{"id":51107,"date":"2022-12-03T12:41:01","date_gmt":"2022-12-03T07:11:01","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=51107"},"modified":"2022-12-03T12:41:03","modified_gmt":"2022-12-03T07:11:03","slug":"section-188-of-the-companies-act-2013","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/section-188-of-the-companies-act-2013\/","title":{"rendered":"Section 188 of the Companies Act 2013: A Deep Insight"},"content":{"rendered":"\n<p>Every day hundreds of fiscal transactions take\nplace within moderate to large-sized businesses. When an entity or its core\nmembers transacts with the relatable business or members, some legal\nimplications come into effect. Sometimes such transactions are used for a fund\ndiversion that largely remains untraceable. That is where Section 188 of the\nCompanies Act 2013 comes into play. The section primarily regularizes the\nmonetary transactions that occur between two related parties. In this article,\nwe will talk about Section 188 of the Companies Act 2013 in detail by delving\ninto different aspects. <\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/section-188-of-the-companies-act-2013\/#Why_Does_Section_188_Of_The_Companies_Act_2013_Come_Into_Effect\" >Why Does Section 188 Of\nThe Companies Act 2013 Come Into Effect?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/section-188-of-the-companies-act-2013\/#What_Do_You_Mean_By_The_Term_%E2%80%9CRelated_Party%E2%80%9D\" >What Do You Mean By The\nTerm \u201cRelated Party\u201d?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/section-188-of-the-companies-act-2013\/#What_Does_Transaction_Mean_In_%E2%80%9CRelated_Party_Transaction%E2%80%9D\" >What Does Transaction Mean\nIn \u201cRelated Party Transaction\u201d?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/section-188-of-the-companies-act-2013\/#How_to_Affirm_That_a_Given_Transaction_Is_a_Related_Party_Transaction_under_Section_188_of_the_Companies_Act_2013\" >How to Affirm That a Given\nTransaction Is a Related Party Transaction under Section 188 of the Companies\nAct 2013?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/section-188-of-the-companies-act-2013\/#Approvals_Required_To_Bring_the_Related_Party_Transactions_into_Effect\" >Approvals Required To\nBring the Related Party Transactions into Effect<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/corpbiz.io\/learning\/section-188-of-the-companies-act-2013\/#What_Does_The_%E2%80%9COrdinary_Course_Of_Business%E2%80%9D_Imply\" >What Does The \u201cOrdinary\nCourse Of Business\u201d Imply?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/corpbiz.io\/learning\/section-188-of-the-companies-act-2013\/#Conclusions\" >Conclusions<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why_Does_Section_188_Of_The_Companies_Act_2013_Come_Into_Effect\"><\/span><strong>Why Does Section 188 Of\nThe Companies Act 2013 Come Into Effect? <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Fund diversion is not a part of the ordinary course of business and\nthus it is hard to trace. Companies use fund diversion in the name of related\nparty transactions for added benefits or sizeable profits without being traced\nanywhere. This is why Section 188 of the Companies Act 2013 plays such a huge\nrole, as it curbs such conduct and compels companies to instil transparency in\ntheir in-house transactions. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_Do_You_Mean_By_The_Term_%E2%80%9CRelated_Party%E2%80%9D\"><\/span><strong>What Do You Mean By The\nTerm \u201cRelated Party\u201d?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Section 188 of <strong>the Companies Act 2013<\/strong><sup><a class=\"text-primary\" href=\"https:\/\/www.mca.gov.in\/Ministry\/pdf\/CompaniesAct2013.pdf\"><strong>[1]<\/strong><\/a><\/sup> underpins norms around\nrelated party transactions. According to Section 2(76) of the Companies Act\n2013, the term \u201cRelated Party\u201d, in the context of a company, implies; <\/p>\n\n\n\n<ul><li>A Director or his\/her relative;\n<\/li><li>A core member or his\/her\nrelative; <\/li><li>A company in which the\nDirector, Manager\/his or her relative is a member or Director <\/li><li>A private firm in which a\nDirector, Manager\/his or her relative is a member or Director <\/li><li>A <strong><a class=\"text-primary\" href=\"https:\/\/corpbiz.io\/public-limited-company-registration\">Public Limited Company<\/a><\/strong> in which the Director or manager holds the\ndirectorship position and, in conjunction with its relative(s) has control over\ntwo percent of the company\u2019s paid-up capital. <\/li><li>Anybody corporate whose BODs,\ndirectors, or MD abide by the directions of the core members such as Director\n(s) or Manager(s)<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_Does_Transaction_Mean_In_%E2%80%9CRelated_Party_Transaction%E2%80%9D\"><\/span><strong>What Does Transaction Mean\nIn \u201cRelated Party Transaction\u201d?