Presentation
On
Related Party Transactions
as applicable to
Private Companies and Unlisted Public Companies
March 13, 2015
Lalit Kumar
Partner
J. Sagar Associates
advocates & solicitors
Ahmedabad | Bengaluru | Chennai | Gurgaon | Hyderabad | Mumbai | New Delhi
Outline
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Definition of “Related Party”
List of “Related Party Transactions”
List of Circulars / Notifications / Orders applicable to related party
transactions
Board Approval and Shareholders’ Approval
Audit Committee Approval / No Central Government Approval
Contents of agenda of board meeting and explanatory statement for
shareholders’ meeting
Concept of “Interested Directors” and “Interested Shareholders”
Treatment of Existing Contracts
Concept of “arm’s length transaction” and “ordinary course of
business”
Disclosure requirements
Penalties for contravention
Impact of Companies (Amendment) Bill, 2014 on related party
transactions
2
Definition
•
Clear definition of “Related Party” in Section 2(76), with
reference to a company, it means:
(i)
a director or his relative;
(ii) a KMP or his relative;
(iii) a firm, in which a director, manager or his relative is
a partner;
(iv) a private company in which a director or manager or his
relative is a member or director;
(v) 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;
3
Definition
(vi)
any body corporate whose board of directors, managing
director or manager is accustomed to act in accordance with
the advice, directions or instructions of a director or
manager;
(vii) any person on whose advice, directions or instructions a
director or manager is accustomed to act;
(viii) provided that nothing in (vi) and (vii) shall apply to the
advice, directions or instructions given in a professional
capacity;
(ix) any company which is a holding, subsidiary or an associate
company; a subsidiary of a holding company to which it is
also a subsidiary;
(x) director other than independent director or KMP of the
holding company or his relative.
4
List of Related Party Transactions
• Clear list of “Related Party Transactions” provided in Section
188, as under:
(a)
sale, purchase or supply of any goods or materials;
(b)
selling or otherwise disposing of, or buying, property of
any kind;
(c)
leasing of property of any kind;
(d)
availing or rendering of any services;
(e)
appointment of any agent for purchase or sale of goods,
materials, service or property;
(f)
such related party's appointment to any office or place of
profit in the company, its subsidiary company or associate
company;
(g)
underwriting the subscription of any securities or
derivatives thereof, of the company.
5
List of Circulars/ Notifications /Orders
Circulars
Circular No. & Date
Subject Matter
14/2014 dated June 9, 2014 • In view of the provisions of section 188
which take away transactions in the
ordinary course of business at arm’s
length price from the purview of related
party transactions, an independent
director will not be said to have
‘pecuniary relationship’ under section
149(6)(c) in such cases
6
List of Circulars/ Notifications /Orders
Circulars
Circular No. & Date
30/2014 dated July 17,
2014
Subject Matter
• Related party has to be construed with
reference only to the contract or
arrangement for which the said special
resolution is being passed. Thus, the
term related party in the above context
refers only to such related party as may
be a related party in the context of the
contract or arrangement for which the
said special resolution is being passed
7
List of Circulars/ Notifications /Orders
Circulars
Circular No. & Date
30/2014 dated July 17,
2014
Subject Matter
• Transactions arising out of compromises,
arrangement and amalgamation will not
attract section 188
• Contracts entered in compliance of section
297 of Companies Act, 1956 which already
came into effect before the commencement
of section 188 will not require fresh
approval under section 188 till the expiry of
the original term of such contracts, provided
there is no modification. If there is any
modification after April 1, 2014, it will
require compliance with section 188
8
List of Circulars/ Notifications /Orders
Circulars
Circular No. & Date
32/2014 dated July 23,
2014
Subject Matter
• Clarification
regarding
transitional
period for resolutions passed under
Companies Act, 1956
9
List of Circulars/ Notifications /Orders
Notifications
Notification No. & Date
GSR 507 (E) dated July
17, 2014
Subject Matter
• Exclusion of independent directors
GSR 590 (E) dated August • Substitution of sub-rule (3) of Rule 15 of
14, 2014
Companies (Meetings of Board and its
Powers) Rules, 2014
10
List of Circulars/ Notifications /Orders
Orders
Order No. & Date
Subject Matter
S.O.1820 (E) Companies
(Removal of Difficulties)
Fifth Order, 2014 dated
July 9, 2014
• Substitution of word “or” with “and” in
sub-clause (v) of sub-section (76) of
Section 2
S.O.1894 (E) Companies
(Removal of Difficulties)
Sixth Order, 2014 dated
July 24, 2014
• Insertion of words “or his relative” after
the word “manager” in sub-clause (iv) in
sub-section 76 of Section 2
11
Board and Shareholders’ Resolution
•
Board resolution required for all cases except for the following
cases for which shareholders’ approval is also required
•
Special Resolution of shareholders required only in the following
cases of contracts or arrangements exceeding certain value:
•
sale, purchase or supply of any goods or materials directly or
through appointment of agents exceeding 10% of the
turnover or Rs. 100 crores, whichever is lower, as mentioned
in clause (a) and clause (e) respectively of sub-section (1) of
section 188;
•
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 crores, whichever is lower, as
mentioned in clause (b) and clause (e) respectively of subsection (1) of section 188;
12
Board and Shareholders’ Resolution
• leasing of property of any kind exceeding 10% of the net worth
or exceeding 10% of turnover or Rs. 100 crores, whichever is
lower as mentioned in clause (c) of sub-section (1) of section
188;
• availing or rendering of any services directly or through
appointment of agents exceeding 10% of the net worth or Rs.
