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RELATED PARTY TRANSACTIONS

Key aspects of Related Party Transactions :-

a. As per section 188 of the Companies Act, 2013, all the Related Party Transactions   mentioned in sub-section (1), require the prior consent of the board of Directors of the Company by way of Board resolution.

b. Further, approval of members is also required by special resolution in case of company having a paid-up capital of not less than such amount or transactions not exceeding such sums, as prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014.

c. There is no approval required if the transaction entered into by the Company is in the Ordinary course of business and on an Arm’s Length basis

d. Transaction on Arm’s length basis is a transaction between related parties that is conducted as if they were unrelated and they acted independently, so that there is no conflict of interest.

Provisions applicable for Listed Companies :-

a. In case of listed entities, SEBI (LODR) Regulations, 2015 shall also be applicable. As per Regulation 23, all related party transactions shall require prior approval of the Audit Committee.

b. The Audit Committee may grant omnibus approval that shall be applicable in respect of transactions which are repetitive in nature. Such omnibus approval shall be valid for a period not exceeding one year and subject to review on quarterly basis.

c. The listed entity shall formulate a policy on materiality of related party transactions and all material related party transactions shall require approval of the shareholders through special resolution and the related parties shall abstain from voting.

Explanations:-

a. A transaction is considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds 10% of the annual consolidated turnover as per the last audited financial statement of the listed entity.

b. All the Companies are required to refer all such contracts or arrangements with related parties mentioned under section 188(1) of the Companies Act, 2013, in the Board Report along with justification for entering into such transaction.

c. In case of Private Companies, Related parties shall not abstain from voting and they shall also vote on the particular resolution.

d. According to Rule 15(3) of  Companies (Meetings of Board and its Powers) Rules, 2014, a special resolution is required, if:

- Sale, purchase or supply of any goods or materials, directly or through appointment of agent, exceeding ten percent of the turnover of the company or rupees one hundred crore, whichever is lower;

- Selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, exceeding ten percent of net worth of the company or rupees one hundred crore, whichever is lower;

- Leasing of property of any kind exceeding ten percent of the net worth of the company or ten percent of turnover of the company or rupees one hundred crore, whichever is lower;

- Availing or rendering of any services, directly or through appointment of agent, exceeding ten percent of the turnover of the company or rupees fifty crore, 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 two and half lakh rupees;

- Remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding one percent of the net worth.

- Limits prescribed in (a) to (d) shall apply for transaction or transactions to  be entered into either individually or taken together with the previous transaction during a financial year.

Checklist for conducting audit regarding RPT implications :-

a. Check whether necessary approval required, has been taken or not.

b. Check the nature and period of the transaction(s), whether it is repetitive in nature and it is regular or annual basis or any other basis.

c. Check whether transaction(s) is on Arm’s length basis or not.

d. Check whether the transaction(s) is come under the ambit of limit prescribed under Rule 15(3) of Companies (Meetings of Board and its Powers) Rules, 2014 for the purpose of obtaining members’ approval by way of Special resolution.

e. Check all the necessary details of every transaction(s), i.e.-

- Material terms and other particulars of the contract or arrangement.
- Monetary value of such transaction(s) and difference between base price and contracted price, if any.


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Category Corporate Law, Other Articles by - Ashish Kumar Gupta 



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