Related Party Transaction

  CS Ashish Gupta     0000-00-00 00:00:00

RELATED PARTY TRANSACTIONS UNDER THE COMPANIES ACT 2013

Companies Act, 2013 has emphasized more on disclosures rather than on approvals, one such area is “related party transactions”.

The Companies Act, 1956 laid need of the approval of Central Government for related party transaction by companies having capital as prescribed (Rs 1 crore) Section 297 of the companies act, 1956, whereas Companies Act, 2013 calls for larger disclosures with members’ approval.
Section 188(Related Party Transactions) of the Companies Act, 2013 deals with holding of office or place of profit and related party transactions which combines the Sections 314 and 297 of the Companies Act,1956.

INTERPRETATION OF SECTION 188 OF COMPANIES ACT, 2013

Section 188 requires a company to obtain approval of the Board and of the members, in certain situations, prior to entering of any transaction or agreement with a related party.
Section 188 is applicable to both private and public companies.

DEFINITION/MEANING OF RELATED PARTY

As per Section 2(76), read with Rule 3 of The Companies (Specification Of Definitions Details) Rules, 2014 “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;
i. 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;

ii. A director or key managerial personnel of the holding company or his relative

Any transaction between a company and its related party relating to:

1. Sale, purchase 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 purchase 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:
Shall not be entered without passing of any resolution in the meeting of Board.

“Office Or Place Of Profit” Means Any Office Or Place—

a. 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;
b. 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;

NATURE OF APPROVALS REQUIRED:

• Every company needs to seek the approval of its Board of Directors for entering into any related party transaction, as listed above, irrespective of the capital of the company or the value of the transaction.
• Approval of Board of Directors
• Approval of the Board has to be sought at a duly convened meeting of the Board and same cannot be obtained by passing of a resolution by circulation.
• Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.
• Prior approval of Members by means of special resolution

In the following situations, in addition to approval of Board of Directors, prior approval of members by means of a special resolution must also be sought before entering into any related party transaction:
Rule 15 (3) of The Cos. (Meetings of Board & its Powers) Rules, 2014 provides that “For the purposes of first proviso to sub-section (1) of section 188, except with the prior approval of the company by a special resolution, a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into,—
(a) as contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188, with
criteria as mentioned below –
(i) Sale, purchase or supply of any goods or materials, directly or through appointment of agent,
exceeding ten per cent. of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;
(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, exceeding ten per cent. of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;
(iii) leasing of property of any kind exceeding ten per cent. of the net worth of the company or ten per cent. of turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (c) of sub-section (1) of section 188;
(iv) availing or rendering of any services, directly or through appointment of agent, exceeding ten per cent. of the turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:
Explanation.—It is hereby clarified that the limits specified in sub-clauses (i) to (iv) shall apply for transaction or transactions to be entered into either individually or taken together with the previous transactions during a financial year.
(b) is for appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and half lakh rupees as mentioned in clause (f) of subsection (1) of section 188; or.
(c) is for remuneration for underwriting the subscription of any securities or derivatives thereof, of the
company exceeding one per cent. of the net worth as mentioned in clause (g) of sub-section (1) of section 188.

DISCLOSURE NORMS

The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-

• Disclosures to be made in notice calling Board Meeting:

a. the 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.
The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section 101 shall contain the following particulars namely:-

• Disclosures to be made in the explanatory statement to be annexed to notice of general meeting:

a. name of the related party ;
b. name of the director or key managerial personnel who is related, if any;
c. nature of relationship;
d. nature, material terms, monetary value and particulars of the contract or arrangement;
e. any other information relevant or important for the members to take a decision on the proposed resolution.

Every related party transaction or contract shall be disclosed in the Board’s report along with the justification for entering into such contract or arrangement.

• Disclosures to be made in Board’s Report:

Every related party transaction or contract shall be disclosed in the Board’s report along with the justification for entering into such contract or arrangement.

NON-APPLICABILITY

The above mentioned provisions will not be applicable in case of transactions entered into by the company in its ordinary course of business, which are on arm’s length basis.
“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.
It is clarified that transactions arising out of Compromises, Arrangements and Amalgamations dealt with under specific provisions of the Companies Act, 1956/Companies Act, 2013, will not attract the requirements of section 188 of the Companies Act, 2013.

PENALITIES/CONSEQUENCES

• If any related party transaction or contract is entered without seeking Board’s and/or Members’ approval and if the same is not ratified by the Board and/or Members as the case may be, within 3 months at a meeting, then the contract or transaction will be voidable at the option of the Board and if the transaction is with any related party to any director or is authorized by any other director, then the concerned directors are liable to indemnify any loss incurred by the company.
• Additionally, the company can also proceed against a director or employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by such contract or arrangement.
• 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:

i. Imprisonment for a term which may extend to 1 year or
ii. fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-, or with both; and

ii. 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/-.

Some clarifications vide Circular No. 30 dated 17/07/2014

Requirement of fresh approvals for Past contracts under Section 188. :-

Contracts entered into by companies, after making necessary compliances under Section 297 of the Companies Act, 1956, which already came into effect before the commencement of Section 188 of the Companies Act, 2013, will not require fresh approval under the said section 188 till the expiry of the original term of such contracts.

Thus, if any modification in such contract is made on or after lst April, 2014, the requirements under section 188 will have to be complied with.

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