ACS Gautam  Singh

The parent Section under the Companies Act, 2013 related to the related party transactions, i.e. Section 188 read with the relevant Rules made thereunder, specifies as:

(1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company:

 [Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a [Ordinary resolution]:

[Provided further that no member of the company shall vote on such [Ordinary resolution], to approve any contract or arrangement which may be entered into by the company, if such member is a related party:]

Provided also that nothing in this sub-section shall 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.

[Provided also that the requirement of passing the resolution under first proviso 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.]

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The Provisions of the Companies Act, 2013 to be invoked while making the any Related Party Transaction can be summarized as with the respective procedural aspects and compliances:

  • Section 188(1) of the Companies Act, 2013 read with the Rule 15 of the Companies (Meetings of Board and its Powers) Rules 2014.
  • Section 186 of the Companies Act, 2013 read with the Rule 11& 12 of the Companies (Meetings of Board and its Powers) Rules 2014.
  • Section 185 the Companies Act, 2013.
  • [1]Rule 6A of the Companies (Meetings of Board and its Powers) Rules 2014.

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[2]Section 188(1) of the Companies Act, 2013 read with the Rule 15 of the Companies (Meetings of Board and its Powers) Rules 2014.

The Contracts and Arrangements as specified under the Section 188(1) of the Companies Act, 2013 can be executed by Board of Directors, if the same are within the limit specified under the Rule(15(3)(a) of the Companies (Meetings of Board and its Powers) Rules 2014.

Further, referring to the provisions of Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules 2014, if the limit as specified as above is being exceeded by the Company, the same can be executed vide Ordinary Resolution.

Note:

> As per the Rule 15(2) of the Companies (Meetings of Board and its Powers) Rules 2014, where any Director is interested in any contracts or arrangement with a related party[3], such Director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

> In case of a wholly owned subsidiary, the [Ordinary 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.

> Regulation 23(2) of the SEBI (LODR) 2015; All related party transactions shall require prior approval of the audit committee.

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Section 186 of the Companies Act, 2013 read with the Rule 11& 12 of the Companies (Meetings of Board and its Powers) Rules 2014.

As per the provisions of Section 186(2) of the Companies Act, 2013 read with the Rule 11 of the Companies (Meetings of Board and its Powers) Rules 2014, a company vide Power of the Board of Directors can give loan, give guarantee provide security in connection to the any loan to any person or other body corporate and acquire securities of any other body corporate, if such are within the limit as specified under sub-section (2) of the Section 186.

NOTE:

> Approval vide Special Resolution is required if the transaction as aforesaid are carried out of the limit specified[4].

> As per Rule 11 of the Companies (Meeting of Board and its Powers) Rules 2014, any above transaction carried between the company and its wholly owned subsidiary company or joint venture, the provisions of Section 186 shall not be applicable.

> As per the Rule 15(2) of the Companies (Meetings of Board and its Powers) Rules 2014, where any Director is interested in any contracts or arrangement with a related party[5], such Director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

> Regulation 23(2) of the SEBI (LODR) 2015; All related party transactions shall require prior approval of the audit committee.

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Section 185 the Companies Act, 2013

The provisions of the Section 185 of the Companies Act, 2013[6] limited the power of the Company to grant Loan, provide guarantee or security in relation to such loan, to its Directors, or to any persons in whom such Director is interested[7].

NOTE:

> Provided that nothing contained in this sub-section shall apply to—

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or

(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:

Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.]

Rule 6A of the Companies (Meetings of Board and its Powers) Rules 2014

The Companies (Meetings of Board and its Power) Second Amendment Rules, 2015 notified after notification of Section 14 of the Companies (Amendment) Act, 2015.

Section 14 of the Companies (Amendment) Act, 2015 inserts a proviso to Clause (iv) of sub- section (4) of Section 177:

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include —

(iv) approval or any subsequent modification of transactions of the company with related parties;

Provided that the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed.

The Companies (Meetings of Board and its Power) Second Amendment Rules, 2015 (i) inserts a new Rule 6A, (ii) omit present Rule 10 and (iii) amend present Rule 15(3).

According to newly inserted Rule 6A, all related party transactions shall require approval of the Audit Committee and the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to the certain conditions enumerated in the Rule.

CONDITIONS:

These conditions mentioned in Rule 6A are:

The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include criteria mentioned in Clause 6A(1);

> The Audit Committee shall consider the certain factors while specifying the criteria for making omnibus approval;

> The Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature and that such approval is in the interest of the company;

> The omnibus approval shall contain or indicate certain details related to transaction;

> 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;

> Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company; and

> Any other conditions as the Audit Committee may deem fit.”

CRITERIA:

According to Clause (1) of Rule 6A, 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:-

(a) maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year;

(b) the maximum value per transaction which can be allowed;

(c) extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;

(d) 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;

 (e) transactions which cannot be subject to the omnibus approval by the Audit Committee.

The Audit committee may fix these criteria as a policy for omnibus approvals of related party transactions on annual basis. This policy shall have approval of the Board of Directors. Related Party Transactions which fulfill these criteria may get omnibus approval otherwise case to case approval shall be required. Policy among other criteria shall have maximum aggregate value of transactions for a financial year (contest here is financial year), maximum value per transaction, and disclosure requirement. The policy shall also have provision for timely review of these omnibus approvals. The policy may exclude certain transaction from omnibus approval in addition to the other exclusions given in the law.

FACTORS:

According to Clause (2) of Rule 6A, the Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely: –

(a) repetitiveness of the transactions (in past or in future);

(b) justification for the need of omnibus approval.

