CL: Know everything about Related Party Transactions (section 188)

Related party

According to section 2(76), related party means:

-            -A director or his relative;

-          -A key managerial personnel (KMP) or his relative;

-          -A firm in which a director, manager or his relative is a partner;

-          -A private company in which a director or manager or his relative is a member or director;

-          -A public company in which a director or manager or his relative is a member or director;

-          -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;

-          -Any body corporate whose BOD, MD or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

-         - Any person on whose advice, directions or instructions a director or manager is accustomed to act;

-          -Any company which is a holding, subsidiary or an associate company of such company; or any company which is a subsidiary of a holding company to which it is also a subsidiary;

-          -A director or KMP of the holding company or his relative.

Section 188: Related Party Transactions

·         As per section 188, every company has to obtain the prior approval of the Board and of the members, in certain situations, for entering any transaction or agreement with a related party. The approval of Audit committee is also required for related party transactions.

·         Following transactions between a company and its related party is known as related party transactions:

-          - Sale, purchase or supply of any goods or material;

-          - Selling or otherwise disposing of, or buying, property of any kind;

-          - Leasing of any property of any kind;

-          - Availing or rendering of any services;

-          - Appointment of any agents for purchase or sale of goods, materials, services or property;

-          - Appointment to any office or place of profit in the company, its subsidiary company or associate company; or

-          - Underwriting the subscription of any securities in or derivatives thereof.

·         Office or place of profits means any designation or post under company which carries any remuneration apart from any remuneration person is getting from company as director. Remuneration means any salary, fees, commission, perquisites or right to occupy any premises.

·         Section 188 will not be applicable in case of transactions entered into by the company in its ordinary course of business, which are on arm’s length basis. Further, this section is not applicable where transaction is arising out of corporate restructuring, amalgamation, etc.

·         Arm’s length transaction means a transaction between two related parties that is conducted as if they were not related, so that there is no conflict of interest.

·         If related party transaction is at arm’s length and in the ordinary course of business, approval of audit committee is sufficient.

·         Related party transactions by company where value of transactions are in excess of limit specified as mentioned below will require prior approval of shareholders by SR:

-> Sale, purchase or supply of goods or materials directly or through appointment or agents exceeding 10% of the annual turnover or Rs. 100 cr., whichever is lower.

-> Selling or otherwise disposing of, or buying, property of any kind, directly or through appointment of agents exceeding 10% of net worth or Rs. 100 cr., whichever is lower.

-> Leasing of property of any kind exceeding 10% of the net worth or 10% of turnover or Rs. 100 cr., whichever is lower.

-> Availing or rendering of any services directly or through appointment of agents exceeding 10% of the turnover or Rs. 50 cr., whichever is lower.

-> Appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding Rs. 2.5 lakhs.

-> Remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding 1% of the net worth.

·         Penalty or consequences of contravening the provisions of section 188

->Disqualification of director for 5 years.

-> In case of a listed company, such director or employee may be punishable with maximum imprisonment of 5 year and/or with fine of Rs. 25,000 to Rs. 5,00,000.

-> In case of any other company, such director or employee may be punishable with fine of Rs. 25,000 to Rs. 5,00,000.