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RELATED PARTY TRANSACTIONS

Section 188 of the Companies Act, 2013 read with Companies (Meetings of Board and its Powers) Rules, 2014

(Updated as per Companies (Amendment) Act, 2015)

Sub section (1) of Section 188

Provides that prior approval of Board of Directors of the Company is required so as to enter into any contract or arrangement with related party in 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.

For the purpose of entering into the transactions mentioned under Sub section 1 of Section 188, prior approval of the shareholders of the Company by an Ordinary Resolution1 is required to be obtained in case:

By the Company which is entering into transaction with the related party, where transaction or transactions to be entered into as contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188 with criteria, exceeds above the limits as prescribed herein below:

Nature of Transaction

 

Limit
*Sale, purchase or supply of any goods or materials directly or through appointment of agents Exceeding 10% of the turnover or Rs.100 crore whichever is lower
*Selling or otherwise disposing of, or buying, property directly or through appointment of agents Exceeding 10%. of net worth or Rs.100 crore whichever is lower
*Leasing of property Exceeding 10% of the net worth or exceeding 10%. of turnover or Rs.100 crore whichever is lower
*Availing or rendering of any services directly or through appointment of agents Exceeding 10% of the turnover or Rs. 50 crore whichever is lower
Appointment to any office or place of profit in the Company, its subsidiary company or associate company At a monthly remuneration exceeding two and half lakh rupees
Remuneration for underwriting the subscription of any securities or derivatives thereof of the company Exceeding one percent. of the net worth

* The limits specified for transaction or transactions to be entered into either individually or taken together with the previous transactions during the year.

Points of Consideration:

  • Provisions of the section are applicable to all the Companies.
  • The turnover or net worth referred in the section and ruled made there under shall be computed on the basis of Audited Financial Statement of the preceding financial year.
  • Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.`
  • The meaning of interested director will be as per Section 2(49) read with Section 184 of the Companies Act, 2013 :

Section 2(49):

Interested director means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company.

Section 184:

Any director of the Company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into –

– with a body corporate in which such director or such director in association with any other director, holds more than 2% of the shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

– with a firm or other entity in which, such director is a partner, owner or member as the case may be.

  • No member of the Company shall vote on the Ordinary Resolution, to approve any contract or arrangement which may be entered into by the company, if the member is a related party to such contract or arrangement.
  • Disclosures in the Agenda of Board meeting to consider the matter shall disclose:

(a) the name of the related party and nature of relationship;

(b) the nature, duration of the contract and particulars of the contract or arrangement;

(c) the material terms of the contract or arrangement including the value, if any;

(d) any advance paid or received for the contract or arrangement, if any;

(e) the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;

(f) whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and

(g) any other information relevant or important for the Board to take a decision on the proposed transaction.

  • Disclosures in the Explanatory Statement: The explanatory statement to be annexed with the notice of the general meeting convened pursuant to section 101 shall contain the following particulars namely:

(a) name of the related party;

(b) name of the director or key managerial personnel who is related, if any;

(c) nature of relationship;

(d) nature, material terms, monetary value and particulars of the contract or arrangement;

(e) any other information relevant or important for the members to take a decision on the proposed resolution.

  • Every contract or arrangement entered into in furtherance to the provisions of sub-section (1) of section 188 shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.[ Sub Section (2)]

Exceptions:

Nothing in this section shall apply to:

  • the transactions entered into the normal course of business and that too on the Arm’s Length Basis; and
  • transactions between Holding Company and its Wholly Owned Subsidiary.2

Sub Section (3)

The section requires the Company to take the prior approval of Board of directors or the shareholders as the case may be.

If the transaction has been entered into without the approval of Board of Directors and the approval of shareholders, the same has to be ratified within 3 Months of the transaction having entered into.

However, if the transaction(s) has not been ratified within 3 months of the transaction having entered into by the concerned authority (i.e. directors or shareholders as the case may be) then in that case the transaction entered into shall be considered as voidable at the option of the Board.

Further, if the transaction was /entered with the relatives of the directors or with some other person but with the authority of Director, the concerned Director shall indemnify the company against the loss incurred by it.

Sub Section (4)

Without prejudice to anything contained in sub-section (3), it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement.

Sub Section (5)

Any director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of the provisions of this section shall,–

(i) in case of listed company, be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both; and

(ii) in case of any other company, be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

Relevant Definitions for interpretation of section:

  • “Office or place of profit” means any office or place:

(i) where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(ii) where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

  • Related Party as defined under section 2(76) of the Companies Act, 2013 and rules made thereunder with reference to a Company, means

(i) a director of the Company or its holding company or his relative;

(ii) a key managerial of the Company or its holding company personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv)  a private company in which a director or manager or his relative is a member or director;

(v) a public company in which a director or manager is a director or holds along with his relatives, more than two percent of its paid-up share capital;

(vi) 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;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;

(viii)      any company which is:

(A) a holding, subsidiary or an associate company of such company; or

(B) a subsidiary of a holding company to which it is also a subsidiary;

(ix)        such other person as may be prescribed;

As per Rule 2(1)(e) of Companies (Meetings of Board and its Powers) Rules, 2014 “Related Party” means a Director or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party.

OTHER POINTS TO BE NOTED

  1. Transactions arising out of Compromises, Arrangements and Amalgamations under Companies Act, 1956/2013, will not attract the requirements of Section 188 of Companies Act, 2013.
  1. Section 177(4) of Companies Act, 2013 amended to empower Audit Committee to give omnibus approvals for related party transactions on annual basis.3

——————

1Special Resolution changed to Ordinary Resolution via Companies (Amendment) Act, 2015 effective from 26th May, 2015.

2 Exemption given via Companies (Amendment) Act, 2015 effective from 26th May, 2015.

3 Introduced via Companies (Amendment) Act, 2015 effective from 26th May, 2015.

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Category : Company Law (3466)
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Tags : Companies Act (1933) Companies Act 2013 (1705)

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