Related party transactions under Companies Act

Related party transaction

2. LOANS BY COMPANY TO:
Directors or Interested
Persons as per
S. 185 of the Act
Any other person
as per
S. 186 of the Act
185. Loan to directors etc.
To prevent:
Diversion of Funds by the company (IPO)
Siphoning of Public funds lent by FIs and Banks
Misuse by transferring funds to private businesses
owned by the Director
Providing corporate guarantees and securities to
financial institutions to secure personal gains for
the Director

3. 185(1) 185(2) 185(3) 186
Prohibited Restricted Exemption/
Exceptions
To other perons

4. Sec 185 (1)

5. Sec 185 (3)
Any exemptions ?
 Loan to a MD or WTD—
(i) as a part of the conditions of
service extended by the company to
all its employees; or
(ii) pursuant to any scheme approved
by the members by a special
resolution; or

6. Co gives loan in its ordinary course of
bus. & collects interest at prevailing
yield (1/3/5) of Govt security
Loan or Gurantee by a holding
company to its WOS
Guarantee by Holding co to its
subsidiary (Bank loan)

7. 185(3)(a) 185(3)(b) 185(3)(b) & (c) 185(3)(b) & (d)
Loan to MD/WTD
(Conditions similar to
all employees)
Loan to MD/WTD
(Scheme approved
by Spl. Resoln.)
Loan to Hold Co. to
WOS (only for
principal business
activities)
Guarantee/ Security
by Hold Co. to
Bank/PFI (only for
principal business
activities)

8. Sec 185 (2)
How can a Company give loan/ give
Guarantee to any person whom
Director is interested?
Can give loan/ G to a person interested
Special resolution/ Expl. Statement
loans are utilised by borrowing company
for its principal
 business activities

10. Sec 185 (4) Penalty
Company
Every officer in Default
Director to whom the loan is
disbursed
Penalty of Min 5 lakhs upto 25 lakhs
Imprisonment upto 6 months

12. Secretarial Checklist for Compliance of Section 185Secretarial Checklist for Compliance of Section 185

13. Sec 186
Transactions Covered
GILS
Approvals required
Board/ Shareholders/ PFI
 Limits
60 % of PUC, FR & Sec. Prem or
100 % FR & Sec. Prem whichever is higher

14. Restrictions on making Investment through not more than 2 Layers [Section
186(1)]
A company shall unless otherwise prescribed, make investment through not
more than 2 layers of investment companies:
Provided that the provisions section 186(1) shall not affect,—
(i) acquiring any other company incorporated in a country outside India if
such other company has investment subsidiaries beyond 2 layers as per the laws
of such country;
(ii)a subsidiary company from having any investment subsidiary for the
purposes of meeting the requirements under any law

15. Restriction on Providing Loans, Guarantee and investment to other Body Corporate or
Person [Section 186(2)] GILS
No company shall directly or indirectly —
(a) give any guarantee
(b) Invest/ acquire by way of subscription, purchase or otherwise, the securities of any
other body corporate,
(c) give any loan to any person or other body corporate;
(d) or provide security in connection with a loan to any other body corporate or
person; and
exceeding 60% of its paid-up share capital, free reserves and securities premium or
100% of its free reserves and securities premium account, whichever is more.
The Explanation to section 185(1) w.e.f. 7-5-2018, provides that the word "person" does
not include any individual who is in the employment of the company.
Restrictions on Providing Loan, Investments, Guarantee & Security

16. Exemptions from the Limits Prescribed u/s 186(3) [Rule 11(1)]
Where a loan or guarantee is given or where a security has been provided by a company to;
•its WOS company; or
•a joint venture company, or
•acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the
securities of its WOS company, the requirement of section 186(3) shall not apply:
Provided that the company shall disclose the details of such loans or guarantee or security or
acquisition in the financial statement as provided u/s 186(4).
Exemptions to a Gov. Company [Notification No. GSR 463(E), 05.06. 2015]
Has provided exemptions from section 186 to a Govt. company and has provided that section 186
shall not apply to—
(a) a Govt. company engaged in defence production;
(b) a Govt. company, other than a listed company, in case such company obtains approval of the
Ministry before making any loan or giving any guarantee or providing any security or making any
investment under the section.
Exemptions from the Limits as Prescribed u/s 186(3)

