1. COMPANIES ACT 2013
–
-By CS Makarand Joshi
-makarandjoshi@mmjc.in

2. Change in approach of Companies
Act 2013
 Shift from Shareholders Protection to stakeholders
protection
 Corporate Governance /Investor Protection is
Mantra
 Lot of Disclosures
 Strict penalties and prosecution
 Liabilities of Directors / Professionals increased
 Cost of Limited Liability increased
 Coverage of the Act increased

3. Approach TOWARDS Related
Party Transaction
 Scope is widened
 Some RPT are prohibited with Director or Auditors
 Balance Transactions to be at arms length
 Avoiding conflict of interest at board meetings
 Avoiding conflict of interest at shareholders meeting
 Promotion of holding subsidiary and not group company
structure
 Protection of shareholders money by charging interest on
loans given
 Supervision on Appointment of Senior Management by
Independent Directors
 Pushing for self sufficient companies NOT dependent
Companies

5. What is the theme in
Companies Act 2013 about
RPT ?
 There should not be unlimited powers
with any person
 No important person or entity should
have conflict of interest

6. Scope of RPT is Widened
Is it only about Directors?
‘NO’

7. Who is regulated under the act?
 Working Directors
 Non Working / Independent Directors
 Entities in which Director is interested
 Key Managerial Personnel and relatives
 Senior Management
 Holding / Subsidiary / Associate Company
 Auditors

8. What are restrictions on
Director?
 Should disclose interest
 If interested, Can not participate at board
meeting
 Every related party transaction should be at
arms length and ordinary course [se.188];
else..
Related party shareholders cannot vote
 Company cannot give loan /guarantee /
security to directors or related entities
 Remuneration is regulated

9. What are restrictions on
Director?
 Discourage non-cash transaction
 No forward contract
 No insider trading
 ANY default would trigger – vacation and
severe penalties

10. What are restrictions on KMP?
 Should disclose interest
 Every related party transaction should be at
arms length and ordinary course [se.188]; else
Related party shareholders cannot vote
 Remuneration is subject to Nomination &
Remuneration Committee
 Remuneration is disclosed in annual return
 No forward contract
 No insider trading

11. What are restrictions on Holding
?
 Every related party transaction should be at
arms length and ordinary course [se.188]; else
Related party shareholders cannot vote
 Related Party Transactions will be disclosed in
Directors Report
 Discourage non cash transaction
 Can not give loan to subsidiary [unless it is
WOS]?

12. What are restrictions on
Auditors?
 Give disclosure of eligibility
 Can not provide any other conflicting service
to the company or its holding/ subsidiary
company
 Can not be a shareholder of the Company
 Can not be indebted to the company
 Even relatives can not be shareholder or
indebted

14. Relevant Sections

16. Who is considered as
related party?

17. Related Party [Section 2 (76)]
 Director
 Relative of Director
 Director of holding company [Rules]
 Relative of Director of Holding Company
[Rules]
 Key Managerial Personnel
 Relative of Key Managerial Personnel
 Key Managerial Personnel of Holding
Company [Rules]
 Relative of KMP of holding Company [Rules]

18. Related Party [Section 2 (76)]
 Firm in which Director or Manager is partner
 Firm in which relative of Director or Manager is
partner
 Private company in which Director is Director
 Private Company in which Director is
Shareholder
 Public company in which Director or Manager
is Director and in which Director or Manager
holds along with relatives more than 2% paid
up capital

19. Related Party [Section 2 (76)]
 Body Corporate – whose board is accustomed
to act as per instruction of a Director or
Manager
 A person on whose advice, direction or
instruction a director or manager is
accustomed to act
 Holding company
 Subsidiary company
 Associate Company
 Subsidiary of its holding company

20. Relative [Section 2 (77)]
 Members of HUF
 Husband and Wife
 Father [Includes Step-Father]
 Mother [Includes Step-Mother]
 Son [Includes Step-Son]
 Sons Wise
 Daughter
 Daughter’s husband
 Brother [Includes Step-Brother]
 Sister [Includes Step-Sister]

21. Director [section 2 (34)]
 Means a director appointed to the board of a
company
 Whoever is not appointed to the board
[shadow director] is not a director
 Even Independent / Nominee / Non Executive
are Directors

22. Key Managerial Personnel
[Se.2(51)]
 Chief Executive Officer OR Managing Director
OR the Manager;
 Company Secretary
 Whole Time Director
 Chief Financial officer; and
 Such other officers as may be prescribed
Other officers not yet prescribed by Central
Govt.

