Related Party Transactions Companies Act 2013

Companies Act, 2013 2.Coverage Relevant Definitions Loan to Directors, etc. Inter corporate loans/Invest ments Approval & disclosure of related party transactions 3.Relevant Definitions Loan to Directors, etc. Inter corporate loans/Invest ments Approval & disclosure of related party transactions Definitions Exclusions: Grand Parents Grand Children Step Daughter Brothers’ Wife Sisters’ Husband Inclusions: Step Father Person Members of HUF Spouse Father and Mother Son & his wife Daughter & her Husband Brother & Sister Step Father, Mother, Son, Brother & Sister Relative [Sec. 2(77) / Rule 4 of Companies (Specification of Definitions details) Rules, 2014. Related Party [Sec. 2(76)]: with reference to a Company means  a Director or his relative;  a KMP or his relative;  a Firm, in which a director, manager or his relative is a partner;  a Private company in which a director or manager is a member or director;  a Public company in which a director or manager is a director or holds along with his relatives, more than two per cent of its paid-up share capital;  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;  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;  any company which is— – (A) a holding, subsidiary or an associate company of such company; or – (B) a subsidiary of a holding company to which it is also a subsidiary; – (ix) such other person as may be prescribed; Under Rule 3]of Companies (Specification of Definitions details) Rules, 2014:  Director or KMP of the Holding Company  Relative of Director or KMP of the Holding Company Who is not RP: •Public Companies where Director holds less than 2% PUC •KMP of Subsidiary Company who is not connected to Directors of Hold Co. •Association of Persons (JVs) Scope is wider and larger than “Relative” Relevant Definitions Loan to Directors, etc. Inter corporate loans/Invest ments Approval & disclosure of related party transactions Loan to Directors, etc. [Sec. 185] Loan to Directors, etc [Section 185] Applicability • Private Company • Public Company Scope • Advancing of any loan, including any loan represented by a book debt • Giving of any guarantee or providing of any security in connection with any loan. Loan to Directors, etc ….contd. Section 185 prohibitive Section.. (unlike Section 295) 185(1): Save as otherwise provided in this Act, no company shall directly or indirectly, advance any loan including any loan represented by a book debt. To: a. any of its directors or b. to any other person in whom the director is interested orgive any guarantee or  provide any security in connection with any loan taken by him or such other person. Loan to Directors, etc ….contd. “To any other person in whom director is interested” Means the following: a) Individual: i. any director of the lending company; or ii. any director of its holding company; or iii. any partner of any such director; or iv. relative of any such director; It is also important to understand the word ‘such director’. ‘Such’ would mean reference to the director of the lending company and director of its holding company. Comments: •Director of a Subsidiary Company and relatives of such Directors are not covered. Loan to Directors, etc ….contd. b) Firm: i. any firm in which any such director is a partner; or ii. any firm in which the relative of any such director is a partner; The firm may be a registered firm under the Indian Partnership Act, 1934 or may be a non-registered. The firm include the LLP. c) Company: i. any private company of which any such director is a director; or ii. any private company of which any such director is a member; Loan to Directors, etc ….contd. d) any Body Corporate:  in which 25% or more of the Total Voting Power is exercised or controlled by one or more Directors at its general meeting.  Its Board of Directors, managing director or manager is accustomed to act in accordance with the directions or instructions of the Board or Director or Directors of the Lending Company. Comments: The expression “accustomed to” means customary; usual; habitual; habituated; acclimated; be used to; being in habit or custom. There must be a regular or usual practice of issuing directions or instruction by the Board or Director (s) of one Co to the Board of another and Board of latter following them. A single isolated event or two would not fall within the meaning of expression accustomed to act. In Body Corporate (now Corporation Sole also included) Loan to Directors, etc ….contd. “Save as Otherwise Provided in this Act” The