Related party Transaction

As per companies act, 1956 Section 297 Boards sanction to be required for certain contracts in which particular directors are interested
(1) Except with the consent of the Board of directors of a compan ! a director of the compan or his relati"e! a firm in which such a director or relati"e is a partner! an other partner in such a firm! or a pri"ate compan of which the director is a member or director! shall not enter into an contract with the compan # (a) for the sale! purchase or suppl of an $oods! material or ser"ices% or (b) after the commencement of this &ct! for underwritin$ the subscription of an shares in! or debentures of! the compan ' (ro"ided that in the case of a compan ha"in$ a paid#up share capital of not less than rupees one crore! no such contract shall be entered into except with the pre"ious appro"al of the )entral *o"ernment+ (2) ,othin$ contained in clause (a) of sub#section (1) shall affect# (a) the purchase of $oods and materials from the compan ! or the sale of $oods and materials to the compan ! b an director! relati"e! firm! partner or pri"ate compan as aforesaid for cash at pre"ailin$ mar-et prices% or (b) an contract or contracts between the compan on one side and an such director! relati"e! firm! partner or pri"ate compan on the other for sale! purchase or #suppl of an $oods! materials and ser"ices in which either the compan or the director! relati"e! firm! partner or pri"ate compan ! as the case ma be! re$ularl trades or does business+ (ro"ided that such contract or contracts do not relate to $oods and materials the "alue of which! or ser"ices the cost of which! exceeds fi"e thousand rupees in the a$$re$ate in an ear comprised in the period of the contract or contracts% or (c) in the case of a ban-in$ or insurance compan an transaction in the ordinar course of business of such compan with an director! relati"e! firm! partner or pri"ate compan as aforesaid+

(.) ,otwithstandin$ an thin$ contained in sub#sections (1) and (2) a director! relati"e! firm! partner or pri"ate compan as aforesaid ma ! in circumstances of ur$ent necessit ! enter! without obtainin$ the consent of the Board! into an contract with the compan for the sale! purchase or suppl of an $oods! materials or ser"ices e"en if the "alue of such $oods or cost of such ser"ices exceeds fi"e thousand rupees in the a$$re$ate in an ear comprised in the period of the contract% but in such a case! the consent of the Board shall be obtained at a meetin$ within three months of the date on which the contract was entered into+ (/) E"er consent of the Board required under this section shall be accorded b a resolution passed at a meetin$ of the Board and not otherwise% and the consent of the Board required under sub#section (1) shall not be deemed to ha"e been $i"en within the meanin$ of that sub#section unless the consent is accorded before the contract is entered into or within three months of the date on which it was entered into+ (0) 1f consent is not accorded to an contract under this section! an thin$ done in pursuance of the contract shall be "oidable at the option of the Board+ (2) ,othin$ in this section shall appl to an case where the consent has been accorded to the contract before the commencement of the )ompanies (&mendment) &ct! 1923 As per Companies act, 2013 (new) 4he accordin$ to new act no appro"al of central $o"ernment is required for enterin$ into an related part transaction or for appointment of an 5irector or an other person to an office or place of profit in the compan or its subsidiar + &nd there are no exceptions in the new act+ ,ow! for the 6elated (art 4ransaction special resolution has to be passed b the board+ Section 1 &part from the existin$ transaction under the old act followin$ transactions are also introduced as related part transactions in the new one' Sellin! or ot"erwise disposin! o#, or $%yin!, property o# any &ind 'easin! o# property o# any &ind Appointment o# any a!ents #or p%rc"ase or sale o# !oods, materials, ser(ices or property Related party)s appointment to any o##ice or place o# pro#it in t"e company, its s%$sidiary company or associate company and *nderwritin! t"e s%$scription o# any sec%rities or deri(ati(es o# t"e company

4he old act did not define related parties separatel and was not also pr7cised but the new act defines the related parties in the definition section with more clarit and the related parties are as follows' +oldin! Company, S%$sidiary Company, Sister S%$sidiary, Associate Company, ,irectors, -ey .ana!ement /ersonnel (incl%din! relati(es), 0irms 1 companies w"ere directors 1 relati(es are interested and Senior mana!ement i2e2 mem$ers o# core mana!ement team one le(el $elow e3ec%ti(e directors incl%din! #%nctional "eads2

