Outlook of Related party as per Companies Act, 1956 & 2013

Related Party Transaction (notified)


  Related party with reference to a company, means: [Sec 2(76)]

  1. a director or his relative;
  2. a key managerial personnel or his relative;
  3. a firm, in which a director, manager or his relative is a partner;
  4. a private co. in which a director or manager is a member or director;
  5. a public co. in which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up S/C;
  6. any body corporate whose BoD, M.D or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
  7. any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
  8. any company which is—

(A) a holding, subsidiary or an associate company of such company;
or
(B) a subsidiary of a holding company to which it is also a subsidiary;

    9.  such other person as may be prescribed

 

“Related Parties”- Comparision between New  & Old Act

                                        Related Party Transactions


Related Parties2013 Act1956 Act
KMP or his relative {Refer Annexure}YesNo
Senior Management of the Co. (All members of management 1 level below the executive directors, including the functional heads)- as per rulesYesNo
A firm in which such director, manager or relative is a partnerYesSome changes
Public co. in which a director or manager is a directorYesNo
Holding, subsidiary , fellow sub. or an associate co. along with their directors & relatives, their KMPs & relatives, their Senior managementYesNo
Related Parties2013 Act1956 Act
Public co. in which a director or manager is a Director holds along with his relatives, > 2% of its paid-up S/CYesSome changes
Any person on whose advice, directions or instructions a director or manager is accustomed to act, unless advice is given in a professional capacityYesSome changes
Body corporate whose BoD’s, MD or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager unless advice is given in a professional capacityYesSome changes

Following transactions are covered u/s 188


1. Board Resolution will be sufficient if following transactions are within the limit prescribed in   the Act.

  • sale, purchase or supply of any goods or materials;
  • selling or otherwise disposing of, or buying, property of any kind;
  • leasing of property of any kind;
  • availing or rendering of any services;
  • appointment of any agent for purchase or sale of goods, materials, services or property;
  • such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and (Rs 2.5 Lakh per month or more)
  • underwriting the subscription of any securities or derivatives thereof, of the company  (remuneration not more than 1% of net worth)

As per notified Rules regarding Section 188 of New Act :

Prior approval by SR at GM required if paid-up capital of Co is Rs.10 Cr or more OR the transaction with RP does not exceed such sum, as may be prescribed . The limits for clauses (a) to (e) as per rules are prescribed as exceeding 25% of annual Turnover or exceeding  10% of Net worth of Co as per last audited FS.

2.  Contracts or arrangements with respect to clauses (a) to (e) of  sub-section (1) of section 188 with criteria, as mentioned below


  1. Sale, purchase or supply of any goods or materials directly or through appointment of agents exceeding 25% of the annual turnover as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;
  2. Selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents exceeding 10% of net worth as mentioned in clause (b) and clause (e) respectively  of sub-section (1) of section 188;
  3. Leasing of property of any kind exceeding ten percent (10%) of the net worth or exceeding  10% of turnover as mentioned in clause (c) of sub-section (1) of section 188;
  4. Availing or rendering of any services directly or through appointment of agents exceeding 10% of the net worth as mentioned in clause (d) and clause (e) of sub-section (1) of section 188;
  • Interested member not to vote on SR – (issue for some Co’s)
  • Disclosure in board report required along with appropriate justification for RPT
  • Section exempts: Any transaction entered by company in its ordinary course of business other than transactions which are not an arm’s length basis.

 

RPT: Disclosure Requirements


What has changed?

  • Boards’ report to capture RP arrangement – this was not required as per the old Act
  • Boards’ report shall also capture the justification of undertaking such RPT
  • Sec 186 disclosure around loans, investments etc now through the ‘FS’ – earlier through ‘register’ (Sec372 A)

Related Party Transaction 

1956 Act2013 Act
  • Limited scope of transactions and persons covered under Co Act (S. 297)
  • Prior approval of CG required in case paid-up capital exceeds INR 10 million (INR 1 crore)
  • Enhanced scope of transactions
  • Enhanced scope of related parties to include KMP and relatives, directors with certain shareholding, persons in advisory capacity (other than professional advice) to board
  • Prior approval of shareholders by SR if:
  • paid-up capital exceeds Rs 10 Cr
  • Trx exceeding higher of 25% of T/O or 10% of N/W as per last audited FS
  • Appointment exceeding Remuneration of Rs 2.5 Lac pm
  • Underwriting remuneration etc exceeding 1% of networth
  • No member shall vote if he is related party

 

Change in Definition – (Relative) [Section 2(77)Rule]


Act 2013 /Act 1956

 
Members and HUF YYHusband and wifeYY
Father (including step-father) YYMother (including step-mother)YY
Father’s father NYMother’s fatherNY
Father’s mother NYMother’s motherNY
Son (including step-son)YYDaughter (NOT MENTIONED including step-daughter) YY
Son’s wife YYDaughter’s husbandYY
Sons’s son/ daughter NYDaughter’s son daughterNY
Son’s son’s wife NYDaughter’s son’s wifeNY
Son’s daughter’s husband NYDaughter’s daughter’s husbandNY
Brother YYSisterYY

Published by

Shushant ( ICAI Final )

Shushant is a Chartered Accountant student at Institute of Chartered Accountants of India. He is also a Student of Company Secretary at Institute Of Company Secretaries of India. He is a administrator of this site . In his spare time he hang out with his friends and discuss about the current issues in market. You can find his latest blog posts at www.enrollmyexperience.com and at his facebook profile.

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