Urgent - contract with related party

This query is : Resolved

Muralidharan (Querist)
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07 September 2014 7th September 2014

ABC Limited is a closely held public limited company. The paid up capital is Rs.13.00 crores. The turnover of the company is about Rs.45.00 crores. There are seven directors on the board. The company is manufacturing engineering components and parts.

XYZ Private Limited is a closely held private limited company. The paid up capital is Rs.55.00 lacs. For the past few years there is no operations / sales in the company. After a long hiatus the company has recommenced its operations during the year 2014-15. There are two directors on the board. This company is also in the manufacture of engineering components and parts.

None of the Directors of ABC is interested in XYZ Private Limited either as a Director or as a Relative of a Director. However it shall be noted that both the companies were promoted by a same group of promoters. In other words the promoters of ABC Limited also holds more than 20% shares in XYZ Private Limited triggering significant control. Accordingly both the companies are considered to be Related Parties.

Both ABC and XYZ wish to enter into following contracts:

(1) ABC Limited will sell components and parts to XYZ Private Limited regularly. The cost of components supplied will be at applicable market rates

(2) XYZ Private Limited will provide services (Labour charges) to ABC Limited. ABC will send components to XYZ for job work. XYZ will complete the job work and send back the components to ABC. For this job work XYZ will charge labour charges on ABC.

I request the forum members to advise and help me how to approve the above said contracts. I would be greatful if somebody could help me with the step by step procedures involved including filing of any Forms with ROC.

with regards

Muralidharan

c.bakshi

c.bakshi (Expert)
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07 September 2014 if the transaction between the companies is on arm's length price then only board of directors is enough to give consent on the approval of contract and a copy of board resolution is enough, however “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.