[section188 and rule 15 of companies (meeting of boards and its powers) rules, 2014] applicable to...

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Related Party Transaction

[Section188 and Rule 15 of Companies (Meeting of Boards and its Powers) Rules, 2014]

Applicable to both Private as well as Public Companies


Who is a Related Party??


Related Party has been explained under section 2(76) of the Companies Act, 2013 which includes:-

1. A Director or his Relative

2. A Key Managerial Personnel

3. A firm in which 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 AND* holds along with his relatives, more than 2% of its paid up capital

6. Any body corporate, whose BOD, MD or Manager is accustomed to act in accordance with the advice, direction or instruction of a Director or Manager given not in a Professional capacity.

7. Any person on whose direction or instruction or advice given not in any professional capacity, a Director or Manager is accustomed to act.

8. Any company which is the company’s holding company or co-subsidiary of that holding company or subsidiary or associate company.

* Companies 1st (Removal of Difficulties) Order, 2014

word “OR” replaced with word “AND”


The following person, with reference to a company as defined under Rule 3 of the Companies (Specification of Definitions of Details), Rules, 2014, shall also be deemed to be related party:

I. A director or

II. Key managerial person of the holding company of such company or

III. Their relative shall be deemed to be related party.


Who are Relatives ?


List of Relative Is defined under Section 2(77) of the Companies Act, 2013.

Under Companies Act, 2013 Under Companies Act 1956

Relative means anyone who is related to another person if they are:-a) members of a HUFb) Husband or Wifec) Related in any manner as prescribed inCompanies (Specification of definitions details) Rules, 2014:-A person shall be deemed to be relative of another, if he /she is related to another in the following manner:-1. Father (Includes Step father)2. Mother (Includes Step Mother)3. Son (Included Step Sun)4. Son’s Wife5. Daughter6. Daughter’s Husband7. Brother (Includes Step Brother)8. Sister ( Includes Step Sister)

The person defined as relative under the New companies act were also defined as relatives in the Old Act, however the following person who were included in the definition of the relatives under old act has been removed from the definition of relative under the New Act, namely: - 1. Father's father. 2. Father's mother. 3. Mother's mother. 4. Mother's father. 5. Son's son. 6. Son's wife. 7. Son's daughter. 8. Son's daughter's husband.9. Daughter's son.10. Daughter's son's wife.11. Daughter's daughter.12. Brother's wife. 13. Sister's husband


Concept of Related party widened

Under the 1956 Act, restriction applied only to transaction with specified person/parties, namely: -

1. A director of the company or his relative

2. A firm in which such a director or relative is a partner, any other partner in such a firm

3. A private company of which the director is member or director.

In contrast, section 188 of Companies Act, 2013 covers all the persons covered in the definition of the term, “Related Party”.


Related Party Transaction

Section 188 of the Companies Act, 2013 deals with certain transactions which requires Boards and Shareholders approval, which have been dealt in following slides:


Related Party Transaction ApprovalsParticular Board’s

ApprovalMembers Approval

Sale purchase or supply of any goods or materials directly or through appointment of Agent

Require Required if transaction value exceeds 10% of the turnover of the company or Rs. 100 crore, whichever is lower

Selling or otherwise disposing of, or buying, property of any kind directly or through Agent

Require Required if transaction value exceeds 10% of net worth of the company or Rs 100 crore, whichever is lower

Leasing of property of any kind Require Requires if transaction value exceeds 10% of the net worth of the company or 10% of turnover of the company or Rs 100 crore, whichever is lower

Availing or rendering of any services directly or through appointment of Agent

Require Requires if transaction value exceeds 10% of the turnover of the company or Rs. 50 crore, whichever is lower

Explanation: it is hereby clarified that the limits specified above shall apply for transaction to be entered into either individually or taken together with the previous transaction during a financial year.

Required if transaction value exceeds 25% of the turnover of the company

Required if transaction value exceeds 10% of the net worth of the Company.

Required if transaction value exceeds 10% of the net worth of the Company.

If Transaction was before

August, 2014


Related Party Transaction Approvals (in Continuation..)

Particulars Board Approval

Members Approval

Underwriting the subscription of any security or derivatives thereof.

Require Required if exceeding 1% of the Net worth

Appointment of any office or place or place of profit in the company or its subsidiary or associate company.

Require Requires if monthly remuneration of such related party exceeds Rs. 2,50,000

Explanation: -(1) 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.(2) In case of a wholly owned subsidiary, the Special Resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between the wholly owned subsidiary and the holding company.

Non Applicability of the Section

If the Transaction are

on or after May 21, 2015,

Ordinary Resolution is

required.


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 Special resolution:

Provided further that no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party:

Provided also that nothing in this sub-section shall apply to any transaction entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.

Provided also that 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.

Ordinary w.e.f. 25th May 2015

Provided further that no member of the company (Other than Private Company) shall vote on such Ordinary resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.

w.e.f. 5th June 2015

Proviso to the scope of related parties


Disclosure of interest by DirectorEvery Director of a Company who in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into –

(a) with a body corporate in which such director or in association with any other director holds more than 2% shareholding of that body corporate OR is a promoter, manager, CEO of that body corporate OR

(b) With a firm or other entity in which, such director is a partner, owner or member, as the case may be, Shall disclose the nature of his concern or interest at the meeting of the Board in which such contract is discussed and shall not participate in such meeting. [Section 184(2)]


Contract Voidable if approval of Board / Member is not taken When a director or any employee enters into any contract, without obtaining the consent of BOD or approval by Special Resolution and if it is not ratified by the Boards/Shareholders within 3 months from the date on which such contract was entered into, such contract shall be voidable at the option of the Board. If the contract or arrangement is with a related party to any other director, or is authorized by any other director, the director concerned shall indemnify the company against loss incurred by it. [Section 188(3)]


Penalty

It shall be open to the company to proceed against a director or any other employee who had entered into 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)]

Any Director or an employee who had entered into or authorized the contract or arrangement with a related party in violation of the provisions of this section shall be punishable:-

1. In case of Listed Company :- Imprisonment up to 1 year or Fine of Rs. 25,000 up to Rs. 5 lakh or both

2. In case of any other company :- Fine of Rs. 25,000 up to Rs. 5 lakh. [Section 188(5)]


Approval of Audit Committee ( u/s 177)

Applicability of Audit Committee: -

Following companies are required to constitute an Audit committee: -

1. Every Listed Company

2. All Public companies with a paid-up capital of Rs. 10 crores or more;

3. All public companies having turnover of Rs. 100 crore or more;

4. All public companies having in aggregate, Outstanding loans or borrowings or debenture or deposits exceeding Rs. 50 crore or more.

Requirement: -

As per the provisions of section 177(4)(iv), every Related party transactions and subsequent modification in any previous transaction will require prior approval of Audit Committee.


Implications of revised clause 49 of Listing Agreement in terms of Related Party Transactions

The Company shall frame and adopt a policy on materiality of related party transactions and dealing with related party transactions. The same shall be filed with the stock exchanges and also be updated in the Company’s website. Further the company shall include the policy in its Annual Report every year.

Any related party transactions irrespective of transactional values requires the prior approval of Audit Committee.

The company shall have a periodical review of the related parties and the transactions entered or to be entered into with the related parties.


Requirement for Listed Companies

Prior approval of shareholders required for all Material related party transactions

Policy of dealing with Related party transactions to be disclosed on website and in annual report.

Details of all “Material Transactions” with related parties shall be disclosed quarterly along with the compliance report on corporate governance.

Material Transaction: Transaction (together with previous transactions with a related party) exceeds 10% of the annual turnover; or

exceeds 20% of the net worth of the company as per last year’s audited financials

Material Transaction: Transaction (together with previous transaction with a related party) exceeds 10% of the turn over as

per last year’s audited financials.

w.e.f. September 15, 2014


Thank You..

[section188 and rule 15 of companies (meeting of boards and its powers) rules, 2014] applicable to...

Documents

new companies act

new act

old act

holding company

private company

definition of relative

associate company

public company