An Important Highlight
under the new company law is on this topic of related party , which is going to
spur many debates. Since many companies have related party transactions with
their holding, subsidiary, associate companies and Joint Venture Companies, the
questions related to this topic raised or to be raised are in plenty.
Rule Based law Rulings:
Rule Based law Rulings:
The Draft Rule
notified on 09.09.2013 for the Section 188(1) states that;
(i)
A Company
having a paid-up share Capital of ` 1 Crore
or more shall not enter into a contract or arrangement with any related party;
or
(ii)
A Company
shall not enter into a transaction or transactions, where the transaction or
transactions to be entered into
a)
Individually
or taken together with previous transactions during a financial year > 5%
of the Annual Turnover or 20% of the Net worth of the company as per
the last audited financial statements of the company, Whichever is higher for
contracts or arrangements as mentioned in sub clauses (a) to (e) of section
188; or
b)
Relates to
appointment to any office or place of profit in the company, its subsidiary
company or associate company at a monthly remuneration exceeding ` 1 Lakh.
c)
Is for
Remuneration for underwriting the subscription of any securities or derivatives
thereof of the company exceeding ` 10
Lakhs.
Except with the prior
approval of the company by a special resolution. For the purposes of second
proviso to sub-section (1) of section 188, in case of wholly owned subsidiary,
the special resolution passed by the holding company shall be sufficient for
the purpose of entering into the transactions between wholly owned subsidiary
and holding company.
A Jist of “Cushions”
and “Repercussions”:
CUSHION :
- Board Resolution necessary and no
need for central government approval. Only Special Resolution
necessary for contract or arrangements exceeding the limits as prescribed
in the draft rules.
- No Member of the company shall be allowed to
vote if he is a related party. This brings in
transparency in terms of voting on a contract.
- Contract or arrangement entered under
sub-section (1) of Sec 188 to be referred in Board’s Report to the
shareholders along with the justifications. This is a good corporate governance
practice.
- Exemptions are provided for RPT’s in case
they are entered in to by a company in the ordinary course of business on
an Arm’s length basis.
REPERCUSSIONS :
- The Transactions relating to availing and rendering of any
services raises ambiguity in our minds. The Definition of
“Service” under the service tax act is very wide and is a
subject matter of many deliberations that are continuously arising
and which are still set to arise in general.
- In case of closely held companies, Only
directors and KMP’s will be attending the AGM. As per the
related party definition both Director’s and their relatives and KMP and
their relatives are not allowed to vote. This will pose practical
difficulty in passing special resolution.
- In a year there may be many contracts or
arrangements, If
everything had to be entered then the board’s report will run into pages
and the annual report will become like an encyclopedia.
- The Arm’s length transaction has been
defined as a transaction between two related parties that is conducted as
if they are unrelated, so that there is no conflict of interest. The Determination
of Arm’s length transaction is always going to be conflicting issue
between the auditors and the company. This is also a subject matter of
deliberation and needs more clarity for a better understanding.
The New law
encompasses certain stringent rules on “Related Party Transactions” due to the
rising number of corporate frauds and diversion of funds which has lead
to erosion of ethics, values and principles within the corporate world and
also to give impetus and strengthen the existing system of corporate
governance widely to bring trust in the minds of public at large.
-M.Sundar, A.C.S
These are my personal
views and interpretation on the above subject matter. however, professional or
other readers views are solicited.
Series…II to be continued
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