RELATED PARTY TRANSACTIONS – Section 188 -Companies Act, 2013

 CS Akhilesh Kumar Jha

Section 188 of the Companies Act, 2013 has been inserted in place of section 297 of the Companies Act, 1956. In previous law, it was mandatory to take Central Government approval for any transactions which was covered under section 297 of the Companies Act, 1956 where the paid up capital of the company was more than Rs. 1 cr.

Now, the scope of Section 188 is larger than Section 297 of the Companies Act, 1956. Let’s discuss some important points of Section 188 of the Companies Act, 2013.:-

Applicability of this Section

It has not been come into force. This section has not been included in the notification dated 12^th Day of September, 2013

Applicability

This is applicable for Private Company and Public Company.

Approval 

The following approval is required for entering transactions with Related Party:-

1-      Board Approval

For entering Transactions as mentioned in this section, the board approval is required along with some other conditions as may be prescribed.

2-      General Meeting

For entering Transactions as mentioned in this section, the special resolution is required in the meeting subjected to the prescribed share capital or Turnover. 

Related Party

The definition of Related as mentioned in the Section 2 (76) of the Companies Act, 1956

“Related party”, with reference to a company, means—

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

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

(iv)  a private company in which a director or manager is a member or  director;

(v) a public company in which a director or manager is a director or holds along with his relatives, more than two per cent. of its paid-up share capital;

(vi) anybody corporate whose Board of Directors, managing director 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 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;

 (ix) such other person as may be prescribed;

Transactions

Company shall enter any contract or arrangement with Related Party which are as mentioned below:-

1- Sale, purchases or supply of any goods or materials.

2- Selling or otherwise disposing of , or buying, property of any kind,

3- Leasing of property of any kind

4- Availing or rendering of any services

5- Appointment of any agent for purchases or sale of goods, materials, services or property.

6- Such related party’s appointment to any office or place of profit in the company its subsidiary company or associate company and

7- Underwriting the subscription of any securities or derivatives thereof, of the company

Conditions for Transactions

1- Board Meeting is required

2- Special Resolution is required after prescribed paid of capital or prescribed turnover

3- For Special Resolution, the member who is not related to Transaction may vote.  

Non Applicability of Section 188 (1) of the Companies Act, 2013

When any transaction has been made on the basis of Arm Length basis, this sub section shall not apply for any transaction related to ordinary course of business.

Personal onion:- it means if any company transacts any transaction which is covered under sub section 188 (1) of the Act,  but the company transacts its business by way of Arm Length basis, in that case the requirement of this section shall not apply.

What is meaning of Arm Length transactions?

According to the Companies Act, 2013, any transactions, which are entered between related parties, shall like as contract made with unrelated. In that type of situation if transactions shall be happened with unrelated parties, it should not be interest there.

The ultimate scope of this section is “interest”, if any interest is there by anyway the Section shall be effective, if there is no interest is there, the section shall be in neutral.

Hence, the simple meaning of Arm Length Transaction is that where there is any transaction which is entering with party, the entering like un-related party and other there is no need to put any interest by any party in such contract by any way.

In short, there is no interest in any contract; such contract automatics cover the meaning of Arm Length Transactions.

Disclosure Requirement (Section 188 (2))

It is mandatory to disclose every contract with proper justification of therein in the Directors Report.

Voidable Contract (Section 188 (3))

According to the aforesaid sub section (1), any contact or arrangement must be passed through Board Meeting or Shareholders Meeting, as case may be,

Suppose, the Contact has been made but the approval has not taken either in the Board Meeting or Shareholders Meeting within 3 months from the date of Contract, In that case the Contract shall be voidable at the option of the Board.

In case of Loss in result of Contract (Section 188(4))

Where any contract has been entered, and any loss has been occurred due to such contract, the company has power to initiate any proceeding against director or employee who has entered into such contract or arrangement. 

Penalty

Any director who enter any contact or any employee who is authorsed to enter any contact make any default for compliance of this provisions shall be penalized in case of:

Listed Company:- Imprisonment for a term which may extend to One Year or fine which shall not be less than 25000/- but which may extend Rs. 5,00,000/- or both

Unlisted Company: – fine which shall not be less than 25000/- but which may extend Rs. 5,00,000/- or both

Section 188 of the Companies Act, 2013 (Bare Act Language)

188. (1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with 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.

Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a special resolution:

Provided further that no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party:

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.

Explanation. — In this sub-section—

(a) the expression “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, 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 holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(b) the expression “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.

(2) Every contract or arrangement entered into under sub-section (1) shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement

(3) 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 special 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 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.

(4) 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.

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