RELATED
PARTY TRANSACTIONS UNDER NEW COMPANY LAW
New Companies Act, 2013 emphasis on the Related Party
Transactions and the manner of approval & disclosure thereof. Under section
188,
·
consent
of Board of Directors of company or in certain cases prior approval by special
resolution required for every such contract or arrangement;
·
Details
of every such contract or arrangement shall be referred to in the Board’s
Report along with the justifications.
·
Member
who is related party to the any contract or arrangement shall not vote on the
special resolution for approval of such contract or arrangement.
·
Where
any contract or arrangement is entered into by a director or any other
employee, without complying with the provisions and if it is not ratified by
the approving authority, such contract or arrangement shall be voidable at the
option of the Board.
·
The
section also provides penalty for director or other employee of a company who
had entered into or authorized the contract or agreement in violation of the provisions
in case of listed company or unlisted company.
Corresponding
provisions in Companies Act, 1956
Section 297: Board's sanction to be required for certain
contracts in which particular directors are interested
Who is ‘related party’
With reference to company, ‘related party’ world mean and
include the following –
I.
a
director or his relative,
II.
KMP
or their relative,
III.
a
firm in which a director manager or his relative is a partner,
IV.
a
private company in which a director or manger is a director or holds along with
his relatives, more than 2% of its paid-up share capital,
V.
a
person on whose advice, directions or instruction (except given in professional
capacity) a director or manager is a accustomed to act,
VI.
a
holding/ subsidiary or associate company, subsidiary’s subsidiary, and such
person as would be prescribed.
Related Party [Section 2(76)]
“Related Party”, with reference to a company, means—
(i)
a
director or his relative;
(ii) a key managerial personnel or his
relative;
(iii) a firm, in which a director, manager
or his relative is a partner;
(iv) a private company in which a director
or manager is a member or director;
(v) a public company in which a director
or manager is a director or holds along with his relatives, more than two per
cent. of its paidup share capital;
(vi) 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;
(vii) 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;
(viii) 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;
(ix) such other person as may be prescribed.
Relative [Section 2(77)]
‘‘Relative’’, with reference to any person, means anyone
who is related to another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner
as may be prescribed.
Key Managerial Personnel [Section
2(51)]
“Key Managerial Personnel”, in relation to a company,
means—
(i) the Chief Executive Officer or the managing director
or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed.
Related Party Transaction
Under
the new Act, 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-
(a) sale, purchase
or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying,
property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of
goods, materials, services or property;
(f) such related party's appointment to any office or
place of profit in the company, its subsidiary company or associate company;
and
(g) underwriting the subscription of any securities or
derivatives thereof, of the company.
In respect of companies having paid up capital of sum as
may be prescribed or transactions
exceeding such sums as may be prescribed, shall require prior approval
of shareholders by way of Special Resolution.
Nature of transactions covered are comprehensive as they
include routine to rare supply of goods or material either by way of direct
sale, purchase or supply of any goods or services (technical support,
maintenance, consultancy, advisory, leasing of property or sharing professional
knowledge etc.) or by appointing agent for the same and underwriting financial
instruments of the Company.
While entering into such type of transactions, Company
will be required to take prior approval of Board of Directors, by way of a
resolution passed in the board meeting.
The transactions done in ordinary course of business on
arm length’s basis shall be outside the scope of this provision.
*Consent: Consent implies knowledge of the necessary facts and materials which
leads to the consent. [Walchandnagar Industries Ltd. v. Ratanchand Khimchand
Motishaw]
Office or Place of profit
Office or place of profit would mean any office or place
:
a) 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;
b) 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.
Where the transactions mentioned above are carried out or
done in the ordinary course of business and on the arm’s length transaction
basis, then there is no requirement of obtaining approval from Board of
Directors.
Arms Length Transaction
Arm’s length transaction would mean transaction between
two related or affiliated parties that is conducted as if they were unrelated,
so that there is no question of a conflict of interest. The concept of an arm's
length transaction is to ensure that both parties in the deal are acting in
their own self-interest and are not subject to any pressure or duress from the
other part.
Consequences of Contravention of
provisions
In case, where any contract or arrangement is entered in
to by a director or any other employee, without obtaining the consent of the
Board or approval by as pecialre solution in the general meeting under
sub-section (1)and, i) if it is not ratified by the Board or ii) 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 contractor arrangement is with
are 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.
Recovery of loss in related party
transaction
Besides subsequent approval, it shall be open to the
company to proceed against a director or any other employee who had entered in
to such contract or arrangement in contravention of the provisions of this
section for recovery of any loss sustained by it.
Penal provisions
Any director or any other employee of a company, who
authorised to enter into the contracts or arrangement, in violation of the
provisions of this clause, shall be punishable as under -
i) In case of listed company – Any director or other
employee of the listed company be punishable with,
a) imprisonment for a term which may
extend to 1 year or
b) fine which shall not be less than twenty five thousand
rupees but which may extend to
five lakh rupees or
c) with both.
ii) In case of other than listed company – Any director
or other employee of the unlisted company be punishable with fine which shall
not be less than twenty five thousand rupees but which may extend to five lakh
rupees.
This Article is shared by CS Ankur Srivastava
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