17. Unanimous consent of all the directors at the Board meeting is required [Section 186(5)]
No investment shall be made or loan or guarantee or security given by the company unless the
resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors
present at the meeting and the prior approval of the PFI concerned where any term loan is
subsisting, is obtained:
No requirement for prior approval of PFI within the limits subject to no default of repayment of
loans and interest thereon [The proviso of section 186(5)]
Prior approval of a PFI shall not be required where the aggregate of the loans and investments so
far made, the amount for which guarantee or security so far provided to or in all other bodies
corporate, along with the investments, loans, guarantee or security proposed to be made or given
does not exceed the limits of 60% of its paid-up share capital, free reserves and securities premium
or 100% of its free reserves and securities premium account, whichever is more and there is no
default in repayment of loan instalments or payment of interest thereon as per terms and
conditions of such loan to the PFI.
Other Requirements needs to be Complied u/s 186

18. Restriction on providing loans on lower rate of interest payable on the Loans [Sec.
186(7)]
No loan shall be given under this section at a rate of interest lower than the prevailing
yield of 1 year, 3 year, 5 year or 10 year Govt. Security closest to the tenor of the loan.
The MCA by General Circular No. 6/2015, dated 9th April, 2015 has clarified that in cases
where the effective yield (effective rate of return) on tax free bonds is greater than the
prevailing yield of 1/3/5/10, Govt. Security closest to the tenor of the loan, there is no
violation of 186(7).
Restriction on providing loan, guarantee or security in case of default Committed
[Section 186(8)]
No company which is in default in the repayment of any deposits accepted or in
payment of interest thereon, shall give any loan or give any guarantee or provide any
security or make an acquisition till such default is subsisting.
Restrictions on the Powers of the Board u/s 186

19. Register of Loans, Investment, Guarantee or Scurity Provided by the Company [Sec.186(9)
Rule 12(1)]
Every company giving loan or giving a guarantee or providing security or making an
acquisition of securities shall, maintain a register in the Form MBP-2 and enter therein
separately, the particulars of loans and guarantees given, securities provided and
acquisitions made as aforesaid.
Entries to be made in the register within 7 days [Rule 12(2)]
Entries in the register shall be made chronologically in respect of each such transaction
within 7 days of making such loan or giving guarantee or providing security or making
acquisition.
Place of keeping and preservation of the Register [Rule 12(3)]
The register shall be kept at the regd. office. The register shall be preserved
permanently and shall be kept in the custody of the CS of the company or any other
person authorised by the Board for the purpose.
Register of Loans, Investments, Guarantee or Security

20. Authentication of the Register [Rule 12(4)]
The entries in the register [either manual or electronic] shall be
authenticated by the CS of the company or by any other person
authorized by the Board.
Inspection of the Register Shall be kept at the regd. office and
(a) shall be open to inspection at such office; and
(b) extracts may be taken there from by any member,
and copies thereof may be furnished to any member of the
company on payment of such fees not exceed Rs.10 for each page.
Register of Loans, Investments, Guarantee or Security

21. Exemption for the Applicability of Section 186 [Section 186(11) w.e.f. 7-5-2018]
Provides that nothing contained in this section, except Section 186(1), shall apply—
(a)to any loan made, any guarantee given or any security provided or any investment made by a
banking company, or an insurance company, or a housing finance company in the ordinary
course of its business, or a company established with the object of and engaged in the business
of financing industrial enterprises, or of providing infrastructural facilities;
(b)to any investment—
(i)made by an investment company;
(ii)made in shares allotted in pursuance of section 62(1)(a) or in shares allotted in pursuance of
rights issues made by a body corporate;
(iii)made in respect of investment or lending activities, by a NBFC registered with RBI and whose
principal business is acquisition of securities.
Exemptions from Applicability of Section 186

22. Summary of S 186
186(2) (a) (b) (c) 186(2) 1
st
Proviso 186(3) 186(11)
GILS by
Co-> any person or
body corporate
Limit –
Exceeding 60% of
PUC, Free
Reserves &
securities
premium account
(OR)
100% of Free
Reserves &
securities
premium account
WHICHEVER IS
HIGHER
Passing of Special
Resolution
Proper Disclosure of
LIGS in the financial
statments
•NBFC Co
•Investment Co
•Rights Issue
Allotment
•GILS by Hold Co to
WOS or Joint
Venture
by way of
subscription,
purchase/acquisitio
n of securities

23. 1.A DIRECTOR or his RELATIVE.
2.A KMP or his RELATIVE.
3.A FIRM – in which Director or Manager of the Company or their relative – is a Partner.
4.A PVT CO– in which Director or Manager of the Company or their relative – is a member or
director.
5.A PUBLIC CO– in which Director or Manager of the company – is a Director.
6.ANY PERSON– On whose advice/ instructions/ directions – A Director or Manager of the
company is accustomed to act. (Exception: The person shall not be related party, if advice/
instructions/directions is given in a professional capacity. )
7. ANY BODY CORPORATE – whose BOD/ MD/ MANAGER – is accustomed to act with the
advice/directions/ instructions of a director or manager of the company. (Exception: The BODY
CORPORATE shall not be related party, if advice/ instructions/ directions is given in a
professional capacity.)
8.ANY BODY CORPORATE Which is:
(A) A HOLDING, SUBSIDIARY OR AN ASSOCIATE COMPANY of such company;
(B) A subsidiary company of a holding company to which company doing transaction is also
 a
subsidiary, or
(C) An INVESTING COMPANY or the VENTURER of the company.
MEANING OF RELATED PARTY: SECTION 2(76) OF COMPANIES ACT, 2013

24. ‘Every transaction with a related party’ may not be a related party transaction,
but ‘every related party transaction’ is necessarily a transaction with a related
party
There is a general presumption that transactions reflected in financial statements
are consummated on an arm’s length basis between independent parties.
However, this presumption may not be valid when related party relationships
exist.
Whenever or wherever there is a transaction with a ‘Related Party’ there is a
scope to give benefit or undue advantage and the same is presumed to be given,
unless established otherwise
Transactions with related parties need not always be disadvantageous to the
parties concerned, but the only concern is when they are abused Therefore,
transparency in case of related party transaction is essential and crucial.
MEANING OF RELATED PARTY: SECTION 2(76) OF COMPANIES ACT, 2013

25. RELATED PARTY TRANSACTIONS: SECTION 188 OF COMPANIES ACT, 2013
S. No.Particulars Exceeding
Limit
a. Sale, purchase or supply of any goods or materials 10% of T/O
b. Selling or otherwise disposing of, or buying, property of any kind10% of Networth
c. Leasing of property of any kind 10% of Networth
d. Availing or rendering of any services 10% of T/O
e. APPT. of any agent for purchase or sale of goods, materials, services or
property
10% of Networth
f. Such related party’s appointment to any office or place of profit in the
company, its subsidiary company or associate company; and (holding CO is not
covered)
Rs. 2.5 Lakhs of
monthly remun.
g. Underwriting the subscription of any securities or derivatives thereof, of the CO1% of Networth
PRIOR APPROVAL OF SHAREHOLDERS THROUGH ORDINARY RESOLUTION
EXCEEDING THE LIMIT FOR THE FOLLOWING TRANSACTIONS:

26. Whether allotment of shares to a related party is a related party transaction
under section 188?
NO
Issue and allotment of shares is not considered as a related party transaction
under
section 188, because the ‘shares’ come into existence only after allotment.
Hence though issue and allotment of shares is a transaction with a related
party, which requires prior approval of audit committee, but not a ‘related
party transaction’ under section 188 and Board approval is not required
Allotment of Shares whether a related party transcation?

27. Whether providing a corporate guarantee to the bank by the
holding company on behalf of its subsidiary for providing a loan is
RPT under section 188?
Providing corporate guarantee is not rendering any ‘service’
Hence this is a transaction with a related party, which requires prior
approval of audit committee, but not a ‘related party transaction’
under section 188 and Board approval is not required
Providing Corporate Guarantee is a RPT?

28. Section 188 – approval of the Board of directors – applicable to both
Public and Private companies
Section 188 – approval of shareholders – once the threshold limits are
crossed
Section 177 – approval of Audit committee – applicable to all listed
companies and certain class of companies, which have to constitute Audit
Committees
Regulation 23 of Listing Regulations – applicable to only where the
companies have listed their Specified Securities i.e. Equity shares and
convertible securities into equity shares
In case any company fall into any regulated sector, in addition to the
above, such company has to comply with such sector regulatory
requirements also
Approval Mechanism of RPT

