Related party transactions: Guide for governance and requirements.
Related party transactions are those transactions that are entered by the companies with the parties with whom it has a common interest. Since the transactions entered is with the related parties so it is necessary to disclose such transactions to avoid any kind of fraud or illegal transactions. Since transactions with related party may raise some concerns which can be detrimental to the stakeholders of the company, therefore, The Companies Act, 2013 governs the related party transaction to protect members and stakeholders of the company from the undue advantage of their position and control in company, which can be taken due to transactions with related parties.
Who are related party?
A related party as per section 2(76) of The Companies Act, 2013, in reference to a company is:-
• a director or his relative;
• a Key Managerial Personnel or his relative;
• a firm, in which a director, manager or his relative is a partner;
• a private company in which a director or 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 his relatives, more than two per cent of its paid-up share capital;
• 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;
• any person on whose advice, directions or instructions a director or manager is accustomed to act;
• any body corporate which is—
a. holding, subsidiary or an associate company of such company
b. subsidiary of a holding company to which it is also a subsidiary
• an investing company or the venturer of the company;
What is Related Party Transactions?
As per Section 188 of The Companies Act 2013 , the provisions of related party transactions applies to following specified transactions-
(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.
(g) underwriting the subscription of any securities or derivatives thereof, of the company.
Now as per the provisions of the act, if a company enters into any of the above contract or arrangement with any related party then approval of board of directors is required.
However in certain cases approval of shareholders by the way of ordinary resolution is also required if the contract of arrangement entered into is above the threshold limit.
Following is the threshold limit:-
• If any member is a related party then such member shall not vote on resolution to approve any contract or arrangement with related party.This condition shall not apply if 90% of the member of the company are relatives or related party.
• The requirement of passing resolution is not applied to transactions entered into between a holding company and its wholly-owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.
• The conditions of board resolution and special resolution will not apply to transactions which are entered by the company on ordinary course of business other than the transactions not on arms length basis.
• If any of the above transactions are entered without obtaining the requisite approvals, then such transactions shall be ratified within 3 months by the board or shareholders as the case may be failing which shall be considered as voidable at the option of the board or shareholders as the case may be.
• If the contract or arrangement is with a related party to any director, or is authorized by any other director, the directors concerned shall indemnify the company against any loss incurred by it.
Also it is opened to the company to proceed against any of the director or employee of the company for the recovery of any loss sustained by them as a result of any contract or arrangement entered by them.
• Every contract or arrangement entered into shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.
Any director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of the provisions section 188 shall:
• In case of a listed company, be liable to a penalty of twenty-five lakh rupees and
• In case of any other company, be liable to a penalty of five lakh rupees.