By S.Dhanapal, Sr. Partner, S Dhanapal &
Associates, Practising
Company Secretaries, Chennai.
Companies
Act, 2013 has unveiled a new era in the Indian Corporate Sector which places
more reliance on disclosure norms rather than on regulatory approvals. One such
area is “related party transactions”. While the Companies Act, 1956 warranted
approval of Central Government for related party transaction by large cap
companies, Companies Act, 2013 calls for greater disclosures with members’
approval. The scope of transactions have also been widened to include
transactions relating to immovable property also which were earlier left
outside the ambit of Section 297 of the Companies Act, 1956.
Under
the Companies Act, 2013, the whole concept of related party transactions has
been capsulated in a single section, namely Section 188 which combines the
erstwhile Sections 314 and 297 of the Companies Act, 1956 and also contains
many new provisions within its scope. The section is deeply layered with many
set of provisions and leaves the mind perplexed with its scope and coverage.
In
this article, we have made an attempt to the analyse the concept of related
party transactions under the Companies Act, 2013 as contained in Section 188
read with relevant rules made thereunder
Analysis of Section 188 of Companies Act, 2013 read with Rule 15
of
Companies (Meetings of
Board and its Powers) Rules, 2014
Section
188 is placed in “Chapter 12 – Meeting of Board and its Powers”. Section 188
requires a company to obtain approval of the Board and of the members, in
certain situations, prior to entering of any transaction or agreement with a
related party. An analysis of Section 188 requires understanding the following:
Applicability of the Section
Definition/Meaning of Related Party
Transactions which are deemed as related party
transactions
Nature of approvals required
Disclosure norms
Exemptions/Non-applicability
Consequences of non-compliance
We will proceed to understand the
above provisions.
v Applicability
of the Section
Section 188 is
applicable to both private as well as public companies and is applicable with
effect from 01.04.2014
v Definition/Meaning
of Related Party
Section 2(76), read
with rule 3 of Companies (Specification of definitions details) Rules, 2014,
defines a related party as under:
“related party”, with reference to a company, means—
·
a director or his relative;
·
a key managerial personnel or his relative;
·
a firm, in which a director, manager or his relative is a
partner;
·
a private company in which a director or manager is a member or
director;
·
a public company in which a director or manager is a director or
holds along with his relatives, more than 2%
of its paid-up share capital;
·
any body 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;
·
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;
·
any company which is—
(A) a holding, subsidiary or an associate company of such
company; or
(B) a subsidiary of a holding company to which it is also a
subsidiary;
a director or key managerial personnel of the holding company or his
relative
COVERAGE OF “RELATED PARTY”
v Transactions
which are deemed as related party transactions
Any transaction between a company and its related party relating
to:
Meaning of Office or place of profit for this purpose:
“office or place of profit” means any office or place—
(i) 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;
(ii) 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;
v Exemptions/Non-applicability
The
above mentioned provisions will not be applicable in case of transactions
entered into by the company in its ordinary course of business, which are on
arm’s length basis.
“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.
v Nature
of approvals required
·
Approval
of Board of Directors
ü
Every company needs to seek the approval of its Board
of Directors for entering into any related party transaction, as listed above,
irrespective of the capital of the company or the value of the transaction.
ü
Approval of the Board has to be sought at a duly
convened meeting of the Board and same cannot be obtained by passing of a
resolution by circulation.
ü
Where any director is interested in any contract or
arrangement with a related party, such director shall participate in the Board
Meeting in which the contract or arrangement is discussed. As per Rule 15 of
the Companies (Meeting of Board and its powers) Rules, 2014, 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.
