Section 188. Related party transactions | Companies Act Integrated Ready Reckoner|Companies Act 2013|CAIRR

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Section 188. Related party transactions

Effective from 01-04-2014 and font in blue from 09-02-2018

Regulation 23 of LODR

(1) Except with the consent of the given by a resolution at a meeting of the Board and subject to such conditions , no company shall enter into any contract or arrangement with a with respect to—

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, 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 subscription of any or thereof, of the company:

that no contract or arrangement, in the case of a company having a of not less than such amount, or transactions not exceeding such sums, shall be entered into except with the prior approval of the company by a ~~special resolution~~

that no of the company shall vote on such ~~special resolution~~ , to approve any contract or arrangement which may be entered into by the company, if such member is a

nothing contained in the second proviso shall apply to a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties:

Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.

Explanation.— In this sub-section,—

(a) the expression “office or place of profit” means any office or place—

(i) where such office or place is held by a director, if the director holding it receives from the company anything by way of over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(ii) where such office or place is held by an individual other than a director or by any firm, or other , if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(b) the expression “arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

(2) Every contract or arrangement entered into under sub-section (1) shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.

(3) Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a ~~special resolution~~ in the general meeting under sub-section (1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement ~~shall be voidable at the option of the Board~~ and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

(4) Without prejudice to anything contained in sub-section (3), it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement.

(5) Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall,—

(i) in case of , be ~~punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both~~; and

(ii) in case of any other company, be ~~punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.~~

2(10) Board of Directors, in relation to a company, means the collective body of the directors of the company

Refer Rule 15 of the Companies (Meetings of Board and its Powers) Rules,2014.To view the rule,Click Here

2(76) Related Party, with reference to a company, means—

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager or his relative is a member or director;

(v) a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital;

(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) 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;

(viii) any body corporate which is—

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary; or

Explanation.—For the purpose of this clause, “the investing company or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.

(ix) such other person as may be prescribed.

2(81) Securities means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)

2(33) Derivative means the derivative as defined in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)

This proviso shall not apply

(a) a Government company in respect of contracts or arrangements entered into by it with any other Government company, or with Central Government or any State Government or any combination thereof;

(b) a Government company, other than a listed company, in respect of contracts or arrangements other than those referred to in clause (a), in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before entering into such contract or arrangement.

Substituted vide MCA notification dated 02.03.2020. To view the notification, Click Here.

~~(a) a Government company in respect of contracts or arrangements entered into by it with any other Government company;~~

(b) a Government company, other than a listed company , in respect of contracts or arrangements other than those referred to in clause (a), in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before entering into such contract or arrangement. Vide notification no.G.S.R. 463(E) dated 5th June, 2015.

(The exceptions, modifications and adaptations provided above shall be applicable only to those Government Companies which has not committed a default in filing its financial statements under section 137 of the said act or annual return under section 92 of the said act with the registrar, vide notification dated 13th June, 2017)

To view the notification,Click Here

2(64) Paid-up share capital or share capital paid-up means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called

Refer rule 15 of the Companies (Meetings of Board and its Powers) Rules,2014.To view the rule,Click Here

substituted by the Companies (Amendment) Act, 2015 (21 of 2015), notified on 26th May, 2015, with effect from 29th May 2015 vide notification S.O. 1440(E).To view the notification,Click Here

Second proviso shall not apply to-

1.Private Companies vide notification G.S.R. 464(E) dated 5th June 2015

(The exceptions, modifications and adaptations provided above shall be applicable only to those Private Companies which has not committed a default in filing its financial statements under section 137 of the said act or annual return under section 92 of the said act with the registrar, vide notification dated 13th June 2017)

To view the notification,Click Here

2.Specified IFSC Public Companies vide notification GSR 08(E) dated 4th January, 2017,

3.(a) a Government company in respect of contracts or arrangements entered into by it with any other Government company;

To view the notifications ,Click Here

2(55) Member, in relation to a company, means—

(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;

(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;

(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository

Substituted by the Companies (Amendment) Act, 2015 (21 of 2015), notified on 26th May, 2015, with effect from 29th May 2015 vide notification S.O. 1440(E). To view the notification,Click Here

