Related Party Transaction – Companies Act, 2013 – Section 188

RELATED PARTY TRANSACTION

INTRODUCTION- Its very common for a company to enter in to transaction with related party for smooth functioning of the company. No where written that company cannot enter into transaction with related part but has to maintain some legal compliance in this regard. In this article we are trying to explain transaction which considered as related part transaction, approvals from Board of directors and shareholders, legal aspects, compliances etc.

WHO IS RELATED PARTY- related party means in respect of company-

1. A director or key managerial personnel or relative thereof;

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

3. A private company in which a director or manager or his relative is a member or director;

4. A public company in which a director or manager is a director AND holds along with his relatives more than 2% of paid up share capital.

5. 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.

6. Any person on whose advice, directions, or instructions a director or manager is accustomed to act. However, nothing contained in clauses (a) and (b) shall apply to the advice, directions or instructions given in a professional capacity.

7. Any Company which is-

8. Holding, subsidiary, or an associate company of such company.

9. Subsidiary of a holding company to which it is also a subsidiary.

10. Investing company or venture of the company.

RELATED PART TRANSACTION as per section- 188- following are the transaction which shall be done only with the consent of Board of Director by way of Board Resolution. Company shall not enter into any contract or arrangements with 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:

Company shall not enter into any contract or arrangements with related party which required shareholder approval if such transaction exceeds their threshold limit.

Note- Limits specified in the table shall apply on transactions which entered individually or together with previous transaction held during the financial year.

Note- if any member is the related party then such member shall not cast vote on resolution passed for such related party transaction.

Exemption to section-188(1)-

1. This section does not apply on companies which entered such transaction in their ordinary course of business.

2. This section does not apply on such transaction which are on arm length bases.

Key Note- Shareholder approval is not required in respect of transaction entered between holding company and its wholly owned subsidiary company whose accounts are consolidated with such Holding company.

ROLE OF AUDIT COMMITTEE IN CASE OF RELATED PARTY TRANSACTION as per section 177(4)(iv)- Approval of Audit Committee is required for related party transaction in case of Companies which are required to constitute Audit committee

Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as per Rule 6A Companies (Meetings of Board and its Powers) Rules, 2014

1. Audit committee shall after obtaining approval of Board specify the criteria for granting omnibus approval.

2. Maximum value of transaction in aggregate which are allowed under omnibus approval route in a year.

3. Maximum value per transaction allowed

4. Manner of disclosure to be made with audit committee for omnibus approval.

5. Review of transaction at such intervals which required omnibus approval.

6. Transaction which are not subject to omnibus approval.

7. Audit Committee shall consider followings factor while granting omnibus approval and satisy itself for omnibus approval and in the interest of the company.

8.Repetitiveness of the transaction

9. Justification for omnibus approval.

10. Omnibus approval shall contain and disclose the following:

11. Name of related party

12. Nature and duration of transaction

13. Maximum amount of transaction

14. Current and forecast contract price

Note-

1. Omnibus approval shall be granting only for those transaction of which value not exceeding 1 crore per transaction.

2. Omnibus approval shall be valid only for a period of 1 financial year and after expiry of such financial year need to take fresh approval for such transaction.

3. Audit committee approval not required where transaction entered between Holding company and its wholly owned subsidiary company other than transaction mentioned under section 188.

DSICLOSURE REQUIREMENT: 

1. Each Related Party Transaction under section 188(1) shall disclose in the Board report along with justification in form AOC-2

2. Every Company which entered Related Party Transaction under section 188(1) shall maintain register in form MBP-4 and shall record full particulars of such Related party Transaction.

CONSEQUANCES AND PENAL PROVISIONS:

1. If any related party transaction is entered by company with any director or any other employee of the company without obtaining Board or shareholder approval as the case may be, then such related party transaction need to ratified by Board or shareholder as the case may be within 3 months of entering such transaction if not ratified then bear followings consequences:

2. Such Related Party Transaction shall be voidable at the option of the Board or shareholder as the case may be.

3. Such Related Party Transaction with related party of director or any authorized person by director, then director concerned indemnify company against any loss incurred by it.

4. It shall be open to the company to proceed against any director or any employee of the company for recovery of loss incurred by such transaction.

.5. Any director or any other employee of the company who entered in related party transaction in violation of the provisions of section 188. 

Disclaimer: Article is based of self interpretation of Act, rules and amendments available at the time of preparation of article. This is only for knowledge purpose and this article is not an advice or any professional consultancy.