Sandeep Ahuja & Co.

Established in the year 1986, we are a leading chartered accountancy firm based in Delhi & NCR rendering comprehensive professional services which include statutory audit, internal audit, direct tax, transfer pricing, GST, bank audit, propriety audit, cost accounting, internal financial controls and risk advisory.

Saturday, May 17, 2014

COMPANIES ACT 2013 - RELATED PARTY TRANSACTIONS AND DISCLOSURE REQUIREMENTS

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.
Related party transactions

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.

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