Till 2013, Related Party Transactions (RPTs) were governed through provisions of Companies Act, 1956 (Section 297,314) which warranted approval of Central Government for entering into RPT by Large Cap Companies.
Whereas, under Companies Act, 2013 this requirement has been done away with and substantial focus is towards disclosure regime. The ambit of provisions governing Related Party Transactions has been increased phenomenally. After concerns of stakeholders several rounds of amendments has been made in the provisions.
In this article unless otherwise expressly provided all rules referred to are of Companies (Meeting of Board & its Powers), 2014 as amended from time to time.
Related Party Definition – Section 2(76)
Related party, with reference to a company, means—
(i) a director or his relative;
(ii) a key managerial 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 and manager is a director [and holds] along with his relatives, more than two per cent 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 body corporate 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; or
(C) an investing company or the venturer of the company.
(ix) such other person as may be prescribed;
Following transactions if entered into with Related Party would attract RPT Compliances:-
1. Sale, purchase or supply of goods or materials.
2. Sell, buy or otherwise dispose property of any kind.
3. Lease Property of any Kind.
4. Avail or render any Service.
5. Sell, purchase of goods, materials, services or property through Agent.
6. Appointment of Related Party to office or Place of profit in Company, it’s Subsidiary or Associate.
7. Underwriting the subscription of any securities or derivatives of Company.
Meaning of Office/place of profit:-
i) Where such office/place held by a Director and he receives anything over and above the remuneration to which he is entitled as director.
ii) Where such office/place held by individual other than Director/firm/Pvt. Co./Body Corporate and person holding it receives anything by way of remuneration.
Omnibus Approval Of Audit Committee
Audit Committee may grant Omnibus approval
As audit committee approval is mandatory for every RPT but in cases where RPTs are entered too frequently its not feasible for the committee to meet every time.
However, in cases where the above information is not available & need for obtaining approval cannot be foreseen then approval may be given subject to value not exceeding Rs. 1 crore.
If value of transaction (including previous transactions in the financial year) exceeds lower of the following limits then Ordinary Resolution is mandatory to be passed:-
|1. Sale/Purchase/Supply of Goods/materials||10%||———–||100 Crores|
|2. Sell, buy or otherwise dispose property of any kind||———–||10%||100 Crores|
|3. Lease Property of any Kind||10%||10%||100 Crores|
|4. Avail or render any Service||10%||———||50 Crores|
|5. Appointment of Agent for Sale/Purchase|
|6. Underwriting the subscription of any securities or derivatives of Company||———||1%||———|
|7. Appointment of Related Party to office or Place of profit in Company, its Subsidiary or Associate||Rs. 2,50,000/- P.M.|
|Note:- In case RPT is between Co. & its WOS whose A/c’s are consolidated it and placed at general meeting for approval then Shareholder’s approval shall not be required for entering into such RPT.|
At Board Meeting
If a Director is interested in any Contract/Arrangement with a related party he shall not be present at the meeting during discussions on such resolution. (Rule 15(2))
Moreover if RPT is such that Director is interested as per section 184(2) then he shall neither discuss nor vote and also not be counted for quorum in respect of such transaction. (Section 184(2) read with 174(3)) (**)(#)
At General Meeting (**) ($) (!)
Related party cannot exercise voting right on shares held by him if RPT is being entered into with such related party. (2ndproviso to Section 188(1))
(**) Does not apply to a PRIVATE COMPANY & IFSC Public Company.
(#) Does not apply to a Section 8 (Not for profit Company) if value of transaction is upto Rs. 1,00,000/- (Rupees One Lakh).
($) Does not apply to transactions between 2 Govt. companies or if the Govt. companies obtains approval of ministry in charge.
(!) Does not apply where atleast 90% of number of members are relatives of promoters or are related parties.
As per Section 188(1) 3rdproviso, RPTs entered into in ordinary course of business and at arm’s length need not require to comply with the following:-
1. Board/Shareholder’s Approval.
2. Restrictions on presence in Board meeting/voting in General meeting.
3. Specific disclosures required in agenda of Board meeting & explanatory statement of General meeting
♦ Meaning of ordinary course of business:- It is not defined under the act or rules.
