Related Party Transactions Compliances

A related party with reference to a company means the following

(1) director or his relative

(2) key managerial personnel or his relative 

(3) a firm in which director, manager or relative is a partner

(4) a private company in which director or manager or his relative is a member or director

(5) a public company in which director or manager is a director or holds along with his relatives more than 2% of its paid up share capital

(6) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the instructions, directions or advice of the director or manager 

(7) any person on whose advise, instructions or directions, the director or manager is accustomed to act. 

(8) any body corporate in which such director singly or in association with another director holds more than 2% shareholding of that body corporate or is a promoter, chief executive officer or manager of that body corporate 

(9) any firm or other entity in which such director is a partner, owner or member. 

Related party contract or arrangement pertains to 

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind; (so immoveable property is covered)

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any 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 or derivatives thereof, of the

company:

It will not be construed as a related party if the transaction entered into by the company is in the ordinary course of business and is on arms length basis. 

BOD consent is required for entering into related party contracts. 

(1) The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-

(a) the name of the related party and nature of relationship;

(b) the nature, duration of the contract and particulars of the contract or arrangement;

(c) the material terms of the contract or arrangement including the value, if any;

(d) any advance paid or received for the contract or arrangement, if any;

(e) the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;

(f) whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and

(g) any other information relevant or important for the Board to take a decision on the proposed transaction.

The interested director shall not be present at the Board meeting where the discussion pertaining to the said related party is taking place. 

 

Prior Special resolution will be required if 

(i) the paid up share capital of the company is Rs.10 crores or more 

(ii) the sale, purchase, supply of any goods or materials directly or though appointment of agents exceeds 25% of the annual turnover, 

(iii) selling or otherwise disposing of property of any kind directly or though agents exceeding 10% of the net worth

(iv) leasing property of any kind exceeding 10% of the net worth or turnover

(v) availing or rendering of services directly or through agents, exceeding 10% of the net worth

(vi) appointment to any office or place of profit in the company or subsidiary or associate company at a monthly remuneration exceeding Rs.2.5 lakhs 

The interested director and the related parties who are members in this particular contract or arrangement shall not vote on the said resolution.

The explanatory statement to be annexed to the notice of a general meeting convened to consider related party transactions shall contain the following particulars namely:-

(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 a decision on the proposed resolution.

The company is required to maintain register of contracts or arrangements in which directors are interested in form MBP-4 and shall enter therein following particulars. 

(1) names of companies, firms, bodies corporates, or other association of individuals in which director has any concern or interest

(2) particulars of contracts or arrangements with related parties 

Entries to be made in the register immediately at once whenever there is a cause to make entry in a chronological order and entries to be authenticated by a company secretary or by any person authorised by the Board for that purpose. 

Revised pricing guidelines on issue/ transfer of securities to non residents

RBI has vide its circular no. 4 dated 15th July 2014 revised the pricing guidelines in respect of issue/ transfer of shares to non residents.

While the pricing guidelines in respect of listed companies will remain the same i.e. SEBI guidelines, the changes have been made in respect of unlisted companies.

In such unlisted companies, the fair valuation of shares shall be done as per any internationally accepted pricing methodology for valuation of shares on arm's length basis duly certified by a chartered accountant or a SEBI registered merchant banker. The guiding principle is that the non resident is not guaranteed any assured exit price at the time of making such investment/ subscription and shall exit at fair price subject to lock in period requirement, if any.

The Indian company recording the sale of its shares or convertible debentures from resident to non resident or vice versa shall record in its balance sheet for the financial year in which the transaction takes place the details of the valuation of shares or debentures, the pricing methodology adopted for the same and the agency which gave the certificate/ valuation.

The RBI circular is available here

ST on services provided by director

Ministry of Finance has vide notification no. 9/2014 dated 11th July 2014 amended Service Tax Rules, 1994 to provide that in respect of services provided or agreed to be provided by a director of a company or a body corporate to the said company or body corporate, the service tax is payable by the recipient of such service. Here the amendment has been that "body corporate" has been added to the clause which hitherto included only company The definition of "body corporate" is the same as is given in the Companies Act, 1956 which is now the Companies Act, 2013. As per the Companies Act, 2013, the definition of "body corporate" includes company incorporated outside India but does not include co-operative society or any other body as may be specified by the Central Government.

online payment of service tax

The Ministry of Finance has vide notification no. 9/2014 dated 11th July 2014 stipulated that with effect from 1st October, 2014, every assessee shall pay the service tax through internet banking. Only the Assistant Commissioner or Deputy Commissioner, shall have the power to allow payment through any other means for reasons to be recorded in writing.

Previously the service tax was payable only where the total service tax paid by the assessee in a financial year exceeded Rs.1 lakh. In such cases payment of service tax was required to be done by online transfer.

Now with effect from 1st October, 2014 all assessees have to make the payment of service tax by internet banking

Interest payable on delayed payment of service tax

The Ministry of Finance has notified vide notification no. 12/2014 dated 11th July 2014 the rates of interest payable on delayed payment of service tax to the government. Accordingly,


1. Delay Up to six months                                              

18 per cent. per annum

2. Delay More than six months and upto one year

18 % for the first 6 months of delay and 24 % for the delay beyond six months and up to one year

3. Delay More than one year                                      

     18 per cent. for the first six months of delay; 24 per cent. for the period beyond six months up to                  one year and 30 per cent. for any delay beyond one year.

This revised penal interest will be applicable from 1st October, 2014. 

Change in definition of Related Party

The Ministry of Corporate Affairs has vide its gazetted order dated 9th July 2014 amended the definition of related party as it appears in the Companies Act, 2013.

Section 2(76)(v) hitherto stated as follows;

(v) 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;

this has been changed to

(v) a public company in which a director or manager is a director AND holds along with his relatives, more than two per cent. of its paid-up share capital;

so what it implies is that the director or manager should fulfill both conditions i.e. directorship as well as shareholding in a public company to be considered as a related party.

Checklist for SBRT FDI applicants

The department of industrial policy & promotion, government of India has created a checklist of documents/ data required by investors flocking into the Single Brand Retail Trade (SBRT) in India. There are about 21 sets of documents/ information / data required and each in turn require multiple documentation to be processed. For eg. main application should be in 18 copies enclosing memorandum & articles of association and certificate of incorporation of the foreign investor, the Indian party and Indian JV partners. Copies of shareholders agreement/ technology transfer agreement/ trademark/ brand assignment agreement. Pre and post shareholding structure. There are some compliance documents in respect of FDI into NBFC sector,

The same set of documents can be used in NRI/ EOU/ Multi brand retail trade also.

The details of the requirements are given in this link, here