The Following article is an detailed explanation of Related Party Transactions. Section 188 deals with the Related Party Transactions under the Companies Act 2013. Check out the Definition of Related Party Transactions along with the Procedure for entering into the Related Party Transactions.
Under the Companies Act, 2013, the whole concept of related party transactions has been capsulated in a single section, namely Section 188 which combines the erstwhile Sections 314 and 297 of the Companies Act, 1956 and also contains many new provisions within its scope. Also read our Previous articles on Directors Appointment in casual Vacancy, Appointment of Additional Director and Appointment of Alternate Director.
Definition/Meaning of Related Party
Section 2(76), read with rule 3 of Companies (Specification of definitions details) Rules, 2014, defines a related party as under:
“related party”, with reference to a company, means-
- 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 is a member or director;
- 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;
- 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:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
- any company which is
- a holding, subsidiary or an associate company of such company; or
- a subsidiary of a holding company to which it is also a subsidiary;
- a director or key managerial personnel of the holding company or his relative
Related Party Transactions
According to Section 188(1), No company shall enter into any contract or arrangement with a related party with respect to –
- sale, purchase or supply of any goods or materials;
- selling or otherwise disposing of, or buying, property of any kind;
- leasing of property of any kind;
- availing or rendering of any services;
- appointment of any agent for purchase or sale of goods, materials, services or property;
- such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
- Underwriting the subscription of any securities or derivatives thereof, of the company
Section 2(76) define related party and Section 2(77) define relatives, which are also a related party. The entity is a related party under section 2(76) of the 2013 Act. The entity and the company are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
These contracts may be contract with (a) consent of board (b) given by way of resolution (c) at a meeting of the Board and (d) subject to prescribed conditions.
No related party contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, shall be entered into except with the prior approval of the company by a special resolution.
such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.
This sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.
Procedure for Entering into a Related Party Transactions
- A notice of Board meeting as per section 173 with additional requirement of Section 188(1). The notice of the meeting shall disclose the following agenda :
- Name of related party and nature of relationship;
- Nature, duration and particular of the contract or arrangement;
- Material terms of the contract or arrangement including value;
- Any advance paid or received, if any;
- Any other relevant information;
- Information that any directors who are interested in the related party transactions shall not be present at the meeting during the discussion;
- Where any transaction/paid up capital is under the threshold limits, the board shall pass a resolution to approve the related party transaction;
- Where any transaction/paid up capital is above the following threshold limits, the board shall issue a notice for convening a general meeting as per Section 101 and 102 of the Act;
- Where company has paid up share capital of one crore rupees or more
- Where transactions is with the related party with all previous transactions during the financial year exceed 5% of annual turnover or 20% of networth whichever is higher;
- Where transaction is to appoint a related party to any place of profit in the company, wholly owned subsidiary, associate company at a monthly remuneration exceeding one lakh rupees;
- Where transaction for underwriting the subscription of any security or derivative of the company exceeding ten lakh rupees
- All related party transaction to be discussed in the general meeting shall be passed as special resolution, the notice for general meeting under section 101 shall contain following particulars:
- Name of related party;
- Name of the director or key managerial personnel who is related;
- Nature of relationship;
- Nature, material terms, monetary value and particulars of the contract or arrangement;
- Any other relevant information
- Form MGT – 14 for passing of special resolution shall be filled with the Registrar.
Related Party transactions examples
- Other subsidiaries under common control
- Owners of the business, its managers, and their families
- The parent entity
- Trusts for the benefit of employees
Related Party Disclosures
In general, any related party transaction should be disclosed that would impact the decision making of the users of a company’s financial statements. This involves the following disclosures:
- General. Disclose all material related party transactions, including the nature of the relationship, the nature of the transactions, the dollar amounts of the transactions, the amounts due to or from related parties and the settlement terms (including tax-related balances), and the method by which any current and deferred tax expense is allocated to the members of a group. Do not include compensation arrangements, expense allowances, or any transactions that are eliminated in the consolidation of financial statements.
- Control relationship. Disclose the nature of any control relationship where the company and other entities are under common ownership or management control, and this control could yield results different from what would be the case if the other entities were not under similar control, even if there are no transactions between the businesses.
- Receivables. Separately disclose any receivables from officers, employees, or affiliated entities.