Related Party Transaction under Companies act 2013

Narendra Kumar

13 Jun, 2019

Section 2(76), read with Rule 3 of Companies (Specification of definition details) Rule 2014, define the Related Party Transaction with reference to a Body Corporate means-

1. A director or his relative,
2. A key managerial personnel or his relative,
3. A firm in which a director, manager, or his relative is a partner,
4. A private company wherein the director or the manager (or his relative) is the member or a director,
5. A public company in which a director or manager is a director and holds along with his relative more than 2 percent of its paid-up share capital,
6. Any body corporate where the Board of directors (BOD), managing director (M.D), manager is familiar to act in compliance with advice directions or instructions a director or manager,
7. Any person under whose advice, direction or instruction a director or manager is accustomed to act,
8. Any company which is –

• A holding, subsidiary, or an associated company of such company

or

• The subsidiary of the holding company to which it’s also a subsidiary.

In addition to the above, a director or Key Managerial Personnel of holding the company or his relative also covered under the definition of related parties.

Exemption to a private company: Subclause (viii) shall not apply with respect to section 188 dealing with related party transaction.

Related Party Transaction- Subsection (1) to Section 188

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, not a single company shall enter into any kind of contract or arrangement by related party with regard to—

Clause

1. Sale and/ or purchase or supply of any goods or materials;
2. Selling or otherwise disposing of, or buying, property of any kind;
3. Leasing of property of any kind;
4. Availing or rendering of any services or property;
5. Appointment of any agent for purchase or sale of goods material, services or property;
6. Such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
7. Underwriting subscription of any securities or derivatives thereof, of a company;

First Proviso

Provided that no contract arrangement, in the case of a company having paid-up share capital of minimum such an amount, or transactions not beyond such sums, as may be given, will be entered into except with the previous approval of the company by a special resolution.

Second Proviso

Provided further that not a single member of a company shall vote on such resolution to approve any contract arrangement which may be entered into by the company if such member is a related party.

Third Proviso

Provided also that nothing in this sub-section will apply to any kind of transaction entered into by a company in the ordinary course of the business except transactions which aren’t on the arm’s length basis.

Provided that the requirement of passing a resolution under the first proviso shalln’t be applicable for transaction that is entered into between the holding company & its wholly-owned subsidiary whose accounts are consolidated with such holding company & it is placed before shareholders at the general meeting for approval

The first & second proviso shalln’t apply to-

• A Government company in respect of contract or arrangement entered into by it with any other Government company.
• The Government company, excluding the listed company, in regard to the contracts or the arrangements apart from those which are referred in clause (a), as it happened if such company gets sanction of ministry or department of the\Central Government who is managerially in charge of company or as the case may be, the State Government prior to entering into such a contract or arrangement

Office or place of profit-

If the office is held by the director & if such a  director receives from the company whatsoever called by way of compensation beyond the remuneration to which he is permitted as director, by means of salary, or fee or commission or perquisites or any kind of rent-free accommodation, or otherwise;

Where such an office is held by the individual excluding a director or by any of the firm, private company or other bodies corporates if such individual, firm, private company or body corporates holding it receives from a company by way of remuneration salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

Arm’s length Transaction-

The Arm’s length transaction is defined as the transactions between 2 related parties that are conducted as if they were not related so that there is not any conflict of interest.