A related party transaction which is not of repetitive nature may not get omnibus approval, even if such transaction may take place more than one time. This is duty of audit committee to consider justification for need of omnibus approval.

REPETITIVE NATURE:

According Clause (3) of Rule 6A, the Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature and that such approval is in the interest of the company.

Repetitive nature is one prominent condition under this Rule for omnibus approval of related party transaction by the audit committee. Not only clause (3) put it as condition but clause (2) put it a factor to be considered by audit committee while granting omnibus approval to a related party transaction. The audit committee has to satisfy that related party transaction under consideration for omnibus approval has repetitive nature to satisfy condition under clause (3) and factor of repetitiveness shall be considered to satisfy the condition under clause (2).

Such omnibus approval of related party transaction by the audit committee should be in the interest of the company. Any related party transaction disparaging the interest of company bound to be rejected by audit committee and may subject to judicial or regulatory review.

CERTAIN DETAILS:

According to Clause (4) of Rule 6A, the omnibus approval shall contain or indicate following details related to related party transaction:

> name of the related parties;

> nature and duration of the transaction;

> maximum amount of transaction that can be entered into;

> the indicative base price or current contracted price and the formula for variation in the price, if any; and

> any other information relevant or important for the Audit Committee to take a decision on the proposed transaction.

NON – AVAILABILITY OF CERTAIN DETAILS:

According to proviso to clause (4) of Rule 6A, where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may make omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

In other words, audit committee may grant omnibus approval to a foreseen transaction for which these details required under clause (4) of Rule 6A are not available at the time of granting omnibus approval. Such approval, as per clause (5) of Rule 6A, shall have validity for one financial year. The value of such omnibus approval for such foreseen related party transaction shall not exceed rupees one crore par transaction. This limit shall not be calculated for a standalone transaction but for a related party transaction with repetitive nature which satisfy condition of clause (3) of Rule 6A.

PERIOD FOR APPROVAL:

According to Clause (5) of Rule 6A, 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.

All omnibus approval granted by audit committee during a financial year shall expire at the end of financial year of the company. The financial year shall end according to the definition under Section 2(41) of the Companies Act, 2013. At the start of new financial year a company may not enter into such related party transaction without approval or omnibus approval by the audit committee. Such fresh approval shall be granted only after the expiry of earlier financial year not before that period. This is advisable to have meeting of audit committee to grant fresh omnibus approval in earliest possible time of the financial year for smooth transactions.

“Financial Year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up. [Section 2(41)]

SELLING OR DISPOSING OF UNDERTAKING:

According to Clause (6) of rule 6A, omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

All transaction in respect of selling or disposing of the undertaking of the company shall not be granted omnibus approval.

OTHER CONDITIONS:

According to Clause (7) of Rule 6A, the audit committee may impose any other conditions as the Audit Committee may deem fit to grant the omnibus approval.

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Regulation 23 of the SEBI (LODR) 2015

(1) The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions:

Explanation:- A transaction with a related party shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds ten percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

(2) All related party transactions shall require prior approval of the audit committee.

(3) Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions, namely-

(a) the audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature;

(b) the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity;

(c) the omnibus approval shall specify:

(i) the name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into,

(ii) the indicative base price / current contracted price and the formula for variation in the price if any; and

(iii) such other conditions as the audit committee may deem fit:

Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may grant omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

(d) the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given.

(e) Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year:

(4) All material related party transactions shall require approval of the shareholders through resolution and the related parties shall abstain from voting on such resolutions whether the entity is a related party to the particular transaction or not.

(5) The provisions of sub-regulations (2), (3) and (4) shall not be applicable in the following cases:

(a) transactions entered into between two government companies;

(b) 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.

Explanation: For the purpose of clause (a), “Government Company (ies)” means Government Company as defined in sub-section (45) of section 2 of the Companies Act, 2013.

(6) The provisions of this regulation shall be applicable to all prospective transactions.

(7) For the purpose of this regulation, all entities falling under the definition of related parties shall abstain from voting irrespective of whether the entity is a party to the particular transaction or not.

(8) All existing material related party contracts or arrangements entered into prior to the date of notification of these regulations and which may continue beyond such date shall be placed for approval of the shareholders in the first General Meeting subsequent to notification of these regulations.

[1] Relates to the provisions of Section 177 of the Companies Act, 2013.

[2] For a Private Limited Company, the Second Proviso to the Sub-Section (1) of Section 188 of the Companies is exempted vide MCA notification no. GSR 464(E) dated 5th June,  2015

[3] Related party as per the Section 2(76) of the Companies Act, 2014.

[4] Exceeding 60% of its paid-up share capital, free reserves and securities premium or 100% of its free reserves and securities premium, whichever is more.

[5] Related party as per the Section 2(76) of the Companies Act, 2014.

[6]In case of private company – Section 185 shall not apply to a private company-
(a) in whose share capital no other body corporate has invested any money;

 (b) if the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and

 (c) Such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section. – Notification dated 5th June, 2015.

3. In case of Nidhi Company – Section 185 shall not apply, provided the loan is given to a director or his relative in their capacity as members and such transaction is disclosed in the annual accounts by a note. – Notification dated 5th June, 2015.

4. In case of Government company – Section 185 shall not apply to Government Company in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security under the section. – Notification dated 5th June, 2015.

[7] For the purposes of this section, the expression “to any other person in whom director is interested” means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

(b) any firm in which any such director or relative is a partner;

(c) any private company of which any such director is a director or member;

(d) anybody corporate at a general meeting of which not less than twentyfive per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) anybody corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

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Category : Company Law (3350)
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Tags : Companies Act (1819) Companies Act 2013 (1593)

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