The general meaning of the same can be taken as all the usual transactions of a Company.
ICAI has vide standrad on auditing 550 provided guidance to determine whether a transaction is at ordinary course of business or not, through examples. Following shall be considered to be outside ordinary course of business:-
1. Corporate Restructurings
2. Sale transactions with unusual large discounts or returns
3. Circular transactions such as sale with commitment to repurchase
♦ Meaning of Arm’s length:- It means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest (explanation to Section 188(1)).
♦ Justification of arm’s length:- Justifications can be classified into 3 categories namely entity oriented, price oriented & documentation oriented. Certain indicators may include:-
No specific disclosures are mandated under law, but as per section 177(6) the committee shall have full access to information contained in the reccords of the company and power to obtain professional advice from external sources, therefore adequate disclosure should also be given to the committee so as to ensure fair decision making by it, whether for specific approval or omnibus approval.
Following information should be given in the agenda (Rule 15):-
√ Name of the related party and nature of relationship
√ Nature, duration of contract/arrangement & its particulars
√ Material terms of the contract/arrangement including value, if any
√ Any advance paid or received for contract/arrangement
√ Manner of determining pricing and other commercial terms
Following Information should be given in Explanatory statement:-
A. General (Section 102):-
√ Concern or interest, financial/otherwise of any Director/KMP or their relatives.
√ Any other information/fact that may enable members to understand meaning, scope and implication of resolution.
√ In case resolution relates to another company then shareholding in that company of every promoter, Director and KMP if it exceeds 2% of paid up share capital.
B. Specific (Rule 15):-
√ Name of related party
√ Name of Director/KMP who is related, if any
√ Nature of relationship
√ Nature,material terms, monetary value and particulars of contract/arrangement
√ Any information relevant/important to take decision by members
As per section 188(2) & 134(3)(h) read with rule 8 of Companies (Accounts) rules, 2014 disclosure required in Board report by way of annexing form AOC-2, can be summed up as under:-
|S. No||Transactions NOT at Arm’s length||Material* transactions at arm’s length|
|1.||Name of the related party and nature of relationship||same|
|2.||Nature of contract/arrangement||same|
|3.||Duration of contract/arrangement||same|
|4.||Salient terms of contract/arrangement including value, if any||same|
|5.||Amount paid as advance, if any||same|
|6.||Justification for entering itno such contract/arrangement||NA|
|7.||Date of Approval by Board||same|
|8.||Date on which special resolution was passed||NA|
* Materiality has not been defined in act/rules. Therefore, Company should define a materiality threshold and transactions falling beyond which will be disclosed in Board’s Report.
As per Section 189 read with rule 16 a register shall be maintained and kept at the registered office for recording particulars of the following:-
A. Entities in which any Director is having concern/interest u/s 184(1)
|1.||Name of entity||4.||Nature of concern/interest or change in them|
|2.||Name of interested Director||5.||Date on which concern/interest arose/ changed|
|3.||Shareholding, if any|
B. Contracts or agreements with related party u/s 188 OR in which any director is concerned / interested u/s 184(2)
|1.||Date & Amount of Contract/arrangement||9.||Date of next meeting at which register was placed for signature|
|2.||Name of party with which contract is entered|
|3.||Name of interested Director||10.||Date of shareholder’s approval, if any|
|4.||Nature of concern/interest|
|5.||Principal terms & conditions||11.||Reference to specific clause (a) to (g) of section 188(1)|
|6.||Whether transaction at arm’s length|
|7.||Date of Board approval||12.||Remarks, if any|
|8.||No. of Directors present, voting in favour, against or remaining neutral|
√ Particulars of body Corporate required to be entered in table A above, if directors together do not hold more than 2% of paid-up share capital of such body corporate.
√ Particulars of contract/arrangement for sale/purchare/supply of goods/material/ sevices, if value of such contract/arrangement is less than Rs. 5 lakh in aggregate in any year.
