CS S. Dhanapal
Companies Act, 2013 has unveiled a new era in the Indian Corporate Sector which places more reliance on disclosure norms rather than on regulatory approvals. One such area is “related party transactions”. While the Companies Act, 1956 warranted approval of Central Government for related party transaction by large cap companies, Companies Act, 2013 calls for greater disclosures with members’ approval. The scope of transactions have also been widened to include transactions relating to immovable property also which were earlier left outside the ambit of Section 297 of the Companies Act, 1956.
Under the Companies Act, 2013, the whole concept of related party transactions has been capsulated in a single section, namely Section 188 which combines the erstwhile Sections 314 and 297 of the Companies Act, 1956 and also contains many new provisions within its scope. The section is deeply layered with many set of provisions and leaves the mind perplexed with its scope and coverage.
In this article, we have made an attempt to the analyse the concept of related party transactions under the Companies Act, 2013 as contained in Section 188 read with relevant rules made thereunder
Analysis of Section 188 of Companies Act, 2013 read with Rule 15 of
Companies (Meetings of Board and its Powers) Rules, 2014
Section 188 is placed in “Chapter 12 – Meeting of Board and its Powers”. Section 188 requires a company to obtain approval of the Board and of the members, in certain situations, prior to entering of any transaction or agreement with a related party. An analysis of Section 188 requires understanding the following:
We will proceed to understand the above provisions.
Section 188 is applicable to both private as well as public companies and is applicable with effect from 01.04.2014
Section 2(76), read with rule 3 of Companies (Specification of definitions details) Rules, 2014, defines a related party as under:
“related party”, with reference to a company, means—
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
(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;
COVERAGE OF “RELATED PARTY”
Any transaction between a company and its related party relating to:
Meaning of Office or place of profit for this purpose:
“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;
The above mentioned provisions will not be applicable in case of transactions entered into by the company in its ordinary course of business, which are on arm’s length basis.
“arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.
ü Every company needs to seek the approval of its Board of Directors for entering into any related party transaction, as listed above, irrespective of the capital of the company or the value of the transaction.
ü Approval of the Board has to be sought at a duly convened meeting of the Board and same cannot be obtained by passing of a resolution by circulation.
ü Where any director is interested in any contract or arrangement with a related party, such director shall participate in the Board Meeting in which the contract or arrangement is discussed. As per Rule 15 of the Companies (Meeting of Board and its powers) Rules, 2014, 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.
ü In the following circumstances, in addition to approval of Board of Directors, prior approval of members by means of a special resolution must also be sought before entering into any related party transaction:
- All related party transactions in case of a company having a paid-up share capital of Rs. 10 Crores or more,
ü The Turnover or Net Worth shall be on the basis of the Audited Financial Statement of the preceding financial year.
ü No member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.
ü In case of wholly owned subsidiary, the special resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between wholly owned subsidiary and holding company.
The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose:
- name of the related party and nature of relationship;
- nature, duration of the contract and particulars of the contract or arrangement;
- material terms of the contract or arrangement including the value, if any;
- any advance paid or received for the contract or arrangement, if any; and
- the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
- 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
- any other information relevant or important for the Board to take a decision on the proposed transaction.
Every director of a 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% shareholding of that body corporate, or
- with a body corporate in which such director 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
shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed.
Where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.
- name of the related party ;
- name of the director or key managerial personnel who is related, if any;
- nature of relationship;
- nature, material terms, monetary value and particulars of the contract or arrangement;
- any other information relevant or important for the members to take a decision on the proposed resolution.
Every related party transaction or contract shall be disclosed in the Board’s report along with the justification for entering into such contract or arrangement.
Every company shall maintain one or more registers in Form MBP 4, and shall enter therein the particulars of contracts or arrangements with a related party with respect to transactions to which section 188 applies.
(i) in case of listed company, be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-, or with both; and
(ii) in case of any other company, be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-.
(Written by S.Dhanapal, Senior Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries, Chennai.)