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Any transaction is said to be a Related Party Transaction if it is\nassociated with the;<\/p>\n\n\n\n<ul><li>Sale, Purchase, or any supply\nof particular good;<\/li><li>Buying, selling or disposing of\nthe property of any kind; <\/li><li>Leasing a property,\nirrespective of the type<\/li><li>Using or facilitating any\nparticular service<\/li><li>The hiring of an agent for the\nsale\/buying of goods, services, or property;<\/li><li>Such related party placement of\nany registered office or profit\u2019s place in which the firm, its subsidiary, or\nassociate entity. <\/li><li>Underwriting the subscription\nconcerning securities of any type or derivatives thereof of the firm<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_to_Affirm_That_a_Given_Transaction_Is_a_Related_Party_Transaction_under_Section_188_of_the_Companies_Act_2013\"><\/span><strong>How to Affirm That a Given\nTransaction Is a Related Party Transaction under Section 188 of the Companies\nAct 2013? <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Transactions that abide by the following conditions shall be deemed\nas related party transactions under Section 188 of the Companies Act 2013. <\/p>\n\n\n\n<ul><li>Transactions falling under <strong>Section 188(1)(a) to (g)<\/strong><\/li><li>Transacting parties under <strong>Section (2) 76 read with rule 3<\/strong>\nconcerning Companies Rules 2014. <\/li><li>Transacting party involves a\ndirector or KMP of the holding company\/his relative for <strong>sub-clause (ix) of clause (76) of Section 2 of the Act.<\/strong><\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Approvals_Required_To_Bring_the_Related_Party_Transactions_into_Effect\"><\/span><strong>Approvals Required To\nBring the Related Party Transactions into Effect <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Transactions exceeding the thresholds mentioned under Rule 15 of\nCompanies (Meetings of Board and its Powers) Rules, 2014 cannot come into\neffect without prior authentication of the company&#8217;s members via a resolutions.<\/p>\n\n\n\n<table class=\"table table-bordered\"><tbody><tr><td>\n  <strong>S.No<\/strong>\n  <\/td><td>\n  <strong>Transactions\n  requiring board authentication as per the Companies Act<\/strong>\n  <\/td><td>\n  <strong>Transactions\n  requiring the company&#8217;s approval via resolution as per Company Rules, 2014 <\/strong>\n  <\/td><\/tr><tr><td>\n  \n   &nbsp;\n  \n  <\/td><td>\n  Materials and Goods: Purchase, sale or supply \n  <\/td><td>\n  Purchase, sale or supply of goods directly or via an\n  agent that amounts to 10% or more of the turnover or Rs 100 crore, whichever\n  is lower\n  <\/td><\/tr><tr><td>\n  \n   &nbsp;\n  \n  <\/td><td>\n  Property: Buying, Selling, or Leasing \n  <\/td><td>\n  Sale, Purchase of property directly or via an agent\n  that amounts to 10% or more of the net worth or Rs 100 crore, whichever is\n  lower\n  &nbsp;\n  &nbsp;\n  In case the property&#8217;s leasing directly, that amounts\n  to 10% or more of the net worth or Rs 100 crore, whichever is lower.\n  &nbsp;\n  &nbsp;\n  <\/td><\/tr><tr><td>\n  \n   &nbsp;\n  \n  <\/td><td>\n  Agent for aforementioned purposes \n  <\/td><td>\n  Using or facilitating services directly or via an agent\n  that amounts to 10% or more of the turnover or Rs 100 crore, whichever is\n  lower\n  <\/td><\/tr><tr><td>\n  \n   &nbsp;\n  \n  <\/td><td>\n  Others\n  i. Accessing or facilitating services \n  ii. Underwriting securities or derivatives thereof\n  iii. Related party\u2019s appointment to a profit\u2019s place or\n  company\u2019s office\/subsidiary\/associate \n  Iv. If a director or person other than the\n  firm\/director\/private company\/body corporate comes across an amount exceeding\n  the remuneration via company managed by directors and anything in the form of\n  remuneration for others\n  &nbsp;\n  &nbsp;\n  &nbsp;\n  <\/td><td>\n  i. Related party\u2019s selection to the profit\u2019s place or\n  office in the firm\/sister concern company\/associate where the remuneration\n  exceeds the figure of 2.5 lakhs \n  ii. Underwriting of securities or derivatives thereof\n  when the payment crosses the threshold amounting to 1 percent of the net\n  worth\n  &nbsp;\n  when payment exceeds 1% of the net worth.