Related Party Transaction Under the Companies Act, 2013

Related Party Transaction

Under the Companies Act, 2013

Applicability of the Section

Applicable on both private and public company w.e.f 1^st April, 2014 as per the MCA notification dated 26^th March, 2014.

 Transactions which are deemed as related party transactions

Any transaction between a company and its related party to:

(i)                 sale, purchase or supply of any goods or materials;

(ii)               selling or otherwise disposing of, or buying, property of any kind;

(iii)             leasing of property of any kind;

(iv)             availing or rendering of any services;

(v)               appointment of any agent for purchase or sale of goods, materials, services or property;

(vi)             such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(vii)           underwriting the subscription of any securities or derivatives thereof, of the company.

Nature of approvals required

Approval of Board of Directors

•  Every company needs to seek the approval of its Board of Directors for entering into any related party transaction, as listed above, irrespective of the capital of the company or the value of the transaction.

•  Approval of the Board has to be sought at a duly convened meeting of the Board and same cannot be obtained by passing of a resolution by circulation.

•   Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

•   The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-

(a) the name of the related party and nature of relationship;

(b) the nature, duration of the contract and particulars of the contract or arrangement;

(c) the material terms of the contract or arrangement including the value, if any;

(d) any advance paid or received for the contract or arrangement, if any;

(e) the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;

(f) whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and

(g) any other information relevant or important for the Board to take a decision on the proposed transaction.

Prior approval of Members by means of special resolution

•   In the following situations, in addition to approval of Board of Directors, prior approval of members by means of a special resolution must also be sought before entering into any related party transaction:

ü   

•  paid-up share capital of the company is equal to or exceeds Rs. 10 Crore; or

•  sale, purchase or supply of any goods or materials directly or through appointment of agents exceeding twenty five percent. of the annual turnover; or

• selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents exceeding ten percent. of net worth; or

•  leasing of property of any kind exceeding ten percent of the net worth or exceeding ten percent. of turnover; or

•  availing or rendering of any services directly or through appointment of agents exceeding ten percent. of the net worth as mentioned; or

• appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and half lakh rupees(Rs. 2,50,000); or

• remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding one percent. of the net worth;

The Turnover or Net Worth referred in the above sub-rules shall be on the basis of the Audited Financial Statement of the preceding Financial year

•   No member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.

•   In case of wholly owned subsidiary, the special resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between wholly owned subsidiary and holding company.

•   Disclosures to be made in the explanatory statement to be annexed to notice of general meeting:

(a) name of the related party ;

(b) name of the director or key managerial personnel who is related, if any;

(c) nature of relationship;

(d) nature, material terms, monetary value and particulars of the contract or arrangement;

(e) any other information relevant or important for the members to take a decision on the proposed resolution.

• Disclosures to be made in Board’s Report:

Every related party transaction or contract shall be disclosed in the Board’s report along with the justification for entering into such contract or arrangement.

Exemptions/Non-applicability

The above mentioned provisions will not be applicable in case of transactions entered into by the company in its ordinary course of business, which are on arm’s length basis.

“arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

Definition:

•   “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 2% 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;

(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)              a director or key managerial personnel of the holding company or his relative with reference to a company;

• “relative’’, with reference to any person, means any one who is related to another, if—

(i)        they are members of a Hindu Undivided Family;

(ii)      they are husband and wife; or

(iii)    if he or she is related to another in the following manner:

(1) Father:

Provided that the term “Father” includes step-father.

(2) Mother:

Provided that the term “Mother” includes the step-mother.

(3) Son:

Provided that the term “Son” includes the step-son.

(4) Son’s wife.

(5) Daughter.

(6) Daughter’s husband.

(7) Brother:

Provided that the term “Brother” includes the step-brother;

(8) Sister:

Provided that the term “Sister” includes the step-sister.

Consequences of non-compliance

All transactions entered without taking respective approvals (and not been ratified by the Board or members, as the case may be, within 3 months of entering into such contract) the said transaction shall be voidable at the option of the Board and if the said transaction with related party of any of the director(s) the said director and directors concerned (consenting to such transaction) shall indemnify the Company against any loss incurred by it. Moreover; in case of a listed company, any director and/or employee of the Company authorizing or entering into such a transaction

If any related party transaction or contract is entered without seeking Board’s and/or Members’ approval and if the same is not ratified by the Board and/or Members as the case may be, within 3 months at a meeting, then the contract or transaction will be voidable at the option of the Board and if the transaction is with any related party to any director or is authorised by any other director, then the concerned directors are liable to indemnify any loss incurred by the company.

Additionally, the company can also proceed against a director or 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.

Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/- and  in case of any other company, be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-.