The new Companies Act have enacted with strict compliance in relation to the provisions relating to the related party transactions.The intent of the legislature is to bar the corporates from entering into transactions which are fraudulent under the cover of sister concerns.With newly enacted provisions the transactions with the related parties will be more transparent and more informed to the shareholders of the company.
Definition of relative Section 2 (77)
Relative with reference to any other person means anyone who is related to another, if :
1. they are husband and wife,
2. they are members of HUF,
3. one is related to the manner as specified in Companies (Specification of Definition) Rules, 2014
Transactions with related parties covered under the act section 188
- Consent of BOD is required at board meeting by way of resolution at the meeting
- Following are the transactions which require the consent of BOD
o Sale, purchase and supply of any goods and materials
o Selling or otherwise disposing of or buying property of any kind
o Leasing of property of any kind
o Availing or rendering of any services
o Appointment of agent for purchase or sale of goods, materials, services or property
o Such related party™s appointment to any office or place of profit in the company, its subsidiary company or associate company
o Underwriting the subscription of any securities or debentures thereof of the company
- Prior approval of company by way of special resolution required for the following transactions in case of paid up share capital of the company is Rs. 10 Crores or more
o Direct or through agent sale, purchase or supply exceeding 25% of annual turnover
o Direct or through agent selling or otherwise dispose or buying property exceeding 10 % of net worth
o Leasing of property of any kind exceeding 10 % of net worth or exceeding 10 % of turnover
o Direct or through agent availing or rendering of services exceeding 10 % of net worth
o Appointment to any office or place of profit in the company, its subsidiary or associate company at a monthly remuneration exceeding Rs. 2.5 lacs
o Underwriting remuneration exceeding 1% of Net worth
- No member should vote if he is related party
- Transactions entered by the company in the ordinary course of business at an arm™s length price shall be out of ambit of section 188
- Arm™s length transactions means a transaction between two related parties that is conducted as if they are unrelated
- Contracts or arrangements with related parties shall be referred to in Board™s report along with justification
- Contracts or arrangement entered by director or employee without board™s consent or special resolution in general meeting shall be ratified in three months, if not ratified then such contract or arrangement is voidable at the option of the Board. In case of such transaction is with a related party to director or is authorised by the other director, the concerned directors shall indemnify the company against the loss incurred by it. Company can proceed for recovery of losses from director or employee who has entered into such contract or arrangement.
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