·
Prior
approval of Members by means of special resolution
ü
In the following circumstances, in addition to
approval of Board of Directors, prior approval of members by means of a special
resolution must also be sought before entering into any related party
transaction:
·
All related party transactions in case of a company
having a paid-up share capital of Rs. 10 Crores or more,
·
Sale, purchase or supply of any goods or materials
directly or through appointment of agents exceeding 25% of the annual turnover as
mentioned in clause (a) and clause (e) respectively of sub-section (1) of
section 188
·
Selling or otherwise disposing of, or buying,
property of any kind directly or through appointment of agents exceeding 10% of
net worth as mentioned in clause (b) and clause (e) respectively of sub-section
(1) of section 188
·
Leasing of property of any kind exceeding 10% of
the net worth or exceeding 10% of turnover as mentioned in clause (c) of
sub-section (1) of section 188
·
Availing or rendering of any services directly or
through appointment of agents exceeding 10% of the net worth as mentioned in
clause (d) and clause (e) of sub-section (1) of section 188
·
Appointment to any office or place of profit in the
company, its subsidiary company or associate company at a monthly remuneration
exceeding Rs. 2.5 Lakhs as mentioned in clause (f) of sub-section (1) of
section 188
·
Remuneration for underwriting the subscription of
any securities or derivatives thereof of the company exceeding 1% of the net
worth as mentioned in clause (g) of sub-section (1) of section 188.
ü
The Turnover or Net Worth shall be on the basis of
the Audited Financial Statement of the preceding financial year.
ü
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.
ü
In case of wholly owned subsidiary, the special
resolution passed by the holding company shall be sufficient for the purpose of
entering into the transactions between wholly owned subsidiary and holding
company.
v Disclosure
norms
·
Disclosures
to be made in notice of Board Meeting
The
agenda of the Board meeting at which the resolution is proposed to be moved shall
disclose:
§
name of the related party and nature of
relationship;
§
nature, duration of the contract and particulars of
the contract or arrangement;
§
material terms of the contract or arrangement
including the value, if any;
§ any advance
paid or received for the contract or arrangement, if any; and
§
the manner of determining the
pricing and other commercial terms, both included as part of contract and not
considered as part of the contract;
§
whether all
factors relevant to the contract have been considered, if not, the details of
factors not considered with the rationale for not considering those factors;
and
§
any other information relevant or important for the
Board to take a decision on the proposed transaction.
·
Disclosure
by interested directors
Every
director of a company who is 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
§ with a body
corporate in which such director or such director in association with any other
director, holds more than 2% shareholding of that body corporate, or
§ with a body
corporate in which such director is a promoter, manager, Chief Executive
Officer of that body corporate; or
§ 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 the contract or arrangement is discussed.
Where
any director who is not so concerned or interested at the time of entering into
such contract or arrangement, he shall, if he becomes concerned or interested after
the contract or arrangement is entered into, disclose his concern or interest
forthwith when he becomes concerned or interested or at the first meeting of
the Board held after he becomes so concerned or interested.
·
Disclosures
to be made in the explanatory statement to be annexed to notice of general
meeting:
§ name of the
related party ;
§ name of the
director or key managerial personnel who is related, if any;
§ nature of
relationship;
§ nature,
material terms, monetary value and particulars of the contract or arrangement;
§ any other
information relevant or important for the members to take a decision on the
proposed resolution.
·
Disclosures
to be made in Board’s Report:
Every
related party transaction or contract shall be disclosed in the Board’s report
along with the justification for entering into such contract or arrangement.
·
Disclosures
to be made in Register of contracts or arrangements in which directors are
interested
Every
company shall maintain one or more registers in Form MBP 4, and shall enter
therein the particulars of contracts or arrangements with a related party with
respect to transactions to which section 188 applies.
v Consequences
of non-compliance
- 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
special resolution in the general meeting, as the case may be, 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 and if the contract or arrangement is
with a related party to any director, or is authorised by any other
director, the directors concerned shall indemnify the company against any
loss incurred by it.
- Additionally,
the company can also proceed against a director or 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.
- Any
director or any other employee of a company, who had entered into or
authorised the contract or arrangement in violation of the provisions of
this section shall –
(i)
in case of listed company, be punishable with
imprisonment for a term which may extend to 1 year or with fine which shall not
be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-, or with both;
and
(ii) in
case of any other company, be punishable with fine which shall not be less than
Rs. 25,000/- but which may extend to
Rs. 5,00,000/-.
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