20 February 2016
if A company takes loan from B company and B company director is giving guarantee for A company in obtaining bank loan are A co. and B co. related
21 February 2016
As per AS - 18, disclosure of Related Party transactions have to be disclosed, even if the same is not outstanding at the year end. The AS states:
"23. If there have been transactions between related parties, during the existence of a related party relationship, the reporting enterprise should disclose the following: (i) the name of the transacting related party; (ii) a description of the relationship between the parties; (iii) a description of the nature of transactions; (iv) volume of the transactions either as an amount or as an appropriate proportion; (v) any other elements of the related party transactions necessary for an understanding of the financial statements; (vi) the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date; and (vii) amounts written off or written back in the period in respect of debts due from or to related parties.
24. The following are examples of the related party transactions in respect of which disclosures may be made by a reporting enterprise: (a) purchases or sales of goods (finished or unfinished); (b) purchases or sales of fixed assets; (c) rendering or receiving of services; (d) agency arrangements; (e) leasing or hire purchase arrangements; (f) transfer of research and development; (g) licence agreements; (h) finance (including loans and equity contributions in cash or in kind); (i) guarantees and collaterals; and (j) management contracts including for deputation of employees.
25. Paragraph 23 (v) requires disclosure of ‘any other elements of the related party transactions necessary for an understanding of the financial statements’. An example of such a disclosure would be an indication that the transfer of a major asset had taken place at an amount materially different from that obtainable on normal commercial terms."
The requirements of Companies Act 2013 also requires the transactions to be disclosed even if they are not reflected in the Opening / Closing Balance Sheets.
28 February 2016
The definitions of who is and who is not a related party is given in paragraphs 3 & 4 of AS 18, which is reproduced below:
"3. This Standard deals only with related party relationships described in (a) to (e) below: (a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries); (b) associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture; (c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any such individual; (d) key management personnel and relatives of such personnel; and (e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise.
4. In the context of this Standard, the following are deemed not to be related parties: (a) two companies simply because they have a director in common, notwithstanding paragraph 3(d) or (e) above (unless the director is able to affect the policies of both companies in their mutual dealings); (b) a single customer, supplier, franchiser, distributor, or general agent with whom an enterprise transacts a significant volume of business merely by virtue of the resulting economic dependence; and (c) the parties listed below, in the course of their normal dealings with an enterprise by virtue only of those dealings (although they may circumscribe the freedom of action of the enterprise or participate in its decision-making process) (i) providers of finance; (ii) trade unions; (iii) public utilities; (iv) government departments and government agencies including government sponsored bodies."
While the details provided by you do not per se indicated relation between Company A & Company B, unless substantial evidence can be attributed to satisfy this assumption, the logical, commercial and legal conclusion would be that Company & Company B are related parties.
Can you justify legally and commercially the following queries - else the two positively covered by sub - paragraphs (a), (b), (d) & (e) and maybe (c) of Paragraph 3 of AS - 18.
Q: Why did Company B extend loan to Company A? A: Company B is an NBFC and extended the loan in the normal course of Business. (Fine and so relationship is averted by sub - paragraph (c)(i) and or (a) of paragraph 4 of AS 18).
Q: Is the Director of B also a Director of A? A: No.
Q: Is he a substantial stakeholder in Company A, either individually or through his relatives and associate firms? A: No.
Q: Then why did he extend guarantee to Company A for a loan from a commercial Bank? A: hmmmm..........hmmm....
Please give a satisfactory answer to the last question. Unless that is given Company A & Company B are related parties. If the answer to any of the other question is also not given as above, Company A & Company B are related parties. And the answer to the last question should be commercially viable and acceptable - please check the provisions of Companies Act 2013 regarding advancing of inter-corporate loans and inter-corporate / personal guarantee of Directors.
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