Overview of Section 188 – Related party transactions

No company shall enter into any contract or arrangement with a related partywith 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,

Special Contract

Other Contracts

Under Rule 15 Of Companies
(meeting of Board and its power)

with the consent of the Board of with the consent of the Board of Directors given by a resolution at Directors given by a resolution at a meeting of the Board.

a meeting of the Board.

&

approval by a [resolution] in the general meeting.

Rule 15 Contracts or arrangement which require approval of members by way of resolution:

Clause A as contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188, with criteria as mention below-

  • sale, purchase or supply of any goods or material, directly or through appointment of agent,3[amounting to ten percent or more] of the turnover of the company
  • selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent,3[amounting to ten percentor more] of net worth of the company
  • leasing of property any kind6[amounting to ten per cent or more of the turnover of the company]
  • availing or rendering of any services, directly or through appointment of agent, 3[amounting to ten percent or more] of the turnover of the company

Explanation.- It is hereby clarified that the limits specified in sub-clause (i) to (iv) shall apply for transaction or transactions to be entered into either individually or taken together with the previous transactions during a financial year.

Clause B: is for appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remmuneration exceeding two and a half lakh rupees as mentioned in clause (f) of sub-section (1) of section 188.

Clause C: is for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding one percent.of the net worth as as mentioned in clause (g) of sub-section (1) of section 188.

Explanation.- (1) The turnover or net worth referred in the above sub-rules shall be computed on the basis of the audited financial statement of the preceding financial year.

Consequences of Non Compliance of Section 188:

(a) Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a resolution in the general meeting under sub-section (1) 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 authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

(b) 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.

(c) Any director or any other employee of a company, who had entered into or authorised 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.

Exceptions to Section 188:

  • Provided also that the requirement of passing the resolution under first proviso shall not be applicable for 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.
  • Provided also that nothing in this sub-section shall 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.

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