Steps and precautions while auditing related party transactions (In case of private limited company)
This article will help in ensuring compliance of SA 230 with respect to related party transactions.
Section 188: Related party transaction
| Specified transactions | Threshold | Audit documentation |
| Sale, purchase or supply of any goods or materials directly or through the appointment of an agent | 10% or more of the turnover |
– Approval of board required # – Ordinary resolution required if amount or transactions exceeds the limits given # – Entry in form MBP 4 (register maintained for contract with related party) – Disclosure in director report |
| Selling or otherwise disposing of, or buying, property of any kind; directly or through the appointment of agent | 10% or more of the net worth | |
| Leasing of property of any kind; | 10% or more of the turnover | |
| Availing or rendering of any services directly or through appointment of agent | 10% or more of the turnover | |
| Related party’s appointment to any office or place of profit | Exceeding Rs. 2,50,000/- per month | |
| underwriting the subscription of any securities or derivatives thereof, of the company. | Exceeding 1% of the net worth |
#Exemption
1. If transactions entered into by the company in its ordinary course of business which is on arm’s length basis (No board and member’s approval require)
2. If transactions are entered 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 (Only board approval require)
Section 185: Loan to directors
| Particulars | Audit documentation |
| 1) A company cannot: (prohibition)
a) Advance loan directly or indirectly b) Advance loan which includes a loan represented by a book debt c) Advance loan which includes a loan represented by a book debt to a director, its holding company or partner or relative of any such director, or any firm in which a director is a relative or a partner 2) A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested |
– Special resolution passed in general meeting (explanatory statement to the notice for the relevant general meeting shall disclose the full particulars) # – Declaration of loans are utilised by the borrowing company for its principal business activities. – Interest free loan is allowed Above conditions pertains to second point given in particulars |
#Exemption:
1. Giving of any loan to a managing or whole-time director as a part of the conditions of service extended by the company to all its employees or pursuant to any scheme approved by the members by a special resolution
2. any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company
3. any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:
Section 186: Loan and investment by company
| Particulars | Audit documentation |
| A company cannot:
a) give any loan to any person or other body corporate b) give any guarantee or provide security in connection with a loan to any other body corporate or person c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate exceeding 60% of (paid up share capital +security premium+ free reserve) or 100% of (security premium + free reserve) whichever is more Exemption from limits given: a) Loans given to individual who is in the employment of the company b) Loan or guarantee given or security provided by company to its wholly owned subsidiary company or a joint venture company |
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Companies (Acceptance of Deposits) Rules, 2014
| Particulars | Audit documentation |
|
1) Loan from director (out of own fund) – An amount which is received from the directors is the loans not the deposits. It is a exempted deposits. 2) Overall limit – Money can be borrowed together with the money already borrowed by the company exceeds the aggregate of its paid-up share capital, free reserves, and securities premium |
If Within the limit
– Board approval – Signed declaration from director that money given is not out of borrowed fund – Terms & condition of loan – File DPT 3 in which it is to be shown as exempted deposits – Disclosure in director report – Disclosure in financials Special resolution required if borrowings exceed the limits given. |
Author Bio
Under column of Audit documentation (Secion 185) you mentioned that Interest free loans are allowed, Is it correct?
Nothing mentioned in section 185 if you read the bylaws, however interest needs to be charged if company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan