To Understand the Section 188 , let us recapitulate Section 2(76) first:
Section 2(76) of Companies Act , 2013 : Related Party with reference to a company means -
(i) A Director or his Relative
(ii) A KMP or his Relative
(iii) A firm , in which a Director , manager , or relative is a partner
Example : Mr. X , Director of ABC Ltd. is a partner in ABC & Co. Partnership Firm.
Therefore , in this case Section 188 will be attracted and ABC & Co. Partnership Firm will be a related party of X Ltd. for the purpose of this section.
(iv) A Private Company in which a Director or Manager or his relative is a Member or Director
Example : Mr. X , Director of ABC Ltd. is a Director of XYZ Pvt. Ltd. as well. Thus , for the purpose of Section 188 of Companies Act , 2013 , XYZ Pvt. Ltd. shall be a related party of ABC Ltd.
(v) A Public Company in which a director or manager is a director and holds along with its relatives, more than 2% of its Paid Up Share Capital;
Example : Mr. X , Manager of ABC Ltd. is holding the position of Director in XYZ Ltd. and along with his Wife Mrs. X , holds 4% of Paid up share capital of XYZ Ltd. Thus , Section 188 will be attracted and XYZ Ltd. will be the Related Party of ABC Ltd.
(vi) 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 of the Company;
(vii) Any person on whose advice , directions or instructions a director or manager is accustomed to act;
Exception : Nothing in Sub - Clauses (vi) and (vii) shall apply to the advice , directions or instructions given in a professional capacity.
(viii) Any Body Corporate which is
- A holding , subsidiary or an associate company of such company;
- A subsidiary of a holding company to which it is also a subsidiary;
- An investing company or the venturer of the company
Explanation : For the purposes of this clause , “the investing or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the Body Corporate
(ix) such other persons as may be prescribed.
Meaning of Relative: As per Section 2(77) of Companies Act , 2013 , a person shall be deemed to be a relative of another only if :
- They are Members of a HUF
- They are husband and wife or
- The one is related to another in the manner indicated in Rule 4 of Companies (Specification of Definitions Details) Rules , 2014.
As per aforesaid Rule 4 of Companies (Specification of Definitions Details) Rules , 2014 , a person shall be deemed to be the relative of another in the following manner namely
- Father (includes Step - Father)
- Mother (includes Step - Mother)
- Son (includes step - son)
- Son’s wife
- Daughter’s Husband
- Brother (including Step - Brother)
- Sister (including step - sister)
As per Section 188(1) of the Companies Act , 2013 , a company can enter into the following 7 contracts with any Related Party , only after the Prior Approval of the BOD given by a Resolution (BR) at the meeting of the Board (within 3 months of the Contract)
- Sale , Purchase or supply of any goods or materials;
- Selling or otherwise , disposing of , or buying , property of any kind;
- Leasing of property of any kind;
- Availing or rendering of any services;
- Appointment of any agent for purchase or sale of goods , materials , services or property;
- Such related party’s appointment to any office or place of profit in the company , it’s subsidiary company or associate company; and
Meaning of “Office or Place of Profit”
(i) Where such office or place is held by a director , if the director holding the it receives from company anything by way of remuneration over and above the remuneration to which he is entitled as a director ;
(ii) Where such office or place is held by an individual other than a director or by any firm , private company or other body corporates , if the individual , firm , private company or body corporate holding it receives from the company anything by way of remuneration.
- Underwriting the subscription of any securities or derivatives thereof , of the company.
However , following 6 related party transactions require company’s approval by way of Ordinary Resolution if the limits mentioned below exceeds [Rule 15 of Companies (Meeting of Board and its powers) Rules , 2014] :
For table reference ,PFA
Note:If it is mandatory for a company to formulate an Audit Committee as per Section 177 , then it will be necessary to require Audit Committee’s Approval. Rule 6A of Companies (Meeting of Board & its Powers) Second Amendments Rules, 2015 was inserted vide Notification No. 14.12.2015 states the procedure for obtaining Omnibus Approval of Audit Committee for Related Party Transactions on annual basis.
- No Contract or arrangement , in case of a company having a paid up share capital of not less than such sum as may be prescribed , shall be entered into except with prior approval of the company by way of Ordinary Resolution.
- Approval of BOD / Shareholders is not required for the transactions entered between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and have been placed before shareholders for approval.
- Approval of BOD / Shareholders is not required for a company in which 90% or more members , in numbers are relatives of promoters or are related parties and no member will vote on such Ordinary Resolution or any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.
Exceptions : Above mentioned provision is not applicable to -
- The private company
- Specified IFSC public company.
- GOVERNMENT COMPANY, in respect of the transactions entered with the other government company, whether it is of central government, state government or any combination thereof.
Further , it is clarified via General Circular No. 30/2014 dated 17th July that transactions arising out of Compromises , Arrangements and Amalgamation dealt with under specific provisions of the Companies Act , 2013 will not attract the requirements of Section 188 of Companies Act , 2013.