Related Party Transactions

What is Related Party Transactions: A Transaction for a transfer of resources or obligations between related parties as defined below, regardless of whether or not a price is charged as per (AS-18).

(1) Related Parties

Related PartyRelations
Director, KMP or their Relatives and Director, KMP of Holding Co.Self
FirmDirector / Manager / Relative is a Partner
Private Limited CompanyDirector / Manager is a Director / Shareholder
Public Limited CompanyDirector / Manager is a Director / Shareholder holding more than 2% shares along with relatives
Any Body CorporateWhose BoD / MD / Manager is accustomed to act on direction of a Director / Manager
Any Personon whose directions a Director / Manager is accustomed to act
A CompanyHolding, Subsidiary, Fellow Subsidiary or an Associate Company [Exempt for Pvt. Ltd. Cos.]
Holding CompanySelf

(2) Who are Relatives

  1. Member of HUF
  2. Father/Step-father
  3. Mother/Step-Mother
  4. Son/Step-son
  5. Son’s Wife
  6. Sister/Step-sister
  7. Daughter
  8. Daughter Husband

(3) Required of Related Party Disclosure/Approval
Section 188(1) of the Companies Act, 2013

Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement
with a related party with respect 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 above purpose
  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:

Provided that nothing in this sub-section 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

Explanation

Such transactions may be prejudicial to the interest of Company or its stakeholders and hence require scrutiny.Even a related party relationship could have an effect on the financial position and operating results of a Company

  1. office or place of profit” means any office or place—
    1. if the director is holding it then he 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;
    2. 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 holder receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
  2. 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.Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution:[Expl. 2 of Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014 – In case of wholly owned subsidiary, the resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between WOS and holding company.]Provided further that 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: [Exempt for Pvt. Ltd. Cos. – MCA Notification dated June 5, 2015]

(4) Register of Contract:

Register(s) to be maintained in form MBP-4

To be placed before the next meeting of the Board and signed by all the directors present at that meeting.To be kept at the regd. office and shall be open for inspection during business hours and extracts may be taken therefrom, and copies thereof may be furnished to any member.The register to be produced at the commencement of every AGM and shall remain open and accessible during the continuance of the meeting.

No entry required to be made in Form MBP-4:

(a) for the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed five lakh rupees in the aggregate in any year; or
(b) by a banking company for the collection of bills in the ordinary course of its business.

(5) Internal Control of Related arty transactions:

  1. Duties of Independent Director: 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 the company
  2. 177(4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include approval or any subsequent modification of transactions of the company with related parties
  3. Certification in form MGT-8 by a practicing Company Secretary
  4. PCS to certify that with respect to the contracts / arrangements with related parties as specified in section 188 of the Act during the financial year, the Company has complied with provisions of the Act & Rules made there under.

(6) Related Party and Secretarial Standards

Secretarial Standard-1 (SS-1): Related Party transactions to be carried out in physical meetings of the Board only and NOT by circulation.

Secretarial Standard-2 (SS-2):A Member who is not entitled to vote on any particular item of business being a related party, if present, shall be counted for the purpose of Quorum.

(7) Proposed Change in Related Party Transaction

  1. If 90% or more members, in number, are relatives of promoters or are related parties, they can vote on resolutions concerning related party transactions in General Meetings.
  2. in sub-section (3), for the words “shall be voidable at the option of the Board”, the words “shall be voidable at the option of the Board or, as the case may be, of the shareholders” shall be substituted

(8) Related Party Transaction: Prior Approval

Rule 15(2) 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.

A contract or arrangement 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) may be 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.

Prior Approval by way of resolution is required.

*If consent is not obtained or such contract or arrangement is not ratified within 3 months, such contract or arrangement shall be voidable at the option of the Board and if the contract or arrangement is with a related party to any director, or is authorized by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

*Without prejudice to anything contained in sub-section (3), it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement. [Section 188(4)]
Penalties

(9) Penalties

On a director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of section 188 —

  1. in case of listed company – imprisonment upto one year or fine of 25,000/- to 5,00,000/- or with both; and
  2. in case of any other company – fine of 25,000/- to 5,00,000/-
    A person convicted for offence under section 188 stands disqualified from holding office of Director for a period of 5 years [Section 164(1)(g)

 

It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.

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Why not give them a call right now at +91 9911222771 and start a conversation immediately.

By | 2018-01-23T17:32:03+00:00 October 10th, 2017|Compliance & Litigation|0 Comments

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