If I am the director of the company, am I authorized to sell or lease the company’s property? Am I authorized to appoint my friend as Finance Manager of the company? Very common questions that comes to our mind. Related Party Transaction in a company has always been an area of interest and ambiguity for stakeholders.  This is mostly due to the fact the existing Act was silent regarding many of the provisions relating to it. It did contain provisions dealing with special transactions which vested director’s interest. The New Act has increased their scope. In this article, we will discuss the nature and scope of related party transactions under Companies Act, 2013. 

Who is a “Related Party”?
The New Act has left no stone unturned in covering the loopholes of the existing Act. It has provided the widest possible definition. Following parties are covered by the definition:

i) Director and his relatives;
ii) Key Managerial Personnel (KMP) and his relatives;
iii)A firm, in which a Director, Manager or his relative is a partner;
iv) A private Company in which Director or KMP is a member or director, even if the shareholding is of one share;
v) A public company in which a Director or KMP is a director, or holds along with his relatives, more than 2 % of its paid up capital;
vi) A body corporate or Board or MD or KMP are accustomed to act on advise of Director or KMP, otherwise than in professional capacity;
vii) Any person on whose advise, other than in professional capacity, the Board, MD or Manager is accustomed to Act;
viii) Holding/Subsidiary or associate company;
ix)   Director/KMP of the holding, subsidiary and associate company.

In the above context, we have used the terms “relative” and “Key Managerial Personnel (KMP)” quite a few times. The new Act has gone lengths in defining these terms as well. Relatives means any person, who is related to another, if:

a) they are husband and wife;
b) if they are members of HUF;
c) one person is related to other as may be prescribed by Central Government.

Key Managerial Personnel (KMP), in relation to a company, means–

a)CEO;
b)Company Secretary;
c)Whole Time Director;
d) CFO;
e) Such officer, as may be prescribed.

What are the types of transactions that are covered?
The Act lists the following transactions as Related Party Transactions:

i) Buying, selling, supplying of any goods or materials;
ii)Selling or otherwise disposing off , leasing of property of any kind;
iii) Leasing of property of any kind;
iv) Appointment as agent for any of the above;
v) Appointment to a place of profit in the company;
vi) Underwriting the subscription of any securities or derivatives, thereof, of the company.

 

Procedural requirements to carry on the transaction:

• Prior approval from Board is required. Further, in certain cases, prior approval of shareholders by way of special resolution is also required.
• The details of the proposed transaction shall be circulated in the notice of the meeting.
• The details and justification of the special transactions shall be referred in the Board’s Report.
• Any director, interested in the transaction shall not be part of the meeting and he will also not vote in passing the Special Resolution, where applicable.
• All such transactions should be approved by the Audit Committee, where applicable.

However, where the above transactions are carried on in the ordinary course of business or on arm’s length basis (transaction between two related parties, as if they are unrelated), then there is no requirement of obtaining prior approval of Board.

Taxmantra Interpretation: The New Act, no doubt aims to pull he strings tighter with respect to the provisions of the existing Act. The existing Act did not provide for any specific definition of related parties. The New Act does it. In doing so, t has adopted a more rational approach. It has reduced the list of covered relatives to exclude the third generation relatives. However, the provisions relating to arm’s length principle is a bit dicey. Whether a transaction is on arm’s length basis or not is left at the discretion of the Board. Also, whether the Board’s decision will be final in this regard or there is further scope of negotiation has not been made clear. Hence, we can conclude that the New Act has provided the much needed structure and framework to this area; few minor clarifications are still required for its systematic implementation.

___________________________________________________________________________________________________

Feel free to write to us,at [info@taxmantra.com] or call us at +91 88208208 11.