Related party relationships are a normal feature of commerce and business.
Generally Business enterprises carry on some business activities through
subsidiaries or associates also sometimes acquire interests in other
enterprises for investment purposes or for trading reasons. Sometimes the
investing enterprise exercises control or exercise significant influence on the
financial and/or operating decisions of its investee.
The Companies Act, 2013 has
made provisions to control related party transactions and to ensure
that Directors who are in fiduciary position in the company sometimes
siphon funds of the company for personal gains. Sometimes Directors
divert funds of the company for personal benefit of directors through
related party transactions.
Transactions with related parties are
most common tool of 'tax management'. To control 'tax planning' through related party transactions there are
certain provisions in Income Tax and Central Excise and Custom Laws.
RELATED
PARTY
Sec 2(76) “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 two per cent. of its
paid-up share capital;
(vi) a 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 directions or
instructions a director or manager is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii)
shall apply to the 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) such other person as may be
prescribed;
Interested
director or his relative
Section 2(49)
“interested director” means a director who is in any way, whether by himself or
through any of his relatives or firm, body corporate or other association of individuals
in which he or any of his relatives is a partner, director or a member,
interested in a contract or arrangement, or proposed contract or arrangement,
entered into or to be entered into by or on behalf of a company.
A
key managerial personnel
Section 2 (51) “key managerial personnel”, in
relation to a company, means—
(i) the CEO or the managing director or the
manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed;
A
Relative
Section 2(77) ‘‘relative’’, with reference to
any person, means one who is related to
another, if—
(i) they are members of a Hindu Undivided
Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such
manner as may be prescribed;
Associated Company
Section 2(6)
“associate company”, in relation to another company, means a company in which
that other company has a significant influence, but which is not a subsidiary company
of the company having such influence and includes a joint venture company.
Explanation.—For the purposes of this clause, “significant
influence” means control of at least
twenty per cent. of total share capital, or of business decisions under an greement;
Control
Section 2(27)
“control” shall include the right to appoint majority of the directors or to control
the management or policy decisions exercisable by a person or persons acting individually
or in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholders/ voting agreements or in any other
manner;
“Office or place of profit”
(a) the expression “office or place of profit” means
any office or place—
(i) where such office or place is held by a
director, if 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 or otherwise;
(ii) 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, or otherwise;
(b) the expression “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.
Transaction requiring consent of the Board of
Directors
(1) Except with the consent of the Board
of Directors given by a resolution at a
meeting of the Board and subject to such
conditions as may be prescribed, no company shall enter into any contract or arrangement
with a related party with respect to—
(a) sale, purchase or supply of any goods
or materials;
(b) selling or otherwise disposing of, or
buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase
or sale of goods, materials, services or property;
(f) such related party's
appointment to any office or place of profit in the company, its subsidiary
company or associate company; and
(g) underwriting the subscription of any
securities or derivatives thereof, of the company:
Provided that
-
No 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, shall be entered into except
with the prior approval of the company by a special resolution:
-
No member (related party
) of the company shall vote on such special resolution, to approve any contract
or arrangement which may be entered into by the company
-
Nothing in 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.
Such Contract or Arrangement
-
Requires disclosure in
Board’s report to the shareholders with justification
(2) Every contract
or arrangement entered into under sub-section (1) shall be disclosed in
the Board’s report to the shareholders with the justification for such contract
or arrangement.
- Voidable if not
ratified by the Board or shareholders within three months
(3) 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 under sub-section (1) 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.
-
Contravention of provisions
may cause recovery of loss by the
company
(4) Without prejudice to anything
contained in sub-section (3), it shall be open to the
company to proceed against
a director or any other 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.
- Violation of the provisions may bring punishment
and imprisonment
(5) Any director or
any other employee of a company, who had entered into or authorized
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 one year or with fine which shall
not be less than twenty-five thousand rupees but which may extend to five lakh
rupees, or with both; and
(ii) in case of any other company, be punishable with fine which shall not be less than
twenty-five thousand rupees but which may extend to five lakh rupees.
RELATED PARTY TRANSACTIONS WHEN THE PROVISIONS DO NOT APPLY
The
provisions relating to related party transactions do
not apply in certain situations.
Provisions not applicable to transactions in ordinary course of
business –
Provisions
of section 188(1) of the 2013 Act are not applicable to any
transactions entered into by the company in its ordinary course of
business, other than transactions not on an 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.
The
burden of proof will be on interested director to establish that the
transaction is in ordinary course of business and is at arm's length.
Provision not applicable to small value transactions upto Rs. five lakhs –
Provisions
relating to disclosure by director or KMP (Key Managerial
Personnel) of transactions in which he is interested does not apply for
contract or arrangement for the sale, purchase or supply of any goods,
materials or services if the value of such goods or the cost of such services
does not exceed five lakh rupees in the aggregate in any year .
Section 189 Disclosure
Requirements of Related Party
Register of contracts or
arrangements in which directors are interested
189 (1) Every
company shall keep one or more registers with particulars of all contracts or arrangements
to which sub-section (2) of section 184 or section 188 applies, and
after entering the particulars, such
register or registers shall be placed before the next meeting of the Board and
signed by all the directors present at the meeting.
Every director or key managerial personnel shall disclose his
interest to the company
189 (2) Every director or key managerial
personnel shall, within a period of
thirty days of his appointment, or relinquishment of his office, as the
case may be, disclose to the company the particulars specified in sub-section (1)
of section 184 relating to his concern or interest in the other associations
which are required to be included in the register under that sub-section or
such other information relating to himself as may be prescribed.
Register of such
contracts shall be kept at the registered office and open
for inspection
189 (3) The register referred to in
sub-section (1) shall be kept at the registered office of the company
and it shall be open for inspection at such office during business hours and
extracts may be taken there from, and copies
thereof as may be required by any member of the company shall be furnished by
the company to such extent, in such manner, and on payment of such fees as may
be prescribed.
Such Register shall
be produced at the commencement of
Company’s AGM
189(4) The
register to be kept under this section shall also be produced at the
commencement of every annual general meeting of the company and shall remain
open and accessible during the continuance of the meeting to any person having
the right to attend the meeting.
189(5) Nothing contained in sub-section (1)
shall apply to any contract or arrangement—
(a)
for the sale, purchase or supply of any goods, materials or services if the
value
of such goods and materials or the cost of such services does not exceed five lakh
rupees in the aggregate in any year; or
Penalty for Non Compliance of Section 189 for Disclosure
Requirements of Related Party
(6) Every director who fails to comply
with the provisions of this section and the rules
made there under shall be liable to a penalty of
twenty-five thousand rupees.
Disclosure of interest
by director
184 (1) Every
director at the first Board meeting held after such change, disclose his
concern or interest in any company or companies or bodies corporate, firms, or
other association of individuals which shall include the shareholding, in such
manner as may be prescribed.
184 (2) 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—
(a) with a body corporate in which such
director or such director in association with any other director, holds more
than two per cent. or
(b) with a firm or other
entity in which, such director is a
partner, owner or member, shall disclose the nature of his concern or
interest at the meeting of the Board in which the contract or arrangement is
discussed and shall not participate in
such meeting.
Any
contract or arrangement where Interest of is not disclosed shall be voidable at
the option of the company.
(3) A contract or
arrangement entered into by the company without disclosure under
sub-section (2)
or with participation by a director who is concerned or interested in any way,
directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.
(4) If a director
of the company contravenes the
provisions of sub-section (1) or subsection (2), such director shall be punishable with
imprisonment for a term which may extend to one year or with fine which shall
not be less than fifty thousand rupees but which may extend to one lakh rupees,
or with both.
