[Section188 and Rule 15 of Companies (Meeting of Boards and its
Powers) Rules, 2014]
Applicable to both Private as well as Public Companies
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Who is a Related Party??
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Related Party has been explained under section 2(76) of
the Companies Act, 2013 which includes:1. A Director or his Relative
2. A Key Managerial Personnel
3. A firm in which Director, Manager or his Relative is a partner
4. A private company in which a director or manager is a member or director
5. A public company in which a Director or Manager is a director AND* holds
along with his relatives, more than 2% of its paid up capital
6. Any body corporate, whose BOD, MD or Manager is accustomed to act in
accordance with the advice, direction or instruction of a Director or Manager
given not in a Professional capacity.
7. Any person on whose direction or instruction or advice given not in any
professional capacity, a Director or Manager is accustomed to act.
8. Any company which is the company’s holding company or co-subsidiary of
that holding company or subsidiary or associate company.
* Companies 1st (Removal of Difficulties) Order, 2014
word “OR” replaced with word “AND”
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The following person, with reference to a company as
defined under Rule 3 of the Companies (Specification of
Definitions of Details), Rules, 2014, shall also be deemed
to be related party:
I. A director or
II. Key managerial person of the holding company of
such company or
III. Their relative shall be deemed to be related party.
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Who are Relatives ?
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List of Relative Is defined under Section 2(77) of the
Companies Act, 2013.
Under Companies Act, 2013
Under Companies Act 1956
Relative means anyone who is related to
another person if they are:a) members of a HUF
b) Husband or Wife
c) Related in any manner as prescribed in
Companies (Specification of definitions
details) Rules, 2014:A person shall be deemed to be relative of
another, if he /she is related to another in the
following manner:1. Father (Includes Step father)
2. Mother (Includes Step Mother)
3. Son (Included Step Sun)
4. Son’s Wife
5. Daughter
6. Daughter’s Husband
7. Brother (Includes Step Brother)
8. Sister ( Includes Step Sister)
The person defined as relative under the New
companies act were also defined as relatives in the
Old Act, however the following person who were
included in the definition of the relatives under old
act has been removed from the definition of relative
under the New Act, namely: 1. Father's father.
2. Father's mother.
3. Mother's mother.
4. Mother's father.
5. Son's son.
6. Son's wife.
7. Son's daughter.
8. Son's daughter's husband.
9. Daughter's son.
10. Daughter's son's wife.
11. Daughter's daughter.
12. Brother's wife.
13. Sister's husband
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Concept of Related party widened
Under the 1956 Act, restriction applied only to transaction with
specified person/parties, namely: 1. A director of the company or his relative
2. A firm in which such a director or relative is a partner, any other
partner in such a firm
3. A private company of which the director is member or director.
In contrast, section 188 of Companies Act, 2013 covers all the
persons covered in the definition of the term, “Related Party”.
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Related Party Transaction
 Section 188 of the Companies Act, 2013 deals with
certain transactions which requires Boards and
Shareholders approval, which have been dealt in
following slides:
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If Transaction
was before
August, 2014
Related Party Transaction Approvals
Particular
Board’s
Approval
Members Approval
Sale purchase or supply of any
goods or materials directly or
through appointment of Agent
Require
Required if transaction value exceeds
Required
transaction
exceedsor
10%
of theifturnover
of value
the company
25%
of crore,
the turnover
of the
Rs.
100
whichever
is company
lower
Selling or otherwise disposing of, or
buying, property of any kind directly
or through Agent
Require
Required
Requiredififtransaction
transactionvalue
valueexceeds
exceeds
10%
of theofcompany
or Rs
10%ofofnet
theworth
net worth
the
100
crore, whichever is lower
Company.
Leasing of property of any kind
Require
Requires if transaction value exceeds
10% of the net worth of the company
or 10% of turnover of the company or
Rs 100 crore, whichever is lower
Availing or rendering of any services
directly or through appointment of
Agent
Require
Requires
Requiredif iftransaction
transactionvalue
valueexceeds
exceeds
10%
ofof
the
company or
10%ofofthe
theturnover
net worth
the
Rs.
50 crore, whichever is lower
Company.
Explanation: it is hereby clarified that the limits specified above shall apply for
transaction to be entered into either individually or taken together with the
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previous transaction Venky
during
a financial year.
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Related Party Transaction
Approvals (in Continuation..)
Particulars
Board
Approval
Members Approval
Underwriting the subscription of any
security or derivatives thereof.
Require
Required if exceeding 1% of the
If the Transaction
Net worth
Appointment of any office or place or
place of profit in the company or its
subsidiary or associate company.
