Related Party transactions

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• November 15, 2019

A related party is a party related to a body corporate /company in any other way other than by the companies own transactions. It means that a special relationship persists between the parties even before the transaction takes place. Section 2(76) of the Companies Act, 2013 (“the Act”), defines a related party with reference to a company

• director or a key managerial person or their relatives or,
• a firm, private company in which the partner, director / manager or his relative is a partner or,
• a private company or 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 share capital.

Transactions which are deemed to be related party transaction
Following transactions between a company and its related party relating to:

1. Sale, 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 service,
5. Appointment of any agent for purchase or sale of goods, materials, service or property,
6. Appointment to any office or place of profit in the co., its subsidiary or associate, and
7. Company underwriting the subscription of any securities or derivatives thereof, of the company.

Arm’s length transactions
An arm’s length transaction means a transaction between two related parties that is conducted as if they were irrelevant so that there is no dispute of interest. In this case, it is to be distinguished that the burden of agreement lies within the parties entering the agreement that the said transactions come within the purview of arm’s length basis. If the transactions are conducted and carried out in a fair, justiciable manner without any trace of influence of the parties’ relation upon itself it is known as a transaction at arm’s length. It means transactions which are not biased by the relation of the parties and conducted as if with an unrelated party. Such transactions have been exempted from compliance with Section 188 of the Act.

Exemptions
All the above conditions would not be applicable in case the transactions are entered into a company in its ordinary course of business which is on arm’s length basis.

Consequences of non-compliance

1. Agreements voidable: Where any contract or arrangement is entered into by a director or any other employee, without the consent of the Board or approval by a special resolution in the general meeting and if it is not ratified by the Board or by the shareholders within three months from the date on which such contract is made, then such contract or arrangement shall be voidable at the option of the Board.
2. Indemnification: If such a contract or arrangement is with a related party to any director, or is authorized by any other director, the directors concerned shall indemnify the company against any loss incurred by it.
3. The company can also proceed against such director or any other employee who had entered into such 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.
4. Penalties for a director or any other employee in violation of the provisions of Section 188 of the Act:

• Listed company: Punishment of imprisonment for a term upto 1 year or with fine from INR 25,000 (Approx. 388 USD) upto INR 5 lacs (Approx. 7750 USD), or both
• Other companies: fine of INR 25,000 (Approx. 388 USD) upto INR 5 lacs (Approx. 7750 USD).

Audit
As per the provisions of the Companies Act, 2013 it is required that the audit committee to approve or modify the transactions with the related parties, scrutinize the same as per the provisions of the act. Further the companies act gives the audit committee the authority to investigate into any matters falling within its ambit and to have full access over the information contained in the records of the company.

The proposal introduced new amendments pertaining to related party transaction, the categories of related party transactions that earlier required approval through special resolution (more than 75% of the voting members) will now need an ordinary resolution (more than half of voting members). However, the listing agreement shall stipulate a special resolution requirement for transactions exceeding the threshold limit.

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