CLARIFICATION ON RELATED PARTY TRANSACTIONS

Ministry of Corporate Affairs has issued clarification on transactions/ matters following under section 188 (Related Party Transactions).

It has clarified that:

1. For non-voting by the interested shareholder: The shareholders who are related party for the contract or arrangement for which resolution is proposed/ to be passed. Only those shareholders cant vote on the matter.

2. Transaction arising out of amalgamation and reconstruction under the Companies Act, 1956 shall not attract provisions of section 188 of CA, 2013.

3. Contracts entered into by the Companies in compliance under provisions of section 297 of the CA, 1956 shall not need further fresh approvals, until there are any modifications to those contracts.

http://www.mca.gov.in/Ministry/pdf/Circular_No_30_17072014.pdf

The Companies (cost records and audit) Rules, 2014

Dear Professionals,

The much awaited The Companies (cost records and audit) Rules, 2014 has been notified. For applicability of cost record Companies has broadly classified into four categories i.e.

(A) Companies engaged in the production of following goods in strategic sectors.

(B) companies engaged in an industry regulated by a Sectoral Regulator or a Ministry or Department of Central Government.


(C) Companies operating in areas involving public interest
(D) Companies (including foreign companies other than those having only liaison offices) engaged in the production, import and supply or trading

each category has specified the  sub-categories or the specified activities. Limits based on paid-up capital and/or turnover and networth is defined for maintenance of cost records.

The said rules has also specified the companies which need to get their cost records audited by the Cost Auditors.

Please go through the following link to check the  The Companies (cost records and audit) Rules, 2014 and to have check the rules:

http://www.mca.gov.in/Ministry/pdf/rules_2_30062014.pdf

Annual Return Format for Financial Year ended on or before 31st March, 2014

MCA has issued clarification on applicability of Annual Return format for the financial year ended on 31/03/2014.

As per the clarification for the F.Y. ended before 01/04/2014 format of Annual Return shall be as per Companies Act, 1956 and not format as per MGT - 7.

MCA has further clarified that untill a fee is specified in the AOA of the company for inspection of documents as per rule 14(2) & rule 16 of the Companies (Management & Administration) Rules, 214, inspection could be allowed without levy of fee.
Please click the below link for copy of clarification by MCA:

www.mca.gov.in/Ministry/pdf/General_Circular_22_2014.pdf

RESOLUTIONS TO BE FILED WITH THE ROC

As per the new act not only the special resolutions or resolutions specified under section 192 of the Companies Act, 1956 but also the resolutions passed by the Board of both public as well as private companies shall be filed with the respective ROC within 30 days of passing of such resolution. Followings are the resolutions to be filed:

Section 117 read with the Companies (Management and Administration) Rules, 2014 :

(a) special resolutions;

(b) resolutions which have been agreed to by all the members of a company, but which, if not so agreed to, would not have been effective for their purpose unless they had been passed as special resolutions;

(c) any resolution of the Board of Directors of a company or agreement executed by a company, relating to the appointment, re-appointment or renewal of the appointment, or variation of the terms of appointment, of a managing director;

(d) resolutions or agreements which have been agreed to by any class of members but which, if not so agreed to, would not have been effective for their purpose unless they had been passed by a specified majority or otherwise in some particular manner;

 

and all resolutions or agreements which effectively bind such class of members though not agreed to by all those members;

(e) resolutions passed by a company according consent to the exercise by its Board of Directors of any of the powers under clause (a) and clause (c) of sub-section (1) of section 180;

i.e.

Section 180(1)(a)

to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.

Section 180(1)(c)

to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business:

Provided that the acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of this clause.

(f) resolutions requiring a company to be wound up voluntarily passed in pursuance of section 304;

(g) resolutions passed in pursuance of sub-section (3) of section 179; 

i.e.:

Section 179(3) 

The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:—

(a) to make calls on shareholders in respect of money unpaid on their shares;

(b) to authorise buy-back of securities under section 68;

(c) to issue securities, including debentures, whether in or outside India;

(d) to borrow monies;

(e) to invest the funds of the company;

(f) to grant loans or give guarantee or provide security in respect of loans;

(g) to approve financial statement and the Board’s report;

(h) to diversify the business of the company;

(i) to approve amalgamation, merger or reconstruction;

(j) to take over a company or acquire a controlling or substantial stake in another

company;

(k) any other matter which may be prescribed.

