This is one of the most important sections of the Companies Act. If a company is entering into any transaction, contract, arrangement etc. they have to check and comply with the provision of this section. Whenever we are concerned about compliances of related party transaction, we have to check following sections:
1. Section 2(76) - Definition of Related Party Transaction
2. Section 188 - Related Party Transaction.
3. Section 189 - Registration of transactions in which directors are interested
Therefore, in general word one can opine that, combined reading/ compliance of above mentioned 3 sections are required to successfully enter into contract/ arrangement with Related Party.
LET'S START DETAIL STUDY ON SECTION 188
DEFINITION OF RELATED PARTY AND STUDY ON SAME IS COVERED AFTER STUDY OF 188
Section 188(1) states about contract or arrangement with related party. Compliance of this section is applicable only for the transaction mentioned u/s 188(1) {a to g}.
In simple word if a company entered into any transaction with related party which are not coved in list of transaction of a to g u/s 188, in such case company is not required to compliance with conditions mentioned in
section 188.
A. TYPE OF TRANSACTION COVERED UNDER 188
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;
G) Underwriting the subscription of any securities or derivatives thereof, of the company
Any Transaction with Related party other then mentioned above are out of preview of Section 188
B. APPROVALS REQUIRED
C. RISTRICTION ON PARTICIPATION
Board Meeting: 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. [Rule 15(2)]
General Meeting: 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 for such transaction.
Exemption: Above mentioned restriction of general meeting, shall apply to a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties
MOST IMPORTANT PROVISION OF SECTION 188
D. EXEMPTION
Exemption from compliance of provisions of Section 188.
A. Ordinary Course of Business and Arm Length Basis: 4th Proviso of Section 188(1) play most important role while complying with the provision of this Section:
Nothing in Sec. 188(1) 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.
Provisions of Sec. 188(1) are not applicable, if:
- Transaction is in ordinary course of business (+)
- Transaction is on arm's length basis
Company need not to comply followings:
- Board/Shareholder's Approval.
- Restrictions on presence in Board meeting/voting in General meeting.
- Specific disclosures required in agenda of Board meeting & explanatory statement of General meeting
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