Related Party Transactions – Section 188 – Companies Act 2013
Who is Related Party?
Section 2(76) of Companies Act, Related party with reference to Company means:
A Director or his Relative
A KMP or his Relative
A firm in which Director, Manager or his relative is a Partner
A private Company in which such Director, Manager or his relative is a Member or Director
A public Company in which a Director or Manager is a Director and holds along with Relatives more than 2% of its Paid up capital
Any Body Corporates whose Board of Directors, Managing Director or Manager is accustomed to the act
Any person on whose advice, directions or instructions , a Director or manager is accustomed to the act
IMPORTANT Note: Nothing in the last 2 clauses shall apply to the advice, directions or instructions given in a professional capacity
Any Company which is holding Company, Subsidiary or associate Company of such Company
A Subsidiary of a Holding Company to0 which it is also a Subsidiary
Important note: The last 2 points mentioned above shall not apply with respect to Related Party Transactions to a Private Company vide Notification dated 5 June 2015
Any other Person as may be prescribed.
WE also need to understand the definition of Relative as per section 2(77)
Anyone who is related to other if :
They are members of Hindu Undivided Family
They are husband and wife
One person is related to other in such a manner as may be prescribed :
Most Important Points: person as may be prescribed is defined under Rule 4 of Companies specification of definition rule
Father including step father
Mother including step mother
Son including step son
Brother including step brother
Sister including step sister
Related Party Transactions useful Points
♠ A Company shall enter into any contract or arrangement with a Related Party only after taking consent of Board of Directors BY PASSING Board Resolution at Board Meeting with Respect to :
Sale, purchase or supply of any goods or materials
Appointment of any agent for purchase or sale of goods, materials , services or property
Interpretation:kindly refer Rule 15 of Meeting of Board and Power Rule
Sale, purchase or supply of goods or materials directly or through appointment of agent exceeding 10% of total turnover of company or 100 crore rupees whichever is lower
Such Contract arrangement shall be entered by the Company by passing resolution in general meeting.
Point to be noted:The word special resolution shall BE AMENDED WITH THE WORD RESOLUTION VIDE Notification dated 29th May 2015
Selling or otherwise disposing of or buying property of any kind
Point to be considered:Property includes securities also.
Interpretation:Kindly refer Rule 15 of Meeting of Board and Power Rules
Kindly Read section 180 with this point to co- relate this point.
Selling or otherwise disposing of or buying property of any kind directly or through appointment of agent exceeding 10% of net worth of Company or rupees 100 crores whichever is lower.
Such Contract or arrangement shall be entered by Company by passing resolution in general meeting
Leasing of Property of any kind
Interpretation:Kindly refer Rule 15 of Meeting of Board and Power Rule
Kindly Read Section 180 with this point to Co-relate the point
Leasing of property of any kind exceeding10% of the net worth of the Company or 10% of turnover of Company or 100 crore rupees whichever is lower.
Availing or rendering of any services.
Interpretation: Now, here question arises weather loan given by Holding Company to wholly owned Subsidiary Company comes under purview of Related Party transaction?
The Answer is No,
Reason– if Holding Company primary business is giving loan and accepting deposit from the public, then such transactions are covered under Related Party Transaction because here holding Company’s primary function is giving loans.
For Example: Banks accepts and provides Loan to Customers on daily basis.
Other than this, No Related Party Transaction will be attracted.
Limits: availing or rendering of any services, directly or through appointment of agent exceeding 10% of Turnover or 50 crores Rupees whichever is lower.
POINT TO BE NOTED: LIMITS SPECIFIED IN ABOVE CLAUSES SHALL APPLY TO TRANSACTION OR TRANSACTIONS TO BE ENTERED INDIVISUALLY OR TAKEN TOGETHER WITH THE PREVIOUS TRANSACTION DURING A FINANCIAL YEAR
Such Related Party’s appointment to any office or place of profit in the Company, its Subsidiary Company or associate Company
⇒ Interpretation– Kindly refer Rule 15 of Meeting of Board and Power Rules
Appointment of any office or a place of profit in a Company, its subsidiary company or associate company at a monthly remuneration exceeding 2.5 Lakhs Rupees.