√ Particulars of contract/ arrangement by a banking company for the collection of bills in the ordinary course of business
√ Disclosure of info. as required u/s 184(1) to be given by Director/KMP within 30 days of appointment, failure would attract penalty of Rs. 25,000/-.
√ Register shall be placed at Board meeting & be signed by all Directors present thereat.
√ Register shall be produced at and shall remain open and accessible during AGM.
√ Register shall be open for inspection and extracts may be given on payment of amount prescribed in AOA (max. Rs. 10) within max. 7 days of request.
A. Under Companies Act, 2013:- Schedule III deals with presentation of financial statements. Following disclosures need to be made:-
1. Details of loans & advances from related parties (under long-term & short-term borrowings)
2. Details of loans & advances to related parties(under long-term & short-term loans & advances)
B. Under AS-18:- Provisions of AS-18 are mandatory on every company as per Companies (Accounting Standard) rules, 2006.
A. Duty of Director:- As per section 166, a director of company shall not
B. Duty of Independent Director:- Independent Director shall pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of Company (schedule IV, para III-point 9)
Ratification:- If Board/Shareholder’s approval not taken before entering into RPT, then same can be ratified by Board/ Shareholders within 3 months. If ratification not done then Contract/arrangement voidable at the option of Board.
Indemnification:- If transaction was with related party of Director/ authorized by any director then he shall indemnify the company against loss incurred.
Recovery of loss:- Company may proceed against a Director/ employee who has entered into such contract/arrangement in contravention of section 188 for recovery of loss.
|Imprisonment||Max. 1 year||NA|
|Fine (min.)||Rs. 25000|
|Fine (max.)||Rs. 500000|
|S.No.||Act/Rules/Notification/Circular/Order [effective date]||Particulars|
|1.||Section 2(76), 188, 189 [01.04.2014]||Provisions of RPT enforced.|
|2.||Rule 15 & 16 of Companies (meetings of Board & its power) Rules, 2014 [01.04.2014]||Rules pertaining to RPT enforced.
|3.||Rule 3 of Companies (specification of definition) Rules, 2014 [01.04.2014]||Rules for related party definition enforced.|
|4.||Companies (Removal of Difficulties) fifth order, 2014 [09.07.2014]||Substitution of ‘or holds’ with ‘and holds’ in Section 2(76)(v).|
|5.||General Circular 30/2014 [17.07.2014]||Clarification regarding past contracts, applicability of section 188 to corporate restructuring; Restriction on voting rights of related party in context of resolution.|
|6.||Amendment to Rule 3 of Companies (specification of definition) Rules, 2014
|Independent Director of holding Company excluded from related party. [Rule 3]|
|7.||Companies (Removal of Difficulties) sixth order, 2014 [24.07.2014]||Private Company in which relative is Director/member also covered in related party. [Section 2(76)(iv)]|
|8.||Companies (meetings of Board & its power) Second Amendment Rules, 2014 [14.08.2014]||Limits triggering shareholder approval altered.|
|9.||Companies (Amendment) Act, 2015 [29.05.2015]||Special Resolution diluted to Ordinary.|
|10.||Exemption notification for private Companies [05.06.2015]||Restriction on voting not to apply on Pvt. Co.|
|11||Exemption notification for section 8 companies [05.06.2015]||Entry in register reqd. only if contract / arrangement of value more than 1 Lakh.|
|12.||Exemption notification for government companies [05.06.2015]||Shareholder’s approval not required, for transaction between 2 Govt. Cos. OR if approval taken from ministry in charge.|
|13.||Companies (meetings of Board & its power) 2nd Amendment Rules, 2015 [14.12.2015]||Audit committee can grant omnibus approval.|
|14.||Exemption notification for IFSC public Companies [04.01.2017]||Restriction on voting not to apply.|
|15.||Companies (meetings of Board & its power) Amendment Rules, 2017 [30.03.2017]||Shareholder’s approval limits tweaked.|
|16.||Exemption notification for private Companies [13.07.2017]||Interested Director can be counted in quorum|
|17.||Companies (Amendment) Act, 2017 [09.02.2018]||Restriction on voting rights of members not to apply in certain cases; Definition of Related Party altered.|