Section 188- Related party transactions

Neha Rajan Redekar , Last updated: 01 July 2020
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SECTION 188: RELATED PARTY TRANSACTION:

Except with the consent of BOD given by the resolution and subject to such conditions as prescribed, no Company shall enter into contract or arrangements with related party with respect to:

Sale, purchase or supply of any goods and materials,
Selling or otherwise disposing of, or buying, property of any kind,
Leasing property of any kind,
Availing or rendering any services,
Appointment of any agent for purchase or sale of goods, materials, services or property,
Such related party’s appointment to any office or place of profit in the Company, its subsidiary Company or associates Company and,
Undertaking the subscription of any securities or derivatives of Company.

No member can vote on the resolution in which he is a related party.

Nothing in this sub section shall apply if transaction entered by the Company is in ordinary course of business other than transactions which are not at arm’s length.

All contracts/arrangements with respect to point no (1) to (5) exceeding the limit as mentioned under Rule 15, shall require prior approval of Company through Ordinary Resolution.

Ministry of Corporate Affairs through its Notification dated 18th November, 2019 amended the Companies (Meetings and Powers of Board) Rules, 2014.

REVISED LIMITS UNDER RULE 15:

SR.NO	PARTICULARS	OLD LIMITS	NEW LIMITS
1	sale, purchase or supply of any goods or materials, directly or through appointment of agent,	10% or more of the turnover or Rs.100 Cr, whichever is lower.	10% or more of the turnover
2	selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent	10% or more of net worth or Rs.100 Cr, whichever is lower.	10% or more of the net worth
3	leasing of property of any kind	10% or more of the turnover or 10% or more of net worth or Rs.100 Cr, whichever is lower.	10% or more of the turnover
4	availing or rendering of any services, directly or through appointment of agent	10% or more of the turnover or Rs. 50 Cr, whichever is lower.	10% or more of the turnover

DEALING WITH RELATED PARTY TRANSACTIONS:

The Company can enter into any contracts/ arrangements/ transactions with related party only after seeking prior approval of the following:

1. Audit Committee:

Companies which are required to set up audit committee shall get the prior approval of for every related party transaction, whether at arm’s length basis or not. Audit committee may also grant omnibus approval for RPT proposed to be entered by the Company subject to the following conditions:

Audit committee shall, after obtaining approval of board of directors, lay down the criteria while granting omnibus approval and such approval shall be applicable in respect of transactions which are repetitive in nature.

Audit committee satisfy itself the need for such omnibus approval for transactions of repetitive nature and such approval is in interest of the Company.

Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval:

Repetitiveness of transactions (In past or future)
Justification for the need of omnibus approval.

Such omnibus approval shall specify:

Names of related parties, nature of transaction, period of transactions, maximum amount of transactions that can be entered into, in aggregate in a year, Maximum value per transactions which is allowed.
Indicative base price/ current contracted price and formula if any.
Other conditions as audit committee may deem fit.

Audit committee shall review at least on quarterly basis, all related party transactions where omnibus approval was given.

Such omnibus approval shall be valid for a period not exceeding 1 year and shall require fresh approval after expiry of financial year.

Omnibus approval shall not be made for transactions in respect of selling or disposing of undertaking of the company.

2. Board of Directors:

All related party transactions which are proposed to be entered by Company which are:

not in ordinary course of business.
Or not at arm’s length.

Shall require prior approval of BOD by means of resolution.

Where directors are interested in related party transactions, he/she shall abstain from discussion and voting on resolution.

3. Shareholders:

Prior approval of shareholders is required for:

All material related transactions as per listing agreement.

All RRT entered by the co. which are not in ordinary business or not in arm’s length, whose value exceed the threshold limit as prescribed under provisions of Companies Act, 2013 read with rule 15 of Companies (meeting of board and its powers) Rules 2014 (Ordinary Resolution)

Disclaimer: Please note that the above article is based on interpretation of related laws, which may differ from person to person and is not a legal advice.