Qualified Munim Group

Related Party Transactions & Penalties: A Guide to Section 188 of Companies Act, 2013

Corporate Law in India

Related party transactions (RPTs) are a common business practice where transactions take place between two parties who have a pre-existing relationship. These transactions can occur between individuals, companies, or other entities that have a connection to each other. Section 188 of the Companies Act, 2013 deals with the regulation of RPTs in India. In this blog, we will provide you with an overview of Section 188 and its implications for companies, along with our company name, Qualified Munim Group

Qualified Munim Group is a professional firm that provides tax and accounting services to businesses and individuals. We understand that complying with the regulations and laws related to RPTs can be challenging. In this blog, we will provide you with a comprehensive guide on Section 188 of the Companies Act, 2013.

Section 188 of the Companies Act, 2013

Section 188 of the Companies Act, 2013 deals with RPTs and the approval process that companies need to follow for such transactions. The section requires companies to obtain prior approval from the board of directors or shareholders for any RPTs entered into by the company.

The section defines RPTs as transactions that take place between two parties who have a pre-existing relationship, including individuals, companies, or other entities that have a connection to each other. Such transactions could include the sale or purchase of goods, services, or property, leasing, borrowing or lending of money, guaranteeing loans, or any other transaction that involves the transfer of assets or liabilities.

The Approval Process for RPTs

As per Section 188, companies are required to obtain approval from the board of directors or shareholders for any RPTs entered into by the company. The approval process is different depending on the type of transaction.

For transactions that exceed the prescribed threshold limit, companies are required to obtain approval from the shareholders through a special resolution. The threshold limit for approval is 10% of the company’s turnover or Rs. 100 crores, whichever is lower.

For transactions that do not exceed the threshold limit, companies are required to obtain approval from the board of directors through a resolution passed at a board meeting. The resolution must be passed with the approval of a majority of the directors present at the meeting.

In addition to obtaining prior approval, companies are required to disclose all RPTs in their financial statements, along with the details of the transaction, the relationship between the parties, and the justification for the transaction.

Implications of Non-Compliance with Section 188

Non-compliance with Section 188 can lead to serious consequences for companies. The section specifies that any transaction entered into by a company without obtaining the necessary approval is voidable at the option of the board or shareholders.

In addition, non-compliance with Section 188 can result in penalties and fines. The Companies Act, 2013 provides for penalties ranging from Rs. 25,000 to Rs. 5 lakhs for non-compliance with various provisions of the Act, including Section 188.

Conclusion

RPTs are a common business practice, and it is essential for companies to comply with the regulations and laws related to such transactions. Section 188 of the Companies Act, 2013 provides a framework for the regulation of RPTs in India, and companies need to follow the prescribed approval process and disclosure requirements.

Qualified Munim Group is here to help you navigate the complexities of the Companies Act, 2013 and ensure that you are complying with all the applicable laws and regulations related to RPTs. Our team of experts can provide you with the necessary guidance and support to manage your compliance obligations and minimize your risk of penalties and fines. Contact us today to learn more about our services.

Tags :
Approval Process,Board of Directors,Companies Act 2013,Compliance,Disclosure Requirements,Penalties,Qualified Munim Group,Related Party Transactions,Section 188,Shareholders
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