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Companies Act

All about Related Party Transactions and its provisions

May 8, 2020 by Team Instabizfilings

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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 resolution:

 

Provided further that no member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party (not applicable in case of private company):

 

Provided also that nothing contained in second proviso shall apply to a company in which ninety per cent or more members, in number, are relatives of promoters or are related parties:

 

Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

 

Explanation.— In this sub-section,—

(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, any rent-free accommodation, 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.

 

(2) Every contract or arrangement entered into under sub-section (1) shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.

 

(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 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 or, as the case may be, of the shareholders 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.

 

(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.

 

(5) 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 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.

 

When prior approval of company by resolution required for related party transaction [Rule 15 of Companies (Meeting of Board and its Powers) Rules, 2014]

For the purpose of first proviso to sub-section (1) of section 188, except with the prior approval of the company by a resolution, a company shall not enter into a transaction or transactions, where the transaction  or transactions to be entered into---

1. as contracts or arrangements with respect to clause (a) to (e) of sub-section (1) of section 188 with criteria, as mentioned below—

 

2. sale, purchase or supply of any goods or materials directly or through appointments of agents amounting to 10% or more of the annual turnover or Rs. 100 Cores, whichever is less, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;

 

3. selling or otherwise disposing of, or buying, property of any kind directly or  through appointment of agents amounting to 10% or more of the net worth or Rs. 100 Crores, whichever is less, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;

 

4. leasing of property of any kind amounting to 10% or more of the net worth or 10% or more of the turnover or Rs. 100 Crores, whichever is less, as mentioned in clause (c) of sub-section (1) of section 188;

 

5. availing or rendering of any services directly or through appointment of agents amounting to 10% or more of the annual turnover or Rs. 50 Crores, whichever and clause (e) of sub-section (1) 188;

 

Explanation : It is hereby clarified that the limits specified in sub-clauses (i) to (iv) shall apply to (iv) shall apply for transaction or transactions to be entered into individually or taken together with the previous transactions during a Financial Year.

 

1. is for appointment to any office or place of profits in the company, its subsidiary company or associate company at  a monthly remuneration exceeding two and half lakh rupees as mentioned in clause (f) of sub-section (1) of section 188; or

 

2. is for remuneration to any underwriting the subscription of any securities or derivatives thereof the company exceeding one percent of the net worth as mentioned in clause (g) of sub-section (1) of section 188.


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