MEANING OF RELATED PARTY TRANSACTIONS
Specified Transaction
1. Sale, Purchase or Supply of any goods or materials directly or through appointment of agents
2. Selling or otherwise disposing of, or buying property of any kind directly or through appointment of agents
3. Leasing of property of any kind
4. Availing or Rendering of any services directly or through appointment of agents
5. Appointment to any Place of Profit in the company , its Subsidiary Company or Associate Company
6. Remuneration for underwriting the subscription of any securities or derivatives thereof of the Company
If the Transaction is not a specified transaction, then company can enter into such transaction with related parties
MEANING OF REALTED PARTY AND RELATIVES
Related Party As per Companies Act, 2013
Sec 2 (76) : Related party”, with reference to a company, means—
A) a director or his relative
B) key managerial personnel or his relative
C) a firm, in which a director, manager or his relative is a partner
D) a private company in which a director or manager is a member or director;
E) 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 paid-up share capital;
F) 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;
G) 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
H) 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;
I) Such other person as may be prescribed
As per Companies (Specification of definition details) Rules, 2014 for the purpose of clause (ix) above a director or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party.
*MCA has proposed to issue under Section 470(1) of the Companies Act’2013 an order which may be called Companies 1st (Removal of Difficulties) Order, 2014 which clarifies related party as mentioned in (v) above would be” a public company in which a director or manager is a director and holds along with his relatives, more than two per cent. of its paid-up share capital”
RELATIVES AS PER COMPANY ACT, 2013
Sec 2(77) of the Companies Act 2013 define Relative as:
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 another in such manner as may be prescribed
As per Companies (Specification of definition details) Rules, 2014 for the purpose of clause (iii) above, a person shall be deemed to be relative of another, if he or she is related to another in the following manner, namely:-
(1) Father (including step-father)
(2) Mother ( including step-mother)
3) Son ( including step-son)
(4) Son’s wife
(5) Daughter
(6) Daughter’s husband
(7) Brother ( including step-brother)
(8) Sister (including step-sister)
APPROVAL & DISCLOSURE REQUIREMENTS
Approval Requirement-Companies Act, 2013
Related Party Transactions in Ordinary course of Business & At Arm’s Length
Section 188 states “Provided also that nothing in this sub-section 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”
Thus, Ordinary course of business means the Company regularly carries on business or regularly trades in such field & Arm’s length basis means the transactions should be independent and is being done on same terms and conditions as if done with some unrelated party.
Hence, if a particular transaction meets both the criteria, only Audit Committee approval is required (Section 177) for entering into the transaction.
Related Party Transactions not in Ordinary course of Business or/and not at Arm’s Length
Board’s Approval:
Prior Consent of the Board is to be accorded by a resolution at a board meeting.
Disclosure in the Board Meeting:
i) The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-
ii) the name of the related party and nature of relationship;
iii) the nature, duration of the contract and particulars of the contract or arrangement;
iv) the material terms of the contract or arrangement including the value, if any;
v) any advance paid or received for the contract or arrangement, if any;
vi) the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
vii) whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
viii) any other information relevant or important for the Board to take a decision on the proposed transaction.
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.
Audit Committee Approval:
Approval of Audit Committee is to be taken for all transactions (Section 177).
Shareholder’s Approval:
Prior approval of shareholders is required (Special Resolution), if the company has:
Paid up Share capital of the Company is Rs. 10 Crore or more,OR
Transaction Exceeds the Specified Amount
The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section 101 shall contain the following particulars namely:
i) name of the related party ;
ii) name of the director or key managerial personnel who is related, if any;
iii) nature of relationship;
iv) nature, material terms, monetary value and particulars of the contract or arrangement;
v) any other information relevant or important for the members to take a decision on the proposed resolution
DISCLOSURE REQUIREMENT
Details of contracts / arrangements / transactions not on arm’s length basis and material contracts/arrangements/ transactions shall be disclosed in the Board’s report
Where any contract or arrangement is entered into by any Director or any other employee without obtaining the consent of the Board or the prior approval by a special resolution in the general meeting
– Rectified by the board or as the case may be by the shareholder at a meeting within 3 months
Otherwise
Shall be voidable at the option of the Board
And if the contract or arrangement is with
-Related party to any director or
-Authorised by any other director
The director concerned shall indemnify the company against any loss incurred by it.
Company can proceed against a director or any employee who entered into such contract or arrangement in contravention of the provisions of this section for recovery of losses sustained by it.
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