Related Party Transaction - 568
Related
Party Transaction
This
is one of most important section of Companies Act. If company is entering into
any transaction, contract, arrangement etc. Company have to check and comply
with provision of this section. Whenever we concerned about compliances of related
party transaction, we have to check following sections:
1.
Section 2(76) – Definition of Related Party Transaction
2.
Section 188-Related Party Transaction.
3.
Section 189- Register of transaction in which director are
interested
Therefore, in general
word one can opine that, combined reading/ compliance of above mentioned 3
sections are required to successfully enter into contract/ arrangement with
Related Party.
Let’s start detail study on Section 188
Definition of Related Party and study on same is covered after study of
188:
Section 188(1) states about contract or arrangement
with related party. Compliance of this section is applicable only for the
transaction mentioned u/s 188(1) {a to g}.
In simple word if a company entered into any
transaction with related party which are not coved in list of transaction of a
to g u/s 188, in such case company is not required to compliance with
conditions mentioned in section 188.
A. TYPE OF TRANSACTION COVERED UNDER 188:-
B.
APPROVALS REQUIRED
C. RISTRICTION ON PARTICIPATION:
·
Board Meeting: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. [Rule 15(2)]
· General Meeting:no member of the company shall vote on such resolution, to
approve any contract or arrangement which may be entered into by the company,
if such member is a related party for such transaction.
Exemption: Above mentioned restriction of general
meeting, shall apply to a company in which ninety per cent. or more members, in
number, are relatives of promoters or are related parties
Most Important Provision of Section 188
D. EXEMPTION:Exemption from compliance of provisions
of Section 188.
A.
Ordinary Course of
Business and Arm Legnth Basis:
4th Proviso of Section
188(1) play most important role while complying with the provision of this
Section:
Nothing
in Sec. 188(1) 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.
Provisions of Sec.
188(1) are not applicable, if:
·
Transaction is in ordinary course of
business (+)
·
Transaction is on arm’s length basis
Company need not to
comply followings:
·
Board/Shareholder’s Aprroval.
·
Restrictions on presence in Board
meeting/voting in General meeting.
· Specific disclosures required in
agenda of Board meeting & explanatory statement
of General meeting
Ordinary Course of Business
§ It
is not defined under the act or rules.
§ The
general meaning of the same can be taken as all the usual transactions of a
Company.
§ Black’s Law
Dictionary definition: the normal routine in managing a
trade or business and terms it as regular course of business, ordinary course.
§ Factors to be consider: Objects, Nature of
Business, History etc.
Arm’s Length Basis:
§ 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.
Justification of arm’s length:-Justifications
can be classified into 3 categories namely entity oriented, price oriented
& documentation oriented. Certain indicators may include:-
B.
Transaction b/w
Holding and WOS:
The requirement of
passing the resolution under first proviso shall not be applicable for
transactions entered into 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.
In case of wholly
owned subsidiary, the resolution is passed by the holding company in
their General Meeting shall be sufficient for the purpose of entering into the
transaction between the wholly owned subsidiary and the holding company.
Audit Committee & its Approval
Constitution of Audit
Committee is mandatory for following Companies:
1)
Every ListedCo.,
2)
All public cos. with a paid up capital
of Rs. 10 crore ormore;
3)
All public cos. having turnover of Rs.
100 crore ormore;
4)
Allpubliccos.,havinginaggregate,outstandingloansorborrowingsor
debentures or deposits exceeding Rs. 50 crore or more
COMPOSITION OF AUDIT COMMITTEE:
·
Audit Committee shall consist of min.
of 3 directors,
·
Independent directors forming a
majority:
·
Majority of members of Audit Committee
including its Chairperson shall be persons with ability to read and understand
financial statement.
NOTE:
¨ Every Audit Committee shall act in
accordance with terms of reference specified in writing by Board of Directors,
¨ One of the terms include: Approval or
any subsequent modification of transactions of co. with related parties.
¨ Audit Committee may make Omnibus
Approval for RPTs proposed to be entered into by Co.
IMPLICATION:
In
case any transaction involving any amount not exceeding Rs. 1 crore is entered
into by a director or officer of the company without obtaining the approval of
the Audit Committee and it is not ratified by the Audit Committee within 3
months from the date of the transaction, such transaction shall be voidable at
the option of the Audit Committee and if the transaction is with the related
party to any director or is authorised by any other director, the director
concerned shall indemnify the company against any loss incurred by it.
Quick Bite:
OMNIBUS APPROVAL OF AUDIT COMMITTE
As audit committee approval is
mandatory for every RPT but in cases where RPTs are entered too frequently its
not feasible for the committee to meet every time.
§ Basis / criteria for granting
omnibus approval to include:-
·
Maximum value, per transaction &
in aggregate
·
Disclosure required for obtaining
approval
·
Periodical review criteria for
approved transactions
·
Specifying transactions which cannot
be approved by omnibus approval
§ Information required for granting
omnibus approval: Particulars which need to be mentioned
in Omnibus Approval Resolution :-
·
Name of Related Parties, Nature &
Duration of Transaction
·
Maximum Amount of Transaction
·
Indicative base price and formula for
variation
Approval of Omnibus transaction without fulfilling the
above criteria:
Special Condition:However,
in cases where the above information is not available & need for obtaining
approval cannot be foreseen then approval may be given subject to value not
exceeding Rs. 1 crore.
