CA Vivekanand Pote
Introduction
New Companies Act enacted with stricter compliance for related party transactions. The intention of the legislature in having stricter compliance to refrain the corporate world from fraudulent transactions under the cover of sister concerns. With newly enacted provisions the transactions with the related parties will be more transparent and more informed to the shareholders of the company. Let us understand the provisions of related parties in detail.
Definition of relative – Section 2 (77)
Definition of related party – Section 2 (76)
Transactions with related parties covered under the act – section 188
- Consent of BOD is required at board meeting by way of resolution at the meeting
- Following are the transactions which require the consent of BOD
o Sale, purchase and supply of any goods and materials
o Selling or otherwise disposing of or buying property of any kind
o Leasing of property of any kind
o Availing or rendering of any services
o Appointment of agent for purchase or sale of goods, materials, services or property
o Such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company
o Underwriting the subscription of any securities or debentures thereof of the company
- Prior approval of company by way of special resolution required for the following transactions in case of paid up share capital of the company is Rs. 10 Crores or more
o Direct or through agent sale, purchase or supply exceeding 25% of annual turnover
o Direct or through agent selling or otherwise dispose or buying property exceeding 10 % of net worth
o Leasing of property of any kind exceeding 10 % of net worth or exceeding 10 % of turnover
o Direct or through agent availing or rendering of services exceeding 10 % of net worth
o Appointment to any office or place of profit in the company, its subsidiary or associate company at a monthly remuneration exceeding Rs. 2.5 lacs
o Underwriting remuneration exceeding 1% of Net worth
- No member should vote if he is related party
- Transactions entered by the company in the ordinary course of business at an arm’s length price shall be out of ambit of section 188
- Arm’s length transactions means a transaction between two related parties that is conducted as if they are unrelated
- Contracts or arrangements with related parties shall be referred to in Board’s report along with justification
- Contracts or arrangement entered by director or employee without board’s consent or special resolution in general meeting shall be ratified in three months, if not ratified then such contract or arrangement is voidable at the option of the Board. In case of such transaction is with a related party to director or is authorised by the other director, the concerned directors shall indemnify the company against the loss incurred by it. Company can proceed for recovery of losses from director or employee who has entered into such contract or arrangement
- Violations of provisions of this section by a director or by employee shall be punishable with imprisonment up to 1 year with a fine ( Rs. 25,000 to 5,00,000 ) or with both in case of listed company and in case of other company with fine ( Rs. 25,000 to 5,00,000 ).
(Author is Working as Finance Professional in Automobile Industry and can be contacted at vcpote@rediffmail.com )
Author Bio
Very useful note. Thanks.