4oida$le 8here an contract or arran$ement is entered into b a director or an other emplo ee! without obtainin$ the consent of the Board or appro"al b a special resolution in the $eneral meetin$ under sub#section (1) and if it is not ratified b the Board or! as the case ma be! b the shareholders at a meetin$ within three months from the date on which such contract or arran$ement was entered into! such contract or arran$ement shall be (oida$le at the option of the Board and if the contract or arran$ement is with a related part to an director! or is authorised b an other director! the directors concerned shall indemnif the compan a$ainst an loss incurred b it+ /%nis"ment 4he new act also $i"es specific punishments for the "iolation and those are' (i) in case o# listed company, $e p%nis"a$le wit" imprisonment #or a term w"ic" may e3tend to one year or wit" #ine w"ic" s"all not $e less t"an twenty5#i(e t"o%sand r%pees $%t w"ic" may e3tend to #i(e la&" r%pees, or wit" $ot"6 and in case o# any ot"er company, $e p%nis"a$le wit" #ine w"ic" s"all not $e less t"an twenty5#i(e t"o%sand r%pees $%t w"ic" may e3tend to #i(e la&" r%pees2

(ii)

Section 295 o# companies act, 1956 and section 1 5 o# companies act, 2013 Section 2951296 Companies Act, 1956 1+ (re"iousl it was restricted+ 1t was allowed with the pre"ious appro"al of central $o"ernment+ 2+ 1mprisonment could be a"oided b full repa in$ the loan+ .+ ,o loans to mana$in$ 5irector or whole time director+ Section 1 5 Companies Act, 2013 1+ ,ow it is strictl prohibited+ 2+ 1n spite of repa ment of the full amount imprisonment is still be inflicted+ .+ 9ana$in$ 5irector or 8hole time director are exempted from pur"iew of section on certain conditions+ -78 C9:,;T;9:< 1+ Special 6esolution b members is required+ 11+ &s a part of conditions of ser"ice extended b the compan to all its emplo ees+ 1+

S7CT;9: 299 A:, 300 90 C9./A:;7S ACT, 1956 Section 299 ,;SC'9S*R7 90 ;:T7R7STS =8 ,;R7CT9R (1) E"er director of a compan who is in an wa ! whether directl or indirectl ! concerned or interested in a contract or arran$ement! or proposed contract or arran$ement! entered into or to be entered into! b or on behalf of the compan ! shall disclose the nature of his concern or interest at a meetin$ of the Board of directors+ (2) (a) 1n the case of a proposed contract or arran$ement! the disclosure required to be made b a director under subsection shall be made at the meetin$ of the Board at which the question of enterin$ into the contract or &rran$ement is first ta-en into consideration! or if the director was not! at the date of that meetin$! concerned or interested in the proposed contract or arran$ement! at the first meetin$ of the Board held after he becomes so concerned or interested+ 1n the case of an other contract or arran$ement! the required disclosure shall be made at the first meetin$

of the Board held after the director becomes concerned or interested in the contract or arran$ement+ :or the purposes of sub#sections (1) and (2)! a $eneral notice $i"en to the Board b a director! to the effect that he is a director or a member of a specified bod corporate or is a member of a specified firm and is to be re$arded as concerned or interested in an contract or arran$ement which ma ! after the date of the notice! be entered into with that bod corporate or firm! shall be deemed to be a sufficient disclosure of concern or interest in relation to an contract or arran$ement so made+ (b) &n such $eneral notice shall expire at the end of the financial ear in which it is $i"en! but ma be renewed for further periods of one financial ear at a time! b a fresh notice $i"en in the last month of the financial ear in which it would otherwise expire+ (.) ,o such $eneral notice! and no renewal thereof! shall be of effect unless either it is $i"en at a meetin$ of the Board! or the director concerned ta-es reasonable steps to secure that it is brou$ht up and read at the first meetin$ of the Board after it is $i"en+ E"er director who fails to compl with sub#section (1) or (2) shall be punishable with fine which ma extend to fift thousand rupees+ (/) ,othin$ in this section shall be ta-en to pre;udice the operation of an rule of law restrictin$ a director of a compan from ha"in$ an concern or interest in an contracts or arran$ements with the compan + (0) ,othin$ in this section shall appl to an contract or arran$ement entered into or to be entered into between two companies where an of the directors of the one compan or two or more of them to$ether holds or hold not more than two per cent of the paid#up share capital in the other compan +
Section 300 ;:T7R7ST7, ,;R7CT9R :9T T9 /ART;C;/AT7 9R 49T7 ;: =9AR,>S /R9C77,;:?S

