Section 188 – Related Party Transaction- Recent Changes in Rules

Recent Amendment in Section 188- Related Party Transaction- Companies (Meeting of Board And Its Powers) Second Amendment Rules, 2019

SECTION 188: RELATED PARTY TRANSACTIONS

The provisions listed below are after taking into account amendments introduced by Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019 vide MCA notification dated November 18, 2019.

Section 188(1) – any contract or arrangement with a related party in connection to below mentioned matters requires consent of the Board of Directors  and compliance of conditions as prescribed under Rule 15 of the said rules:

(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:

• All the contracts or arrangements exceeding sums as prescribed u/R 15 shall require prior approval via ORDINARY RESOLUTION (OR).
• Any member being related party shall not vote on such

However, nothing contained above shall apply to a company in which 90 % or more members, in number, are relatives of promoters or are related parties.

Exemption-

> Nothing mentioned u/s 188 (1) shall apply to any transactions entered into by the company in its ordinary course of business AND on arm’s length basis.

> No OR required 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:

> In case of wholly owned subsidiary, the OR passed by the holding company shall be sufficient for the purpose of entering into the transaction between the wholly owned subsidiary and the holding company.

Explanation

> “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,  r body corporate holding it receives from the company anything by way of remuneration, salary, fee, comm ission, 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 holdin g it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

> “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.

Disclosures:

> In the Board’s Report along with the justification for entering into such contract or arrangement.

Ratification:

> If any contract or arrangement mentioned u/s 188 is entered into by a director or any other employee, without obtaining the consent of the Board or approval of shareholders and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within 3 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.

> 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.

Penalties:

> 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,—

• • in case of listed company, be punishable with imprisonment for a term which may extend to 1Year 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
  • 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.

RULE 15:

> BM COMPLIANCES:

1. Information to be provided in agenda of BM :

(a) name of the related party and nature of relationship;

(b) the nature, duration of the contract and particulars of the contract or arrangement;

(c) the material terms of the contract or arrangement including the value, if any;

(d) any advance paid or received for the contract or arrangement, if any;

(e) the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;

(f) 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

(g) any other information relevant or important for the Board to take a decision on the proposed transaction.

2. Interested Director**1 shall not be present at the meeting.

> GENERAL MEETING COMPLIANCES:

1. All contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188 meeting with criteria as mentioned below shall be entered into by the Company only with the prior approval by way of an OR:

** Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019 vide MCA notification dated November 18, 2019, Effective from the date of publication in official gazette

## NW= Net worth; TO= Turnover

Clause	Particulars	New criteria ** amounting to:
(i)	sale, purchase or supply of any goods or material, directly or through appointment of agent as mentioned u/s (188) (1) (a) & (e);	10 % or more of the TO	10 % or more of the TO or Rs. 100 Cr, whichever is lower
(ii)	selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent as mentioned u/s (188) (1) (b) & (e);	10 % or more of NW	10 % or more of NW or Rs. 100 Cr, whichever is lower
(iii)	leasing of property any kind as mentioned u/s (188) (1) (c);	10 %  or more of TO	10 %  or more of NW or 10 %  or more of TO or Rs. 100 Cr, whichever is lower,
(iv)	availing or rendering of any services, directly or through appointment of agent as mentioned u/s (188) (1) (d) & (e),	10% or more of the TO	10% or more of the TO or Rs. 50 Cr, whichever is lower
	Explanation- 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 FY.
(b)	appointment to any office or place of profit in the company, its subsidiary company or associate company as mentioned u/s (188) (1) (f)	monthly remuneration exceeding Rs. 2.5 lakh (NO CHANGE)	monthly remuneration exceeding Rs. 2.5 lakh
(c)	remuneration for underwriting the subscription of any securities or derivatives thereof, of the company as mentioned u/s (188) (1) (g)	exceeding 1% of NW (NO CHANGE)	exceeding 1% of NW
Explanation-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.

2. Contents of Explanatory statement:

a. name of the related party;

b. name of the director or KMP who is related, if any;

c. nature of relationship;

d. nature, material terms, monetary value and particulars of the contract or arrangements;

e. any other information relevant or important for the members to take a decision on the proposed resolution.

Capsule: 1. All RPT requires approval of the BOD. 2.  All RPTs exceeding limits mentioned U/R 15 requires prior approval of the shareholders via OR. 3. All RPTs under Ordinary Course & on Arm’s length Basis are exempt from Section 188. 4. Any member being related party shall not vote on the matter. 5. However, a company in which 90 % or more members, in number, are relatives of promoters or are related parties can vote on RPT items. 6. No OR required for transactions between H Co. & WOS. OR of H Co. sufficient for WOS Co. 7. Disclosure of all RPTs in Board Report. 8. In case of non-compliance, ratification allowed within 3 months if the transaction. 9.Interested Director shall not be present in such BM. 10. BM agenda & explanatory statement of GM, as the case may be, to have details as mentioned in rule 15. 11. Limits mentioned in Rule 15 have been amended to only take into consideration 10% of Turnover or Net worth as the case may be. 12. In case of private Company, Section 2(76)(viii) shall not apply with respect to section 188.

