In this article, Nehal Nikhil Wagle pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses Related Party Transactions under the Companies Act, 2013.

The enactment of Companies act, 2013 is leading towards a new era in the Indian corporate sector which places more reliance on disclosure norms rather than on regulatory framework. One such area is related party transaction. The concept of related party transaction was not defined under the earlier act, Companies Act, 1956. However, the old companies act dealt with restrictions imposed on various transactions with parties like director of the companies or his relative, firm in which such a director or relative is a partner, any other partner in such a firm and private company of director is a member or director. Under the companies act 2013 the whole concept of related party transaction has been encapsulated in single section namely section 188 which is a combination of section 314 and section 297 of the Companies Act, 1956.

Applicability of Section 188 of Companies Act, 2013

Section 188 is applicable to both private as well as public companies and is applicable with effect from 1.4.2014.

Meaning of Related Party Transaction

As per section 2(76) of Companies Act, 2013 the term Related party transaction means-

Related party with reference to a company means-

1. A director or his relative
2. A key managerial personnel or his relative
3. A firm, in which a director, manager or his relative is a partner
4. A private company in which a director or manager is a member or director
5. A public company in which a director or manager is a director or holds along with his relative more than 2% of his paid up share capital
6. 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
7. 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 advice, directions or instructions given in professional capacity
8. Any company which, is

• A holding, subsidiary or an associate company of such company
• A subsidiary of a holding company to which it is also a subsidiary

9. A director or key managerial personnel of the holding, subsidiary or associate company of such company or his relative
10. Any person appointed in senior management in the company or its holding, subsidiary or associate company i.e. personnel of the company or its holding, subsidiary or associate company who are core management team excluding board of directors comprising all members of management one level below the executive directors, including functional heads.

Transactions which are deemed to be related party transaction

Following transactions 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 service
5. Appointment of any agent for purchase or sale of goods, materials, service or property
6. Appointment to any office or place of profit in the co., its subsidiary or associate
7. Company Underwriting the subscription of any securities or derivatives thereof, of the company

Exemption/Non-applicability

However, it is to be noted that the above-stated conditions shall not be applicable in case of transactions entered into by a company in its ordinary course of business which are on arm`s length basis. An 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. In this case, it is to be noted that the onus of responsibility lies with the parties entering into contract that the said transactions come within the purview of arm`s length basis.

Nature of Approval Required

A contrasting change has been introduced by the Act of 2013, in comparison to the act of 1956 is that in the later act the previous approval of the central government was mandatory for companies having paid up share capital of not less than one crore rupees for entering into any transaction with the related parties.

As per the new act of 2013 every company irrespective of its capital needs to seek the approval of BOARD OF DIRECTORS before entering into any related party transactions. It is necessary that such a resolution is obtained at a meeting conducted by the board of directors. As per rule 15 of Companies (meeting of board and its powers)  Rules 2014, a director who has `an interest` in the contract or arrangement with such related party must not be present at the meeting during the discussions pertaining to the subject matter of the contract or arrangement.

• In following cases, in addition to the approval of board of directors, prior approval of members by special resolution must be sought before entering into related party transaction

All related party transaction in case of companies having paid up share capital of Rupees 10 crores or more-

• Sale, purchase or supply of any goods or materials directly or through appointment of agents exceeding 25% of annual turnover
• Selling or disposing of property of any kind directly or through appointment of agents exceeding 10% of the net worth
• Leasing property of any kind exceeding 10% of the net worth
• Availing or rendering services directly or through appointment of agents exceeding 10% of the net worth
• Remuneration for underwriting the subscription of any securities or derivatives thereof of company exceeding 1% of the net worth
• In case of a Special Resolution in an extraordinary general meeting, no member of the company who is a related party shall cast a vote on such a special resolutions which aim at approving any contract or arrangement which may be entered into by the company. In case of wholly owned subsidiary the special resolution passed by the holding company shall be considered sufficient for entering into transactions between wholly owned subsidiary and the holding company.

Disclosure Norms

1. Board Meeting

The agenda at the board meeting in which a resolution is to be passed must consist of the following

• Name and nature of the relationship with the related party
• The duration of the contact
• Material terms of the contract or arrangement
• If any advance has been paid or received for the contract or arrangement
• Manner of determining pricing and commercial terms both of which form a part of the contract and the once that are not considered part of the contract.
• Any other relevant or important transaction undertaken by the board.

2. Disclosure by interested directors

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

3. Board Disclosures

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

4. Disclosures to be made in the Register

Every country has to maintain one or more registers in MBP 4, and shall enter the particulars of the contract or arrangement with a related party with respect to transactions enumerated in section 188 of companies act, 2013

Audit

As per the provisions of the Companies Act, 2013 it is required that the audit committee to approve or modify the transactions with the related parties, scrutinize the same as per the provisions of the act. Further the companies act gives the audit committee the authority to investigate into any matters falling within its ambit and to have full access over the information contained in the records of the company.

Non Compliance

In cases where a contract or an 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 then in such cases, the contract or arrangement shall be treated as voidable. Such a director or employees who contravene the provisions of the act shall be punishable with imprisonment for a term which may extend to one year or fine not less than twenty-five thousand rupees which may extend to five lakh rupees or both. And in case of any other company shall be punishable with fine not less than twenty-five thousand rupees but which may extend to five lakhs.

Proposed Amendments

Following a great representation from the industry, the Government of India has proposed to introduce Companies (Amendment) Bill 2014, which has already been passed by Lok Sabha and now awaits the approval of Rajya Sabha. The proposal is expected introduce new amendments pertaining to related party transaction, the categories of related party transactions that earlier required approval through special resolution (more than 75% of the voting members) will now need an ordinary resolution (more than half of voting members). However, the listing agreement shall stipulate a special resolution requirement for transactions exceeding the threshold limit.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:  

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA