Related Party Transaction
The Related Party Transaction is explained below purely on the basis of Companies Act, 2013, the Accounting Standards, Listing regulations are not considered while drafting this Article.
As per Section 2(76) of the Companies Act, 2013 “related party”, with reference to a company, means—
But as per the MCA circular dated 05/06/2015 aforesaid sub-clause (viii) is not applicable to the private companies.
As per Section 188 of the Companies Act, 2013 its states that, before entering into any kind of Related Party Transaction as described below, consent of the Board is required i.e a Board Resolution is required to be passed, Also, as per Rule 15 of the Companies (Meetings of Board and its Power) if the transaction value exceeds a particular limit, then a Shareholders Resolution (SR) is to be passed( the limit shall be taken individually or for any previous transaction undertaken during the financial year),
(a) sale, purchase or supply of any goods or materials directly or through its agent (SR if -amounts to 10 % or more of the Turnover of the Company);
(b) selling or otherwise disposing of, or buying, property of any kind directly or through an agent (SR if – amount exceeds 10% of more of the Net Worth of the Company);
(c) leasing of property of any kind (SR if – amount exceeds 10% or more of the turnover of the Company);
(d) availing or rendering of any services directly or through appointment of agent (SR if – amount exceeds 10% or more of the turnover of the Company) ;
(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 (SR – exceeding 2.5 Lacs rupees per month)
(g) underwriting the subscription of any securities or derivatives thereof, of the company: (SR if – Remuneration if exceeds 1% of the net worth)
* ‘the Turnover with respect to the above transactions shall be computed on the basis of audited financial statements of the proceeding financial year’
** In case of WOS, if the Holding company passes the Shareholders Resolution, the WOS is not required to pass the resolution if the accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.
No member shall vote on the above resolutions in clause (a) to (d) if such member is a related party however if the 90% or more of members in numbers are the promoters or relatives or are related parties they shall vote on such resolutions
Nothing in Sub section (1) of section 188 shall apply to transactions entered in the ordinary course of business other than transactions which are not at arms length basis(here Arms Length means such transactions which are undertaken as if they are unrelated and no undue privilege is given with respect to price or any other such service) . Hence if any transaction as per the above list is entered between the Company as per its main objects the resolution for the same is not required.
All Related Party transactions shall be referred to in Directors Report to the shareholders along with justification for entering into such transactions.
Where any contract or arrangement is entered into by the Director or any other employee without the consent or the Company or the BOD and if the same is not ratified by the Board or as the case may be or the shareholders within 3 months from the date of entering into such contracts or arrangements such transactions will be voidable at the option of the Board or as the case may be of the shareholders and if such contract is with the related party to a director or it is authorized by the Director, the Director shall indemnify against loss on such transactions to the company.
If any of the provisions of section 188 of the Companies Act, 2013 is undertaken, the Directors or employees who have entered into such transactions and have not ratified the same, they shall be liable to a penalty in case of :
a) Listed Company – 25 Lacs
b) Any other Company – 5 Lacs
For any further clarifications kindly drop a message.
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