SECTION 2 (76) “RELATED PARTY”, WITH REFERENCE TO A COMPANY, MEANS—

(i)  Director or his relative;

(ii) KMP or his relative

(iii) Firm, in which a director, manager or his relative is a partner

(iv) A Pvt Co. in which a director or Manager or his relative is a Member or director

(v) A Public Co. in which a director and Manager is a director and Holds along with his relatives, more than 2% of its PSC.

(vi) Any Body corporate who’s BOD, MD 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;

(B) a subsidiary of a holding company to which it is also a subsidiary; or

(C) an investing company or the venture of the company;

Explanation.—For the purpose of this clause, “the investing company or the venture of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.

 In case of private company – Sub-clause (viii) shall not apply with respect to section 188.

(ix) Such other person as may be prescribed i.e., a director other than an independent director or KMP of the holding company or his relative with reference to a Company, shall be deemed to be a related party

SECTION 2(77) “RELATIVE”, WITH REFERENCE TO ANY PERSON, MEANS ANYONE WHO IS RELATED TO ANOTHER, IF—

(i) they are members of a Hindu Undivided Family;

(ii) they are husband and wife; or

(iii) one person is related to the other in such manner as may be prescribed i.e.:

A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely

(1) Father (includes step-father)& Mother (includes the step-mother)

(3) Son (includes the step-son) & Son’s wife.

(5) Daughter & Daughter’s husband.

(7) Brother (includes the step-brother)& Sister (includes the step-sister)

(**1 )SECTION 184- DISCLOSURE OF INTEREST BY DIRECTOR

> 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—

(a) 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 is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) 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 and shall not participate in such meeting:

• • In case of private company interested director may participate in such meeting after disclosure of his interest.
  • In case of Section 8 Company – Section 184 (2) shall apply, only if the transaction with reference to section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees.

> A contract or arrangement entered into by the company without compliance of above provision shall be voidable at the option of the company.

Exemption: 

> Nothing in this section shall apply to any contract or arrangement entered into or to be entered into between two companies or between one or more companies and one or more bodies corporate where any of the directors of the one company or body corporate or two or more of them together holds or hold not more than 2% of the paid-up share capital in the other company or the body corporate.

Capsule: Thus, on one hand, Section 188 restricts participation of Interested Director in such meeting but on the other hand Section 184 allows participation of interested director in such meeting after disclosure of his interest in case of private company. It’s advisable to go with the stringent provision for better corporate governance

SECTION 189- REGISTER OF CONTRACTS OR ARRANGEMENTS IN WHICH DIRECTORS ARE INTERESTED

> Form MBP 4: particulars of all contracts or arrangements to which sub-section (2) of section 184or section 188 applies shall be maintained separately in form MBP-4.

> After entering the particulars, such register shall be placed before the next BM and signed by all the directors present at the meeting.

> Every director or KMP shall, within a period of 30 days of his appointment, or relinquishment of his office, as the case may be, disclose to the company the particulars specified in sub-section (1) of section 184 relating to his concern or interest in the other associations which are required to be included in the register or such other information relating to himself as may be prescribed.

> Register to be maintained at registered office, preserved permanently in the custody of the company secretary of the company or any other person authorised by the Board for the purpose & shall be open for inspection.

> Extracts of such register to be provided to a member of the company on his request, within 7 days of such request & on payment of such fee as may be specified in AOA not exceeding Rs. 10 per page.

> Register to be produced on the commencement of AGM & shall remain open and accessible during the continuance of the meeting to any person having the right to attend the meeting

> The entries in the register shall be made at once, whenever there is a cause to make entry, in chronological order and shall be authenticated by the CS of the company or by any other person authorised by the Board for the purpose.

Exemption from maintenance of register:

> Nothing contained in sub-section (1) shall apply to any contract or arrangement—

• for the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed Rs. 5,00,000 in the aggregate in any year; or
• by a banking company for the collection of bills in the ordinary course of its business.

For section 8 companies:

In case of Section 8 Company – Section 189 shall apply only if the transaction with reference to section 188 on the basis of terms and conditions of the contract or arrangement exceeds Rs. 1,00,000.

Disclaimer- This article is not any professional advice. It’s just an analysis or study of the topic.