Process to Enter into Related Party Transaction (RPT) and Reporting’s

As per Companies Act, 2013, Section 188 states about Process and Provisions of Related Party Transactions. We have already published our article no 568 on Related Party Transaction provisions. In this editorial author shall discuss process of Related Party Transaction and their reporting’s:

Checks – Related Party Transaction

I. Transaction entered into by ‘Company’ (as one party)

II. Transaction is with ‘Related Party’ u/s 2(76)

III. Transaction is a “Prescribed Transaction as per 188 (1) {a to g}

IV. Whether transaction is in “Ordinary Course of Business” and ‘arms’ length basis? If yes, then provisions of Section 188 shall not applicable.

• Before entering into any transaction, First check above mentioned first 3 clauses.
• If Company satisfied first 3 conditions then check further 2 clauses.

If Company comply above conditions then it shall be considered that transactions is related party Transaction and Company have to comply process mentioned u/s 188 to enter into such transaction.

PROCESS:

There are three stages of approvals to Enter into Related Party Transaction i.e.:

1. Approval of Audit Committee

2. Approvals of Board of Directors

3. Approval of Shareholders in General Meeting

Quest- 1 : Whether above mentioned approvals are prior approvals or Post Transaction approvals?

Ans: As per section 188(3) 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)

Such transaction required to be ratified by Board and General Meeting within three months from the date on which such contract or arrangement was entered into.

Therefore, one can opine that prior approvals are not mandatory for transactions with Related Party u/s 188

STEP- I-

Approval of Audit Committee:

If Audit Committee applicable on Company as per limits given below then it is mandatory for the Company to take approval of Audit Committee for all the Related Party Transactions. In case the company does not have any Audit Committee, this provision will not apply.

Constitution of Audit Committee is mandatory for following Companies:

1) Every Listed Co.,

2) All public cos. with a paid up capital of Rs. 10 crore ormore;

3) All public cos. having turnover of Rs. 100 crore ormore;

4) All public cos., having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs. 50 crore or more

COMPOSITION OF AUDITCOMMITTEE:

• Audit Committee shall consist of min. of 3 directors,
• Independent directors forming a majority:
• Majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand financial statement.

NOTE:

• Every Audit Committee shall act in accordance with terms of reference specified in writing by Board of Directors,
• One of the terms include: Approval or any subsequent modification of transactions of co. with related parties,
• Audit Committee may make Omnibus Approval for RPTs proposed to be entered into by Co.

IMPLICATION:

In case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within 3 months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee. Refer Section 177

Quick Bite:

Whether all the related party transactions required approval of Audit Committee or the RPT mentioned u/s 188 required approval of Audit Committee?

As per Companies Act, 2013 section 177 all the transactions entered with Related Party u/s 2(76) required approval of Audit Committee, If audit Committee is applicable on the Company.

NOTE:

i. In Audit Committee Resolution can be passing by Circular Resolution also.

ii. Audit Committee can pass Omnibus Resolution Also.

iii. Audit Committee can ratify the transaction within 3 months of entering into transactions.

STEP- II-

Approval of Board of Directors:

As per Section 188(1), all related party Transaction mentioned u/s 188(1){a – g} mandatorily required to pass by approval of Board of Directors in their Meeting.

Approval of Board of Directors:

No co. shall enter into any contract/arrangement with related party w.r.t. certain transactions, except with Board of Directors consent given by resolution at its meeting.

Interested Director:

Where any director is interested in any contract/arrangement with related party, such director shall not be present at meeting during discussions on subject matter of resolution relating to such contract/arrangement.

NOTE:

I. Interested Director shall not count for Quorum.

II. Interested Director shall not allow participating in Resolution or vote.

III. Resolution shall be pass in the Meeting of Board of Directors, whether physical Board Meeting or through Video Conferencing.

IV. Resolution can’t pass by Circular Resolution.

V. Board of Directors can ratify the transaction within 3 months of entering into transactions.

VI. If all the Directors are interested in any matter then such matter can be refer to General Meeting.

Board meeting’s Resolution shall disclose:

1. Name of related party and nature of relationship;

2. Nature, duration of contract and particulars of contract / arrangement;

3. Material T&C of contract / arrangement including value, if any,

4. Any advance paid/received for contract/arrangement, if any;

5. Manner of determining pricing and other commercial terms, both included as part of contract and not considered as part of contract;

6. Whether all factors relevant to contract have been considered, if not, details of factors not considered with rationale for not considering those factors; and

7. Any other info. Relevant / important for Board to take   a decision on proposed transaction.

STEP- III-

Approval of Shareholders in General Meeting:

Where transaction exceeds prescribed limits under Rule 15 , Co. shall enter into contract/arrangement related party after obtaining prior shareholder’s approval by Ordinary Resolution.

Threshold for Shareholders Approval:

NOTE:

I. If transaction crossed above limit mandatory to pass resolution in General Meeting.

II. If member is related party shall not allow vote on such resolution.

III. Company is required to pass Ordinary Resolution.

IV. No need to file any MGT-14 for such General Meeting Resolution.

Exemption to above restriction;

In case of Private Company even if, member is related party then also he can vote on such resolution.

a) This restriction shall not apply to a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties.

b) Does not apply to transactions between 2 Govt. companies or if theGovt. companies obtains approval of ministry in charge.

c) Does not apply to a Section 8 (Not for profit Company) if value of transaction is upto Rs. 1,00,000/- (Rupees One Lakh).

First Disclosure

DISCLOSURES REQUIRED FOR RPT’s

Every contract / arrangement entered into u/s 188(1) shall be referred to in Boards Report to shareholders along with justification for entering into such contract / arrangement.

Board Report should include particular of contracts with related party.

Form  AOC – 2 as prescribed in Cos. (Accounts) Rules, 2014 is divided in 2 parts, namely

1. Details of contracts/ arrangements/ transactions not at arm’s length basis,

2. Details of material contracts/ arrangement/ transactions at arm’s length basis.

Second Disclosure

PARTICULARS TO BE ENTERED IN REGISTER

As per Section 189 read with rule 16 a register shall be maintained and kept at the registered office for recording particulars of the following:-

A. Entities in which any Director is having concern/interest u/s 184(1)

B. Contracts or agreements with related party u/s 188 OR in which any director is concerned / interested u/s 184(2)

Other Requirements pertaining to Registers:-

• Disclosure of info. as required u/s 184(1) to be given by Director/KMP within 30 days of appointment, failure would attract penalty of Rs. 25,000/-.
• Register shall be placed at Board meeting & be signed by all Directors present thereat.
• Register shall be produced at and shall remain open and accessible during AGM.
• Register shall be open for inspection and extracts may be given on payment of amount prescribed in AOA (max. Rs. 10) within max. 7 days of request.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected])

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts has made to provide authentic information, it is suggested that to have better understanding kindly cross-check the relevant sections, rules under the Companies Act, 2013. The observations of the author are personal view and the authors do not take responsibility of the same and this cannot be quoted before any authority without the written