Monday, August 3, 2015

Related Party Transaction (Applicable to both Private as well as Public Companies) By.Mr.Venky Rathi


WHO IS A RELATED PARTY  ??

Related Party has been explained under section 2(76) of the Companies Act, 2013 which includes:-
  1. A Director or his Relative
  2. A Key Managerial Personnel
  3. A firm in which Director, Manager or his Relative is a partner
  4. A private company in which a director or manager is a member or director
  5. A public company in which a Director or Manager is a director AND* holds along with his relatives, more than 2% of its paid up capital
  6. Any body corporate, whose BOD, MD or Manager is accustomed to act in accordance with the advice, direction or instruction of a Director or Manager given not in a Professional capacity.
  7. Any person on whose direction or instruction or advice given not in any professional capacity, a Director or Manager is accustomed to act.
  8. Any company which is the company’s holding company or co-subsidiary of that holding company or subsidiary or associate company.
*Companies 1st (Removal of Difficulties) Order, 2014 word  “OR” replaced with word “AND”

The following person, with reference to a company as defined under Rule 3 of the Companies (Specification of Definitions of Details), Rules, 2014, shall also be deemed to be related party:
  1. A director or 
  2. Key managerial person of the holding company of such company or 
  3. Their relative shall be deemed to be related party.
WHO ARE RELATIVES ?



Concept of Related party widened
Under the 1956 Act, restriction applied only to transaction with specified person/parties, namely: -
  1. A director of the company or his relative
  2. A firm in which such a director or relative is a partner, any other partner in such a firm
  3. A private company of which the director is member or director. 
In contrast, section 188 of Companies Act, 2013 covers all the persons covered in the definition of the term, “Related Party”.

RELATED PARTY TRANSACTION
  • Section 188 of the Companies Act, 2013 deals with certain transactions which requires Boards and Shareholders approval, which have been dealt in following slides:
Related Party Transaction Approvals
(If Transaction was BEFORE August, 2014)


Related Party Transaction Approvals
(If Transaction was AFTER August, 2014)

Related Party Transaction Approvals (in Continuation..)
 
Proviso to the Scope of related Parties


Office or Place of Profit 
Office or Place of Profit means any office or place: -
which is held by a director, where 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 accommodation.
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.

Example:
  1. If a Director of a company is being provided a rent free accommodation from the side of the company which is not a part of his/her usual salary package then such transaction will be covered under office or place of profit.
  2. If a relative of a Director or KMP is being provided a favour from the side of the company which is beyond the perquisites being offered to the Director under the usual term will fall under this category.
Disclosure of interest by Director:  [Section 184(1)]
Every Director shall: 
  • At the 1st meeting of the Board after incorporation of the company;
  • At the 1st meeting of the Board after his appointment;
  • At the 1st meeting of the Board in every financial year;
  • When there is any change in the disclosure already made, then at the 1st meeting held after such change, shall
Disclose his concern or interest in any:
  • Company or Companies;
  • Bodies corporate;
  • Firms or other association of individual;
  • Change in his Shareholding.
Director shall disclose his concern or interest by giving a notice in writing in Form No MBP-1 within 30 days of from the date of his appointment or change in interest.

Disclosure of interest by Director
Every Director of a Company who in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into –

(a)With a body corporate in which such director or in association with any other director holds more than 2% shareholding of that body corporate OR is a promoter, manager, CEO of that body corporate OR
(b)With a firm or other entity in which, such director is a partner, owner or member, as the case may be, Shall disclose the nature of his concern or interest at the meeting of the Board in which such contract is discussed and shall not participate in such meeting. [Section 184(2)]
  • No need to pass ordinary resolution for transactions entered into between holding company and wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.
  • Contracts entered into as per section 297 of Companies Act, 1956 shall not be required for fresh approval under the provisions of section 188. However, if any change in contract is made on or after April 1, 2014, section 188 of Companies Act, 2013 will be attracted and applied.
  • No need of any approval if the related party transaction is at arm length basis in the ordinary course of business.
Contract Voidable if approval of Board / Member is not taken  
When a director or any employee enters into any contract, without obtaining the consent of BOD or approval by Special Resolution and if it is not ratified by the Boards/Shareholders within 3 months from the date on which such contract was entered into, such contract shall be voidable at the option of the Board. If the contract or arrangement is with a related party to any other director, or is authorized by any other director, the director concerned shall indemnify the company against loss incurred by it. [Section 188(3)]

