Section 188 of the Companies Act 2013 lay down provisions regarding related party transactions. This Section discusses type of related party contracts and arrangements, disclosure in board report, rendered related party contract voidable for non – ratification, recovery of any loss and provision for fines. We have discussed these provisions earlier here.
Rule 15 of the Companies (Meeting of Boards and its powers) Rules 2014 add conditions on which a company may enter into a contract with related party:
(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.
The words “shall not present” signifies leaving the room. I do not think this requirement is of any use. He may otherwise know through minutes, who voted in favour or against his interests.
(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 —
(a) 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
(b) a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into—
- 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 turn overas 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;
- 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
- 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 on the basis of the Audited Financial Statement of the preceding Financial year.
(4) 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.
(5) 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.
Rule 16 of the Companies (Meeting of Boards and its powers) Rules 2014 mandate for Register of contracts or arrangements in which directors are interested.
Every company shall maintain one or more registers in Form MBP – 4 and shall enter therein the particulars of—
(a) company or companies or bodies corporate, firms or other association of individuals, in which any director has any concern or interest, as mentioned under sub-section (1) of section 184:
The particulars of the company or companies or bodies corporate in which a director himself together with any other director holds two percent or less of the paid-up share capital would not be required to be entered in the register;
(b) contracts or arrangements with a body corporate or firm or other entity as mentioned under sub-section (2) of section 184, in which any director is, directly or indirectly, concerned or interested; and
(c) contracts or arrangements with a related party with respect to transactions to which section 188 applies.
The entries in the register shall be made at once, whenever there is a cause to make entry, in chronological order and shall be authenticated by the company secretary of the company or by any other person authorised by the Board for the purpose.
The register shall be kept at the registered office of the company and the register shall be preserved permanently and shall be kept in the custody of the company secretary of the company or any other person authorised by the Board for the purpose.
The company shall provide extracts from such register to a member of the company on his request, within seven days from the date on which such request is made upon the payment of such fee as may be specified in the articles of the company but not exceeding ten rupees per page.
MBP – 4:
A. Contracts or agreements with any related party under section 188 or in which any director is concerned or interested under sub- section (2) of section 184:
- Date of contract / arrangement
- Name of the party in which contract is entered into,
- Name of the interested director,
- Relation with director/company/nature of concern or interest,
- Principal terms and conditions,
- Whether transactions are at arm’s length price,
- Date of approval at the meeting of the Board,
- Number of director present in meeting,
- Director voting in favour,
- Director voting against,
- Director remain neutral,
- Date of next meeting at which register was placed for signature,
- Reference of specific items – (a) to (g) of sub – section (1) of section 188,
- Amount of contract or arrangement,
- Date of shareholders approval, if any,
- Remark, if any.
B. Name of the bodies corporate, firms or other association of individuals as mentioned under sub-section (1) of section 184, in which any director is having any concern or interest
- Name of companies/ bodies corporate/firms/association of individuals/
- Name of interest director,
- Nature of interest or concern/ change in interest or concern
- Shareholdings (if any)
- Date on which interest or concern arose/ changed,
Please note: This blog post is not a professional advice. I welcome your comments and feedback. Readers may share this post on social media by using buttons given here.
Private limited company, Share Capital Rs.5 lakhs turnover Rs.15 lakhs
All sales are to related party in USA. Transaction is at arm’s length
1. Is MBP-1 to be filed?
2. Is special resolution reqd.?
3. What are the other forms to be filed?
4. Is MBP-4 to be maintained?
If transactions are at arm’s length, these are exempted. Hope you can prove that these are at arms’s length. otherwise follow standard procedure.
Pingback: Second Amendment to Companies MBP Rules | AishMGhrana
Pingback: Board’s Report – 2 | AishMGhrana
If a company has manufacturing as its main object/activity; can any kind of investing ina related party company be considered as an act “in ordinary business and at arms length” ??
All related party transactions done or to be done at arms length in any company have certain disclosure relaxation and do doubt less legal tussle with authorities.
Pingback: Meetings of Board and its Power: Second Amendment Rules | AishMGhrana
Pingback: Index of Companies Law Posts | AishMGhrana
Pingback: Amendment in MBP Rules | AishMGhrana