Offences under Related Party Transaction

Narendra Kumar

27 Nov, 2020

Where any contract entered into by the director or any other employee, without obtaining the consent of the Board or requires the approval by way of resolution & if it’s not corrected by the Board/Shareholder^[1] within 3 months from date on where such a contract was entered into, such a contract or arrangement shall be voidable at the option of Board. If the contractor the arrangement is with a Party related to any director or is authorized by any other director, such a director shall indemnify the company against any loss incurred by it.

Further, it shall be open to the company to proceed against a director or any other employee who had already entered into such a contract or arrangement which in contravention of the provision of a section for recovery of the loss sustained by it according to such contract or arrangement.

Offense & Penalty for Non-Compliance with Related Party Transaction:

Any of the director or other employees of the company, who had entered into or are authorized by the contract or arrangement in violation of provision of this section it shall, in case of listed company shall be punishable with imprisonment or in custody for the term or period which may be extended to 1 year or with fine which shall not be less than 25000 but which may extend to 500000 rupees or with both; & in case of any other company, it shall be punishable by fine which shall not be less than Rs.25000 but which may be extended to 500000 rupees.

Disclosure Requirement;

• Disclosure is to be made in Board’s report.
• Disclosure is to be made in Register of contracts in which directors are interested; every company shall maintain a register in Form MBP 4.

Omnibus approval for related party transactions which is an annual basis;

1. All related party shall be required for prior approval of the audit committee, and the Audit Committee may make omnibus approval for related party transaction proposed to be entered into by the company.
2. Omnibus consent will be in force for a period of not extending 1 F.Y & also require approval afresh after the expiration of such particular financial year.
3. Omnibus approval shall not be made for a transaction in respect of selling or disposing of the undertaking of the company.
4. As long as where the need for related party transaction can’t be foreknown&the details above aren’t available. Audit Committee can make approval for such a transaction depending on their value which is not beyond rupees 1,00,00,000 per transaction.

Though, Audit Committee will consider diverse consideration before giving the omnibus approval to any contracts or arrangements-

• Repetitiveness of a transaction
• A justification for a need for omnibus approval.

 The omnibus approval will contain or indicate the following;-

• Name of related parties;
• Nature & duration of transaction;
• Maximum amount of transaction that can be entered into;

Audit Committee to take a decision on proposed transaction of related party & For related party contact and arrangements, Form AOC 2 is required to be enclosed with a Board Report.