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Related party disclosure
deepshikha pandey 30 Apr 2018

Related party disclosure

 

RELATED PARTY DISCLOSURE

 

Companies Act 2013 has made several changes in the compliance requirement of the Companies and several amendments has also taken place after its enforcement for better transparency and one of such section is section for related party transaction disclosure.

 Section 188 of the Companies Act 2013, what do we call it a relieve or a burden, it is a relieve because you don’t need to take much approval from the concerned authority but one has to make proper disclosure in the financial statements of the company and shall be required to take Board’s and member’s approval in certain situation.

Section 188 is applicable on all private and public companies and applicable from 01.04.2014.

Before understanding the compliance under section 188 one shall understand the meaning of related party and purview of related party.

Section 2(76), read with rule 3 of Companies (Specification of definitions details) Rules, 2014, defines a related party as under:

In case of individual following shall be Related Party-

·         Key Managerial person or its relative;

·         Director or its relative;

·         Any person on whose advice, direction, director or Manager is accustomed to act;

·         A director or Key Managerial person of Holding Company or its relative;

In case of other than individual following shall be treated as related party-

·         A firm in which director, a manager or his relative is a partner;

·         A private Company in which director or a manager is a director or a member;

·         A public company in which director or manager is a director or manager or holds with his relative more than 2% in the paid-up share capital of the company;

·         Any body corporate whose board of director is accustomed to act in accordance with the advice or instruction of director or manager;

·         A holding, subsidiary or an associate company;

·         A subsidiary of a company to which it is also a subsidiary;

·         A body corporate (foreign company) which is a holding/ subsidiary/ associate/ fellow subsidiary shall be treated as related party as per Companies amendment act 2017;

·         Both now Associate company and investor shall be treated as related to each other as per Companies Amendment Act 2017;

 

 

Section 2(77) of the Companies Act, 2013 defines the word relative as below. “relative”, with reference to any person, means anyone who is related to another, if –

·         they are members of a Hindu Undivided Family;

·         they are husband and wife;

·         or on person is related to the other in such manner as may be prescribed;

Now after understanding Related party one has to understand what are the transaction which comes under the purview of related party transaction.

Any transaction between a Company and its Related party relating to

a)      Sale or purchase or supply of any goods or materials;

b)      Underwriting the subscription of any securities or derivatives thereof of the company;

c)       Selling or otherwise disposing of or buying property of any kind;

d)      Leasing of property of any kind;

e)       Appointment of any office or place of profit in the company, or its subsidiary or its associate;

f)        Appointment of any agent for purchase or sale of any goods, materials or services or property;

g)      Availing or rendering of any services;

 

Non-Applicability-

The above provision provided shall not be applicable in case of transaction entered into company in its ordinary course of business, which are on arm’s length basis.

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

Now after understanding related party and transactions will understand the mandatory compliances under companies act 2013.

Approval of Board of Directors-

Every company in respect of above given transaction is required to take approval of board in duly convened meeting not by circulation for entering into related party transaction, irrespective of capital of the company or value of the transaction.

Every director which are interested in the transaction shall not attend meeting and shall not vote In respect of particular transaction. Exemption has been provided to private company that interested directors can participate in the discussion.

Approval of members in general meeting-

In the following cases company shall be required to take approval of members in duly convened meeting of members for entering into related party transaction-

·         All related party transaction in case of company having paid up capital of 10 crores;

·         Sale or purchase of goods or materials directly or through agents exceeding 10% of the total turnover of the company or INR 1 billion, whichever is lower as mentioned in clause (a) and (e) of sub section (1) of section 188;

·         Selling or otherwise disposing of or buying property of any kind directly or through agent exceeding 10% of the net worth of the company or INR 1 billion, whichever is lower as mentioned in clause (b) and (e) of sub section (1) of section 188;

·         Leasing of property of any kind exceeding 10% of net worth or 10% of turnover of the company or INR 1 billion, whichever is lower as mentioned in clause (c) of sub section (1) of section 188;

·         Availing or rendering of any services directly or through agent exceeding 10% of net worth or INR 500 million, whichever is lower as mentioned in clause (d) and (e) of sub section (1) of section 188;

·         Appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding Rs. 2.5 Lakhs as mentioned in clause (f) of sub-section (1) of section 188;

·         Remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding 1% of the net worth as mentioned in clause (g) of sub-section (1) of section 188;

The Turnover or Net Worth 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.

Above given were the approval which shall be required to be taken before entering into related party transaction now lets see what are the disclosure needs to be done.

Disclosures to be made in notice of Board Meeting

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

·         name of the related party and nature of relationship;

·         nature, duration of the contract and particulars of the contract or arrangement;

·         material terms of the contract or arrangement including the value, if any;

·         any advance paid or received for the contract or arrangement, if any; and

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

·         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

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

Disclosure by interested directors

Every director of a company who is 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

·         with a body corporate in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate, or

·         with a body corporate in which such director is a promoter, manager, Chief Executive Officer of that body corporate; or

·         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 the contract or arrangement is discussed.

Where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.

 

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

·         name of the related party;

·         name of the director or key managerial personnel who is related, if any;

·         nature of relationship;

·         nature, material terms, monetary value and particulars of the contract or arrangement;

·         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.

Disclosures to be made in Register of contracts or arrangements in which directors are interested

Every company shall maintain one or more registers in Form MBP 4 and shall enter therein the particulars of contracts or arrangements with a related party with respect to transactions to which section 188 applies.

Penalty for non-compliance-

Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a special resolution in the general meeting, as the case may be, and if it is not ratified by the Board or, as the case may be, 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 contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

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 –

(i) in case of listed company, 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/-, or with both; and

(ii)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/-

NOTES-

·         Companies Act 2013, Section 188 requires that related party transaction which does not meet the exemption criteria shall be approved by ordinary resolution passed by disinterested shareholder and further requires that no related member shall vote on such transaction but amendment made in Companies amendment act 2017 if 90% or more of the members are related to promoters or are related parties, all shareholders will be entitled to vote on the ordinary resolution.

·         In companies act 2013 if contract or arrangement of related party transaction is not rectified within 3 months of the contract, it shall be voidable at the option of Board of directors but after enforcement of Companies amendment act 2017 same would also be voidable at the option of shareholders.

·         After the enforcement of companies amendment act 2017 if the Audit committee does not approve RPT then it shall make recommendation to the board and board shall consider and approve these RPT.

·         The Companies Amendment act 2017 has provide some relaxation in the approval from audit committee, that company can enter into related party transaction upto the limit of INR 1 Crore but the same shall be ratifies within 3 months from the date of contract and shall be voidable at the option of Audit committee.

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