TODAY’S TOPICS

1.Related Party Transactions.2.Loan to Directors.3.Loan and Investment by the company.

RELATED PARTY TRANSACTIONS

DEFINITIONS – KMP [SECTION 2(51)]

Key Managerial Personnel [Section 2(51)] (Notified on 12th September, 2013) - in relation to a company, means

The CEO or the MD or the manager

Company Secretary

Whole – time Director

CFO

Any other prescribed officer

As per AS – 18:KMP means those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise

RELATED PARTY TRANSACTION (NOTIFIED)

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Sec 2(76) -Related party with reference to a company, means:(i) a director or his relative;(ii) a key managerial personnel or his relative;(iii) a firm, in which a director, manager or his relative is a partner;(iv) a private co. in which a director or manager is a member or director;(v) a public co. in which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up S/C;(vi) any body corporate whose BOD, M.D or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) Any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in professional capacity;

(viii) any company which is—(A) a holding, subsidiary or an associate

company of such company; or(B) a subsidiary of a holding company to which

it is also a subsidiary;(C) such other person as may be prescribed

CONTRACTS WITH RELATED PARTIES WHICH ARE COVERED UNDER SECTION 188 :-

(a) Sale or purchase or supply of any goods and or materials; (directly or through appointment of agent)

LIMIT : 10% of Turnover ; orRs. 100 cr.Whichever is lowerIf transaction exceeds the limit:

Board ApprovalResolution at the General Meeting

If transaction does not exceed the limit:Board Approval

Condition applies to all the transaction.

(b)Selling or Otherwise disposing of, or buying, property of any kind; (Whether directly or through appointment of agent)

LIMIT:10% of Net Worth of Company; orRs. 100 cr. Whichever is lower.

(c) Leasing of property of any kind;LIMIT:10% of Turnover of company; or10% of Net worth of company; orRs. 50 cr.Whichever is lower.

(d) Availing and rendering of any services; (Whether directly or through appointment of agent)

LIMIT:-10% of Turnover of company; orRs. 50 Cr.Whichever is lower.

(e) Appointment of any agent for purchase or sale of goods, materials, services or property

LIMIT:-Limits of point (a), (b) or (d) will be applicable as the case may be.

Note:

The above limits shall apply for transactions to be entered into either individually or taken together with the previous transactions during a financial year.

The turnover or Net worth shall be computed on the basis of audited financial statements of preceding financial year.

(f) Such related party’s appointment to any office or place of profit in company, its subsidiary company or associate company;

LIMIT:Monthly remuneration exceeds 2.5 Lakh rupees.

(g) Underwriting the subscription of any securities or derivatives thereof, of the company.

LIMIT:Remuneration exceeds 1% of Net worth of company.

CONTENTS OF EXPLANATORY STATEMENTS TO BE ANNEXED WITH THE NOTICE OF GENERAL MEETING

(a) Name of the related party;(b) Name of the director or Key Managerial

personnel who is related, if any(c) Nature of relationship(d) Nature, material terms, monetary value

and Particulars of the contract or arrangement

(e) Any other information relevant or important for the members to take the decision on proposed contract.

NOTE:- No member of the company shall vote on

such resolution, to approve the contract or arrangement, if such member is a related party.

Where director is in interested in any contract or arrangement with the related party, such director shall not be present at meeting during the discussions on that subject matter.

2nd proviso to section 188(1) shall not be applicable on Private Company.

1st Proviso: Need for getting resolution in case transaction exceeds the limit specified.

2nd Proviso: Member who is related party to contract, not allowed to vote in meeting.

1st and 2nd proviso also not applicable on Contracts between two government

companies. Contracts for which approval of Ministry or

deptt. Of CG has been obtained before entering into the contract.

Every contract or arrangement entered into, shall be referred to in Board’s Report to the shareholders along with the justification for entering into such Contract.

Contract or arrangement shall be voidable at the

option of Board, if:-a. Contract is entered into without obtaining

consent of the board or approval by a resolution, wherever required.

b. Not ratified by the board or shareholders at meeting within 3 months from the date on which contract was entered into.

Nilesh S VikamseyCompanies Act, 2013Section 185:-Loan to Directors

SECTION: 185185(1): Save as otherwise provided in this Act, no

company shall:directly or indirectlyadvance any loan (including any loan represented

by a book debt)To:

     a.  any of its directors or     b.   to any other person in whom the director is interested

or     c.  give any guarantee or

d. provide any security in connection with any loan taken by him or such other person

NOTE:-

The words ‘save as otherwise provided in this Act’ is to be noticed. To elucidate, this would mean that if anywhere else, i.e. if any other section of the Companies Act, 2013 (and not that of Companies Act, 1956) allows giving of loans etc. to the persons covered in section 185 then that will be permitted.

For the purposes of this section, the expression “to any other person in whom director is interested” means-a) Individual entity:     i.  any director of the lending company; or    ii.  any director of its holding company; or    iii. any partner of any such director; or    iv. relative of any such director;b) Firm:     i. any firm in which any such director is a partner; or    ii. any firm in which the relative of any such director

is a partner;

c) Company:  i. any private company of which any such director is a director; or  ii. any private company of which any such director is a member;

d)  Any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by   i. Any such director; or   ii. By 2 or more such directors, together; or

e) Any body corporate, the board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of

the:  i. Board; or of  ii. Any director or directors of the lending

company

In the proviso to this sub-section, some exceptions have been provided :-

(a) the giving of any loan to a managing or whole-time director:(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;

(b) a company which in the ordinary course of its business   provides:-

loans; or gives guarantees; or securities for the due repayment of any loan and in respect of such loan an interest is charged at a rate not less than the

bank rate declared by the Reserve Bank of India.