50 crores, whichever is lower as mentioned in clause (d) and
clause (e) of sub-section (1) of section 188;
• appointment to any office or place of profit in the company, its
subsidiary company or associate company at a monthly
remuneration exceeding Rs. 2,50,000 as mentioned in clause (f)
of sub-section (1) of section 188; or
13
Board and Shareholders’ Resolution
• remuneration for underwriting the subscription of any securities
or derivatives thereof of the company exceeding 1% of the net
worth as mentioned in clause (g) of sub-section (1) of section
188
• The limits specified in first four bullets above apply for
transactions to be entered into either individually or taken
together with the previous transactions during a financial year
• “Turnover” or “Net Worth” shall be on the basis of the audited
financial statement of the preceding financial year
• Rule 15(2) of Companies (Meetings of Board and its Powers)
Rules, 2014 provides that in case of a wholly subsidiary, the
special resolution passed by the holding company will be
sufficient for a transaction between wholly owned subsidiary
and the holding company
14
Audit Committee Approval / No Central Government
Approval
• Section 177(4)(iv) provides for approval or
any subsequent modification of transactions
of the company with related parties
• No approval of Central Government required
– irrespective of any threshold of share
capital or net worth or turnover
15
Contents of Agenda of Board Meeting and
Explanatory Statement for Shareholders’ Meeting
•
Agenda of Board Meeting (Rule 15(1) of Companies
(Meetings of Board and its Powers) Rules, 2014
•
•
•
•
•
the name of the related party and nature of relationship
the nature, duration of the contract and particulars of the
contract or arrangement
material terms of the contract or arrangement including
the value, if any
any advance paid or received for the contract or
arrangements, if any
manner of determining the pricing and other commercial
terms, both included as part of contract and not
considered as part of the contract
16
Contents of Agenda of Board Meeting and Explanatory
Statement for Shareholders’ Meeting
•
•
•
whether all factors relevant to the contract have been
considered, if not, the details of factors not considered with
the rationale for not considering those factors
any other information relevant or important for the board to
take a decision on the proposed transaction
Contents of Explanatory Statement
•
•
•
•
•
Name of the related party
Name of the directors or KMP who is related, if any
Nature of relationship
Nature, material terms, monetary value and particulars of the
contract or arrangement
Any other information relevant or important for the members
to take a decision on the proposed resolutions
17
Concept of “Interested Directors” and “Interested
Shareholders”
• Rule 15(2) of Companies (Meetings of Board
and its Powers) Rules, 2014 provides that
interested director shall not be present at the
meeting during discussions on the subject matter
of the resolutions relating to such contract or
arrangement
• Second proviso to section 188(1) provides that
no member shall vote on special resolution to
approve any contract or arrangement which may
be entered into by the company, if such member
is a related party
18
Treatment of Existing Contracts
• Refer Circular No. 30/2014 dated July 17,
2014
• Refer Circular No. 32/2014 dated July 23,
2014
• No ratification or approval required after
April 1, 2014 if terms of contract are not
modified
19
“Arm’s Length Transaction” and “Ordinary Course
of Business”
• “Arm’s length transaction” means a transaction
between two related parties that is conducted as
if they were unrelated, so that there is no conflict
of interest
• “Ordinary course of business” is not defined
• Transactions in ordinary course of business and
at arm’s length are exempted
20
Disclosure Requirements
•
Section 134(3)(h) – particulars of contracts or
arrangement with related parties to be provided in the
board of directors’ report in the form prescribed in Rule 8
of Companies (Accounts) Rules, 2014 – Form AOC-2
•
Section 188 (2) requires justification for entering into
related party transactions in board of directors’ report
•
Rule 16 (1)(c) of Companies (Meetings of Board and its
Powers) Rules, 2014 provides maintenance of register of
contracts or arrangement with a related party with respect
to transactions to which section 188 applies – Form
MBP-4 – such register shall be placed before the next
meeting of the board and signed by all directors present at
the meeting
21
Disclosure Requirements
•
Section 189(4) – the register to be produced at the
commencement of every AGM and shall remain open and
accessible during the meeting
•
Section 189(5) – no requirement of maintaining register
for contract or arrangement
•
for the sale, purchase or supply of any goods, materials or
services if the value of such goods and materials or the
cost of such services does not exceed Rs. 5 lacs in the
aggregate in any year; or
•
by a banking company for the collection of bills in the
ordinary course of its business.