DUTY OF AUDIT
COMMITTEE:
The
audit committee shall review (at such interval as the Audit Committee may deem
fit) the details of related party transactions entered into by the Company
pursuant to Each of the
omnibus approvals given.
TERM OF OMNIBUS
APPROVAL:
Omnibus
approvals shall be valid for a period not
exceeding one year and shall require fresh approvals after the expiry
of one year.
NOTE:
·
Omnibus
approval shall not be made for transactions in respect of selling or disposing
of the undertaking of the Company.Clause-6
·
Any
other conditions as the Audit Committee may fit.
Board of Directors & its Consent
Approval of Board of
Directors:
No
co. shall enter into any contract/arrangement with related party w.r.t. certain
transactions, except with Board of Directors consent given by resolution at its
meeting.
Interested Director:
Where
any director is interested in any contract/arrangement with related party, such
director shall not be present at meeting during discussions on subject matter
of resolution relating to such contract/arrangement.
Board meeting’s Agenda
shall disclose:
1.
Name of related party and nature of
relationship;
2.
Nature, duration of contract and
particulars of contract / arrangement;
3.
Material T&C of contract /
arrangement including value, if any,
4.
Any advance paid/received for
contract/arrangement, if any;
5.
Manner of determining pricing and other commercial terms, both included as part of contract and not considered as part
of contract;
6.
Whether all factors relevant to
contract have been considered, if not, details of factors not considered with
rationale for not considering those factors; and
7.
Any other info. Relevant / important
for Board to take a decision on proposed transaction.
Shareholders’ Approval
Where
paid-up share capital / transaction exceeds prescribed limits, Co. shall enter
into contract/arrangement after obtaining prior shareholder’s approval by
Ordinary Resolution.
**
Member
shall not vote on such resolution, if such member is a related party
Exemption to above
restriction;
a)
This restriction shall not apply to a
company in which ninety per cent. or more members, in number, are relatives of
promoters or are related parties.
b)
Does not apply to transactions between
2 Govt. companies or if theGovt. companies obtains approval of ministry in
charge.
c)
Does not apply to a Section 8 (Not for
profit Company) if value of
transaction is upto Rs. 1,00,000/- (Rupees One Lakh).
Threshold for
Shareholders Approval:
Contract / Arrangement with related party with respect to:
|
Revised
Threshold
|
Sale, purchase or supply of any goods or materials
|
10% or more of the turnover
|
Selling or otherwise disposing of, or buying,
property of any kind
|
10% of net worth of the company
|
Leasing of property of any kind
|
10% or
more of the turnover
|
Availing or rendering of any services
|
10% or
more of the turnover
|
Appointment
of any agent for purchase or sale of goods, materials, services or property
|
10% or
more of the turnover
|
It is hereby clarified that the limits specified in
sub-clause (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.
|
|
Such related party‟sappointment to any office or place
of profit in the company,its
subsidiary company or associate company
|
Monthly remuneration exceeding Rs. 2,50,000/-
|
Underwriting the subscription of any
securities orderivatives thereof, of the company
|
Remuneration exceeding 1% of the net worth.
|
The turnover or net worth referred in the above sub-rules
shall be computed on the basis of the audited financial statement of the
preceding financial year.
|
|
DISCLOSURES REQUIRED FOR RPT’s
Every contract / arrangement
entered into u/s 188(1) shall be referred to in Boards Report to shareholders
along with justification for entering into such contract / arrangement.
Board Report should include
particular of contracts with related party.
Form AOC – 2 as prescribed in Cos. (Accounts)
Rules, 2014 is divided in 2 parts, namely
1.
Details of contracts/ arrangements/
transactions not at arm’s length basis,
2.
Details of material contracts/
arrangement/ transactions at arm’s length basis.
Ratification of
Transaction:
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 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 or, as
the case may be, of the shareholders.
If any related party
transaction entered by Company without approval of Board of Directors and
Shareholders such transaction can be approve by Board and General Meeting
within 3 month of entering into transaction.
Checks - Related Party Transaction
q Before
entering into any transaction, First check above mentioned first 3 clauses.
q If
Company satisfied first 3 conditions then check further 2 clauses.
Who are relatedParties?
First Category:
Second Category:
Third Category:
Fourth Category:
Fifth Category:
Any Body Corporate whose
Ø Board of
Directors,
Ø MD or
Ø Manager
is accustomed to act in accordance with the advice, directionsor instructions of a director ormanager.
Sixth Category:
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;
Seventh Category:
Any Body
Corporate which is—A
B.
Eight
Categories:
Difference between - RELATED PARTY and RELATIVE
Food for Thought:
A.Whether a Company can have Relatives?
B.
Whether Directors / KMP’s can have Related Parties?