Clarification provided vide Circular 30/2014.To view the Clarification,Click Here

Inserted vide Companies (Amendment) Act, 2017 dated 03.01.2018 effective from 09.02.2018. To view the notification,Click Here

Inserted by the Companies (Amendment) Act, 2015 (21 of 2015), notified on 26th May, 2015, with effect from 29th May 2015 vide notification S.O. 1440(E). To view the notification,Click Here

2(78) Remuneration means any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961 (43 of 1961)

2(68) Private company means a company having a minimum paid-up share capital as may be prescribed, and which by its articles, —

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that—

(A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company

2(11) Body Corporate includes a company incorporated outside India, but does not include—

(i) a co-operative society registered under any law relating to co-operative societies; and

(ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf

Substituted by the Companies (Amendment) Act, 2015 (21 of 2015), notified on 26th May, 2015, with effect from 29th May 2015 vide notification S.O. 1440(E). To view the notification,Click Here

Substituted vide Companies (Amendment) Act, 2017 dated 03.01.2018 effective from 09.02.2018. To view the notification,Click Here

2(52) Listed company means a company which has any of its securities listed on any recognised stock exchange

Substituted vide Companies (Amendment) Act, 2020 dated 28.09.2020 with effect from 21.12.2020. To view the Act, Click Here. To view the commencement notification, Click Here.

12.1.15-Companies (Meetings of Board and its Powers) Rules,2014

15. Contract or arrangement with a related party.-

A company shall enter into any contract or arrangement with a related party subject to the following conditions, namely:-

(1) The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-

(a) the name of the related party and nature of relationship;
(b) the nature, duration of the contract and particulars of the contract or arrangement;
(c) the material terms of the contract or arrangement including the value, if any;
(d) any advance paid or received for the contract or arrangement, if any;
(e) the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
(f) whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
(g) any other information relevant or important for the Board to take a decision on the proposed transaction.

(2) Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement-

For the purposes of first proviso to sub-section (1) of section 188, except with the prior approval of the company by a , a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into,—

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

(i) sale, purchase or supply of any goods or materials, directly or through appointment of agent, ~~exceeding ten per cent~~. of the turnover of the company , as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;

(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, ~~exceeding ten per cent.~~ of net worth of the company , as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;

(iii) leasing of property of any kind ~~exceeding ten per cent.~~ ~~of the net worth of the company or~~ ~~ten per cent. of~~ ~~of the company or rupees one hundred crore, whichever is lower~~, as mentioned in clause (c) of sub-section (1) of section 188;

(iv) availing or rendering of any services, directly or through appointment of agent, ~~exceeding ten per cent.~~ of the turnover of the company , as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:

Explanation.—It is hereby clarified that the limits specified in sub-clauses (i) to (iv) shall apply for transaction or transactions to be entered into either individually or taken together with the previous transactions during a financial year.

(b) is for appointment to any office or place of profit in the company, its subsidiary company or at a monthly remuneration exceeding two and half lakh rupees as mentioned in clause (f) of subsection (1) of section 188; or

(c) is for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding one per cent. of the net worth as mentioned in clause (g) of sub-section (1) of section 188.

Explanation.- (1) The Turnover or Net Worth referred in the above sub-rules shall be computed on the basis of the Audited Financial Statement of the preceding Financial year.

(2) In case of a wholly owned subsidiary, the passed by the holding company shall be sufficient for the purpose of entering into the transactions between the wholly owned subsidiary and the holding company.

(3) The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section 101 shall contain the following particulars, namely:—

(a) name of the related party ;

(b) name of the director or key managerial personnel who is related, if any;

(d) nature, material terms, monetary value and particulars of the contract or arrangement;

(e) any other information relevant or important for the members to take a decision on the proposed resolution.