22
Penalties for contravention
•
Section 188(3) – if contract or arrangement not ratified
within 3 months; such contract voidable at the option of
the board
•
Section 188(3) – if the contract or arrangement is with
related party to any director or is authorised by any other
director, the directors concerned shall indemnify the
company against loss incurred by it
•
Section 188(4) – the company is free to proceed against a
director or any other employee who had entered into such
contract or arrangement in contravention for recovery of
any loss sustained by it as result of such contract or
arrangement
23
Penalties for contravention
•
Section 188(5) – contravention by director or any other
employee
• in case of listed company – imprisonment up to 1 year or
with fine from Rs. 25,000 to Rs. 5 lacs or with both
• in case of any other company – fine from Rs. 25,000 to Rs. 5
lacs
•
Section 189(6) – failure to maintain the register and
comply with the provisions applicable to register – penalty
of Rs. 25,000
•
Section 164(1)(g) – a person shall be disqualified to be
appointed as a director if he has been convicted of the
offence dealing with related party transactions under
section 188 at any time during the last preceding 5 years
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Some interesting issues!
•
Whether foreign holding company is a related party?
•
Transactions between two public companies which were exempted under
Companies Act, 1956 are now covered
•
What about transactions between two government companies?
•
Does a party need to be a signatory to a related party contract to be a
related party?
•
A related party shareholder though not related to the transaction- is the
shareholder entitled to vote on the resolution for that transaction?
•
Whether transaction of “shares” and “other securities” covered under
section 188? If yes, then whether both primary and secondary
transactions covered?
•
Whether loan transactions covered under section 188?
•
Whether payment of royalty for technical know-how covered under
section 188?
•
Whether limits under Rule 15(3) are for each transaction or for aggregate
transactions?
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Some interesting issues!
•
What is the time to test the related party – whether only at the time of
entering the contract?
•
Appointment of managing director is not office or place of profit
•
All kinds of situations other than holding company and wholly owned
subsidiary are not provided
•
Meaning of implementation of resolution before April 1, 2014 for the
purposes of General Circular No. 32/2014?
•
What prevails Companies Act, 2013 or Clause 49?
•
Additional accountability of independent directors, audit committee and
directors
•
Whether recording in register of contract also required for exempted
transactions on arm’s length basis?
•
Concept of urgent necessity as was under section 297 of Companies Act,
1956 is not applicable now
•
Whether section 149(6)(e) also exempted for independent director’s
transactions at arm’s length in ordinary course of business?
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Companies (Amendment) Bill, 2014
•
•
•
•
Bill No 185 of 2014
Passed by Lok Sabha on December 17, 2014
Still to be passed by the Rajya Sabha
Then it will require assent of the President
of India
• Shall come into force on such date as the
Central Government by notification in
Official Gazette notify
• Supposedly for ease of doing business! Lets
see if that really happens!
27
Amendments affecting Related Party Transactions
• Section 177 deals with audit committee – The following proviso
shall be inserted in sub-section (4)(iv):
“Provided that the Audit Committee may make omnibus approval
for related party transactions proposed to be entered into by the
company subject to conditions as may be prescribed.”
Impact: The need to obtain approval for each and every related
party transactions will be dispensed with just like it is provided in
Clause 49 of the listing agreement for listed companies
• Section 188– The words “special resolution” in sub-section (1) and
sub-section (3) shall be substituted by “resolution”
Impact: Approval of shareholders for related party transactions
wherever required will be by an ordinary resolution and not special
resolution. The jury is still out whether it is good or a bad
amendment. The real beneficiary of this amendment will be public
unlisted companies unless SEBI also amends Clause 49 of the
listing agreement
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Amendments affecting Related Party Transactions
• Section 188 – The following fourth proviso to be inserted under
sub-section (1):
“Provided also that the requirement of passing the resolution
under first proviso shall not be applicable for transactions entered
into between a holding company and its wholly owned subsidiary
whose accounts are consolidated with such holding company and
placed before the shareholders at the general meeting for approval
Impact: Shareholders approval will not be required for related
party transactions between a holding company and its wholly
owned subsidiaries provided the accounts of the wholly owned
subsidiary are consolidated with the holding company and placed
before the shareholders at the general meeting for approval. Same
exemption as is currently provided by Clause 49 of the listing
agreement. Consequently, Rule 15(2) of the Companies (Meetings
of Board and its Powers) Rules, 2014 which provides for passing of
special resolution by the holding company as sufficient for related
party transactions between wholly owned subsidiary and the
holding company will be deleted / modified
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Thank You
lalit@jsalaw.com
Disclaimer:
This presentation has been compiled for general information and does not constitute professional guidance
or legal opinion. Readers should obtain appropriate professional advice.