then irrespective of the value of transaction, Section 188 of CA, 2013 is not applicable, whereby approval of the shareholders is not required.

If answer in Step III is No, examine the value of transaction in relation to threshold limits given in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014. If the value of the proposed transaction :

– does not exceed the threshold limit, no approval of Shareholders is required in terms of Section 188.

– exceeds the threshold limit, then PRIOR approval of the Shareholders by way of Resolution at a General Meeting or through Postal Ballot is required.

Sub     clause    of
Sec. 188(1)
Nature of transaction Threshold Limit#
(a) & (e) Sale, purchase or supply of any goods or materials, directly or through appointment of agent Exceeding 10% of Turnover of the company or Rs. 100 Crore whichever is lower.
(b) & (e) Selling or otherwise disposing of, or buying, property of any kind, directly or through appointment of agent Exceeding 10% of Net worth of the company or Rs. 100 Crore whichever is lower.
(c) Leasing of property of any kind Exceeding 10% of Net worth of the Company or 10% of Turnover of the company or Rs.100 Crore whichever is lower.
(d) & (e) Availing    or   rendering   of any      services,
directly or through appointment of agent
Exceeding 10% of Turnover of the company or Rs. 50 Crore whichever is lower.
The above threshold limit shall apply for transaction or transactions entered into either individually or taken together with the previous transactions during a financial year.
(f) Appointment to any office or place of profit in the company, its subsidiary company or associate company Monthly remuneration exceeding Rs. 2.5 lacs
(g) Underwriting the subscription of any securities or derivatives thereof, of the company Exceeding 1% of Net Worth of the company

# Net worth/ Turnover shall be computed on the basis of the audited financial statement of the preceding financial year.

Disclosure in Board meeting Notice:

The agenda of the Board meeting at which the resolution regarding RPT is proposed to be moved should disclose-

(a) the name of the related party and nature of relationship

(b) the nature, duration of the contract and particulars of the contract or arrangement;

(c) the material terms of the contract or arrangement including the value, if any;

(d) any advance paid or received for the contract or arrangement, if any;

(e) the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;

(f) whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and

(g) any other information relevant or important for the Board to take a decision on the proposed transaction.

Disclosure by interested directors

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:

  • with a body corporate in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate, or
  • with a body corporate in which such director is a promoter, manager, chief executive officer of that body corporate; or
  • 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, in Form MBP-1, at the meeting of the Board in which the contract or arrangement is discussed.

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.

However, a general notice given to the Board by a director in Form MBP-1, to the effect that he is a director or a member of a specified body corporate or is a member of a specified firm is to be regarded as concerned or interested in any contract or arrangement which may, after the date of the notice, be entered into with that body corporate or firm, shall be deemed to be a sufficient disclosure of concern or interest in relation to any contract or arrangement so made.

Non-Participation of Interested Director

Any director, who is interested in any contract or arrangement with a related party, shall not be present at the meeting during discussions on the subject matter of the resolution. However, in case of a Private company, interested Director may participate in such meeting after disclosure of his interest.

Disclosures in General Meeting notice

The explanatory statement to be annexed to the notice of a general meeting shall contain the following particulars namely:

(a) name of the related party ;

(b) name of the director or key managerial personnel who is related, if any;

(c) nature of relationship;

(d) nature, material terms, monetary value and particulars of the contract or arrangement;

(e) any other information relevant or important for the members to take a decision on the proposed resolution.

Shareholders who are not entitled to vote

Member of a company who is a Related Party in the context of the contract or arrangement for which the resolution is being passed (i.e. only contractual parties) shall not vote on such resolution. However, this provision is not applicable to:

  • Private companies.
  • Government company entering into RPT with any other Government company

Disclosure of RPTs

– Under Companies Act, 2013

o Particulars of every contract or arrangement with related parties entered into under section 188(1) shall be referred to in the Board’s Report along with the justification for entering into such contract or arrangement, in Form AOC-2.

o In the Balance Sheet, under Long Term Borrowings and Short Term Borrowings, Loans and Advances from Related Parties are to be shown as separate line items. Similarly, under Long Term Loans and Advances and Short Term Loans and Advances, Loans and Advances to Related Parties are to be given as separate line items.

– Under AS-18 Disclosures pertaining to related parties are to be made in the financial statements even if the transactions are arm’s length transactions or transactions are not influenced by the relationship pursuant to AS-18.

Register(s) to be maintained

Every company is required to maintain one or more registers in Form MBP 4 and enter therein particulars pursuant to Section 189 of the Companies Act, 2013.

PROCESS FOR DEALING WITH RELATED PARTY TRANSACTIONS

RPT

(Author – CS Deepak Banga is a Company Secretary working with GMR Group and can be contacted at csdeepakbanga@gmail.com)

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Category : Company Law (3768)
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Tags : Companies Act (2234) Companies Act 2013 (2008)

One response to “Handling Related Party Transactions – Unlisted Companies”

  1. Shilpi Gupta says:

    Amazing Article !!!!Deepak …..Thanks…looking forward for more articles from you

  2. vswami says:

    Impromptu
    “…However, AC may grant omnibus approval for RPT subject to such conditions as may be prescribed*.
    * not yet prescribed by Central Government….”
    This, bedsides several other such noted deficiencies of a serious nature, covered in the article in a run-of-the-mill style though, goes to lend merited credence to the school of thought, based on a closer study, as canvassed in legal circles; that is to the effect that many of the half-baked ideas sought to be impulsively introduced and given a legal shape have the obvious but inevitable potential of leading to a hung corporate.

    For enlightenment, and a dilated vision and broader view of things, suggest to devote thoughts on the lines brought out in many write-ups in public domain. For a sample, HERE >

    INDIAN CORPORATE LAW: Guest Post: New Regime of …

    As commented:
    Q
    On the first blush, to put across one’s instant and spontaneous reactions, there are seen to be very good, rather extra – strong, reasons to drive / persuade anyone to believe that the new regime of ‘corporate governance’ sought to be ushered in by the so-believed -brand- new -legislation is not going to even remotely help in accomplishing what has been the pet “Talk of the Town (Nation!)” in recent times. At best, there are ample valid reasons to intelligently foresee that it is going to turn out / prove itself, in the long run, as just yet another piece of legislation (Corporate Code !) churned out as a fond pastime / hobby ; but pushing further off / away the vociferously proclaimed objective of “GOOD” governance to an unpredictable future. In a nut shell, “hung” corporate is expected to be the new but never thought of / aimed at by-product of the brand new code; NOT THE EXPECTED / PLANNED by-product given the brand name of,- Good Governance.
    UQ

    Another diagonally opposite view may be seen to have been aired HERE>

    Don’t apply related-party norms to private firms: Satwinder …

    If not mistaken, a special committee appointed was required to have a re-look through the entire new legislation (open to be corrected, if wrong). However, there has been no development, if any, thus far reported.

  3. Manoj kumar says:

    If the co is not required to appoint audit committee, then how they will get approval from committee?? Pls clarify sir , thank you

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