23. Some More Definitions
 Chief Executive Officer means an officer of a
company, who has been designed as such by
it
 Chief Financial Officer means a person
appointed as CFO of the Company
 Whole Time Director includes a director in
whole time employment of the Company

24. Who is not covered?
 Public company in which Director does not
hold shares
 Public companies in which Director hold
shares less than 2% with their relatives
 Public companies in which Director personally
do not hold shares but other directors put
together hold more than 2%

25. WHO will determine ‘who’ is
Related Party?
Director [MBP 1]
Management [MBP 1]
Audit Committee

26. Which Transactions are
covered in this section?

27. Related Party Transactions
 Following Transactions are covered –
1. Sale, purchase or supply of any goods/
materials
2. Selling or otherwise disposing of, or buying
property of any kind
3. Leasing of property of any kind
4. Availing or rendering of any services
5. Appointment of any agent for purchase or sale
of goods, materials, services or property

28. Related Party Transactions
6. Such related party’s appointment to any
office or place of profit in the Company, its
subsidiary or associate company
7. Underwriting the subscription of any
securities or derivatives thereof of the
Company
 Whether loan transactions are covered under
this section?
 Whether providing guarantee is rendering
service?
Will
depend on
case to
case basis

29. Which Transactions are not
covered?
 Equity
 Loan
 Guarantee
 Security
 Directors’ salary

30. What are Exemptions ?
 Nothing in this section [none of the approvals]
shall apply to transaction in ordinary course of
business and at arms length; ELSE ….
 There are two approvals –
1. At the board of directors by non interested
directors
2. #Special Resolution at the shareholders
meeting of non related party shareholders

31. What are Exemptions from
requirement of Special
Resolution ?
 Special resolution is not required if the paid up
capital is less than Rs. 10 crores or
 sale, purchase or supply of any goods or
materials directly or through appointment of
agents exceeding 25% of the annual turnover
 selling or otherwise disposing of, or buying,
property of any kind directly or through
appointment of agents exceeding 10% of net
worth
 leasing of property of any kind exceeding 10%
of the net worth or exceeding 10% of turnover

32. What are Exemptions from
requirement of Special
Resolution ?
 availing or rendering of any services directly or
through appointment of agents exceeding 10%
percent of the net worth
 remuneration for underwriting the subscription
of any securities or derivatives thereof of the
company exceeding 1% of the net worth
 appointment to any office or place of profit in
the company, its subsidiary company or
associate company at a monthly remuneration
exceeding 2.5Lakhs

33. Who can not vote at Board
Meeting [se. 184]
 If a Director is interested in proposed contract
with following entities –
1. Body corporate in which Directors together with
other Directors hold more than 2%
2. Body corporate in which Director is Promoter,
CEO or Manager
3. Firm or other entity in which Director is Partner
or Owner or member
 Contracts with Directors or relatives not covered
 However Directors should not have conflict of
interest

34. Who can not vote at
Shareholders Meeting?
 If transaction is in Ordinary Course and Arms
Length every shareholder can vote; ELSE
 Shareholder who is related party for that
transaction can not vote

35. What is Ordinary Course?
 Strict view –
Main business activity of the company
 Liberal View –
Any activity which is essential for the company
to perform in normal course of business

36. What is arms length?
Means a transaction between two related parties
that is conducted as if they were unrelated so
that there is no conflict of interest

37. Who will determine whether it is
ordinary course and arms
length?
Management?
Audit Committee?
Board of Directors?

38. What is the consequence of
default?
 Contract voidable at the option of Directors
and Shareholders
 Director shall indemnify company against the
loss suffered by the Company
 Company can claim against the employee or
director for the loss suffered
 Fine 25000 – 500,000
 If director does not disclose his interest –
vacation of directorship

40. Prohibited Loan/ Guarantee/ Security
[se. 185]
 Following Loan /Guarantee/Security are
prohibited :
To a ny d ire c to r o f the le nd ing c o m p a ny ,
To a ny Dire c to r o f its holding company or
To any partner or relative of any such
director;
To a ny firm in which a ny s uch d ire c to r o r
re la tive is a p a rtne r;
To any private company of which any such
director is a director or member

41. Prohibited Loan/ Guarantee/
Security
 To any body corporate at a general
meeting of which not less than twentyfive
per cent. of the total voting power may be
exercised or controlled by any such
director, or by two or more such directors,
together;
 To a ny bo d y c o rp o ra te , the Bo a rd o f d ire c to rs ,
m a na g ing d ire c to r o r manager, whereof is
accustomed to act in accordance with the
directions or instructions of the Board, or of
any director or directors, of the lending
company

42. What would ‘Body Corporate’
include?
 Private Limited Company
 Public Limited Company
 Limited Liability Partnership
 Foreign Company
 Foreign LLP

43. What is control and exercise?
 Whether holding – subsidiary company would
be covered in this clause?
 Who is said to have control and exercise over
25% voting power of other company?
 Whether person attending general meeting of
any company as a representative of body
corporate would be considered as having
exercising power?

