Related Party Transactions under the Companies Act, 2013

Section 188 deals with Related Party Transactions. As per Section 188 of the Companies Act, 2013, a Company cannot enter into any Contracts or Arrangements with, a Related Party without the consent of the Board at the Board meeting.

Section 188 is applicable to all Companies, whether Public or Private.

Specified Contracts:-

A Contract or Arrangement with respect to Section 188 (1) and the limit which is Prescribed under the Rule 15 of the Companies (Meeting of Board and its Powers) Rules, 2014 are mentioned below:-

1. Sale , Purchase or Supply of any goods or materials
   
   • Limit:-10% of Turnover of the Company or Rupees 100 crore, whichever is Lower
     
2. Selling or otherwise disposing of, or buying , Property of any kind
   
   • Limit:-10% of Net Worth of the Company or Rupees 100 crore, whichever is Lower.
     
3. Leasing of Property of any kind
   
   • Limit:-10% of Turnover of the Company or 10% of Net Worth of the Company or Rupees 100 crore, whichever is Lower.
     
4. Availing or rendering of any Services
   
   • Limit:-10% of Turnover of the Company or Rupees 50 crore, whichever is Lower
     
5. Appointment of any agent for Purchase or Sale of goods, materials, services or property.
   
   • If sale, purchase, supply of any goods or materials through appointment of an agent:- 10 % of the total turnover of the Company or Rupees 100 Crore whichever is lower.
     
   • If selling or otherwise disposing of or buying property of any kind, through appointment of agent:- 10% of the networth of the Company or Rupees 100 Crore whichever is lower.
     
   • Availing or rendering of any Services through appointment of an agent:- 10% of the turnover of the Company or Rupees 50 crore whichever is lower .
     
6. Appointment of related party to any office or Place of Profit in the Company or its Subsidiary Company or Its Associate Company.
   
   • Limit:- Monthly Remuneration upto Rupees 2,50,000
     
7. Underwriting the Subscription of any Securities or derivatives thereof, of the Company
   

   Limit:- Remuneration upto 1% of the Networth
   

Additional Points:-

• If these limits are exceeded which are mentioned above, prior approval of the members of the company is required by way of Ordinary Resolution
  
• The limit specified above (a) to (e) shall apply for all the transaction(s) to be entered into, during a financial year either individually or taken together with the previous transactions
  
• Turnover and Net worth referred to above shall be computed on the basis of the Audited Financial Statements of the preceding financial year.
  
• Section 188 is not applicable if any transaction is entered by the Company in the ordinary course of business at arm’s length basis.**(transaction between two related parties is conducted as if they were unrelated)
  
• Ordinary Resolution is not required for transaction between holding Company and its*wholly owned subsidiary Company if the Consolidated accounts are placed at the General Meeting of such holding Company.
  *(No exemption is available for other subsidiaries)
  
• As per Rule 15 (2) of Companies (Meeting of Boards and its Power), Interested director is not entitled to be present at the meeting during discussion on such contract by the Board but as per MCA notification dated05/06/2015,Private Companies Interested Directors may participate in such meeting after disclosure of his interest.The meaning of Interested Director will be as per Section 2(49) read with Section 184 of the Companies Act, 2013
  
• Every Contract or arrangement entered into Section 188(1) of the Companies Act, 2013 should be referred to in the Board’s report to the Shareholders along with the justification for entering into such Contract or Arrangement.
  
• Where any Contract or Arrangement is entered into by Director or any other employee, without obtaining the approval of the Board of Directors and the approval of the Shareholders, as the case may be, and the same has not been ratified within 3 months of the transaction having been entered into, then such transaction, shall be considered as voidable at the option of the Board.
  
• Further, if such transaction was entered into, with the authority of the director(s), th concerned director(s) shall indemnify the company against the loss incurred.
  
• As per Rule 15(1) of the Companies (Meeting of Boards and its Power) Rules, 2014 disclosure is required in the agenda of the Board Meeting. TheAgenda of the Board meeting disclose the following contents:-
  
• As per Rule 16(1)(c) of Companies ( Meeting of Board and its Powers) Rule, 2014, every Company shall maintain registers in Form MBP 4, shall enter therein the particulars of contracts or arrangements with a related party with respect to transaction to which Section 188 applies.
  
• Disclosure is required in explanatory statement and should be annexed to the notice of the general meeting regarding the following particulars:-
  

Section 2(76) of the Companies Act, 2013 provides the Related Party definition with reference to a Company , which is shown below in diagrammatical form:-

*As per MCA notification dated 5th June 2015, In case of Private Companies the following Companies will not be considered as related party:-
It’s Holding Company
It’s Subsidiary Company
It’s Associate Company
A Subsidiary of Holding Company of a Private Limited Company

**A Director other than Independent Director (Or) Key Managerial Personnel of the Holding Company (Or) Relative of Director and key managerial Personnel

As per Section 2(77) of the Companies Act, 2013, the Related Party definition with Reference to any person, is shown below:-