RELATED PARTY TRANSACTIONS UNDER NEW COMPANY LAW

Co-Author: Nikita Agarwal  ACA, ACS

Section 188 of the new Companies Act, 2013 corresponds to section 297 of the companies Act, 1956 and seeks to provide the manner in which contracts or arrangements by a company with related parties shall be made and disclosed. It provides for the matter that requires the consent of Board of Directors of company or prior approval by special resolution. It seeks to provide that every such contract or arrangement shall be referred to in the Board’s Report to the shareholders along with the justification. It provides that the member who is related party to the any contract or arrangement shall not vote on the special resolution for approval of such contract or arrangement. It also provides that where any contract or arrangement is entered into by a director or any other employee, without complying with the provisions and if it is not ratified by the approving authority, such contract or arrangement shall be voidable at the option of the Board. The section also provides penalty for director or other employee of a company who had entered into or authorized the contract or agreement in violation of the provisions in case of listed company or unlisted company. 

 Related Party [Section 2(76)]

“Related Party”, with reference to a company, means—

(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 is a member or director;

(v)  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;

(vi)  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;

(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;

(viii)   any company which is—

(A) a holding, subsidiary or an associate company of such company; or

(B) a subsidiary of a holding company to which it is also a subsidiary;

(ix) such other person as may be prescribed.

 Relative [Section 2(77)]

‘‘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 the other in such manner as may be prescribed.

Key Managerial Personnel [Section 2(51)]

“Key Managerial Personnel”, in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed.

Who is ‘related party’

With reference to company, ‘related party’ world mean and include the following –

• a director or his relative,
• KMP or their relative,
• a firm in which a director manager or his relative is a partner,
• a private company in which a director or manger is a director or holds along with his relatives, more than 2% of its paid-up share capital,
• a person on whose advice, directions or instruction (except given in professional capacity) a director or manager is a accustomed to act,
• a holding/ subsidiary or associate company, subsidiary’s subsidiary, and such person as would be prescribed.

 Nature of transactions

The scope of dealing with Related Party Transactions has been widened in Companies Act, 2013. The contracts or arrangements with related party which comes with respect  to the following shall be covered under the scope of this provision:

(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.

However, nature of transactions covered are comprehensive as they include routine to rare supply of goods or material either by way of direct sale, purchase or supply of any goods or services (technical support, maintenance, consultancy, advisory, leasing of property or sharing professional knowledge etc.) or by appointing agent for the same and underwriting financial instruments of the Company. While entering into such type of transactions, Company will be required to take prior approval of Board of Directors , by way of a resolution passed in the board meeting.

 The transactions done in ordinary course of business on arm length’s basis shall be outside the scope of this provision.

 Office or Place of profit

Office or place of profit would mean any office or place :

a)   where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the   remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites,any rent-free a ccommodation,or otherwise;

b)   where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private  company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation or otherwise.

Where the transactions mentioned above are carried out or done in the ordinary course of business and on the arm’s length transaction basis, then there is no requirement of obtaining approval from Board of Directors.

Arms Length Transaction

Arm’s length transaction would mean transaction between two related or affiliated parties that is conducted as if they were unrelated, so that there is no question of a conflict of interest.The concept of an arm’s length transaction is to ensure that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other part

AdditionalRequirements

In certain cases, following additional requirements need to be fulfilled by the Company to enter into the specified contracts or arrangements –

i)   In the case of a company having more than prescribed paid-up share capital or transactions not exceeding prescribed amount, company shall enter in to related party transaction only by prior approval of the company by way of special resolution in general meeting.

ii)   No member of the company shall vote on such special resolution, to approve such contracts or arrangement, if such member is a related party.

 Disclosure Board’s report

Every related party contracts or arrangements shall have to be disclosed in the Board’s    report and referred to shareholders along with the justification for entering into such type of transactions.

 Consequences of Contravention of provisions

In case, where any contract or arrangement is entered in to by a director or any other employee, without obtaining the consent of the Board or approval by as pecialre solution in the general meeting under sub-section (1)and,

i)      if it is not ratified by the Boardor

ii)     by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board and if the contractor arrangement is with are lated party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

Recovery of loss in related party transaction

Besides subsequent approval, it shall be open to the company to proceed against a director or any other employee who had entered in to such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as are sult of such contractor arrangement.

Penal provisions

Any director or any other employee of a company, who authorised to enter into the contracts or arrangement, in violation of the provisions of this clause, shall be punishable as under –

i)      In case of listed company – Any director or other employee of the listed company be punishable with,

a)    imprisonment for a term which may extend to 1 year or

b)    fine which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees or

c)    with both.

ii)     In case of other than listed company – Any director or other employee of the unlisted company be punishable with fine which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees.