Meaning of Related Party’ under Section 188 of the Companies Act, 2013

The meaning of the word ‘Related Party’ is given under Section 188 of the Companies Act, 2013 and also includes the following:

◊ A director or his relative;

◊ Key managerial person or their relative;

◊ A firm where a director, manager or any of his relative is a partner;

◊ A private company where a manager, director or any of his relative is a director or is a member;

◊ A public company where a manager, director holds with their relatives more than 2% of its paid up share capital;

◊ Any person who gives advice, direction or any instruction to director or manager and they are accustomed to act upon that but this excludes the advice, directions and instruction which is given in professional capacity;

◊ Also includes a holding company or subsidiary company or associate company, if any subsidiary have subsidiary then that subsidiary and any person as prescribed;

◊ Body-corporate which is:

– A holding, subsidiary or an associate company of such company;

– A subsidiary’s subsidiary company which is subsidiary of holding company;

– An investing company;

– The venture of the company.

DEFINITION OF RELATIVE under Section 2(77) of Companies Act, 2013

Relative is defined under section 2(77) as it includes:

  • Member of HUF;
  • Spouse;
  • Father and Mother;
  • Son and his wife;
  • Daughter and her husband;
  • Brother and sister;
  • Step father, mother, son, brother and sister.

But it excludes,

  • Grandparents;
  • Grandchildren;
  • Step daughter;
  • Brother’s wife;
  • Sister’s husband.

Overview of Related Party Transactions Section 188

NATURE OF  TRANSACTION:

Any agreement which is entered into with the related party in matter of the following shall be covered under the provision of Section 188 of the Companies Act, 2013:

1. sale, purchase or supply of any goods or materials;

2. selling or disposing of, or buying any kind of property;

3. leasing of any type of property;

4. availing or rendering of any services;

5. appointment of any agent for purchase or sale of goods, materials, services or property;

6. such related party’s appointment to any office or place of profit in the company, or at any of its subsidiary;

7. company or associate company; and

8. Underwriting the subscription of any securities or derivatives, of the company.

There are following transactions where a company shall not entered without getting approval from the shareholders of the company by way of passing special resolution:

1. Any contracts or arrangement which is related to Section 188 sub section 1 clause (a) to (e) with the criteria below mentioned:

2. Sale, purchase or supply of any goods or materials, directly or through appointment of agent, that exceeds ten per cent of the turnover of the company.

3. Selling or disposing of or buying property of any kind, directly or through appointment of agent, that exceeds ten per cent of net worth of the company.

4. Leasing of any type of property amounting to ten percent or more of the turnover of the company.

5. Availing or rendering of any services, directly or through appointment of agent, that exceeds ten per cent of the turnover of the company.

6. Any contract or arrangement which is for appointment to any office or place of profit in the company, its subsidiary company or associate company at a remuneration of that exceeds two and half lakh rupees monthly.

7. Any contract or arrangement which is for remuneration for underwriting the subscription of any securities or derivatives of the company that exceeds one per cent of the net worth of the company.

PENALTY:

If any director or any of the employee of the company contravenes the provision of Section 188 of the Companies Act, 2013 shall be punishable:

1. in case the company is listed company then they will be liable for penalty of Rs. 25 lakhs and

2. in case of any other company they will be liable for penalty of Rs. 5 lakhs.

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Author- Adv.Shivam Kumar
Legel and content Executive, Taxblock India Pvt. Ltd

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Location: PUNE, Maharashtra, India
Member Since: 24 Jun 2021 | Total Posts: 86
Taxblock, founded in 2019, is a fintech startup located in Pune, Maharashtra. We are enrolled as an E-Return Intermediary with Income Tax Department & have established an In-House team of Technology & Tax Experts to build a “Financial Compliance Ecosystem” for Individual & Corporate View Full Profile

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