WHO IS A RELATED PARTY:
With reference to a Company, Section 2(76) of the Companies Act, 2013 covers the following under umbrella of Related Party:
| INDIVIDUALS | OTHER THAN INDIVIDUALS |
| 1. Director
2. Relative of Director 3. Key Managerial Personnel (KMP) 4. Relative of KMP 5. Any person on whose advice Director or Manager is accustomed to act. However, any advice given in professional capacity (including opinions) is not to be covered here.
|
1. Firm in which Director/ Manager or his relative is a partner
2. Private Company in which Director or Manager is a Shareholding 3. Private Company in which Director or Manger is a Director 4. Public Company in which Director or Manager is Director and holds more than 2% of its paid up share capital (relatives holdings are also counted for the purpose of 2%) (see note on recent clarifications below) 5. Any Body Corporate whose Board and KMP is accustomed to act on the Directions of Board 6. Any Holding, Subsidiary or Associate Company 7. Subsidiary of Holding Company 8. Directors other than Independent Directors or KMP of Holding Company (see note on recent clarifications below) 9. Relatives of Directors other than Independent Directors or KMP of Holding Company (see note on recent clarifications below) |
*Relative has been defined under Section 2(77) of Companies Act read with The Companies (Specification of definitions details) Rules, 2014.
KEY CHECKS FOR RELATED PARTY TRANSACTIONS:
- Identification of Related Party:
- Classify Related Party according to the scope of Companies Act, 2013, AS-18 and Income Tax Act, 1961
- Identify transactions with related party affecting directly or indirectly
- Identification of transaction with Related Party and Pricing of the same:
- Identification of nature of transaction with related party
- Review of current methodology of determining ordinary course of business and pricing of such transactions
- Evaluation of existing contracts and identify the risk areas, if any
- One-time risk assessment of all related party transactions to ensure consistent approach going forward
- Drafting of specific policy for the recurring related party transactions, this will also ensure consistency
- Requisite Documentation and Disclosures:
- Maintenance of supporting contracts for Related Party Transactions
- Identification and evaluation of existing contracts which may need to undergo approval process of the Board or Shareholders as the case may be
- Establishment of pricing policy based on internal and external comparables which should include industry and local benchmarks
- Consistent ‘Pricing’ methodology needs to be aligned with domestic and international transfer pricing guidelines & related provisions of Income Tax Act, 1961
- All related party transactions must be disclosed in the Board Report in Form No. AOC.2
- Each related party transaction must be ratified by the Board or Shareholders as the case may be
CONSEQUENCES OF NON-COMPLIANCE ON RELATED PARTY TRANSACTIONS:
Voidable unless ratified by Board:
Every contract or arrangement with all related parties is voidable at the option of the Board, unless ratified within three months, as the case may be, by Board or Shareholder in their respective meetings
Indemnification by Director:
Directors are liable to indemnify the Company for any losses where Director are party to a transaction (relatives of such Director are also included)
Disqualification of Director:
Directors are liable to be disqualified to act as Director in any Company for a period not less than five years
Fine and Imprisonment:
Directors or any other employee of a company who had entered into contract and arrangement in violation of provisions of the Section 188 are liable to:
- Fine ranging from Rs. 25,000 to Rs. 5,00,000 (applicable on Private Limited Companies also)
- Imprisonment upto one year or fine as mentioned above or both (applicable only on Public Listed Company)
RECENT CLARIFICATIONS ON RELATED PARTY TRANSACTIONS:
The Ministry has issued following circulars / orders to provide certain clarifications and amendments to the provisions concerning related parties in the month of July, 2014:
- Companies (Removal of Difficulties) Fifth Order, 2014 dated 9th July, 2014
- Companies (Specification of definitions details) Amendment Rules, 2014 dated 17th July, 2014;
- General Circular No. 30/2014 dated 17th July, 2014
By Companies (Removal of Difficulties) Fifth Order, 2014 dated 9th July, 2014, Ministry substituted the word “or holds” with “and holds” in the definition of related party as provided in section 2(76)(v). This means, in relation to a Company, a Public Company in which a Director or Manager is a Director and holds more than 2% of its paid up share capital (relatives holdings are also counted for the purpose of 2%) will amount to a Related Party.
By Companies (Specification of definitions details) Amendment Rules, 2014 dated 17th July, 2014, Ministry excluded the Independent Directors of the holding company from being related party. This means, in relation to a Company, the Director other than Independent Director or KMP or their relatives of Holding Company will only be considered for Related Party
By General Circular No. 30/2014 dated 17th July, 2014, Ministry clarifies the following:
- As per second proviso of Section 188(1) Companies Act, 2013, it stated that no member of the company shall vote on special resolution to approve any contract if such member is a related party.
Ministry now clarifies that related party in the above context has to be construed with reference to the contract or arrangement for which the said special resolution is being passed. That means, for every interested contract, majority of Shareholders will have to be determined differently
- Ministry now clarifies that the transactions arising out of Compromise, Arrangements and Amalgamations will not amount to related party transactions as per Companies Act, 2013
- With regard to any existing contracts entered by Companies prior to 01st April, 2014, the Ministry now clarifies that such contracts will not require fresh approval under Section 188 of Companies Act, 2013, till the expiry of the original term of such contracts
Further, it is also clarified that any modification in such contract made on or after 01st April, 2014 will be treated as fresh contracts and provisions of Section 188 of Companies Act, 2013 will apply
Hope the above information provides some more insight on related party compliance’s that required immediate attention. Our team is prepared to take care of the implementation of these changes and help regularize the gaps, if any.
You may get back to us for any more details on above provisions or any other matter related to Companies Act, 2013 at below mentioned contact details-
Malavika Bhatia | <malavika.bhatia@bluelotusstrategy.com> | M +91 98733 18440
Monika Bhardwaj | <monika.bhardwaj@bluelotusstrategy.com> |M +91 98915 60525
We will do our best to assist you with the compliances and removal of doubts / queries. However, please note that since the Act is new, certain clarifications are needed as there are lot many areas where operational issues are to be sorted out.
In case of queries that require clarification from Ministry of Corporate Affairs, we will come back to you after seeking necessary clarifications from the Ministry.
