Related Party

Transactions &
Managerial
Remuneration
Companies
Act, 2013

06.06.2014
FAPCCI,
CS R.Ramakrishna
Gupta
Partner, R & A

Coverage

Definitions
Relative [Sec. 2(77) / Rule 4 of Companies (Specification of Definitions
details) Rules, 2014

Exclusions:
Grand Parents
Grand Children
Step Daughter
Brothers Wife
Sisters
Husband
Inclusions:
Step Father

Blood
Relation is
the Basis

Wifes Brother
continue to be
outside the purview
of Relative

Definitions contd.
Related Party [Sec. 2(76)]: with reference to a Company
means
a Director or his relative;
a KMP or his relative;
a Firm, in which a director, manager or his relative is a
partner;
a Private company in which a director or manager is a
member or director;
a Public company in which a director or manager is a director
or holds along with his relatives, more than two per cent of its
paid-up share capital;
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;
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 a
professional capacity;
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;
(ix) such other person as may be prescribed;

Scope is
wider and
larger than
Relative

Who is not RP:

Public
Companies
where Director holds
less than 2% of PUC
KMP of Subsidiary
Company who is not
connected
to
Directors of Hold Co.
Association
of
Persons (JVs)

Loan to Directors, etc. [Sec. 185]

Loan to Directors, etc [Section 185]

Applicability

Loan to Directors, etc .contd.

Section 185 prohibitive Section.. (unlike Section
295)
185(1):Save as otherwise provided in this Act, no
company shall directly or indirectly,
advance any loanincluding 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
give any guarantee or
provide any security in connection with any loan
taken by him or such other person.

Loan to Directors, etc .contd.

To any other person in whom
director is interested
Means the following:
Individuals
a) Individual:
Partnership
i. any director of the lending company; or
Firms
ii. any director of its holding company; or
iii. any partner of any such director; or Companies
Body Corporate
iv. relative of any such director;
It is also important to understand the wordsuch director.

Such would mean reference to the director of the lending

company and director of its holding company.
Comments:
Director of a Subsidiary Company and relatives of such
Directors are not covered.

Loan to Directors, etc .contd.

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;
The

firm may be a registered firm under the Indian

Partnership Act, 1934 or may be a non-registered.
The firm includes the LLP.
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;

Loan to Directors, etc .contd.

d)any Body Corporate: {Body Corporate includes a
Foreign Company}
in which 25% or more of the Total Voting Power is exercised
or controlled by one or more Directors at its general meeting.
Its Board of Directors, managing director or manager is

accustomed to act in accordance with the directions or

instructions of the Board or Director or Directors of the Lending
Company.
Comments:
The expression accustomed to means customary; usual;
habitual; habituated; acclimated; be used to; being in habit
or custom. There must be a regular or usual practice of
issuing directions or instructions by the Board or Director (s)
of one Co. to the Board of another and Board of latter
following them.
A single isolated event or two would not fall within the

meaning of expression accustomed to act.

Loan to Directors, etc .contd.

Save as Otherwise Provided in
this Act
The words saveas otherwise provided inthisAct is to be
noticed. To elaborate, this would mean there are exceptions to Section
185 elsewhere in the Companies Act, 2013.
Section 186 of the 2013 Act can be considered as an exception to
section 185 of the 2013 Act and hence what a company cannot do
under section 185 can be done under section 186 The answer is NO
Section 185 is a Special Provision and where as Section 186
is General Provision.
If we allow all the things which are not permitted u/s. 185 to be
carried on under Section 186, then Section 185 will be virtually
redundant.
Such an interpretation is contrary to the well-settled rule of statutory
interpretation, that no provision of an enactment should be interpreted

Loan to Directors, etc .contd.

Any Loan Represented by a Book
Debt
UnderSec 185 of Companies Act, 2013, loan includes any
loanrepresented by a book debt.
Book debt is a debt arising in the ordinary course of a business
and such debt shall be entered in the books of accounts maintained in
relation to that business.
The coverage of loan represented by a book debt, in this sub section,
is in line with the section 296 of the Erstwhile Companies Act 1956
with the difference that section 296 covers it by way of any transaction
represented by a book debt which was from its inception in the
nature of a loan or an advance.
The expression indirectly means is that the company shall not give a
loan to a director through the agency of one or more intermediaries.
Further, the Word "indirectly" in the section cannot be read as

Loan to Directors, etc .contd.