29. where ever shareholder approval is required it should always be
prior approval
When the RPT cross the prescribed threshold limits shareholder
approval is required
In case of listed companies for material related party transaction
shareholder approval is required
In case of a wholly owned subsidiary the resolution passed by the
holding company shall be sufficient for entering into transactions
between the WOS and its holding company
Where subsidiary accounts are consolidated with the holding
company and placed before AGM prior approval of shareholder is
not required
SHAREHOLDERS’ APPROVAL

30. The interested director shall not be present at the meeting during discussions on
such related party contract or arrangement
No member of the company shall vote on such resolution, if such member is a
related party
This provision shall not be applicable to a private company
MCA has clarified that the concerned related party with the transaction shall not
vote on such shareholder resolution. (General Circular No 30 dated July 17, 2014)
A company in which 90% or more members, in number, are relatives of
promoters or are related parties this provision is not applicable – Companies
(Amendment) Act, 2017
However under Regulation 23 of the Listing Regulations, all related parties shall
not vote
VOTING RIGHTS OF RELATED PARTY

31. •Board and shareholders approvals are not
required for transactions entered in the
ordinary course of business on an arm’s
length basis
•There is no exemption from obtaining the
approval of the audit committee
•This exemption is not available under
LODR
•Transactions which doesn’t exceed the
threshold limits are exempted from
obtaining shareholders approval
•In case of listed companies only material
related party transaction requires
shareholders approval
EXEMPTIONS TO RPT
In case of a PVT CO the restriction that related
parties shall not vote on a resolution
approving the RPT is not applicable
In case of wholly owned
 subsidiary
,
the
 resolution passed by the HOLD CO shall
be sufficient for the purpose of entering into
the transaction between the WOS and the
HOLD CO
Shareholders’ approval is not required in case
of the following transactions
•Transactions between two GOVT CO
•Transaction between the HOLD CO &
WOS, provided the accounts of WOS are
consolidated with that of the holding
company and placed before the general
meeting for approval

32. Ordinary course of business – not defined.
Black’s Law Dictionary defines ‘ordinary course of
business’ as the ‘normal routine in managing
trade or business’.
Ordinary course of business –
any transaction which is usually entered
into by the company while carrying on its
business or promoting or furtherance of its
business;
which is not of extraordinary or unusual
nature or which is directly connected to its
business can be said to be a transaction
entered into by the company in its ordinary
course of business
This is very subjective, judgemental and can vary
on case to case basis giving consideration to the
nature of business and objects of the entity
WHAT IS ORDINARY COURSE OF BUSINESS?
To decide on the “ordinary course of
business” the following may be considered
•Whether the activity is covered in the
objects clause of MOA
•Whether the activity is in furtherance of
business
•Whether is activity is a regular transaction
or a one off transaction
•Whether the transactions are common in
that particular industry
•Whether the revenue generated is shown
as part of business income

33. Arm’s length transactions means – a
transaction between two related parties that
is conducted as if they were unrelated so that
there is no conflict of interest
Arm’s length price shall be any method
1. which considers the price which has been
charged or paid or would have been charged
or paid
2. or the same or similar uncontrolled
transaction,
3. with or between non-associated
enterprises,
4. under similar circumstances, considering all
the relevant facts
WHAT IS ARM’S LENGTH BASIS?
1. Arms length price may be determined by any of the
following methods having regard to nature and class
of transactions, class of persons and such other
relevant factors
2. Burden to establish that the transaction was on
arm’s length would be on the company. The company
should create and maintain appropriate and adequate
documentation with regard to price and terms of
supply
3. Though arm’s length transaction is defined, the
methodologies and approaches for determining the
‘arm’s length transactions’ have not been prescribed
4. In such absence the methodologies / approaches
existing under ‘Indian Transfer Pricing Guidelines’
contained in the Income Tax Act 1961 may be adopted
5. Arms length assessment is subjective exercise and
requires judgement after considering various
parameters

34. 1.Form MBP-1 by Directors (S. 184(1))
2.Form AOC-2
•Materaial & Arms Length Basis
•Materail & Not on Arms Length Basis
3.Financial Statement (As per Ind AS 24 or
AS 18 format)
4.Form MBP-4 (Register of RPT contracts)
5.Quarterly Corporate Governance Report
(Only for Listed Co)
DISCLOSURES
1.Disqualification for appointment as
a director u/s164(g)
2.Director/Employee who violated
this provision
Listed Co ->
•Penalty – Rs. 25 Lakhs
Other Co ->
•Penalty – Rs. 5 Lakhs
PENAL PROVISONS