Require
are on or after
May 21,
2015,
Requires
if monthly
Ordinary
remuneration
of such related
party
exceeds Rs.
Resolution
is 2,50,000
required.
Explanation: (1) The Turnover or Net Worth referred in the above sub-rules shall be computed on
the basis of the Audited Financial Statement of the preceding financial year.
(2) In case of a wholly owned subsidiary, the Special Resolution passed by the
holding company shall be sufficient for the purpose of entering into the transactions
between the wholly owned subsidiary and the holding company.
Non Applicability of the
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Section
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Proviso to the scope of related parties
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
Ordinary resolution:
with the prior approval of the company by a Special
w.e.f. 25th May 2015
Provided
further
that
member
of company
the company
on Company)
such special
Provided further
that
no no
member
of the
(Othershall
thanvote
Private
shall vote onto
such
Ordinary
any contract
arrangement
which
resolution,
approve
anyresolution,
contracttoorapprove
arrangement
whichormay
be entered
may
be entered
into by the
company,
if such
a related party.
into by
the company,
if such
member
is amember
relatedisparty:
w.e.f. 5th June 2015
Provided also that nothing in this sub-section shall apply to any transaction
entered into by the company in its ordinary course of business other than
transactions which are not on an arm’s length basis.
Provided also that the requirement of passing the resolution under first
proviso shall not be applicable for transactions entered into between a
holding company and its wholly owned subsidiary whose accounts are
consolidated with such holding company and placed before the shareholders
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at the general meeting
for approval.
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Disclosure of interest by Director
Every Director of a Company who 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 in association with
any other director holds more than 2% shareholding of that body
corporate OR is a promoter, manager, CEO of that body corporate OR
(b) With a firm or other entity in which, such director is a partner, owner
or member, as the case may be, Shall disclose the nature of his concern
or interest at the meeting of the Board in which such contract is
discussed and shall not participate in such meeting. [Section 184(2)]
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Contract Voidable if approval of Board /
Member is not taken
When a director or any employee enters into any
contract, without obtaining the consent of BOD or
approval by Special Resolution and if it is not ratified
by the Boards/Shareholders within 3 months from the
date on which such contract was entered into, such
contract shall be voidable at the option of the Board. If
the contract or arrangement is with a related party to
any other director, or is authorized by any other
director, the director concerned shall indemnify the
company against loss incurred by it. [Section 188(3)]
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Penalty
It shall be open to the company to proceed against a director
or any other employee who had entered into 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. [Section 188(4)]
Any Director or an employee who had entered into or authorized the
contract or arrangement with a related party in violation of the provisions
of this section shall be punishable:1. In case of Listed Company :- Imprisonment up to 1 year or Fine of
Rs. 25,000 up to Rs. 5 lakh or both
2. In case of any other company :- Fine of Rs. 25,000 up to Rs. 5 lakh.
[Section 188(5)]
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Approval of Audit Committee ( u/s 177)
Applicability of Audit Committee: Following companies are required to constitute an Audit committee: 1. Every Listed Company
2. All Public companies with a paid-up capital of Rs. 10 crores or more;
3. All public companies having turnover of Rs. 100 crore or more;
4. All public companies having in aggregate, Outstanding loans or
borrowings or debenture or deposits exceeding Rs. 50 crore or more.
Requirement: As per the provisions of section 177(4)(iv), every Related party
transactions and subsequent modification in any previous transaction
will require prior approval of Audit Committee.
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Implications of revised clause 49 of Listing
Agreement in terms of Related Party
Transactions
 The Company shall frame and adopt a policy on materiality of related
party transactions and dealing with related party transactions. The same
shall be filed with the stock exchanges and also be updated in the
Company’s website. Further the company shall include the policy in its
Annual Report every year.
 Any related party transactions irrespective of transactional values
requires the prior approval of Audit Committee.
 The company shall have a periodical review of the related parties and the
transactions entered or to be entered into with the related parties.
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Requirement for Listed Companies
 Prior approval of shareholders required for all Material related
party transactions
 Policy of dealing with Related party transactions to be
disclosed on website and in annual report.
 Details of all “Material Transactions” with related parties shall be
disclosed quarterly along with the compliance report on corporate
governance.
w.e.f. September 15, 2014
 Material
Transaction: Transaction (together with previous
transactions
with a Transaction
related party)
exceeds
10% transaction
of the annual
Material Transaction:
(together
with previous
with
turnover;
or
a related party) exceeds 10% of the turn over as per last year’s audited
 exceeds 20% of the net worth
of the company as per last year’s
financials.
audited financials
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Thank You..
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