(1) ,o director of a compan shall! as a director! ta-e an part in the discussion of! or "ote on! an contract or arran$ement entered into! or to be entered into! b or on behalf of the compan ! if he is in an wa ! whether directl or indirectl ! concerned or interested in the contract or arran$ement % nor shall his presence count for the purpose of formin$ a quorum at the time of an such discussion or "ote% and if he does "ote! his "ote shall be "oid+ (2) Sub#section (1) shall not appl to # (a) a pri"ate compan which is neither a subsidiar nor a holdin$ compan of a public compan % (b) a pri"ate compan which is a subsidiar of a public compan ! in respect of an contract or arran$ement entered into! or to be entered into! b the pri"ate compan with the holdin$ compan thereof%

(c) an contract of indemnit a$ainst an loss which the directors! or an one or more of them! ma suffer b reason of becomin$ or bein$ sureties or a suret for the compan % (d) an contract or arran$ement entered into or to be entered into with a public compan ! or a pri"ate compan which is a subsidiar of a public compan ! in which the interest of the director aforesaid consists solel # (i) in his bein$ a director of such compan and the holder of not more than shares of such number or "alue therein as is requisite to qualif him for appointment as a director thereof! he ha"in$ been nominated as such director b the compan referred to in sub#section (1)! or (ii) 1n his bein$ a member holdin$ not more than two per cent of its paid#up share capital% (e) a public compan ! or a pri"ate compan which is a subsidiar of a public compan ! in respect of which a notification is issued under sub#section (.)! to the extent specified in the notification+ (.) 1n the case of a public compan or a pri"ate compan which is a subsidiar of a public compan ! if the )entral *o"ernment is of opinion that ha"in$ re$ard to the desirabilit of establishin$ or promotin$ an industr ! business or trade! it would not be in the public interest to appl all or an of the prohibitions contained in sub#section (1) to the compan ! the )entral *o"ernment ma ! b notification in the <fficial *a=ette! direct that sub#section shall not appl to such compan ! or shall appl thereto sub;ect to such exceptions! modifications and conditions as ma be specified in the notification+ S7CT;9: 1 @ 90 C9./A:;7S ACT, 2013 4here is no new addition of an pro"ision to the old section onl certain new pro"ision has been modified in the new act and those are as follows' .odi#ication in section 299 E"er director of a compan who is in an wa ! whether directl or indirectl ! concerned or interested in a contract or arran$ement or proposed contract or arran$ement entered into or to be entered into# 1+ 8ith a Bod )orporate in which such director! or directors in association with an other director! holds more than two percent shareholdin$ of that bod corporate! or is a (romoter! 9ana$er )hief Executi"e <fficer of that Bod )orporate% or 11+ 8ith a firm or other entit in which! such director is a partner! owner or member! as the case ma be! shall disclose the nature of his concern or interest at the meetin$ of the Board in which the contract or arran$ement is discussed and shall not participate in such meetin$'

1n case of pri"ate compan also! an interested 5irector cannot "ote or ta-e part in the discussion relatin$ to an matter in which he is interested+ & contract or arran$ement entered into b the compan without disclosure or with participation b a director who is concerned or interested in an wa ! directl or indirectl ! in the contract or arran$ement! shall be "oidable at the option of the compan +

.odi#ication in section 300 ,otice interest under this section b directors shall ha"e to be $i"en at the Board 9eetin$! as opposed to )ompanies &ct! 1902! where it can also be brou$ht up and read at the Board meetin$+ 4he punishment in case an 5irector who fails to $i"e the mandator disclosure of interest as required under this section has been increased wherein the defaulter shall be liable to imprisonment for a term which ma extend to one ear or with fine which shall not be less than fift thousand rupees but which ma extend to one la-h rupees! or with both+