In addition to the above, as per the Companies (Meetings of Board and its Powers) Rules, 2014 following powers of the Board shall be excersied by passing a resolution:

 (1) to make political contributions;

(2) to appoint or remove key managerial personnel (KMP);

(3) to take note of appointment(s) or removal(s) of one level below the Key Management Personnel;

(4) to appoint internal auditors and secretarial auditor;

(5) to take note of the disclosure of director’s interest and shareholding;

(6) to buy, sell investments held by the company (other than trade investments), constituting five percent or more of the paid up share capital and free reserves of the investee company;

(7) to invite or accept or renew public deposits and related matters;

(8) to review or change the terms and conditions of public deposit;

(9) to approve quarterly, half yearly and annual financial statements or financial results as the case may be.

 (h) any other resolution or agreement as may be prescribed and placed in the public domain.

All the above resolutions shall be filed with the ROC in e-form MGT – 14 within 30 days of passing of said resolutions.

~By Nikita Singh~

CONVERSION OF PRIVATE COMPANY INTO ONE PERSON COMPANY

(1) A private company other than a company registered under section 8 of the Act having paid up share capital of fifty lakhs rupees or less or average annual turnover during the relevant period is two crore rupees or less may convert itself into one person company by passing a special resolution in the general meeting.
(2) Before passing such resolution, the company shall obtain No objection in writing from
members and creditors.
3) The company shall file copy of the special resolution with the Registrar of Companies within thirty days from the date of passing such resolution in Form No. MGT.14.
(4) The company shall file an application in Form No.INC.6 for its conversion into One Person Company along with fees as provided in in the Companies (Registration offices and fees) Rules, 2014, by attaching the following documents, namely
(i) The directors of the company shall give a declaration by way of affidavit duly sworn in confirming that all members and creditors of the company have given their consent for conversion, the paid up share capital company is fifty lakhs rupees or less or average annual turnover is less than two crores rupees, as the case may be;
(ii) the list of members and list of creditors;
(iii) the latest Audited Balance Sheet and the Profit and Loss Account; and
(iv) the copy of No Objection letter of secured creditors.
(5) On being satisfied and complied with requirements stated herein the Registrar shall issue the certificate.

ONE PERSON COMPANY UNDER COMPANIES ACT, 2013

One Person Company (OPC):  means a company which has only one person as a member.

•   An OPC will be a private company for the provisions of this act.

Formation/ Registration:

•  No. of Members: One Member. the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent, who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles.

          (1) Only a natural person who is an Indian citizen and resident in India-

(a) shall be eligible to incorporate a One Person Company;

(b) shall be a nominee for the sole member of a One Person Company.

         (2) No person shall be eligible to incorporate more than a One Person Company or become
           nominee in more than one such company.

•  Name: “One Person Company” shall be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved.

Meetings:

 Annual General Meeting/General Meeting:

• An OPC need not to call AGM, any business which need to be transacted at AGM or any general meeting as per the provisions of the Companies Act, 2013, shall be accepted to be duly transacted in case of OPC, if the resolution is communicated by the member to the company and entered in the minutes-book required to be maintained under section 118 and signed and dated by the member and such date shall be deemed to be the date of the meeting for all the purposes under this Act.

  Board Meeting:

• where there is only one director on the Board of Director of a One Person Company, any business which is required to be transacted at the meeting of the Board of Directors of a company, it shall be sufficient if, in case of such One Person Company, the resolution by such director is entered in the minutes-book, and signed and dated by such director and such date shall be deemed to be the date of the meeting of the Board of Directors.

• One Person Company shall be deemed to have complied with the provisions of this section if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days. The provisions with respect of quorum shall not be applicable on OPC, where there is only one director on Board.

Financial Statement & Board Report:

•  Singing of Financial Statement:  In case of OPC financial Statement shall be signed by one Director before it is given to auditors for their report.

• Board Report: The report of the Board of Directors to be attached to the financial statement shall, in case of a One Person Company, mean a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.

• Filing: One Person Company shall file a copy of the financial statements duly adopted by its member, along with all the documents which are required to be attached to such financial statements, within one hundred eighty days from the closure of the financial year

Director:

• At least one director in case of OPC and maximum of 15 directors.
• Until the directors are duly appointed and in case of a One Person Company an individual being member shall be deemed to be its first director until the director or directors are duly appointed by the member.

  

Contracts by One Person Company:

• Where One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract

     Provided that nothing in this sub-section shall apply to contracts entered into by the company in   the ordinary course of its business.

• The company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors as mentioned above, within a period of fifteen days of the date of approval by the Board of Directors.

Mandatory Conversion into Private/Public Company:

• Where the paid up share capital of an One Person Company exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person Company.

• Such One Person Company shall be required to convert itself, within six months of the date on which its paid up share capital is increased beyond fifty lakh rupees or the last day of the relevant period during which its average annual turnover exceeds two crore rupees as the case may be, into either a private company with minimum of two members and two directors or a public company with at least of seven members and three directors

______________

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/-.