The recently notified section 188 of the Companies Act, 2013 talks about the approval required in order to enter into related party transactions. The section provides for the various transactions which cannot be entered into by the company without the consent of the Board of Directors. Meaning thereby unless the Board of Directors have given their consent by way of a resolution at a meeting of the Board, the company cannot enter into the prescribed transactions.
Related Party Transactions Under Companies Act 2013
The 2013 Act defines the term “related party” to mean:
- A director or his relative
- KMP or his relative
- A firm, in which a director, manager or his relative is a partner
- A private company in which a director or manager is a member or director
- A public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid-up share capital
- A body corporate whose board, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager, except if advice/ directions/ instructions are given in the professional capacity
- Any person on whose advice, directions or instructions a director or manager is accustomed to act, except if advice/ directions/ instructions are given in the professional capacity
- Any company which is: A holding, subsidiary or an associate company of such company, or A subsidiary of a holding company to which it is also a subsidiary
- Such other persons as may be prescribed.
Subsection 1 of Section 188 prescribes the following transactions:
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.
It is to be noted that the proviso to the Section 188 provides that a company, whose paid-up capital is more than Rupees Ten crore or is proposed to enter into transactions exceeding such sums as prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules 2014, cannot enter into the transactions, except with the previous approval of shareholders by way of Special resolution.
The transactions, as prescribed under Rule 15 (3), which require prior approval of Shareholders by way of Special Resolution are:
a. With respect to the subsection 1 of Section 188, the following contracts or arrangements as per their respective limits:
- Any Sale, purchase or supply of goods or materials directly or through any agents amount of which exceeds twenty-five percent of the annual turnover of the Company;
- Selling or otherwise disposing of, or buying, property of any kind directly or through the agent amount of which exceeds ten percent of net worth of the company;
- Any leasing of property which amounts ten percent or more of the turnover of the company;
- Availing or rendering of any services directly or through the agent amount of which exceeds ten percent of the net worth of the company;
b. Appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding Rupees Two Lakh Fifty Thousand;
c. The remuneration for underwriting the subscription of securities or derivatives thereof of the company exceeding one percent of the net worth of the company.
The above-mentioned provisions will not be applicable in the 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.
Disclosures to be made in notice of Board Meeting
The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose:
- name of the related party and nature of a relationship;
- nature, duration of the contract and particulars of the contract or arrangement;
- material terms of the contract or arrangement including the value, if any;
- any advance paid or received for the contract or arrangement if any; and
- the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
- 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
- any other information relevant or important for the Board to take a decision on the proposed transaction.
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.
Disclosures to be made in Register of contracts or arrangements in which directors are interested
Every company shall maintain one or more registers in Form MBP 4, and shall enter therein the particulars of contracts or arrangements with a related party with respect to transactions to which section 188 applies.
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