This clause appears to be very dangerous as any book debt in the
books of the company, in the name of any Director or any other person
in whom the Director is interested will be treated as a loan. Hence,a
company cant make "credit sales" orcant accept any contract
or provideany service oncredit basisto any other person covered
u/s.185.

Book Debts can be of any amount due from Director. Suppose, a

petrol bunk or gas company or ice cream company, etc. sells to
director even on market price and collect the money once a month for
sales made on daily basis to the director, there will be outstanding in
the books of the company and any outstanding amounts to a bookdebt).
Existing loans already provided by the company as on 12 th Sep, 2013
are not affected by the above provisions. However the same shall be
renewed and repaid on due date.
Comments:
There is an excessive prohibition.

Exceptions to Section 185

Express Provisions:
1) the giving of any loan to a MD or WTD.
(i) as a part of the conditions of service extended by the
company toallits employees; or
(ii) pursuant to any scheme approved by the members by a special
resolution;
This exception is only to Executive Directors and not for
an ordinary director(s) and applies only for advancing
Loan (not Guarantee / Security)
2) NBFC company but interest charged should not be less than Bank
Rate Declared by RBI
3) 100% Subsidiary: Any loan made / guarantee given / security
provided by a Hold Co to its 100% Subsidiary Co. [Rule 10 of
Companies (Meetings of Board and its Powers) Rules, 2014]. NO
PROHIBITION FOR 100% WOS
4) Other Subsidiaries: Any Guarantee / Security provided by a Hold
Co. in respect of a Loan by any Bank or Financial Institution to
its Subsidiary Company (i.e. All Subsidiaries), provided such
loans, etc are utilised by the Sub. Co. for its Principle Business
activities [Rule 10].
Others:

Some illustration to wrap up Section 185

E.g. 1: M/s. XYZ Private Limited having Mr. A as a Director decides

to give loan / guarantee / security to M/s. PQR Private Limited

having Mr. A as its Director NOT permitted Clause (c) of the
Explanation.
E.g. 2: If M/s. PQR Private Limited is a subsidiary of a Public

Company then the situation would be different it is permitted

E.g. 3: M/s. XYZ Private Limited having Mr. A as a Director

decides to give loan to M/s. PQR Private Limited in which Mr. A is

not a Director but a shareholder NOT permitted Clause (c) of
the Explanation. (even if Mr. R is holding a single share).
E.g. 4: M/s. XYZ Private Limited and PQR Private Limited does not

have a single common director. However, in M/s. PQR Private

Limited, wife (relative) of Mr. A is a Director Permitted.
E.g. 5: M/s. XYZ Private Limited and M/s. PQR Private Limited does

not have any common directors. If they have Mr. A as a common

shareholder holding more than 25% voting power Permitted.
The situation is different if Mr. A is also a Common Director NOT
Permitted.

Penal Provisions
185(2):If contravention of section 185(1):

i). The GIVER and

ii). The RECEIVER, both are punishable;
Giver (Company)

- Fine Min. Rs. 5 Lacs upto Rs. 25 Lacs

Receiver ( Director or the other person):

- Imprisonment which may extend to 6 months; or

- Fine (not less than Rs.5 lakhs but may extend to Rs.25
lakhs) or with both
Officer in default punishable under Sec.450 (Residual
Section)
No Vacation of office (unlike Section 295)

Inter-corporate Loans and Investments [Sec. 186]

General Prohibitions

Inter-corporate Loans and Investments [Sec. 186]

contd..
General Prohibitions.
Applies to Both Private & Public Company
No Investment beyond two Layers of
Investment
Companies is allowed except in case:
Company acquiring any Foreign Company if
such F.Co. has Investment Subsidiaries beyond 2
Layers as per the laws of Such Country.
A Subsidiary Company having any Investment
Subsidiary to meet the requirements of law /
rule / regulation at present.

Comments:
Indian Companies cant float a Foreign
Subsidiaries
and
have
Investment
Subsidiaries beyond 2 Layers

JJ Irani committee :
It is the Committees
considered view that
the
mechanism
of
inter-corporate loans /
investments
and
resultant transfer of
funds to subsidiaries
etc. should remain
only an instrument
of corporate growth
rather than a method
for
diversion
of
funds from a healthy
enterprise.

Inter-corporate Loans and Investments [Sec. 186]

contd..

