FAQ’S RELATED PARTY TRANSCTIONS:
A. Whether the provisions pertaining to "related parties" are applicable based on a financial year?
The provisions pertaining to "related party" and "related party transactions" are applicable for all contracts or arrangements with related parties entered on or after 1 April 2014, irrespective of the accounting year followed by the Company.
B. What is the effective date of applicability of the provisions/ sections/ rules relating to related party transactions?
Solu. Provisions of the 2013 Act and Rules framed thereunder in relation to related party and related party transactions are effectively applicable from 1 April 2014.
The clause 49 of the listing agreement is now effective in a piecemeal basis. However, the applicability of provisions relating to related party transactions remains effective from 1 October 2014
C. A corporate group has several foreign subsidiaries. Will provisions in relation to related parties apply to foreign companies as well?
Solu. The term ‘company’, as defined under the Companies Act 2013, is a company incorporated under this Act or any previous company law. Company incorporated under the relevant legislation of a foreign country is not a ‘company’ under Companies Act 2013. However, transactions by Indian company with a foreign company, which is a subsidiary, associate, fellow subsidiary, joint venture of the same venturer or company under control of same promoter, would be covered, based on understanding of combined reading of revised clause 49 and Companies Act 2013.
D. In case of Companies Act, is the board required to approve all related party transactions?
Solu The Companies Act 2013 prescribes that a company needs approval of the audit committee on all related party transactions and subsequent modifications thereto. This is irrespective of whether they are in the ordinary course of business and consummated at arm's length price or they are below prescribed thresholds
E. Whether the contracts or arrangements of transactions with related parties entered on or before 1 April 2014 are also governed by the provisions of the 2013 Act?
No, the contracts or arrangements of transactions with related parties entered on or before 1 April 2014 shall continue to be governed by the provisions of the erstwhile Act, and other applicable provisions.
F. Whether any modification in the contracts or arrangements of transactions with related parties entered on or before 1 April 2014 are also governed by the provisions of the 2013 Act?
Modifications made to such contracts/ arrangements on or after 1 April 2014 shall be governed by the provisions of the 2013 Act
G. In Listed Companies:
Whether the contracts or arrangements of transactions with related parties entered on or before 1 October 2014 and will continue beyond 31st March 2014, are also governed by the provisions of the 2013 Act?
Such contracts or arrangements for material transactions shall be placed for approval before the shareholders in the first general meeting held after 1 October 2014.
H. Whether the provisions relating to special resolution under Section 188 are also applicable to transactions with wholly owned subsidiaries?
No! Wholly owned subsidiary companies are exempted from the requirement of passing a special resolution, provided requirement of the special resolutions have been complied by the holding company.
I. Can there be a situation in which contracts or arrangements require special resolution with related party only under amended listing agreement, and not under the 2013 Act?
Yes. Contracts or arrangements with related parties in the ordinary course of business and at armâ€Ÿs length prices are exempted from approval from shareholders and board, except the prescribed approvals under Section 177. Whereas Clause 49 requires material related party transactions to be approved by way of a special resolution in the members meeting, in-spite of such transactions being in the ordinary course of business and carried out at an armâ€Ÿs length price
J. How to compute annual turnover and net-worth for the purposes of Rule 15(3) and Clause 49?
Net-worth and the annual turnover shall be based on the audited financial statements of the preceding financial year
K. Whether the thresholds Sub-rule 3 of Rule 15 the Board Meeting Rules, 2014 is applicable to individual transaction of sale or purchase or is applicable at an aggregate level?
The Second amendment to the Board Meeting Rules 2014 includes an explanation clarifying that the limits listed under the sub-rule 3(i) to (iv), shall apply for transaction or transactions to be entered into either individually or taken together with all the previous transactions during a financial year.
L. Can a related party transaction entered into without obtaining approval from the board/ members be ratified subsequently?
