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    Categories: Accounting

How crucial are related party transactions from the compliance point of view.

The adoption of the concept of related party transactions had been posted in India for the very first time with respect to company law.

Related party transactions generally mean any transaction which is entered into by a company with its related party.

Given below is a symbolic checklist for identifying the bearing of Section 188 of the Act:

  1. Transactions with the company are basically necessary that a company is a union to the said transactions. The company can administer or account for the crucial services, the company can sell, purchase, the supply any component.
  2. The testimony of magistral transaction is vital that the company enters into a given transaction, mentioned in the sub-section (1) of Section 188, which includes sale, purchase or supply of any materials, selling or disposing of, or buying, leasing of property, accounting or rendering of any services, employing of any agent for purchase or sale of goods, materials, services or property, such related party’s assignment to any office or place of profit in the company, its subsidiary company, underwriting the subscription of any securities or derivatives thereof, of the company.
  3. Identification of what is called a related party is mandatory for the company to enter into a prescribed enterprise with a related party of its own. Some of the related parties being
  • The director
  • relative of the director
  • key managerial personnel
  • relative of key managerial personnel
  • Given firm in which director or director’s relative is a partner
  • private or a public company in which director or manager is an interested subsidiary company
  • The holding company
  • Associate company
  • Investing company
  • Venture company.

If all the above three conditions are checked off, then it operational to further curate with the confirmation, consent, and disclosures under the provisions of Section 188 of the Act.

Coming to what the compliances mean, it’s basically straightforward. It is the act of entering into a lawful contract and filling of the E-form MGT-14, together with related attachment pertaining to the  Ministry of Corporate Affairs in a period of thirty days from the date of passing Board resolution.

What are the steps involved when a related party transaction has already been done or is about to occur in a company?

Related party transaction approval can be divided into two parts.

  1. The requirement to pass Board Resolution only.
  2. The requirement to seek consent from the representative of the company apart from the board.

But what if this fails?

  1. Where the parties enter into any contract or arrangement, be it a director or any other employee, without attaining consent from the Board or approval by a resolution in the form of a general meeting and if it is not affirmed by the Board or, by any case, by the shareholders at a meeting within a period three months from the initial date on which such contract was entered into, such arrangement shall dissolve at the option of the Board.
  2. The parties entered into a contract, or an agreement against the provision of this section, be it any director or any other employee of the company, shall either,
  3. in the case of the listed company, be guilty with imprisonment for a term which may extend to one year or with a compensatory fine not less than twenty-five thousand rupees but which can be extended to five lakh rupees or sometimes even both.
  4. In the case of any other company, the punishment ranges from a fine which is not less than twenty-five thousand rupees but which may extend to five lakh rupees.

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