nidhigoel89 (Company Secretary ) (594 Points)
29 September 2010
Shraddha Shukla
(Corporate law Consultant)
(346 Points)
Replied 29 September 2010
Kindly specify the real problem you are facing.
nidhigoel89
(Company Secretary )
(594 Points)
Replied 29 September 2010
can we consider A as associate concern of B (In books of B)...........Plz support it with valid sections............i want to know about the related party concept..............which we have to mention in notes of accounts............case law i have already mentioned
Ajay Mishra
(Company Secretary)
(74337 Points)
Replied 29 September 2010
What Does Related-Party Transaction Mean?
A business deal or arrangement between two parties who are joined by a special relationship prior to the deal. For example, a business transaction between a major shareholder and the corporation, such as a contract for the shareholder's company to perform renovations to the corporation's offices, would be deemed a related-party transaction
Investment is one of the major decisions in finance. Analysis of Financial information provided by the entity is one of the significant task to take right decisions. To protect the interest of the investors, transparency in the books of account is essential. Indian companies have been viewed by the outside world as family controlled and not professionally managed.
Family controlled businesses represent almost 80% of the listed companies. These companies carry on their business through subsidiaries, associates and acquire interest in other enterprises. The transactions between these entities play very important role in analyzing the investment feasibility of an entity. If these transactions are unchecked, companies will use this opportunity for tax evasion and cheat the investor. One more instance where we can find these types of transactions are directors entering into transactions with the company and gain personal benefit. To avoid these types of transactions and to bring transparency, stringent provisions are introduced in various laws.
In this article an attempt has been made to make a analysis of provisions under different laws relating to Related Party Transactions. An awareness of various provisions is very much required so as to take adequate care while entering into related party transaction and disclosing the same in the Financial Statements.
In a corporate world, the real owners are different from the management. So there is possibility that, management by using their powers may cheat the investors.
Companies Act
To have control on all these activities the Companies Act imposes certain conditions through various sections, when a company entering into any transaction in which directors are interested.
Section 297 of the Companies Act 1956 requires board approval for entering into any contract or arrangement with the related parties. However this section will cover only transactions relating to sale, purchase or supply of any goods, materials and services or for underwriting the subscripttion of any shares in, or debentures of, the company.
Further, there is a requirement to take central Governament approval if the company has more than one crore paid up capital.
At the same time section 297 (2) provides exemption to get approvals if (a) purchase/sale is for cash and at prevailing market prices or (b) Contract relates to goods, materials and services regularly traded or done business provided the contract is less than Rs. 5000/- (c) in the case of a banking or insurance company any transaction in the ordinary course of business of such company.
Section 299 imposes duty on directors to disclose their interest in other concerns to the Board of Directors before entering into any contract with the related parties. Sec 299 is much wider than sec 297 since it covers any contract or arrangement with entities in which director is concerned or interested. Only exception is where directors of one company taken together have less than 2 % of paid up capital of another company.
Sec 299 (1) requires that notice of such interest be disclosed by the directors. Section 299 (3) allows for a general notice of interest, which shall be valid for a year and can be renewed for a further period of one year in the last month of the Financial year. Such general notice & renewal should also be given in the Board Meeting.
Section 300 disallows the director to participate in voting when the board resolution is passed relating to any business in which he is interested. The main intentions behind these sections are to avoid personal gain by the interested director. But mere taking approval from the board to enter into transaction is not serve the purpose as outside world can’t know about this transactions.
Accounting Standard
To make investor aware about these transactions the Institute of Chartered Accountants of India Introduced Accounting Standard 18- ‘Related Party Disclosures’ and made it mandatory for companies to disclose related party transactions in the financial statements.
Indian investors may find that details of relevant related party transactions are available in a few places other than the section on related party disclosures. The section on managerial remuneration, loans/advances due from directors and subsidiaries and the auditor’s report (which may certify/qualify certain transactions) may provide important supplementary information.
In their present form, the related party disclosures (as detailed by Accounting Standard 18) may leave investors in public companies more enlightened about how the company is managed. However, there still appears to be considerable room for improving the present disclosures.
In general, the related party disclosures presented by companies to meet with the requirements of the US GAAP have been far more detailed than those presented to meet the requirements of AS-18. There are several gaps that need to be bridged.
Income Tax
A disclosure that a related party transaction was made during the year serves little purpose, unless one is apprised of the terms of the transaction and tax implication. Section 40 A (2) of the Income tax Act disallows the expenditure incurred in respect of specified persons (Related Parties) if it is the opinion of the Assessing officer that the expenditure is excessive and unreasonable. These expenditures are (a) the fair market value of goods, services or facilities for which the payment is made or persons (Related Parties) or (b) legitimate needs of business or profession of the assessee or (c) the benefit derived by or accruing to the assessee from the payment.
Regards
CAclubindia
