Related Party Transactions
Section-188 of the Companies Act, 2013
A Concise Comparison:-
i. Section 188 of the Companies Act, 2013 replaces the section 297 of the Companies Act,1957.
ii. Under Companies Act, 1957, if any transaction is covered under section 297 and the company is having paid up capital more than 1 crore then previous approval of Central government is required for entering in to related party transactions but now no such approval is required.
Applicability of Section 188 :-
i. Section 188 of the Companies Act, 2013 is applicable w.e.f. 1st, April 2014.
ii. This section is applicable on both Public and Private Companies.
Meaning of Related Party as per Section 2(76) :-
After reading the Section 2(76) of the Companies Act,2013 relative includes the following in relation to a company:-
1. A director or his relative.
2. A key manager personnel or his relative.
3. A firm in which director , manager or his relatives is a partner.
4. A private company in which a director or manager is a member or director.
5. A public company in which director or manager is a director or hold along with relatives more than 2 % of paid up share capital.
6. Any body corporate whose board of directors, managing directors or manager habitual to the act , in accordance to advice directions or instructions of a director or manager.
7. Any person on whose advice the director or manager becomes the habitual of the act.
8. Any company which is :-
i. a holding , subsidiary or an associate company of such company; or
ii. a subsidiary of a holding company to which it is also a subsidiary.
9. A director or key manager personnel of a holding company or his relative with reference to a company shall be deemed to be related party.
Approvals Required for Related Party Transactions:-
Following approvals are required for entering in to related party transactions:-
- Shareholders approval.
- Board approval.
1. Shareholders approval:- If the company having paid up capital of 10 crore or more proposes to enter in to a contract with related party, then such transaction in addition to the board approval requires approval of shareholders by way of special resolution are as follows:-
i. Any supply of goods or material through any agent or any sale purchase made during the year does not exceeds 25% of annual turnover of the company as per clause (a) sub section 1.
ii. Buying , selling or disposing any kind of property the amount for the same has not been exceeds 10% of net worth as per clause (b) sub section 1.
iii. Any type of leasing of leasing of property which amounts to 10% or more of the turnover of company.
iv. Availing or rendering of any services directly or through any agent the value for such service exceeds 10% of net worth.
2. Directors approval:-
If the company proposes to enter in to related party transaction as listed below than every company requires directors approval irrespective of the capital structure:-
i. Sale, purchase or supply of any goods or material.
ii. Selling or otherwise disposing off or buying of property of any kind.
iii. Leasing of property of any kind.
iv. Underwriting the subscription of any securities or derivatives thereof, of the company.
Appointment of any agent for purchase or sale of any goods, material , services or property.
Non compliance with the procedure as specified in subsection(1) of section 188 :-
1. If any non-compliance made w.r.t to this sub section (1) of section 188 and can not be ratified with in 3 months than such contract is voidable at the option of board of directors.
2. As per section 164 sub section (1) clause (g) of the companies act,2013 , if a person convicted any offense dealing with related party transactions under section 188
Penal provisions:-
Section 188 sub-section (5) of the companies Act, 2013 articulate the following penal provisions for any director or employee of the company who enters into any contract in contract in infringement to the provision of this section :-
1. In case of listed company-
i. Fine up to `5,00,000/- but not less than `25,000/-; or
ii. Imprisonment up to 1 Year; or
iii. Both.
2. In case of other companies :-
Fine up to `5,00,000/- but not less then `25,000/-.
Written by:
Vivek Chaudhary
Mail id: vivek5676@yahoo.in
Currently working with:
RPMD & Associates.
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