(c) Any loan made by a holding company to its wholly owned subsidiary company; orany guarantee given or security provided by the holding company in respect of any loan made to its wholly owned subsidiary company.

(d) Any guarantee given or security provided by holding company in respect of any loan made by bank or financial institution to its subsidiary company.

Condition: Loan should be utilized for the principal business activity.

EXAMPLES: ABC Private Limited is a wholly owned subsidiary of

XYZ Limited. The principal business activity of ABC Private Limited

is manufacturing of cement. ABC Private Limited borrows money from State Bank

of India. It seeks corporate guarantee from XYZ Limited. Mr. R is a director of ABC Private Limited and also a

director of XYZ Limited. Prior to the clarification dated 14.02.2014, this would

have attracted the provisions of section 185 because of common directorship.

E.g. 1: ABC Private Limited having Mr. R as a Director decides to give loan to XYZ Private Limited also having Mr. R as its Director.

E.g. 2: If XYZ Private Limited is a wholly owned subsidiary of a Limited Company.

E.g. 3: ABC Private Limited having Mr. R as a Director decides to give loan to XYZ Private Limited in which Mr. R is not a Director but a shareholder.

E.g. 4: ABC Private Limited and XYZ Private Limited does not have a single common director. In ABC Private Limited, Mr. R is a Director and in XYZ Private Limited, the wife of Mr. R is a Director.

E.g. 5: ABC Private Limited and XYZ Private Limited does not have any common directors. ABC Private Limited has Mr. M as a shareholder and even XYZ Private Limited has Mr. M as a shareholder.

E.g. 6: ABC Limited wants to give loan to XYZ Limited. The loan will not be allowed to be given if the voting power in XYZ Limited is exercised or controlled by a common director between ABC Limited and XYZ Limited and which is not less than 25% of the total voting power. Here it could be one such director or by 2 or more such directors, put together.

(e) Loan given by Nidhis, provided the loan is given to director or his relativein their capacity as a member and Such transaction is disclosed in the annual accounts by a note.

(f) Private Company(i) No other body corporate has invested any money in its share capital.(ii) Borrowing < (Paid up share capital) X 2 ; orRs. 50 Cr.Whichever is lower.(iii) No default in repayment of any loan.

Borrowing may be from Bank or Financial Institution or any other body corporate.

(g) Government company

Condition: Prior approval of the ministry or department of Central Government has been taken before

(i) Making loan(ii) Providing Security(iii) Giving guarantee

PENALTY FOR CONTRAVENTION:- 185(2): If contravention of section 185(1):

i.  The giver andii. The receiver, both are punishable;

The company shall be punishable with:  A fine (not less than Rs.5 lakhs but may extend to Rs.25 lakhs)

The director or the other person (receiver) shall be punishable with:    a.  imprisonment which may extend to 6 months; or   b. with fine (not less than Rs.5 lakhs but may extend to Rs.25 lakhs) or with both

Section 186Loans and Investment by Company

186(1)A company shall make investment through:

Not more than 2 layers of investment

companies. (unless otherwise prescribed)

Exceptions:

(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two 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 or under any rule or regulation framed under any law for the time being in force.

186(2)No company shall directly or indirectly —(a) give any loan to any person or other

body corporate;(b) give any guarantee or provide

security in connection with a loan to any other body corporate or person; and

(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate

LIMIT

OR

Whichever is Higher

60% of (Paid up share capital + Free Reserve+ Security Premium)

100% of (Free Reserves + Securities Premium)

CLARIFICATION:-Loans/advances to employees

in accordance with the condition of service applicable to the employees; and

are in accordance with the remuneration policy, in cases where such policy is required to be formulated.

ARE NOT GOVERNED BY THE REQUIREMENTS OF SECTION 186.

APPROVAL NEEDEDWhere the present and

proposed LIGS exceeds the ceiling

Yes1. Pass Unanimous BR2. Pass Special

Resolution in GM.

NO1. Pass Unanimous

Board Resolution (All Directors must be in favour.

DISCLOSURE TO MEMBERS [186(4)]

The company to disclose to the members:

• in the financial statement • The full particulars of the loans and

investments/ guarantee/security provided an

• The purpose for which the same is proposed to be utilized by the recipient of it.

186(5) Unanimous Board Resolution.

Prior approval of Public financial Institution, where any term loan is subsisting.

Exception: No approval required, where

(i) Ceiling limit not exceeded; and(ii) No default in repayment.

RATE OF INTEREST ON LOAN [186(7)]: Rate should not be less than the prevailing yield

of govt. security closest to the tenor of loan.

NO LOAN TILL DEFAULT IS SUSISTING [186(8)]: If any default in repayment of deposit exist then LIGS is

not allowed.

MAINTENANCE OF REGISTER [186(8)]: Every company shall keep a register,

which shall contain the particulars of LIGS.

Entries should be made with 7 days. Register to be kept at the Registered

office.

REGISTER TO OPEN FOR INSPECTION [186(10)]:

Register to be kept at registered office. Shall be open for inspection, and Extract may be taken on payment of

fee prescribed in AOA.

186(11): Exemption to Banking company, Insurance

Company or Housing Finance Company. NBFC Company whose principal business is acquisition of

securities.

186(12): Power of CG to make the rules.

186(13)Contravention: If company contravenes: Company shall be punishable with fine (not less

than Rs.25000 but which may extend to Rs.5 lakhs)

Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 2 years and with fine not less than Rs.25000 but which may extend to Rs.1 lakh.

Thanks & Regards

Arpit KhandelwalEmail:- todwalarpit@gmail.com