words ‘save as otherwise provided in this Act’ is to be noticed. To elaborate, this would mean there are exceptions to Section 185 elsewhere in the Companies Act, 2013. Section 186 of the 2013 Act can be considered as an exception to section 185 of the 2013 Act and hence what a company cannot do under section 185 can be done under section 186 – The answer is “NO” Section 185 is a Special Provision and where as Section 186 is General Provision. If we allow all the things which are permitted u/s. 185 to be carried on under Section 186, then Section 185 will be virtually redundant. Such an interpretation is contrary to the well-settled rule of statutory interpretation, that no provision of an enactment should be interpreted in such a way as to make it useless, ineffective and otiose. Comments: There seems to be a drafting error in Section 185. It should be “Save as otherwise provided under this Section”. Similar expression was used in Section 295 of CA, 1956. Inter-corporate Loans and Investments [Sec. 186]… contd.. General Prohibitions….  Applies to Both Private & Public Company  No Investment beyond two Layers of Investment Companies is allowed.  Company acquiring any Foreign Company if such F.Co. has Investment Subsidiaries beyond 2 Layers as per the laws of Such Country.  A Subsidiary Company having any Investment Subsidiary to meet the requirements of law / rule / regulation at present. Comments:  Indian Companies can’t float a Foreign Subsidiaries and have Investment Subsidiaries beyond 2 Layers JJ Irani committee : “It is the Committees considered view that the mechanism of inter- corporate loans / investments and resultant transfer of funds to subsidiaries etc. should remain only an instrument of corporate growth rather than a method for diversion of funds from a healthy enterprise”. Loan, Guarantee and Security can be provided to Person Body Corporate Higher of the following: 60% of Paid-up Share capital + Free Reserves + Securities Premium Account. Or 100% of Free Reserves + Securities Premium Account. limits Inter-corporate Loans and Investments [Sec. 186]… contd.. Specific Restrictions… Section applies both to Private & Public Companies Applies to Loans / Guarantee / Security Limits & Persons covered:  All persons included those excluded u/s. 185 are covered u/s. 186 Inter-corporate Loans and Investments [Sec. 186]… contd.. Board’s Approval- Unanimous Resolution Approval from Financial Institution in case the Company has took any loan or guarantee Disinterested Member’s Approval in case it exceeds limit of 60% of or 100% - whichever is high APPROVALS REQUIRED Other Conditions to be complied under Section 186:  Board’s Approval by way of Unanimous Resolution upto ceiling specified.  Special Resolution beyond the Ceiling Limit.  Approval of PFI’s: - When limit exceeds the Ceiling or any default to them towards repayment of principal or interest on Loans due to them.  Rate of Interest: not less that prevailing yield rate of 1 / 3 /5 /10 Years for Govt. Security closest to tenure of loan.  Condition Precedent: must pay the deposit (need not be a public Deposit) and interest thereon if any due before making any transactions.  No SH’s approval for WOS - subject to disclosures in FSs.  Disclosures in FSs:  Full particulars of Loans / Guarantee / Security  Purpose of Loans / Guarantee / Security to be utilised by Recipient  Maintain a Register to be in Form – MBP 2  No provision for compiling the existing transactions. Inter-corporate Loans and Investments [Sec. 186]… contd.. Exceptions….  Banking Companies, Insurance and Housing Finance Companies  Any Company whose principal business is acquisition of Securities.  Loan / security / guarantee provided by Company to its WOS or JV Company.  Investment by H.Co. by way of subscription, purchase or otherwise of, the securities of its WOS.  Companies registered under Section 12 of SEBI Act, 1992 (Market Intermediaries) subject to ceiling prescribed by SEBI Inter-corporate Loans and Investments [Sec. 186]… contd.. Register of Loans and Investments, etc. • Shall be maintained in chronological Order – manual or electronic • To be entered within 7 days of making of the transaction. • Shall be kept at the registered office and preserved permanently. • Authenticated by Company Secretary or any person authorised by the Board. • May be furnished to members on payment of fees not exceeding Rs.10/- for each page • Rules are silent as to Compilation of existing register Inter-corporate Loans and Investments [Sec. 186]… contd.. Penalties ….. Inter-corporate Loans and Investments [Sec. 186]… contd.. • Company: – Fine - Min. Rs. 25,000/- upto Rs. 5 Lacs • Office in Default: – imprisonment for a term which may extend to 2 years; or – Fine - Min. Rs. 25,000/- upto Rs. 5 Lacs Relevant Definitions Loan to Directors, etc. Inter corporate loans/Investments Approval & disclosure of related party transactions • Sections 294, 294A, 294AA, 297, 314 of CA, 1956 • Applies to both Private & Public Companies including OPC & Small Company • Emphasis is on Disclosures, transparency and Stakeholders approval • Approvals Required: – Audit Committee (by Public Companies prescribed) – Board’ Approval – PRIOR approval of Disinterested Shareholders by SR Related Party Transactions [Sec. 188 & Rule 16]… MCA views to JPC: The intention is to provide that companies manage their affairs, without intervention of Government, in a responsible manner with full disclosures, transparency and after obtaining approval of competent body(ies) i.e. Board or shareholders, as the case may be Transactions Covered: (a) sale, purchase or supply of any goods or materials; (b) selling or otherwise disposing of, or buying, property of any kind; (c) leasing of property of any kind; (d) availing or rendering of any services; (e) appointment of any agent (need not be Sole Selling 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 securities or derivatives thereof, of the company: Related Party Transactions [Sec. 188 & Rule 16]… Approvals Required & other conditions…… Related Party Transactions….contd.. Board Approval Audit Committee Approval Shareholders Approval Board Approval All Companies requires Board Approval(Circular Resolution not allowed) Board Agenda shall disclose: Name of the RP and nature of relation Nature, duration, Particulars of Contract Material Terms of contract including value Any advance paid or received Manner of determining the price or other commercial terms Whether all factors relevant to contract considered Any other relevant information  Interested Director should not be present at the Meeting Related Party Transactions….contd.. Audit Committee Approval In addition to Board Approval All Listed Companies Public Companies with,  PUC of Rs. 10 Cr or more; or Turnover of Rs. 100 Cr or more; or Outstanding loans / borrowing / Debenture / Deposits of Rs. 50 Cr or more  Interested Director should not be present at the Meeting Related Party Transactions….contd.. Shareholders Approval….  Shareholders Approval  Disinterested SHs approval by Special Resolution (except in WOS)  Based on Share Capital All Companies with the paid up share capital of Rs. 10 Crore or more  Based on Transaction Value  All the Companies where the transaction value is as follows: Related Party Transactions….contd.. S.No Transaction with related Party Value of the transaction 1 Sale, purchase or supply of any goods or materials Exceeding twenty five percent. of the annual turnover 2 selling or otherwise disposing of, or buying, property of any kind Exceeding ten percent. of net worth. 3 leasing of property of any kind Exceeding ten percent. of net worth. 4 Appointment of any related party 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 5 Remuneration for underwriting the subscription of any securities or derivatives thereof of the company Exceeding one percent. of the net worth Other provisions…..  Transactions at “arm’s length” not covered  All RPTs shall be referred in the Board’s Report  In case of urgent contracts with Director / Employee– approval of Board / SHs can be sought in 3 months  Urgent Contract with Director / Employee – if not ratified by Board / SHs within 3 months – concerned shall indemnify loss, if any, incurred by the Company.  Listed Company [SEBI Cir. Dated April 17, 2014:  All existing material related party contracts or arrangements as on the date of this circular which are likely to continue beyond March 31, 2015 shall be placed for approval of the shareholders in the first General Meeting subsequent to October 01, 2014. However, a company may choose to get such contracts approved by the shareholders even before October 01, 2014. Related Party Transactions [Sec. 188 & Rule 16]… [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.] Penalty for violation……..  Company is open to proceed with Director / Employee to recover loss  Listed Company:  Imprisonment upto 1 Year; or  Fine Min Rs. 25K upto Rs. 5 Lacs; or  Both  Other Company:  Fine Min Rs. 25K upto Rs. 5 Lacs; or  Both  Disqualification for 5 years Related Party Transactions [Sec. 188 & Rule 16]…