Related Party Transactions

The enactment of the Companies Act, 2013 is leading towards a new era in the Indian corporate sectors, which places more reliance on disclosure norms rather than on regulatory framework. One such area is ‘Related Party Transaction’. The whole concept of the related party transaction has been encapsulated in a single section 188 of the Companies act 2013. In this article, we will look at Related Party Transactions under the Companies Act, 2013 in detail.

Applicability of Section 188

Section 188 of Companies Act, 2013 applies to both private and public companies and is applicable with effect from April 2014.

Related Party

Related party concerning a Companies Act, 2013 is given here:

A Director or his/her relative.
Key managerial personnel or his/her relative.
A company in which a director, manager or his relative is a partner.
A public firm in which a director or manager is a director or holds along with his relative more than two per cent of his paid-up share capital.
A private firm in which a director or manager is a member or director.
Any corporate whose board of directors, managing director or manager is accustomed to Companies act: In accordance with the advice, directions of a director or manager.
Any person on whose advice, instructions a director or manager is customary to companies act.
Any firm which is a holding, subsidiary or an associate company of such firm.
A director or critical managerial staff of the holding, subsidiary or associate firm of such company or his relative.
Any company which a subsidiary of a holding firm to which it is also the subsidiary.
Any person appointed by senior management in the company or its holding, subsidiary or associate company that is the personnel of the company or its holding, subsidiary or associate company who is core management team excluding the board of directors comprising all members of management one level below the executive directors, including functional heads.

Related Party Transactions

Following transactions between a firm and its related party is described as a related party transaction.

Sale, purchase or supply of any materials or goods
Availing or rendering of any service
Selling or buying property of any kind
Leasing of the property of any kind
Appointment of an agent for the sale or purchase of goods, materials, service or property
Related party’s appointment to the place of profit or office in the company, associate and subsidiary
Firm underwriting the subscription of any securities or derivatives of the company

Exemption

It is to be noted that the above-mentioned conditions would not be applicable in case of transactions entered into a company in its ordinary course of business which is on arm`s length basis. An arm’s length transaction means that a transaction between two related parties that is conducted as if they were irrelevant so that there is no dispute of interest. In this case, it is to be distinguished that the burden of agreement lies with the parties entering into an agreement that the said transactions come within the purview of arm`s length basis.

Nature of Approval Required

As per the Companies Act, 2013 every company irrespective of its capital needs to seek the approval of the Board Of Directors before entering into any related party transactions. It is mandatory that such a resolution is obtained at a meeting conducted by the board of directors. According to the provision of Companies (meeting of the board and its powers) Rules 2014, a director who has an interest in the contract with such related party must not be present at the meeting during the discussions concerning to the subject matter of the contract or arrangement.

Need for Special Approval

Following transactions, in addition to the approval of the board of directors, prior permission of members by special resolution must be obtained before entering into related party transaction. It applied to all related party transaction in case of companies having paid up share capital of ten crores or more

Purchase, sale or supply of any materials or goods directly or through the appointment of agents exceeding twenty per cent of annual turnover
Selling or disposing of any property directly or through the appointment of agents exceeding ten per cent of the net worth
Leasing property of any kind exceeding ten per cent of the net worth
Availing or rendering services directly or through the appointment of agents exceeding ten per cent of the net worth
Remuneration for underwriting the contribution of any securities or derivatives thereof of firm exceeding one per cent of the net worth
If a Special Resolution in an extraordinary general meeting, no member of the company who is a related party will cast a vote on such special resolutions, which intend at approving any arrangement, which may be entered to by the firm. In case of a wholly owned subsidiary, the special resolution passed by the holding company will be considered adequate for entering into transactions between wholly owned subsidiary and the holding company.

Disclosure Norms

Disclosure norms under the companies act, 2013 is explained in detail below:

Board Meeting

According to the provision of the companies act, the agenda at the board meeting in which a resolution is to be passed should consist of the following information:

Name and nature of the relationships with the related party
The duration of the contact
Material terms of the arrangement or contract
In case of any advance has been paid or received for the arrangement
The manner of determining the price and commercial term, both of which form a part of the contracts and the once that are not considered part of the contract
The board undertakes any other relevant or vital transaction

Disclosure by Interested Directors

Every director of a firm who has any direct or indirect interest involved in the contract or entered into or about to be entered in to must disclose the nature of the concern at the meeting of the boards in which such contract or arrangement is discussed

Board Disclosures

Every related party transaction will be disclosed in the board`s report along with the justification for entering into the contract or arrangement

Disclosures in the Register

Every nation has to maintain one or more registers in MBP 4 and will enter the particulars of the contract with a related party with respect to transactions enumerated in the companies act, 2013

Audit

According to the provisions of the Companies Act, 2013 it is needed that the audit committee to approve or modify the transaction with the related party scrutinizes the same as per the provisions of the companies act. Further, this act provides the audit committee with the authority to investigate the matters falling within its scope and to have full access over the information contained in the records of the company.

Non Compliance

In cases where any contract is entered by the director or any other employees, without getting the consent of the boards or approval by a special resolution in the general meeting, such cases the contract will be treated as voidable. Such employees or director who contravene the provisions of the companies act will be punishable with incarceration for one year or fine of twenty-five thousand rupees which may extend to five lakh rupees or both. And in case of any other firm will be punishable with a fine of twenty-five thousand rupees, which may extend to five lakhs.