Is approval required for transaction between Private Company and its Holding company under Section 188 of Companies Act, 2013?

Absolutely not.

Let us see how…

Section 188 of Companies Act, 2013.

(1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—

(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 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:

 

[Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a [resolution]:

 

RULE 15 OF Companies (Meetings of Board and its Powers) Rules, 2014

[(3) For the purposes of first proviso to sub-section (1) of section 188, except with the prior approval of the company by a [resolution], a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into,-

 

(a) as contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188, with criteria as mention below-

 

(i) sale, purchase or supply of any goods or material, directly or through appointment of agent, [amounting to ten percent or more] of the turnover of the company, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;

 

(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, [amounting to ten percent or more] of net worth of the company, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;

 

(iii) leasing of property any kind [amounting to ten per cent or more of the turnover of the company], as mentioned in clause (c) of sub-section (1) of section 188;

 

(iv) availing or rendering of any services, directly or through appointment of agent, [amounting to ten percent or more] of the turnover of the company as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:

 

Explanation.- It is hereby clarified that the limits specified in sub-clause (i) to (iv) shall apply for transaction or transactions to be entered into either individually or taken together with the previous transactions during a financial year.

 

(b) is for appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and a half lakh rupees as mentioned in clause (f) of sub-section (1) of section 188.

 

(c) is for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding one percent.of the net worth as as mentioned in clause (g) of sub-section (1) of section 188.

 

Explanation.- (1) The turnover or net worth referred in the above sub-rules shall be computed on the basis of the audited financial statement of the preceding financial year.

 

WHO IS A RELATED PARTY?

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 company in which a director or manager 1[or his relative] is a member or director;

 

(v) a public company in which a director or manager is a director 2[and holds] along with his relatives, more than two per cent of its paid-up share capital;

 

(vi) 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;

 

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

 

[(viii) any body corporate which is—

 

(A) a holding, subsidiary or an associate company of such company;

 

(B) a subsidiary of a holding company to which it is also a subsidiary; or

 

(C) an investing company or the venturer of the company;";

 

(ix) such other person as may be prescribed;

 

ANALYSIS:

Based on the above analysis it is clear that we need approval of Board/ Shareholders as per Section 188 & Rule 15. Further as per Sec 2(76) (viii), holding company is a related party, hence it is obvious to get approval from Board / Shareholders for transactions between Private Company and its Holding company under Section 188 of Companies Act, 2013 unless and until it is in Ordinary Course of Business. 

 

Like this we cannot conclude…

 

As per MCA Circular dated 5^th June 2015, certain provisions of the Companies Act, 2013, as specified, shall not apply or shall apply with such exceptions, modifications and adaptations, as specified in a private company of which it is specifically mentioned that “sub clause (viii) of Section 2(76) of Companies Act, 2013, shall not apply to Section 188 of Companies Act, 2013”. 

 

CONCLUSION:

Upon analyzing the mentioned exemption, a holding company, being a related party under sub-clause (viii) of Section 2(76), is not applicable with respect to Section 188 as per this circular. Therefore, approval for transactions between a private company and its holding company under Section 188 of the Companies Act, 2013, is not required in light of the circular.

 

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From the desk of CS SHARATH

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