44. What is accustomed to act?
 Whether common director would mean
accustomed to act?
 Whether common Chairman / Managing
Director would mean accustomed to act?
 Whether holding subsidiary company would
mean accustomed to act?
 Whether 2 companies promoted by same
owner would mean accustomed to act?

45. Exemption:
 Any loan given to MD as part of employee
benefits OR under some scheme approved by
shareholders
 Advance loan, give guarantee or provide
security in respect of loan made by any person
to wholly owned subsidiary
 Give guarantee or provide security in respect of
loan made by any bank or financial institution to
subsidiaries companies
 NBFC can give loans/ provide guarantee /
security
 If borrowing party is anybody other than

46. Some Questions
 Whether Holding Company not allowed to give
loan its subsidiary company?
 Whether company can not give loan to group
company?
 What happens to the loans which are given
before 12 September 2013?

47. What is the consequence of
default?
 For Company granting loan fine 5-25 lacs
 For director / entity receiving loan –
imprisonment upto 6 months OR fine 5-25 lacs
 If director does not disclose his interest –
vacation of directorship
 Loan granted may be considered as ultra vires
and person granting it may be personally
responsible
 Directors personal default in his duties

48. DIRECTORS Remuneration

49. Director – Remuneration
 Total remuneration not to exceed 11% of the net
profits computed as per section 198
 Shareholders approval and CG approval for
payment of remuneration exceeding 11% subject to
schedule V
 Remuneration to anyone of MD/WTD/Manager not
to exceed 5 % and collectively 10%
 Remuneration to directors other than MD/WTD not
to exceed
 1% if there is a MD/WTD/Manager
 3% in other case

50. Director – Remuneration
 Sitting fees not to exceed Rs.100,000
 Different fees for different classes of directors
however, Independent director not to be
paid less than non independent director
 Independent directors is not entitled to any
stock option

51. Director – Remuneration
(Schedule V)
 If Company is having profits, it may pay
remuneration exceeding the limits subject to
shareholders approval
 If Company is not having profits or inadequate
profits, without CG approval [for unlisted
companies]
 Nomination & Remuneration committee approval
 Special resolution for payment of remuneration
for a period not exceeding 3 years
 no default in repayments of debts for a
continuous period of 30 days
 Explanatory statement to be provided as per
schedule

52. Director – Remuneration
 If any director draws or receives in excess of
the limits with or without approval of CG if
required, he shall refund the same to the
company unless waiver of excess
remuneration is permitted by CG
 If any provisions of section 197 is contravene,
person shall be punishable with fine not less
than RS. 100,000 but may extend upto
Rs.500,000

53. What is status of Private
company?
 Need Board Resolution and Shareholders
resolution
 Need compliance with Schedule V
 Need all disclosure in explanatory statement
 No approval of CG is required, if no default in
payment of dues to bank and appointment is
for 3 years

54. Who can vote?
 Who is considered as interested while
approving directors salary?
 Can interested director vote at directors
meeting?
 What if director does not have quorum?
 Who can vote at shareholders meeting?
 Can same director vote at shareholders
meeting?
 Will there be any significance of ‘arms length’?

55. KEY MANAGERIAL
PERSONNEL

56. Key Managerial Personnel
 Listed Company and Public Company paid up
capital of Rs. 10 Cr require following KMP-
 MD / WTD / CEO
 CS & CFO
 All companies with capital less than Rs. 10
Crore if have CEO /CS / CFO / MD – he is
officer in default.
 Private Companies with capital of Rs. 5 crores
are required to appoint CS

57. Key Managerial Personnel
 Appointment by resolution of the Board
 A whole time KMP not to hold office in more
than one Company except in its subsidiary at
the same time
 KMP is allowed to be director with the
permission of the Board
 If holding office in more than one company,
needs to choose one company he wishes to
continue within 6 months from the
commencement of the Act

58. Key Managerial Personnel
 MD can be appointed as MD in not more than
one company and such appointment is
approved by the Board with consent of all
directors present in meeting and specific
notice is given
 In case of contravention, company punishable
with fine of 5 lakhs rupees and director and
KMP who are in default shall be punishable
with fine which may extend to Rs. 50 thousand
and if contravention is of continuing one with a
further fine upto Rs. 1000 for every day till
default continues