C.
Whether an HUF can be related Party.
D.
What is meaning of Related Party for private Limited
Company?
Exemption - Private Limited Company
For the purpose of
transactions u/s 188
Quick Bites
A. Transaction by a Company
with related party-such transaction is not 'prescribed transaction' under
Section 188 (a to g) of the Companies Act, 2013. Whether provisions of Section
188 attracts?
B. Transactions mentioned
u/s 188 with a party, which is not related party?
C. Transactions entered by A
Limited with B Limited.
a) Both having common
Directors, whether A and B shall be considered as Related Parties?
b) Directors of A limited
hold 25% of paid up capital of B Limited. However, directors are not common.
c) Relatives of Directors of
A limited hold 25% of paid up capital of B Limited. However, directors are not
common
D. Whether a LLP can be
related party, where no Directors or relative of directors are partners in LLP?
E. Preferential allotment to
promoters of Company shall be considered as Related Party Transaction?
Meaning of ‘Office or Place of Profit’
Office is held by
Director: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.
Office is held by an
individual other than a director or by any firm, private co. or other body
corporate:
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.
Quick Bites:
1.
Increase in remuneration of Director
shall be considered as Related Party transaction?
2.
Appointment of Director or related
party in Holding Company for office and place of profit shall be considered as related
party transaction?
3.
If Mr. A Faineance manager of Company
appointed as Director of Company, whether this transaction shall be considered
as related party transaction.
4.
Mrs. X is Director of ABC Ltd. Co.
proposes to appoint Mrs. P daughter as Director
5.
Mr. A directors in ABC Insurance
Limited. Mr. A proposes to take any insurance from Company ABC Insurance
Limited?
G. Whether company need
to file MGT-14 for resolution passed by Shareholders of Company?
PARTICULARS TO BE ENTERED IN REGISTER
As per Section 189 read with rule 16 a
register shall be maintained and kept at the registered office for recording
particulars of the following:-
A. Entities in which
any Director is having concern/interest u/s 184(1)
S.N.
|
Particulars
|
S.N.
|
Particulars
|
1.
|
Name of entity
|
4.
|
Nature of concern/interest or
change in them
|
2.
|
Name of interested Director
|
5.
|
Date on which concern/interest arose/ changed
|
3.
|
Shareholding, if any
|
||
C. Contracts or
agreements with related party u/s 188 OR in which any director is concerned /
interested u/s 184(2)
S.N.
|
Particulars
|
S.N.
|
Particulars
|
1.
|
Date & Amount of
Contract/arrangement
|
9.
|
Date of next meeting at which
register was placed for signature
|
2.
|
Name of party with which
contract is entered
|
||
3.
|
Name of interested Director
|
10.
|
Date of shareholder’s approval,
if any
|
4.
|
Nature of concern/interest
|
||
5.
|
Principal terms & conditions
|
11.
|
Reference to specific clause (a)
to (g) of section 188(1)
|
6.
|
Whether transaction at arm’s length
|
||
7.
|
Date of Board approval
|
12.
|
Remarks, if any
|
8.
|
No. of Directors present, voting
in favour, against or remaining neutral
|
||
Other Requirements pertaining to Registers:-
§ Disclosure
of info. as required u/s 184(1) to be given by Director/KMP within 30 days of
appointment, failure would attract penalty of Rs. 25,000/-.
§ Register
shall be placed at Board meeting & be signed by all Directors present
thereat.
§ Register
shall be produced at and shall remain open and accessible during AGM.
§ Register
shall be open for inspection and extracts may be given on payment of amount
prescribed in AOA (max. Rs. 10) within max. 7 days of request.
Duty to Directors: As per section 166,
§ a
director of company shall not Involve in a situation in which he may have a
direct/indirect interest that conflicts or may conflict with interest of the
Company.
§ Not
achieve/ attempt to achieve any undue gain either to himself or to any of his
relatives, partners or associates and if
found guilty then liable to pay equal amount.
Duty of Independent Director:-Independent
Director shall pay sufficient attention and ensure that adequate deliberations
are held before approving related party transactions and assure themselves that
the same are in the interest of Company (schedule IV, para III-point 9)
CONSEQUENCES
OF NON-COMPLIANCE
Ratification:- If Board/Shareholder’s approval not
taken before entering into RPT, then same can be ratified by Board/
Shareholders within 3 months. If ratification not done then
Contract/arrangement voidable at the option of Board.
Indemnification:- If transaction was with related party
of Director/ authorized by any director then he shall indemnify the company
against loss incurred.
Recovery
of loss:-
Company may proceed against a Director/ employee who has entered into such
contract/arrangement in contravention of section 188 for recovery of loss.
Penalty:-
|
|
LISTED COMPANIES
|
OTHER
|
Imprisonment
|
Max. 1 year
|
NA
|
Fine(min.)
|
Rs. 25000
|
|
Fine (max.)
|
Rs. 500000
|
|
hi sir,
ReplyDeleteIs filing MGT 14 for the ordinary resolution required in case of private companies for Sec 188?