Yes, contract or arrangement entered into without obtaining the consent of the board or approval by a special resolution in the general meeting, as the case may be, shall be ratified by the board or members, by way of a special resolution, within three months from the date of such contract or arrangement being entered.
M. Can a director who is interested in a contract or arrangement with a related party be present during the discussion at the board meeting for approval of such transactions?
Pursuant to the provisions of Sub rule 2 of Rule 15 of the Companies Board Meeting Rules, 2014, none of the interested directors shall be present during the course of discussions at the board meeting.
N. What are the provisions of the 2013 Act and clause 49, in connection with voting rights of related party at the general meeting?
Under the 2013 Act, a related party, being a member of the company and also interested in a contract or arrangement for which a special resolution is passed in the general meeting, shall not be entitled to vote on such special resolution.
Whereas, under the clause 49 every related party, whether interested or not in a transaction being subject to special resolution, shall mandatorily be abstain from voting
O. How to interpret the term “Ordinary Course of its Business” (OCB) as used in the context of „related party transactionâ€Ÿ under the 2013 Act?
Which are directly or indirectly connected to or necessary to conduct its business. For example, company ABC which is primarily engaged in the business of manufacturing and selling auto parts, and advancing loans to a related party which is in the business of providing information technology services, could be viewed as a transaction not in the OCB. Whereas, if the company ABC entered into a contract with related party to avail travel services for its employees/ staff, such services, being necessary for ABCâ€Ÿs ordinary activities, could be regarded as transaction in the OCB.
P. Whether provisions of the Companies Act, 2013 and relevant rules framed thereunder are applicable to every company?
Yes, as of now the provisions in connection with „related partyâ€Ÿ and „related party transactionsâ€Ÿ are applicable to every company including private, public or public listed companies
Q. Powers of Board to Approve any related party transaction.
Where a Company operating only through Board of Director:
The Board of Directors must approve all the related party transactions, where such related party transactions are: not in the ordinary course of its business;
• in the ordinary course of its business, but carried at other than arm’s
• length price
R. Powers of Audit Committee to Approve any related party transaction.
A Company having an audit committee, under Section 177 of the 2013 Act Audit committee shall approve all: related party transactions; and
• Subsequent modifications to the previously approved related party
S. Powers of Share holders for Approve any related party transaction
No contract or arrangement for a transaction with a related party shall be entered into without prior approval of:
(a) the Board of Directors/ Audit committee, as the case may be, and
(b) by members by way of a special resolution
If such a contract or arrangement is for:
• transactions which are not in the ordinary course of the business;
• transactions which are in the ordinary course of the business, but are carried at other than arm’s length price.
T. Power of approval of Related Party Transactions in the Listed Company.
Every listed company must obtain an approval of its member by way of a special resolution in respect of material related party transactions. Such approval is mandatory even if the related party transactions are:
• in the ordinary course of the business; and
• carried at an arm’s length price
U. List of Transactions which are covered under Section 188 of Companies Act, 2013.
i. Sale of goods, material, services and supply of material
ii. Purchase of goods, material and services
iii. Sale or purchase of any kind of property (movable or immovable, tangible or intangible, financial or non-financial)
iv. Disposing of any kind of property
v. Leasing of property of any kind (movable or immovable, tangible or intangible, financial or nonfinancial)
vi. Appointment of any agent for purchase of goods, purchase of material and purchase of services
vii. Appointment of any agent for purchase of property 8. Appointment of any agent for
sale of goods material and services
viii. Appointment of any agent for sale of property
ix. Appointment of related party to any place of profit or to any office in the company
x. Appointment of related party to any place of profit or to any office in the subsidiary
xi. Appointment of related party to any place of profit or to any office in the associate company
xii. Underwriting the subscription of any securities and derivatives
V. Applicability of Section 188.
Section 188 will be applicable on ALL COMPANIES.
• Private Limited
• Public Limited
• Listed Company
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