59. Restriction on Transactions with
KMP
 Section 188 – sale, purchase of goods/
materials / services / properties / agency –
applicable to transactions with KMP / relatives
 Loan can be given to KMP
 KMP can not enter into insider trading
 KMP can not enter into forward dealing

60. Responsibilties
 CFO – to maintain books and preparation of
financial statement
 CS –report to board about compliance and
guide board to discharge their duties
 MD / WTD / CEO / CFO / CS – officer in
default

61. What if company is not required
to BUT has CFO or CEO ?

62. ROC disclosures
 Appointment / removal to be informed
 Remuneration details to be given in Annual
Return
 Details of RPT to be given in Directors Report
 Appointment / removal of one level below
KMP is also required to be informed to ROC

63. DISCLOSURE OF
INTEREST

64. DISCLOSURE OF INTEREST
 Disclosure in the first board meeting of financial
year
 Disclosure whenever there is any change
 Form MBP 1 for making disclosure
 Interest/concern may be disclosed as director/
promoter/manager/shareholder/CEO/Partner/
owner/member in other body corporate /firm
 Interested director not to participate if he holds
more than 2 percent of shareholding or he is a
promoter/manager/CEO of other body corporate

65. DISCLOSURE OF INTEREST
 If contract or arrangement is entered without
disclosure or director participate- voidable at the
option of the Company
 In case of contravention - imprisonment for a term
which may extend to one year or with fine which shall
not be less than fifty thousand rupees but which may
extend to one lakh rupees, or with both
 Office of the director shall become vacant
 If he fails to disclosure interest directly or indirectly
or
 Acts in contravention relating to entering into
contracts or arrangements in which he is interested

66. DISCLOSURE OF INTEREST
 Noting of disclosure of interest to be intimated
to ROC within 30 days
 Register of contracts and arrangements to be
maintained for disclosure of interest in the
form MBP- 4
 Entries in the register to be authenticated and
the register is to be kept in safe custody by of
CS or any other person authorised by Board

67. Whether MBP is required
from KMP?

68. Auditors

69. AUDITOR – Disqualification
Disqualification of Auditor:-
 Person who is in full time employment
elsewhere
 A person who or his relative or partner-
(a) holding any security or interest in the
company more than Rs. 1 lakh/-, its
subsidiary or its holding or associate
company or fellow subsidiary
(b) Indebted to the company, subsidiary,
holding, associate or fellow subsidiary in
excess of Rs. 5 Lakh

70. AUDITOR - Disqualification
Disqualification of Auditor:-
 A person/firm –directly/indirectly has
business relationship with the company
/subsidiary / holding / fellow
subsidiary/associate as may be prescribed
 A person whose relative is director or is in
employment of the company as a Director or
KMP.

71. Restriction on Providing Services [Clause
144]
 Auditor cannot provide following services to the
company/holding/subsidiary directly or indirectly:-
 Accounting and book keeping
 Internal audit
 Design and implementation of any financial
information system
 Actuarial services
 Investment advisory
 Investment banking
 Rendering of outsourced financial services
 Management Services

72. Board Report

73. Board Report [RPT disclosures]
 Policy about directors appointment and
remuneration
 Criteria for determining qualification, attributes
and independence of directors
 Particulars of contracts with related party
transactions
 Formal annual evaluation of performance of
board
 Remuneration of Director and KMP is
disclosed in annual return which is part of
Directors report

74. AS 18 / Companies Act 2013

75. Comparison
AS 18 Companies Act 2013
Related party transaction - a transfer
of resources or obligations between
related parties, regardless of whether or
not a price is charged
Narrow definition which excludes
loan / investment etc.
An Associate - an enterprise in which
an investing reporting party has
significant influence and which is
neither a subsidiary nor a joint venture
of that party
Restricted to company not an
‘enterprise’
Key management personnel - those
persons who have the authority
and responsibility for planning,
directing and controlling the activities
of
the reporting enterprise
It includes only MD / WTD / CEO /
CFO and CS

76. Comparison
AS 18 Companies Act 2013
Relative – in relation to an individual,
means the spouse, son,
daughter, brother, sister, father and
mother who may be expected to
influence, or be influenced by, that
individual in his/her dealings with the
reporting enterprise.
It is a rule based definition and not
principle based definition

77. Summary

78. Summary
 Make a list of related parties under various
sections
 Understand what is completely prohibited and
stop such transactions
 All other transactions should be in ordinary
course and arms length
 Director should not have conflict of interest
 Ensure sufficient quorum at Board and
Shareholders meeting
 Company’s stand should not be in isolation,
should consider our stand in Direct and Indirect
Tax laws

79. THANK YOU.
Le ts he lp indus try to be be tte r g o ve rne d