Definition of Related Party Transaction
According to SEBI (Listing Obligations And Disclosure Requirements) Regulations, 2015 Regulation 2(1) (zc), a “related party transaction” refers to a transfer of resources, services, or obligations between a listed entity and a related party. This includes transactions where a price is charged, and it encompasses both single transactions and a group of transactions in a contract. However, this definition does not apply to units issued by mutual funds listed on recognized stock exchanges.
Nature of Related Party Transactions
The scope of dealing with Related Party Transactions has expanded under the Companies Act, 2013. Section 188(1) of the Act outlines that, without the consent of the Board of Directors given through a resolution at a board meeting and subject to conditions prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, no company shall enter into contracts or arrangements with related parties regarding:
(i) Sale, purchase, or supply of goods or materials.
(ii) Selling or disposing of property.
(iii) Leasing property.
(iv) Availing or rendering services.
(v) Appointment of any agent.
(vi) Appointment to any office or place of profit.
(vii) Underwriting the subscription of securities or derivatives.
Conditions for Entering Related Party Transactions
Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 specifies conditions for entering into contracts or arrangements with related parties. These conditions include disclosing details such as the name and nature of the relationship, contract duration, material terms, value, advance payments, pricing determination, and other relevant information crucial for the Board’s decision-making process.
Prior Approval of the Company by a Resolution
The first proviso to Section 188(1) mandates that no company shall enter into contracts or arrangements exceeding prescribed amounts without the prior approval of the company through a resolution. Rule 15 provides criteria for such approvals based on transaction types and values.
Exceptions are provided for transactions between a holding company and its wholly owned subsidiary and for Government companies.
Information to be Provided
The explanatory statement accompanying the notice of a general meeting convened under Section 101 must contain particulars such as the related party’s name, nature of the relationship, contract details, and any other information relevant for members to decide on the proposed resolution.
Related Party Not to Vote on Resolution
The second proviso to Section 188(1) prohibits a member who is a related party from voting on a resolution approving a contract or arrangement entered into by the company.
Non-Applicability of Section 188(1) : Section 188(1) does not apply to transactions conducted in the ordinary course of business on an arm’s length basis.
Disclosure in Board’s Report
Every related party contract or arrangement must be disclosed in the Board’s report, along with justifications for entering into such transactions.
Consequences of Non-Compliance
Section 188(3) states that contracts or arrangements entered into without Board consent or shareholder approval are voidable. If not ratified within three months, the directors concerned must indemnify the company against any loss.
Penalties for Non-Compliance
Section 188(5) provides that any director or any other employee of a company, who had entered into or
authorised the contract or arrangement in violation of the provisions of this section shall,—
- in case of listed company, be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both; and
- In case of any other company, be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.