\n  &nbsp;\n  &nbsp;\n  <\/td><\/tr><\/tbody><\/table>\n\n\n\n<p><strong><em>Note: &nbsp;For the wholly-owned\nsubsidiary, the resolution passed in the general meeting by the holding company\nwill be adequate for bringing transactions between the wholly-owned subsidiary\n&amp; the holding company into effect. <\/em><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_Does_The_%E2%80%9COrdinary_Course_Of_Business%E2%80%9D_Imply\"><\/span><strong>What Does The \u201cOrdinary\nCourse Of Business\u201d Imply? <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The Companies Act 2013 is yet to clearly define the term \u201cordinary\ncourse of business\u201d. In general, this phrase is used in the context of typical\nbusiness practices relating to daily affairs and transactions within no hidden\naspects whatsoever. The reputable institute ICAI has penned down the following\ntransactions that fall outside the scope of the \u201cordinary course of business\u201d. <\/p>\n\n\n\n<ul><li>Complex Equity Transactions<\/li><li>Transactions with foreign\ncompanies in areas lacking apt corporate laws<\/li><li>If case of nil consideration,\nthe leasing of a business place or facilitation of services by a firm to\nanother company<\/li><li>Sales transactions adhering to\nmassive discounts or return<\/li><li>Transactions that have\narrangements for re-purchase. <\/li><li>Contract transactions lacking unalterable\nterms.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusions\"><\/span><strong>Conclusions <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>We hope that this write-up has helped you better understand the concept of Related party transactions under Section 188 of the Companies Act 2013. It is important to clearly understand the term &#8220;related party&#8221; in the context of the governing legislation. According to Section 2(76) of the Companies Act, 2013, the notion of a related party fundamentally revolves around the relative(s) or parties that are closely connected. The phrase &#8220;related party transaction&#8221; has a significant impact on how companies deal with day-to-day transactions. The section instils transparency in fiscal management and ensures better control over of company\u2019s finances.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read Our Article<\/b>: <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/public-limited-company-documents-and-registration-process\/\">Public Limited Company: Documents and Registration Process<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Every day hundreds of fiscal transactions take place within moderate to large-sized businesses. When an entity or its core members transacts with the relatable business or members, some legal implications come into effect. Sometimes such transactions are used for a fund diversion that largely remains untraceable. That is where Section 188 of the Companies Act [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":51108,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[2924],"acf":{"service_id":"1"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.","postViews":6662,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/51107"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=51107"}],"version-history":[{"count":2,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/51107\/revisions"}],"predecessor-version":[{"id":51110,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/51107\/revisions\/51110"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/51108"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=51107"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=51107"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=51107"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}