What are “Related Party Transactions”?
Provision on Related party transactions are as mentioned below:
- Section -188 of Companies Act, 2013
- Section -297 & 314 of Companies Act, 1956
Now, let’s compare;
| Sl. No. | Nature of Difference | Companies Act, 2013 | Companies Act, 1956 |
| 1. | Approval from Board |
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| 2. | Transactions exceeding the prescribed amount (Annexure-1) |
Prior approval of company by way of special resolution is required. | Prior approval of Central Government. |
| 3. | Member’s vote | Directors/Member (along with their relatives) shall not vote at any such resolution for approving any contract, if he is a related party. General Circular No. 30/2014 Dated: 17th July, 2014 |
No provision. |
| 4. | Ordinary course of business | The transactions entered into in ordinary course of business are exempted from taking Board’s approval except the transactions which are not on arm’s length basis. | Only in case of a banking/insurance company any transaction in the ordinary course of business are exempted from taking Board’s approval except the transactions which are not on arm’s length basis. |
| (The term, ‘Arm’s length transaction’ has been defined as a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.) | |||
| 5. | Disclosure in Board’s report. | Disclosure of all such contracts alongwith the justification for entering into such contracts needs to be given under Board’s report. | No provision. |
| 6. | Violation of provision | Companies can proceed against director/employees who had authorized such contract in violation of provision of this section for recovery of any loss sustained by it. | No provision. |
| 7. | Penalty | Penalty structure has been changed. (i)listed Company, Imprisonment for 1 year or with fine between 25 thousand rupees & 5 lakh rupees, or with both; and (ii) Non listed Co., Punishable with fine between 25 thousand rupees &5 lakh rupees. |
No provision. Non compliance with the provision will result in voilance of the transaction. |
| 8. | The provisions for prior approval of Board for appointment to any office or place of profit in the company or its subsidiary company are clubbed. | ||
| 9. | Approval of Central Government is not required for appointment of any director or any other person to any office or place of profit in the company or its subsidiary. These sections are clubbed in one, Section 188 of the Act 2013 | ||
| 10. | Language is more simplified | ||
| 11. | Redundant provisions deleted. | ||
Pros and Cons of the Amendment:
Earlier the companies whose paid up capital is Rs. 10 crore or more, they need approval from the shareholders. But now the criteria are changed as threshold limits has been introduced. These amended provisions are more beneficial for those enterprises having smaller net worth as they can avail the benefits easily by these amended provisions but companies having higher net worth will face difficulty in getting the approval of shareholders for entering into any transaction.
The above mentioned monetary limits are definitely a good step but larger companies may face problem because this threshold limit is a very low amount as it is computed for a group of transactions earlier focus was more on paid-up capital, now the focus shifts from paid-up capital to threshold limits. These limits may create some havoc for the large corporate enterprises as well. Further, the ministry talks about transaction between holding and its wholly owned subsidiary and only special resolution is required for the contracts between them. On the other hand, there remains a grey area which does not talk about the transaction which takes place between two wholly owned subsidiaries.
Annexure-1
| Sl No. | Criteria | Limit |
| 1.* | Sale, purchase or supply of any goods or materials directly or through appointment of agents | 10 % of Turnover of the Company or Rs.100 Crores whichever is lower. |
| 2.* | Selling or otherwise disposing of, or buying property of any kind directly or through appointment of agents | 10 % of Net worth of the Company or Rs.100 Crores whichever is lower. |
| 3.* | Leasing of property of any kind | 10 % of Net worth of the Company or 10% of Turnover of the Company or Rs.100 Crores whichever is lower. |
| 4.* | Availing or rendering of any services directly or through appointment of agents for purchase or sale of goods, materials ,services or property | 10 % of Turnover of the Company or Rs.50 Crores whichever is lower. |
| *10 % of Turnover of the Company or Rs.50 Crores whichever is lower. | ||
| 5. | Appointment to any office or place of profit in the company, its subsidiary company or associate company | Monthly Remuneration of Rs.2,50,000/- |
| 6. | Underwriting the subscription of any securities or derivatives thereof, of the company | 1% of Net Worth of the Company. |