Penalty
It shall be open to the company to proceed against a director or any other employee who had entered into 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. [Section 188(4)]
Any Director or an employee who had entered into or authorized the contract or arrangement with a related party in violation of the provisions of this section shall be punishable:-
  1. In case of Listed Company :- Imprisonment up to 1 year or Fine of Rs. 25,000 up to Rs. 5 lakh or both 
  2. In case of any other company :- Fine of Rs. 25,000 up to Rs. 5 lakh. [Section 188(5)]
Associate Company
Company in which another company has a significant influence, but which is not a subsidiary company.
Note: Significant Influence means control of at least 20% of Total Share Capital or of business decision.
Key Features: 
  • Associate company will now be considered as ‘Related Party’.
  • Any Director concerned/interested in associate companies, will not be regarded as Independent Director.
  • Any Auditor holding any Security or is indebted to or has as business relation with Associate Company, cannot be appointed as the Auditor of the Company.
  • Annual Return shall contain particulars of Associate companies.
  • Register of Director/KMP shall include the details of securities held by tem in the company or its holding, subsidiary, subsidiary of company’s holding company or Associate Companies.
Holding Company
Holding company means a company which : -
  1. Controls the composition of the Boards of Directors OR
  2. Exercise or control more than 50% of the Total share capital either at its own or together with one or more of its subsidiary companies.
Subsidiary Company
Subsidiary company, in relation to any other company(that is to say Holding company), means a company in which the holding company :- 
  • Controls the composition of the Boards of director   
OR
  • Exercise or control more than 50% of the Total share capital either at its own or together with one or more of its subsidiary companies.
Approval of Audit Committee (u/s 177)
Applicability of Audit Committee:
Following companies are required to constitute an Audit committee: -
  1. Every Listed Company
  2. All Public companies with a paid-up capital of Rs. 10 crores or more;
  3. All public companies having turnover of Rs. 100 crore or more;
  4. All public companies having in aggregate, Outstanding loans or borrowings or debenture or deposits exceeding Rs. 50 crore or more.
Requirement: -
As per the provisions of section 177(4)(iv), every Related party transactions and subsequent modification in any previous transaction will require prior approval of Audit Committee.

Details of Related party transactions to be filed with ROC 

A) Details of material contracts or arrangements or transactions at arm’s length basis: 
  1. Name(s) of the related party and nature of relationship
  2. Nature of contracts, arrangements, transactions
  3. Duration of the contracts, arrangements, transactions
  4. Salient terms of the contracts, arrangements or transactions including the   value, if any
  5. Date(s) of approval by the board
  6. Amount paid as advances, if any
B) Details of contracts or arrangements or transactions not at arm’s length basis:
  1. In addition to the above, date on which the special resolution was passed in general meeting, and
  2. Justification for entering into such contracts, arrangements or transactions.
Implications of revised clause 49 of Listing Agreement in terms of Related Party Transactions
  • The Company shall frame and adopt a policy on materiality of related party transactions and dealing with related party transactions. The same shall be filed with the stock exchanges and also be updated in the Company’s website. Further the company shall include the policy in its Annual Report every year.
  • Any related party transactions irrespective of transactional values   requires the prior approval of Audit Committee.
  • The company shall have a periodical review of the related parties and the transactions entered or to be entered into with the related parties.
Requirement for Listed Companies 
  • Prior approval of shareholders required for all Material related party transactions
  • Policy of dealing with Related party transactions to be disclosed on website and in annual report.
  • Details of all “Material Transactions” with related parties shall be disclosed quarterly along with the compliance report on corporate governance.
  • Material Transaction: Transaction (together with previous transactions with a related party) exceeds 10% of the annual turnover; or
    exceeds 20% of the net worth of the company as per last year’s audited financials
 w.e.f. September 15, 2014
  • Material Transaction: Transaction (together with previous transaction with a related party) exceeds 10% of the turn over as per last year’s audited financials

2 comments:

  1. Any transaction with an Entity :
    which is incorporated outside India &
    Fellow Subsidiary & /or
    Common Director & Director is an Advocate and employee of one of the Group Company
    & at arm's length transaction
    whether it will be related party transaction or not

    ReplyDelete
    Replies
    1. Dear Mr.GambhirK,

      Thank u for ur comment.

      I here by request you, pls add respect beginning in your comment.

      Delete

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