Important Note: No member of the Company shall vote on such resolution to approve any contract or arrangement which may be entered by the Company if such member is a related party.
Points to be noted:
The above important Note shall not be applicable to Government Company in respect of Contract or arrangement entered by it with any other Government Company vide notification dated 5th June 2015
This important point shall not applicable to private company vide notification dated 5th June 2015
Important Note: Nothing in section 188(1) shall apply to the transactions entered by the Company in its ordinary course of business and transactions which are at Arm length basis.
What is ordinary Course of Business?
The activities that are normal, necessary and incidental to business are covered under ordinary course of business.
Example: A contractor works with financial institution to secure a loan to continue the project.
What are arm length Transactions?
Arm Length transaction is transaction between two related party without any pressure and they are conducted as they are unrelated so that there is no conflict of interest.
Each of the independent parties are expected to get best possible deal done.
For example: if Company is selling machine to other company at Rupees 25000, but fair market value is 50,000. Then such Transaction is not at arm length price as there is conflict of interest.
New Amendment: for approving related party transaction under section 188(1), the requirement of passing the resolution shall not be applicable for transactions entered between holding Company and wholly Owned Subsidiary Company whose accounts are consolidated with Holding Company and placed before the shareholders at General Meeting for approval.
Important points for omnibus approval
Companies need to take prior permission from Audit Committee to approve Related Party Transactions
Audit Committee shall make omnibus approval to approve Related Party Transactions
Point to be noted- Before approval of Audit Committee to grant omnibus approval, prior approval of Board is required
The Audit Committee shall consider the following factors while granting Omnibus approval:
Maximum value of transaction in aggregate that can be allowed during the year
Maximum value per transaction that can be allowed
Review of each Related party transaction after omnibus approval
Disclosures made to Audit Committee at time of omnibus approval
Transactions which cannot be subject to omnibus approval by Audit Committee
Factors specifying the Omnibus approval
Such approval shall be applicable to those related party transactions which are repetitive in nature
The omnibus approval shall specify :
Name of Related Party
Nature of Transaction
Period of Transaction
Maximum amount of transaction that can be entered into
Any other condition as Audit Committee may deem fit
Important Note: Omnibus approval without fulfilling the above criteria
Audit Committee may grant omnibus approval for a transaction not exceeding 1 crore rupees per transaction
Point to be noted: Omnibus approval shall be valid for a period of 1 year and after expiry of 1 year, fresh approval is required.
Important Note: The word omnibus is used to approve two or more matters independently.
Omnibus approval shall be made for transactions for selling or buying of undertakings of the Company
Any other item as it may deem fit
Important Note: The omnibus approval shall expire at the end of financial year of company. For approving related party transactions, a fresh approval is required after commencement of new financial year but not before that period.
Point to be noted: The word omnibus approval is given under section 177(4)(iv) proviso which states that for approving related party transaction, omnibus approval of audit Committee is required.
Point to be noted: A related party transaction which is not repetitive in nature may not get omnibus approval even if such transaction takes placed more than one time.
Some important points of related party transactions given under Rule 15 of (Meeting of Board and power Rules)
Where Director is interested in in any Contract or arrangement with a related party, such Director shall not be present in a meeting during such discussion on subject matter of resolution relating to such contract or arrangement
]in case of wholly owned subsidiary Company, resolution passed by holding company shall be sufficient for the purpose of entering the transactions between holding Company and wholly owned subsidiary Company
Explanatory statement to be annexed to the notice of General Meeting shall contain following particulars namely :
Name of Related Party
Name of Director or KMP who is related if any
Nature of relationship
Nature, monetary value and particulars of contract or arrangement
Any other information important for the members to take a decision on the proposed resolution.