This article is one of the very necessary tool in understanding the aspects of section 188 of companies act, 2013 also termed as RELATED PARTY TRANSACTION.  In this article, you will be learning about some basic principles, law & rules applicable to the transactions entered by the company with their related parties, so let’s begin,

MEANING OF RELATED PARTY: SECTION 2(76) OF COMPANIES ACT, 2013

RELATED PARTY with reference to the company means:

1. A DIRECTOR or his RELATIVE.

2. A KMP or his RELATIVE.

3. A FIRM – in which Director or Manager of the Company or their relative – is a Partner.

4. A PRIVATE COMPANY – in which Director or Manager of the Company or their relative – is a member or director.

5. A PUBLIC COMPANY – in which Director or Manager of the company – is a Director.

6. ANY PERSONOn whose advice/ instructions/ directions – A Director or Manager of the company is accustomed to act.

Exception: The person shall not be related party, if advice/ instructions/directions is given in a professional capacity.

7. ANY BODY CORPORATE whose BOD/ MD/ MANAGER – is accustomed to act with the advice/directions/ instructions of a director or manager of the company.

Exception: The BODY CORPORATE shall not be related party, if advice/ instructions/ directions is given in a professional capacity.

8. ANY BODY CORPORATE Which is:

(A) A HOLDING, SUBSIDIARY OR AN ASSOCIATE COMPANY of such company;

(B) A subsidiary company of a holding company to which company doing transaction is also  a subsidiary, or

Example:  COMPANY XYZ is a holding company, and when transaction will take place Between 2 Subsidiaries of company XYZ, these 2 subsidiaries will be treated as RELATED PARTY.

(C) An INVESTING COMPANY or the VENTURER of the company.

RELATED PARTY TRANSACTIONS: SECTION 188 OF COMPANIES ACT, 2013

 – COMPANY CAN ENTER INTO THE FOLLOWING TRANSACTIONS WITH THE RELATED PARTY, ONLY AFTER OBTAINING APPROVAL OF BOARD OF DIRECTORS:

1. SALE , PURCHASE OR SUPPLY of Goods Or Material

2. BUYING, SELLING OR OTHERWISE DISPOSING OF Property of Any Kind.

3. LEASING of property of any kind

4. AVAILING OR RENDERING of any services.

5. APPOINTMENT OF AGENT For Purchase or Sale of Goods, Materials, Services or Property.

6. APPOINTMENT OF ANY RELATED PARTY To Any Office OR Place of Profit in the Company, Its Subsidiary Company OR Associate Company.

7. UNDERWRITING The Subscription of Any Securities or Derivatives of the Company.

HOWEVER, THE BOARD CAN APPROVE THE ABOVE TRANSACTIONS UPTO CERTAIN LIMIT, AND IF THE LIMITS GIVEN BELOW EXCEEDS, APPROVAL OF SHAREHOLDERS SHALL BE REQUIRED BY ORDINARY RESOLUTION, AND THE LIMITS ARE:

1. In Case of, SALE, PURCHASE, OR SUPPLY of GOODS OR MATERIAL Directly or Through an Agent: 10% OR MORE OF THE TURNOVER of the Company.

2. In case of, BUYING, SELLING, LEASING OR OTHERWISE DISPOSING of PROPERTY of any kind directly or through Agent: 10% OR MORE OF THE NETWORTH of the Company.

3. In case of, AVAILING OR RENDERING OF ANY SERVICES, Directly or through Appointment of Agent: 10% OR MORE OF THE TURNOVER of the Company.

(NOTE: Limits specified in POINT 1 TO 3 above, shall apply for transaction or transactions to be entered into EITHER INDIVIDUALLY OR TAKEN TOGETHER WITH THE PREVIOUS TRANSACTIONS DURING A FINANCIAL YEAR.)

4. In case of, APPOINTMENT TO ANY OFFICE OR PLACE OF PROFIT in the company, its subsidiary company or associate company: At a MONTHLY REMUNERATION EXCEEDING TWO AND A HALF LAKH RUPEES.

5. In case of, APPOINTMENT OF UNDERWRITER for underwriting the subscription of securities: At a REMUNERATION EXCEEDING 1% OF NETWORTH.

NOTES:

1. Approval of BOD/ Shareholders is not required if the transaction is entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and the accounts are placed before the shareholders at the general meeting for approval.

2. Approval of BOD/ Shareholders is not required if the transaction is with the related party, and which is in the ordinary course of business and a t arm’s length price. Member of The Company Shall not Vote on The Transaction, if Such Member is a Related Party to that transaction. However, nothing shall apply, if 90% or more of the members are related party. EXCEPTION: This provision is not applicable to:

    •  the private company
    • Specified IFSC public company.
    • GOVERNMENT COMPANY, in respect of the transactions entered with the other government company, whether it is of central government, state government or any combination thereof.

3. Every contract/ arrangement entered by the company with the Related Party shall be mentioned in the Board’s Report to Shareholders along with the explanation for entering into the contract or arrangement.           

CONSEQUENCES OF NOT OBTAINING THE APPROVAL OF BOD OR SHAREHOLDERS BY ORDINARY RESOLUTION:

  • If the transaction has been entered by the company without obtaining the approval of BOD/SHAREHOLDERS, as the case may be; and If such transaction is not ratified by the BOD/SHAREHOLDERS at the meeting, WITHIN 3 MONTHS from the date on which the transaction was entered, Then such transaction shall be voidable at the option of the BOD/ SHAREHOLDER, as the case may be, or if such transaction is  authorized by any other director, the Directors who is related to the transaction shall indemnify the company against any  loss incurred by it.
  •  If Any director or any other employee of a company, who had been entered into or authorized  the contract or arrangement with the related party in violation of the provisions of this section shall,  (i) in case of listed company, is liable to a penalty of twenty-five lakh rupees,

    (ii) In case of any other company, is liable to a penalty of five lakh rupees

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