Related party transactions 24042014

24.04.2014
Achromic Point
CS R.Ramakrishna Gupta
Partner, R & A Associates
Related Party
Transactions -
Companies
Act, 2013

Coverage
Relevant
Definitions
Loan to
Directors,
etc.
Inter
corporate
loans/Invest
ments
Approval &
disclosure of
related party
transactions

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

Definitions contd….
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”

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
or
 give any guarantee or
 provide any security in connection with any loan taken by him
or such other person.

“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.

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;

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)

“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.

“Any Loan Represented by a Book Debt”
Under Sec 185 of Companies Act, 2013, loan includes any loan represented by a book
debt.
Book debt is a debt arising in the ordinary course of a business and such debt shall be
entered in the books of accounts maintained in relation to that business.
The coverage of loan represented by a book debt, in this sub section, is in line with the
section 296 of the Erstwhile Companies Act 1956 with the difference that section 296
covers it by way of any transaction represented by a book debt which was from its
inception in the nature of a loan or an advance.
The expression “indirectly” means is that the company shall not give a loan to a director
through the agency of one or more intermediaries.
Further, the Word "indirectly" in the section cannot be read as converting what is not a
loan into a loan. [Dr. Fredie Ardeshir Mehta Vs. Union Of India And Others on 3 August,
1989]

This clause appears to be very dangerous as any book debt in the books of the
company, in the name of any Director or any other person in whom the Director is
interested will be treated as a loan. Hence, a company can’t make "credit sales"
or can’t accept any contract or provide any service on credit basis to any other person
covered u/s.185.
Book Debts can be of any amount due from Director. Suppose, a petrol bunk or gas
company or ice cream company, etc. sells to director even on market price and collect
the money once a month for sales made on daily basis to the director, there will be
outstanding in the books of the company and any outstanding amounts to a book-debt).
Existing loans already provided by the company as on 12th Sep, 2013 are not affected
by the above provisions. However the same shall be renewed and repaid on due date.
Comments:
There is an excessive prohibition.
Genuine credit transactions are badly hit if they are at Market Price

Express Provisions:
1) the giving of any loan to a MD or WTD.
(i) as a part of the conditions of service extended by the company to all its
employees; or
(ii) pursuant to any scheme approved by the members by a special resolution;
 This exception is only to Executive Directors and not for an ordinary director(s)
and applies only for advancing Loan (not Guarantee / Security)
2) NBFC company – but interest charged should not be less than Bank Rate Declared by
RBI
3) Any loan made / guarantee given / security provided by a Hold Co to its 100%
Subsidiary Co. [Rule 10 of Companies (Meetings of Board and its Powers) Rules,
2014]. NO RESTRICTION FOR 100% WOS
4) Any Guarantee / Security provided by a Hold Co. in respect of a Loan by any Bank or
Financial Institution to its Subsidiary Company (i.e. All Subsidiaries), provided such
loans, etc are utilised by the Sub. Co. for its Principle Business activities [Rule 10].
Others:
 Public Companies or its Directors
 Director (s) of Subsidiary Company or relative of such Director.
 Loan / Guarantee / Security given by a Public Company to its Subsidiary Company
which is a Private Company.
Exceptions to Section 185…

 E.g. 1: M/s. XYZ Private Limited having Mr. A as a Director decides to give loan /
guarantee / security to M/s. PQR Private Limited also having Mr. R as its Director –
NOT permitted Clause (c) of the Explanation.
 E.g. 2: If M/s. PQR Private Limited is a subsidiary of a Limited Company then the
situation would be different – it is permitted
 E.g. 3: M/s. XYZ Private Limited having Mr. R as a Director decides to give loan to
M/s. PQR Private Limited in which Mr. A is not a Director but a shareholder – NOT
permitted Clause (c) of the Explanation. (even if Mr. R is holding a single share).
 E.g. 4: M/s. XYZ Private Limited and PQR Private Limited does not have a single
common director. In M/s. PQR Private Limited, wife (relative) of Mr. A is a Director
– Permitted.
 E.g. 5: M/s. XYZ Private Limited and M/s. PQR Private Limited does not have any
common directors. If they have Mr. A as a common shareholder holding more than
25% voting power – Permitted. The situation is different if Mr. A is also a Common
Director – NOT Permitted.
Some illustration to wrap up Section 185…

 185(2): If contravention of section 185(1):
i). The GIVER and
ii). The RECEIVER, both are punishable;
 Giver (Company)
- Fine Min. Rs. 5 Lacs upto Rs. 25 Lacs
 Receiver ( Director or the other person):
- Imprisonment which may extend to 6 months; or
- Fine (not less than Rs.5 lakhs but may extend to Rs.25 lakhs) or
with both
 Officer in default punishable under Sec.450 (Residual Section)
No Vacation of office (unlike Section 295)
Penal Provisions…

Relevant
Definitions
Loan to
Directors,
etc.
Inter
corporate
loans /
Investments
Approval &
disclosure of
related party
transactions

Inter-corporate Loans and Investments [Sec. 186]…
• No Investment beyond 2
Layers of Investment
Companies
• Foreign Subsidiary
permitted
General
Prohibitions
• Board Approval upto 60%
of NW
• General Meeting approval
beyond 60% of NW
Specific
Restrictions

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
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

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.

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

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

Penalties …..
• 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:

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

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

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:
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.
[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 24042014

Related party transactions 24042014

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