~~(3) For the purposes of first proviso to sub-section (1) of section 188, except with the prior approval of the company by a special resolution-~~

~~(i) a company having a paid-up share capital of ten crore rupees or more shall not enter into a contract or arrangement with any related party; or~~

~~(ii) a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into-~~

~~(a) as contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188 with criteria, as mentioned below—~~

(i) sale, purchase or supply of any goods or materials directly or through appointment of agents exceeding twenty five percent.of the annual turnover as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;

(ii) selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents exceeding ten percent of net worth as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;

~~(iii) leasing of property of any kind exceeding ten percent of the net worth or exceeding ten percent of turnover as mentioned in clause (c) of sub-section (1) of section 188;~~

~~(iv) availing or rendering of any services directly or through appointment of agents exceeding ten percent of the net worth as mentioned in clause (d) and clause (e) of sub-section (1) of section 188;~~

(b) is for 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 as mentioned in clause (f) of sub-section (1) of section 188; or

(c) is for remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding one percent of the net worth as mentioned in clause (g) of sub-section (1) of section 188.

Explanation.- (1) The Turnover or Net Worth referred in the above sub-rules shall be computed on the basis of the Audited Financial Statement of the preceding Financial year.

(2) In case of wholly owned subsidiary, the special resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between wholly owned subsidiary and holding company.

~~(3) The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section 101 shall contain the following particulars namely:-~~

~~(a) name of the related party ;~~

~~(b) name of the director or key managerial personnel who is related, if any;~~

~~(c) nature of relationship;~~

~~(d) nature, material terms, monetary value and particulars of the contract or arrangement;~~

~~(e) any other information relevant or important for the members to take a decision on the proposed resolution.~~

substituted vide GSR 590(E) Companies (Meetings of Board and its Powers) Second Amendment Rules, 2014 dated 14 August, 2014. To view the rule,Click Here

substituted with resolution vide Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015 dated 14 December,2015. To view the rule,Click Here

Substituted vide Companies (Meetings of Board and its Powers) Amendment Rules, 2017 GSR 309(E) dated 30.03.2017. To view the notification,Click Here

Omitted vide the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019 dated 18.11.2019. To view the Notification. Click Here.

Substituted vide Companies (Meetings of Board and its Powers) Amendment Rules, 2017 GSR 309(E) dated 30.03.2017. To view the notification,Click Here

Omitted vide the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019 dated 18.11.2019. To view the Notification. Click Here.

Substituted vide the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019 dated 18.11.2019. To view the Notification. Click Here.

Substituted vide Companies (Meetings of Board and its Powers) Amendment Rules, 2017 GSR 309(E) dated 30.03.2017. To view the notification,Click Here

Omitted vide the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019 dated 18.11.2019. To view the Notification. Click Here.

2(6) Associate Company, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.
Explanation.—For the purpose of this clause—
(a) the expression “significant influence” means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement;
(b) the expression “joint venture” means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;

substituted with resolution vide Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015 dated 14 December, 2015. To view the notification,Click Here

Regulation 23 of LODR

12.1.15-Companies (Meetings of Board and its Powers) Rules,2014

Commencement Notification dated 09.02.2018

Commencement Notification under Companies (Amendment) Act, 2020 dated 21.12.2020

Companies (Meetings of Board and its Powers) Second Amendment Rules,2014 [G.S.R 590 E] dated 14/08/2014

Companies (Amendment) Act, 2020 dated 28.09.2020

Companies (Meetings of Board and its Powers) Amendment Rules, 2017 [GSR 309(E)] dated 30/03/2017

Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015 [G.S.R. 971 (E)] dated 14/12/2015

Enforcement Notification S.O. 1440(E) dated 29/05/2016

Enforcement Notification S.O. 902(E) dated 26/03/2014

Exemption to Govt Companies G.S.R. 463(E) dated 05/06/2015

Exemption to Specified IFSC Public company [GSR 08(E)] dated 04/01/2017

Exemptions to Government Companies [Amendment to GSR 463(E)] dated 13/06/2017

Exemptions to Government Companies under section 462 of the CA 2013, notification dated 02.03.2020

Exemptions to Private Companies [Amendment to GSR 464(E)] dated 13/06/2017

Exemptions to private companies [GSR 464 (E)] dated 05/06/2015

The Companies (Amendment) Act, 2017 (Effective from 03.01.2018)

The Companies (Amendment) Act,2015

The Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019 dated 18.11.2019

General Circular 30/2014