Before we start with related party transactions, we have to understand that as per Company law powers of the Company are exercise either by the Board of Directors or by Shareholders. The relationship between the Board of Directors and Shareholders is like a federation.

Some powers are exclusively reserved for the Board of Directors and some are exercise by the board of directors after the approval of shareholders either by “Ordinary resolution” or by “Special resolution”.

In simple words we can say that either board has absolute power(s) in the certain matter(s) such as appointing an additional director as per Section 161 of the Companies Act, 2013 or the Board has restricted power(s) such as the appointment of Independent Director as per Section 149 of the Companies Act, 2013.

Similarly, in relation to related party transactions, we will study the absolute power of the board for entering into related party transactions and restricted power for the same in which the board has to take the approval of shareholders by way of ordinary resolution.

Provisions relating to Related party transactions are given under Section 188 read with Rule 15 of Companies (Meeting of Board and its Powers) Rules, 2014.

Here we can understand these provisions in a simplified manner.

The absolute power of the Board of Directors for entering into related party transactions as per Section 188 (1) of the Companies Act, 2013.

Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to:

1. Sale, purchase, or supply of any goods or materials;

2. selling or otherwise disposing of, or buying, property of any kind;

3. Leasing of property of any kind;

4. Availing or rendering of any services;

5. Appointment of any agent for purchase or sale of goods, materials, services or property;

6. Such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

7. Underwriting the subscription of any securities or derivatives thereof, of the company:

If a company is proposing to enter into any contract or arrangement in relation to any of the above-mentioned transactions with any related party defined under Section 2(76) of the Companies Act, 2013, and if the above-mentioned transactions do not cross the limits mentioned under Rule 15 of Companies (Meeting of Board and its Powers) Rules, 2014 (we will discuss this in in the latter part of this article) then Company requires only a board resolution passed at a Board

Meeting as per Section 188 (1) read with Section 179(3) of the Companies Act, 2013.

Restricted power of Board of Director for entering into related party transaction as per Section 188 (1) read with Rule 15 of Companies (Meeting of Board and its Powers) Rules, 2014 of the Companies Act, 2013.

For these below mentioned transactions company has to take prior approval of shareholders in addition to a board resolution

1. Sale, purchase, or supply of any goods or material, directly or through the appointment of an agent, amounting to ten percent or more of the turnover of the company.

2. Selling or otherwise disposing of or buying property of any kind, directly or through the appointment of an agent, amounting to ten percent or more of the net worth of the company.

3. leasing of property any kind amounting to ten percent or more of the turnover of the company.

4. Availing or rendering of any services, directly or through the appointment of an agent, amounting to ten percent or more] of the turnover of the company

Explanation – It is hereby clarified that the limits specified in the above points shall apply for transactions or transactions to be entered into either individually or taken together with the previous transactions during a financial year.

5. Is for 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

6. Is for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding one percent of the net worth of the Company

If a company is proposing to enter into any contract or arrangement in relation to any of the above-mentioned transactions with any related party defined under Section 2(76) of the Companies Act, 2013, then the Company requires a board resolution passed at a Board Meeting as per Section 188 (1) read with Section 179(3) of the Companies Act, 2013 further company shall take the approval of Shareholders by way of ordinary resolution as per Section 188 (1) read with Rule 15 of Companies (Meeting of Board and its Powers) Rules, 2014 of the Companies Act, 2013.

Other Important Points

Point 1. No member of the company shall vote on such Ordinary resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.

(condition of point 1 shall not apply to a company in which ninety percent. or more members, in number, are relatives of promoters or are related parties)

(condition of point 1 shall not apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis)

(condition of point 1 shall not apply to any transactions entered into between a holding company and its wholly-owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval) 

Point 2. Every contract or arrangement entered with any related party shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.

Point 3. Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval of the shareholder in the general meeting, as the case may be and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board or, as the case may be, of the shareholders and if the contract or arrangement is with a related party to any director, or is authorized by any other director, the directors concerned shall indemnify the Company against any loss incurred by it.

(Without prejudice to anything contained in Point 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.) 

Penal Provisions

Any director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of the provisions section 188 shall:

  • In case of a listed company, be liable to a penalty of twenty-five lakh rupees and
  • In case of any other company, be liable to a penalty of five lakh rupees.

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The article is written by Team Anupama Tripathi & Associates and solely for the purpose of education and comment, for more you can connect us # 8800839633 or [email protected]

Author Bio

Qualification: CS
Company: Anupama Tripathi & Associates
Location: New Delhi, Delhi, India
Member Since: 07 Apr 2021 | Total Posts: 19
Anupama Tripathi, the co-founder of Alliance Professional, she is a Company Secretary in Practice and pursuing Law from University of Delhi and did her graduation from Jesus & Mary Collage, University of Delhi. She has an experience of more than 5+ years. She did her internships from PSU liste View Full Profile

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