Specific
Restrictions
Section applies both to Private &
Public Companies
Applies to Loans / Guarantee /
Security
Limits & Persons covered:

All persons included those

excluded u/s. 185
are covered u/s. 186

limits

Higher of the
following:
60% of Paid-up Share
capital
+
Free
Reserves
+
Securities Premium
Account.
Or
100% of Free Reserves
+
Securities
Premium Account.

Inter-corporate Loans and Investments [Sec. 186]

contd..
APPROVALS REQUIRED

Inter-corporate Loans and Investments [Sec. 186]

contd..
Other Conditions to be complied under
Section 186:

Boards Approval by way of Unanimous Resolution upto ceiling

specified.
Special Resolution beyond the Ceiling Limit.
Approval of PFIs: - When limit exceeds the Ceiling or any
default to them towards repayment of principal or interest on
Loans due to them.
Rate of Interest: not less that prevailing yield rate of 1 / 3 /5 /10
Years for Govt. Security closest to tenure of loan.
Condition Precedent: must pay the deposit (need not be a
public Deposit) and interest thereon if any due before making any
transactions.
No SHs approval for WOS - subject to disclosures in FSs.
Disclosures in FSs:
Full particulars of Loans / Guarantee / Security
Purpose of Loans / Guarantee / Security to be utilised by
Recipient

Inter-corporate Loans and Investments [Sec. 186]

contd..

Exceptions.
Banking Companies, Insurance and
Housing Finance Companies
Any
Company
whose
principal
business is acquisition of Securities.
Loan / security / guarantee provided
by Company to its WOS or JV
Company.
Investment by H.Co. by way of
subscription, purchase or otherwise of,
the securities of its WOS.
Companies registered under Section 12
of
SEBI
Act,
1992
(Market
Intermediaries)
subject
to
ceiling
prescribed by SEBI

Inter-corporate Loans and Investments [Sec. 186]

contd..
Register
of
Loans
and
Investments, etc.
Shall be maintained in chronological Order manual
or electronic
To be entered within 7 days of making of the
transaction.
Shall be kept at the registered office and preserved
permanently.
Authenticated by Company Secretary or any person
authorised by the Board.
May be furnished to members on payment of fees
not exceeding Rs.10/- for each page
Rules are silent as to Compilation of existing
register

Inter-corporate Loans and Investments [Sec. 186]

contd..
Penalties ..
Company:
Fine - Min. Rs. 25,000/upto Rs. 5 Lacs

Office in Default:
imprisonment for a term
which may extend to 2
years; or
Fine - Min. Rs. 25,000/upto Rs. 5 Lacs

RELATED PARTY [Sec. 2 (76)]:

Related Party with reference to a Company means
a Director or his relative;
a KMP or his relative;
a Firm, in which a director, manager or his relative is a
partner;
a Private company in which a director or manager is a
member or director;
a Public company in which a director or manager is a director
or holds along with his relatives, more than two per cent of its
paid-up share capital;
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;
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 a
professional capacity;
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;
(ix) such other person as may be prescribed;

Under Rule 3]of Companies (Specification of Definitions

Scope is
wider and
larger than
Relative

Who is not RP:

Public
Companies
where Director holds
less than 2% of PUC
KMP of Subsidiary
Company who is not
connected
to
Directors of Hold Co.
Association
of
Persons (JVs)

Related Party Transactions [Sec. 188 & Rule 16]

Sections 294, 294A, 294AA, 297,
314 of CA, 1956
Applies to both Private & Public
Companies including OPC & Small
Company
Emphasis
is
on
Disclosures,
transparency
and
Stakeholders
approval
Approvals Required:
Audit Committee
(by
Listed & Public
Companies prescribed)
Board Approval
PRIOR
approval
of
Disinterested
Shareholders by SR

MCA views to
JPC:
The intention is to
provide that
companies
manage their
affairs, without
intervention of
Government, in a
responsible
manner with full
disclosures,
transparency
and after
obtaining
approval of
competent body
(ies) i.e. Board or

Related Party Transactions [Sec. 188 & Rule 16]

Transactions Covered:
(a) sale, purchase or supply of any goods or
materials;
(b) selling or otherwise disposing of, or buying,
property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent (need not be
Sole Selling Agent) for purchase or sale of
goods, materials, services or property;
(f) such related party's appointment to any office
or place of profit in the company, its
subsidiary company or associate
company; and
(g) underwriting the subscription of any securities

Related Party Transactions.contd..

Approvals Required & other conditions

Related Party Transactions.contd..

