Manshi Baid

The definition of Related Party is given in Clause (76) of section 2 of Companies Act 2013 . This section provides that a related party for a company are :-

1.      A director or his relative

2.      A key managerial personnel or his relative

3.      A firm in which director , manager or his relative is a partner

4.      A private company in which director or manager or his relative os a member or director

5.      A public company in which director or manager is a director or holds along with his relative more than 2% of the paid up share capital of the company

6.      A body corporate whose board of director or managing director or manager is accustomed to act in accordance with the directions or instructions of the director or manager other than the directions given in a professional capacity

7.      A person on whose directions or instructions the director or manager is accustomed to act other than the directions given in a professional capacity.

8.   (A) holding or subsidiary or associate company

(B) a subsidiary company of the holding company of which such company is also a subsidiary.

Section 188 of the Companies Act 2013 provides that no company shall inter into any transaction with the related parties except with the consent of the board of directors which will be given passing a resolution at the meeting of the board of director. These transactions may be :-

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

2.      Purchasing or selling or otherwise disposing of any property of any kind

3.      Leasing of any property

4.      Rendering or availing of any services

5.      Appointment of any agent or sale purchase or rendering of any goods , materials or services

6.      Appointment of related party to any office or place of profit in the company its subsidiary or associate company

7.      Underwriting the subscriptions of any securities or derivatives thereof

However in case of a company having a paid up share capital of Rs. 10 core or more shall enter into any transactions with the related party only after the prior consent is received by passing a special resolution. Special resolution is also to be received compulsorily in following cases also :-

1.      In case of sale , purchase or supply of goods or materials directly or through appointment of agents exceeds 25% of the annual turnover of the company

2.      In case of purchasing or selling or otherwise disposing of property of any kind directly or through appointment of the agents and the value exceeds 10% of the net  worth of the company

3.      In case of leasing of property the value exceeds 10% of the net worth of the company

4.      In case of rendering or availing services of any kind directly or through appointment of agent value exceeds 10% of the net worth of the company.

5.      In case of appointment of a related party at any office or place of profit in th company or subsidiary or associate company at a monthly remuneration of more than Rs. 250000.00

6.      In case remuneration for underwriting of share or securities of the company exceeds 1% of the net worth.

Here the turnover and net worth of the preceding audited financial statement to be considered for calculation of limits.

This section provides that no member shall vote at the time of passing the special resolution in case the such member is a related party to approve any contract or arrangement.

However nothing contained in this section shall apply in case the transactions are at arm length price in the ordinary course of business.

In case any contract is entered into without obtaining the prior consent of the director or approval by passing a special resolution in general meeting and it is not ratified within three months from the date on which such contract or arrangement was entered into then such contract or arrangement will be voidable at the option of the director. Where any director is interested in any contract or arrangement with a related party then such director shall not be present at the meeting at the time of passing the resolution.

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

In case the transactions are entered into wholly owned subsidiary the special resolution passed at the holding company shall be sufficient for the purpose of entering into transaction between wholly owned subsidiary and holding company.

Vide notification dated 05.06.2015 it is provided that in respect of  private companies the transactions between any company 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;

Shall not be treated as Related Party Transactions

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Tags : Companies Act (1934) Companies Act 2013 (1706) Manshi Baid (14)

0 responses to “Section 188 – Related Party Transactions”

  1. VINIT GOYAL says:

    In my opinion and one of my queries regarding the related party term establishment if the common director in public company ??

    In MCA circular the definition of related party as above mentioned has been changed with the replace the word OR to AND so in my interpretation::

    5. A public company in which director or manager is a director AND holds along with his relative more than 2% of the paid up share capital of the company

    Now the director in public company and he hold along with his relative more than 2% of the paid up share capital of the company consider is a related party

    so i think if the director hold the common directorship in two public company and no hold any share then it can not be treat as a related party ??? or not ??

  2. Sushir Bhatia says:

    Hi Manshi

    Another point I would like to share is that a related party transaction would also need Audit Committee’s approval under Sec.177

    Sushir Bhatia

  3. Manshi Baid says:

    Yes Mr. Venkatesan . In case the transaction are at arm lengh price in the ordinary course of business then prior consent is not required. Neither by board nor by passing special resolution.

  4. Anil shah says:

    If both the conditions arm’s length and in the normal course of business, then said transactions are exempted under the Companies Act, 2013. But, the same is not the criteria under Listing Agreement.

  5. Venkatesan says:

    “However nothing contained in this section shall apply in case the transactions are at arm length price in the ordinary course of business.”

    When this is said, I am confused, as to what is not applicable. Does this mean that no prior consent of shareholders is required, if the related party transactions are in the ordinary course of business?

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