1.

Definition of Related Party

[S. 2(76)]

“related party”, with reference to a Co, means—

• a director/his relative;
• a KMP/his relative;
• a firm, in which a director, manager or his relative is a partner;
• a private co in which a director/manager/his relative is a member or director;
• a public co in which a director/manager is a director and holds along with his relatives, > 2% of its paid-up share capital;
• any body corporate whose BoD, MD 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:

  # Not applicable to the advice, directions or instructions given in a professional capacity

• any body corporate which is—
  • a Hold Co/Sub Co/Asct Co of such Co; or
  • a Sub Co of a Hold Co to which it is also a Sub Co i.e. sister concern; or
  • an investing Co/the venturer of the Co - i.e., a body corporate whose investment in the Co would result in the Co becoming an Asct Co of the body corporate
• such other person as may be prescribed

2.

“office or place of profit”

[Expl. (a) to S. 188(1)]

means any office or place is held by —

3.

“arm’s length transaction” [Expl. (b) to S. 188(1)]

means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest

4.

Board approval
[S. 188(1), R. 15]

• by a resolution at a BM, provided the agenda of the BM at which the resolution is proposed to be moved shall disclose-
  • the name of the related party and nature of relationship;
  • the nature, duration of the contract and particulars of the contract/arrangement;
  • the material terms of the contract/arrangement including the value, if any;
  • any advance paid/received for the contract/arrangement, if any;
  • the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
  • whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
  • any other information relevant or important for BoD to take a decision on the proposed transaction
• Interested director in any contract/arrangement with a related party shall not be present at the BM during discussions on the subject matter of the resolution relating to such contract or arrangement

5.

Prior approval of the Co by a resolution (at GM)

[S. 188(1), R. 15]

i.r.o. RPT beyond the prescribed threshold (except transactions between Hold Co and its WOS whose accounts are consolidated with such Hold Co and placed before SH at GM for approval)–

(For prescribed thresholds of various types of RPTs, please refer Sr. No. 13 of Criteria under the Co Act 2013 triggering certain compliances)

• The explanatory statement to the GM notice shall contain :-
  • name of the related party;
  • name of the director/KMP who is related, if any;
  • nature of relationship;
  • nature, material terms, monetary value and particulars of the contract/arrangements;
  • any other information relevant or important for the members to take a decision on the proposed resolution
• A member of the Co who is a related party shall NOT vote on such resolution to approve any contract or arrangement
  • Not applicable to: a Co in which 90% of members, in number, are relatives of promoters or are related parties

6.

Non-applicability of S.188(1) [4th Proviso to S. 188(1)]

to any transactions entered into by the Co in its ordinary course of business other than transactions which are not on an arm’s length basis

7.

Disclosure in BoD report
[S. 188(2)]

Every contract/arrangement entered into u/s 188(1) shall be referred to in the BoD’s report to the SH along with the justification for entering into such contract or arrangement

8.

Any contract or arrangement is entered without obtaining the consent

[S. 188(3), (4)]

• any contract/arrangement is entered into by a director/any other employee, without obtaining the consent of BoD/approval by a resolution in GM
  • may be ratified by BoD/the SH, as the case may be, at a meeting within 3 months from the date on which such contract or arrangement was entered into,
    • if not ⟶ such contract/arrangement shall be voidable at the option of BoD/the SHs, as the case may be, and
    • if the contract/arrangement is with a related party to any director, or is authorised by any other director ⟶ the directors concerned shall indemnify the Co against any loss incurred by it
• open to the Co to proceed against a director/any other employee who had entered into such contract/arrangement in contravention of S. 188 for recovery of any loss sustained by it as a result of such contract/arrangement