Board Approval
All Companies requires Board Approval(Circular
Resolution not allowed)
Board Agenda shall disclose:
Name of the RP and nature of relation
Nature, duration, Particulars of Contract
Material Terms of contract including value
Any advance paid or received
Manner of determining the price or other commercial
terms
Whether all factors relevant to contract considered
Any other relevant information

Interested Director should not be present at the

Meeting

Related Party Transactions.contd..

Audit Committee Approval
In addition to Board Approval
All Listed Companies
Public Companies with,
PUC of Rs. 10 Cr or more; or
Turnover of Rs. 100 Cr or more; or
Outstanding loans
/ borrowing /
Debenture / Deposits of Rs. 50 Cr or
more
Interested Director should not be present at the
Meeting

Related Party Transactions.contd..

Shareholders Approval.
Shareholders Prior
Special Resolution

Approval

by

way

of

Approval
should
be
by
Disinterested
Shareholders (except in WOS)
Applies to which Companies?
All Companies with PUC of Rs. 10 Crores
Others based on the transaction value

Related Party Transactions.contd..

Other companies - Based on Transaction Value
S.N
o.

Transaction with
related Party

Value of the
transaction

Sale, purchase or supply of any

goods or materials

Exceeding 25% of the

annual turnover

selling or otherwise disposing of,

or buying, property of any kind

Exceeding 10% of net

worth.

leasing of property of any kind

Exceeding 10% of net

worth.

Appointment of any related party At a monthly remuneration

to any office or place of profit in
exceeding Rs. 2.5 Lakh
the
company,
its
subsidiary
rupees
company or associate company

Remuneration for underwriting the

subscription of any securities or
derivatives thereof of the company

Exceeding 1% of the net

worth

Related Party Transactions [Sec. 188 & Rule 16]

[The expression arms
length transaction
means a transaction
between two related
parties that is conducted
as if they were
unrelated, so that there
is no conflict of interest.]

Other provisions..
Transactions at arms length not covered
All RPTs shall be disclosed in the Boards
Report
In case of urgent contracts with Director /
Employee approval of Board / SHs can be sought
in 3 months
Urgent Contract with Director / Employee if
not ratified by Board / SHs within 3 months
concerned shall indemnify loss, if any, incurred by
the Company.
Listed Company [SEBI Cir. Dated April 17, 2014:

All existing material related party contracts or arrangements as

on the date of this circular which are likely to continue
beyond March 31, 2015 shall be placed for approval of the
shareholders in the first General Meeting subsequent to

Related Party Transactions [Sec. 188 & Rule 16]

Penalty for violation..
Company is open to proceed with Director /
Employee to recover loss
Listed Company:
Imprisonment upto 1 Year; or
Fine Min Rs. 25K upto Rs. 5 Lacs; or
Both

Other Company:
Fine Min Rs. 25K upto Rs. 5 Lacs; or
Both

Disqualification for 5 years

Remuneration

The overall limits of Remuneration (Section

197)

For Public Companies:

upto 11% of the Net Profits for current year
Beyond 11% - approval of Central Government
In case of No Profits & in adequate Profits
upto the limits mentioned in Schedule V

For Private Companies

If profits are available no limit
If no profit as per limits given at
Schedule V

Limits for Directors (Section

197)
1.Managerial Personnel:
If the Company has
only one Managerial
Personnel

5% of Net Profit

If more than one such

10% of Net Profit
Director
2. Non-Executive Directors:
Directors who are not
Managerial Personnel :
1% of Net Profits
if there is a
Managerial Personnel
3% of Net Profits
in any other case

Limits under Schedule V

(1)

(2)

Where the effective capital is

Limit of yearly remuneration

payable
shall
not
exceed
(Rupees)

(i) Negative or less than 5 crores

30 lakhs

(ii) 5 crores and above but less

than 100 crores

42 lakhs

(iii) 100 crores and above but less 60 lakhs

than 250 crores
(iv) 250 crores and above

60 lakhs plus 0.01% of the

effective capital in excess of Rs.
250 crores:

The above limits is Doubled if Special

Resolution is passed

Sitting Fees
A company may pay sitting fee to a
director for attending board meetings
or committee meetings, such sum as may
be prescribed by the board which shall
not exceed one lakh rupees per meeting
of board or committee thereof.
Provided that for Independent Directors
and Women Directors, the sitting fee shall
not be less than the sitting fee payable to
other directors.