What
is Related Party Transaction?
In the Act, there are provided some transaction that if
entered into any contact/ arrangement with Related party as per 2(76), will be
considered as Related Party Transaction.
List of Contract/
arrangement:
a)
sale, purchase or supply of any
goods or materials;
b)
selling or otherwise disposing
of, or buying, property of any kind;
c)
leasing of property of any kind;
d)
availing or rendering of any services;
e)
appointment of any agent for
purchase or sale of goods, materials, services or property;
f)
such related party's
appointment to any office or place of profit in the company, its subsidiary
company or associate company; and
g)
underwriting the subscription
of any securities or derivatives thereof, of the company.
Approvals Required:
Though the Transaction which crosses threshold limits
would require consent from members also, in the form of passing of Ordinary
resolution. The limits set out in the Companies Act, 2013 are modified w.e.f. 1 8/11/2019
Old Rule
|
Amendment
|
New Rule
|
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Sale/Purchase/Supply of goods/material directly or through an agent covering 10% or more
of turnover OR one hundred
Crores (whichever is lower).
|
The words “one hundred Crores (whichever is lower)” shall be
omitted.
|
Sale/Purchase/Supply of goods/material
directly or through an agent covering 10% or more of turnover.
|
||||
Sale/Purchase
|
of
|
property
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The words “one hundred Crores
|
Sale/Purchase
|
of
|
property
|
directly or through an agent that is 10% or more of net worth OR one hundred Crores (whichever is
lower).
|
(whichever is lower)” shall be
omitted.
|
directly or
through an agent that is 10% or more of net worth.
|
In case of leasing of
property of any kind amounting to 10% or more of the net worth or 10% or
more of turnover OR one hundred
Crores (whichever is lower).
|
The words “10% or more of the net worth”, “one hundred Crores
(whichever is lower)” shall be omitted.
|
In case of leasing of property of any kind amounting to 10% or
more of turnover.
|
Availing or rendering of any services directly or through an agent
that is 10% or more of the turnover OR 50 Crores (whichever
is lower).
|
The words “Fifty Crores (whichever is lower)” shall be omitted.
|
Availing or rendering of any services directly or through an agent
that is 10% or more of the turnover.
|
Underwriting the subscription of any securities or derivatives
thereof, of the company more than 1% of net worth of the
company.
|
Underwriting the subscription of any securities or derivatives
thereof, of the company more than 1% of net worth of the
company.
|
*Board Member interested in any contract/ arrangement
with a related party, such director shall not be present in the meeting during
discussion on the subject matter of the resolution. While in the member’s
meeting, the interested member is allowed to attend the meeting but shall not
cast vote on the subject matter.
Situation
|
Exception
|
Interested member may also vote in General
Meeting.
|
where 90% or more members, in number are
relatives of promoters or are related parties.
|
Board approval and Shareholder’s
approval is not required.
|
where transaction entered into by the company in its Ordinary
Course of business other than the transactions which are not on an arm’s
length
basis.
|
Member’s Approval is not required, while exceeding threshold limit.
|
where transaction entered into between a holding company and its
wholly owned subsidiary whose accounts are consolidated with such holding
company and such accounts are also placed before
shareholder’s in General
Meeting.
|
Every transaction entered into with related party shall
be referred to in Board’s report along with justification for entering into
transaction to the shareholders.
Register of RPT:
All the Related party transaction entered into by the
Company shall be kept in a separate Register in the format of MBP-4.
Some Important Definition:
(i) a director or his relative;
(ii) a key managerial personnel or his
relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager 1[or his relative]
is a member or director;
(v)
a public company in which a
director and manager is a director 2[and holds] along with his relatives, more
than two per cent of its paid-up share capital;
(vi)
any body 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;
(vii)
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
b.
Arm’s length transaction: If the
transactions are conducted and carried out in a fair, justiciable manner
without any trace of influence of the parties' relation upon itself it is known
as a transaction at arm's length. It means transactions which are not biased by
the relation of the parties and conducted as if with an unrelated party. Such
transactions have been exempted from compliance with Section 188 of the Act.
Consequences of Non-Compliance:
Where any contract or arrangement is entered into by a
director or any other employee, without the consent of the Board or approval by
a special resolution in the general meeting and if it is not ratified by the
Board or by the shareholders within three months from the date on which such
contract is made, then such contract or arrangement shall be voidable at the
option of the Board.
1.
Agreements voidable
2.
Indemnification: If such a
contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the
company against any loss incurred by it.
3.
The company can also proceed
against such director or any other employee who had entered into such contract
or arrangement in contravention of the provisions of this section for recovery
of any loss sustained by it as a result of such contract or arrangement.
4. Penalties for a director or any
other employee in violation of the provisions of Section 188 of the Act:
a.
Listed company: Punishment of
imprisonment for a term upto 1 year or with fine from INR 25,000 upto INR 5
lacs or both
b.
Other companies: fine of INR
25,000 upto INR 5 lacs.
ABOUT THE AUTHOR
CS SHEFALI GUPTA:
Economics Honours Graduate from Delhi University and Qualified Company Secretary
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