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Related Party Transactions in Pvt Ltd

CS Pooja (Professional) (12 Points)

16 August 2021

Following transactions took place in a Private Limited Company in FY 2020-2021:

a) Loans taken from Directors.

b) Loans/advances given to Subsidiary Company.

c) Salary to KMPs.

d) Rent paid for the Registered Office premises of the Company.

Will these transactions require Board's Approval and taken in AOC-2, Notes to accounts or Board's Report of the Company for FY 2020-2021?

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10 Replies

Chirag (Professional) (1979 Points)
Replied 17 August 2021

AOC -2 required two kind of disclosure,all RPT txn which are not at arm's length basis or in ordinary course of business and second one is ALB+ OCB txn but are material in nature, material is not defined, so you can take reference of Rule 15 ,

it will better if you provide all these info in Notes to account as per AS-18* ( and specific disclosure in board report for Rent + Salary to KMP)

Board Approval is required for RPT which are not either in usual course of business or/& at ALP basis.

Loan Taken From Director - Falls under 2(1)(c)*
Loan Given to subsidiary - 186 ( Board approval required)
Salary To KMP - Check at Arms length and and not breaching 2.5Lacs Limit
Rent paid for office Premise - OCB, but satisfy that in OCB+ALP

Due to pvt company, so any designated director who is entrusted by board to discharge duty of audit committee, else Board has to approve Rent part!

Loan From Director falls under 179 - So Board Approval required

Loan To Subsidiary - 186 ( Board Approval Required)

Salary To KMP - appointment already approved so unless not comply with OCB+ALP no further approval

Rent Paid For Premise - Board Has to take a Note, approval only when not fulfilling ALB+OCB.

*Disclaimer

CS Divesh Goyal (Practicing Compnay Secretary) (50010 Points)
Replied 18 August 2021

1. AOC-2 cover transaction which fall in 188 only.

CS Divesh Goyal (Practicing Compnay Secretary) (50010 Points)
Replied 18 August 2021

c) Salary to KMPs.

doesn't fall in 188. so not required to mention in AOC-2

CS Divesh Goyal (Practicing Compnay Secretary) (50010 Points)
Replied 18 August 2021

All other transation with related party needs to mention in AOC-2

CS Pooja (Professional) (12 Points)
Replied 18 August 2021

But Salary to KMP is as per AS 18 so to be included in Board's Report and notes to accounts.

Further in AOC 2 in which head will it be included?

CS Divesh Goyal (Practicing Compnay Secretary) (50010 Points)
Replied 18 August 2021

Salary to KMP is not part of AOC-2.

CS Pooja (Professional) (12 Points)
Replied 18 August 2021

So all transactions to be included in Boards report and Notes to accounts as RPT during the year

and excluding salary others to be included in AOC2?

Chirag (Professional) (1979 Points)
Replied 18 August 2021

Remuneration to kmp may not be RPT but transaction with related party , its a debatable matter , because AOC -2 demands contracts or arrangements with related party , so some views are that office or place of profit would be something which other than legitimate remuneration of kmp and exceeding 2.5 Lacs is material , while other view is remuneration is a contractual kind of payment to kmp so if it's its not in ALB or OCB or material should be disclosed in AOC -2 and there is no harm as such to disclose..

CS Pooja (Professional) (12 Points)
Replied 25 August 2021

In case the remuneration is paid by that pvt co. to KMP of Rs. 40 LPA and later co. got the same reimbursed from a LLP. Both the LLP and Co have common partners and directors.

Will this required Board or SR approval?

and will this be mentioned in AOC-2 and on what basis Arm's Length basis as its a Pvt Ltd.

Chirag (Professional) (1979 Points)
Replied 27 August 2021

Prima Facie, It's a Transaction with related party ,because LLP is under same control, and required AOC-2 Disclosure, if you go into technicality then it's a borrowing by company and as per fact it's not normal course of business and ALP(it will be subject to peer check - Remuneration of KMP) , and will require audit committee approval/note and not require any board approval u/s 188, but may fall under 179,180 ....But practically it's my personal view,that, reimbursement by LLP to company is not exempted u/r 2(1)(c) unless LLP is shareholder ,which is not in this case, so such reimbursement txn itself is not tenable....