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Approval for related parties transaction

Swati Sharma (TRAINEE) (328 Points)

26 May 2015

Dear Friends,

For approval of related parties transations for the year 2014-15, can the Board members of Pvt. Co. approve these transactions now. Also can Board takes advance approval for RPT incurring in Yr. 2015-16. If yes, then kindly provide draft Resolution.

Kindly Guide.

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5 Replies

ACS Anjali Jain (SERVICE - CS) (472 Points)
Replied 27 May 2015

board approval is required before transaction take place so cannot be ttaken for transaction taken place in 2014-15.

Also you cannot take a approval before hand for 2015-16 -RTP. As when the company is going to enter in such transaction board approval is to be taken.

Swati Sharma (TRAINEE) (328 Points)
Replied 27 May 2015

Hi anjali,

can u guide what shall the qourum for approving RPT(under arms length basis and ordinary course of business). in following case:

RPT between Holding(Pvt. Co.) having 7 Director(one is NRI) and subsidiary Co, of which 5 directors are common. Only one Director is uniterested, then what shall the qourum will be.

Though there is no need for Board approval for arms lenght transactions but the co. still wants to get it approved.

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 27 May 2015

PROVISIONS RELATING THE RELATED PARTY

The recently notified section 188 of the Companies Act, 2013 talks about the approval required in order to enter into related party transactions. The section provides for the various transactions which cannot be entered into by the company without the consent of the Board of Directors. Meaning thereby unless the Board of Directors have given their consent by way of a resolution at a meeting of the Board, the company cannot enter into the prescribed transactions. Subsection 1 of Section 188 prescribes the following transactions:

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, services or property;

f. Such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and

g. Underwriting the subscripttion of any securities or derivatives thereof of the company.

It is to be noted that the proviso to the Section 188 provides that a company, whose paid-up capital is more than Rupees Ten crore or is proposed to enter into transactions exceeding such sums as prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules 20142, cannot enter into the transactions, except with the previous approval of shareholders by way of Special resolution. The transactions, as prescribed under Rule 15 (3)3,which require prior approval of Shareholders by way of Special Resolution are:

a. With respect to the subsection 1 of Section 188, the following contracts or arrangements as per their respective limits:

1. Any Sale, purchase or supply of goods or materials directly or through any agents amount of which exceeds twenty five percent of the annual turnover of the Company;

2. Selling or otherwise disposing of, or buying, property of any kind directly or through the agent amount of which exceeds ten percent of net worth of the company;

3. Any leasing of property which amounts ten percent or more of the turnover of the company;

4. Availing or rendering of any services directly or through the agent amount of which exceeds ten percent of the net worth of the company;

b. Appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding Rupees Two Lakh Fifty Thousand;

c. The remuneration for underwriting the subscripttion of securities or derivatives thereof of the company exceeding one percent of the net worth of the company.

The Ministry of Corporate Affairs, Government of India, vide its notification dated 14th August 2014 has issued the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2014 and modified the above mentioned Rule 15 (3) with respect to the provisions relating to Related Party Transactions.

The changes made by the Ministry under the above mentioned notification prescribes various thresholds limits with respect to the various transactions viz. the contracts or arrangements as mentioned under Sub Rule 3 of Rule 15 in reference to Sub section 1 of Section 188 of the Companies Act, 2013.

Earlier, the Companies having paid-up capital of Rs. 10 Crore or more were required shareholders approval by way of special resolution. This limit has been dispensed with and the new threshold limits have been introduced. The revised provision states that a company shall not enter into transaction(s) or transactions without the previous approval of shareholders, where the transaction(s) to be entered into involves the following:

a) Contracts or arrangements with respect to clauses (a) to (e) of Section 188(1) and involves:

1. Sale, purchase or supply of any goods or materials, whether directly or through any agent and wherein the amount involved exceeds ten per cent. of the turnover of the company or Rupees Hundred crore, whichever is lower;

2. Selling or otherwise disposing of or buying property of any kind, directly or through any agent and where the amount involved exceeds ten percent of the net worth of the company or Rupees Hundred crore, whichever is lower;

3. Leasing of property of any kind and the amount involved exceeds ten percent of net worth of the company or ten per cent. of turnover of the company or Rupees One Hundred crore;

4. Availing and rendering of any kind of services, directly or through appointment of agent and which involves amount exceeding ten per cent. Of the turnover of the company or Rupees Fifty Crore, whichever is lower;

The Notification issued by Ministry provides the explanation that the above mentioned limits that are specified for the transaction(s) shall apply to the transactions to be entered into either individually or taken together with the previous transactions during a financial year.

b) Appointment of any person in the office or any place of profit in the company, its subsidiary or associate company at a monthly remuneration exceeding Rupees Two lakh Fifty Thousand;

c) Remuneration for underwriting of subscripttion of any securities or derivatives of the Company exceeding one percent of net worth of the company.

The Notification issued by Ministry provides the explanation in regard to above provisions that the turnover or the net worth referred in the above Subrules shall be computed on the basis of the Audited Financial Statements of the preceding financial year.

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 27 May 2015

for the purpose of quorum .. its deals by sction 188 of company act 2013, however this section

Exemption

The Section will not apply to transactions entered by the Company in its Ordinary course of business, on arm’s length basis.
The term “Ordinary Course of business” will cover the usual transactions, practices and customs of a business and of a Company.