Related Party Transaction under New Companies Act 2013

The ministry has now released rules for ten chapters of the Companies Act. Notifications related to National Financial Reporting Authority (NFRA), Investor and Education Protection Fund, sick companies, special courts and National Company Law Tribunal (NCLT), among others, would come later.

The latest rules pertain to registration of charges, management and administration, declaration and payment of dividend, meetings of board and its powers, appointment and qualification of directors.

Last week, the ministry had notified more than 180 sections of the new Companies Act. The new law -- Companies Act, 2013 enacted on 29 August 2013 - replaces the nearly 60-year old Companies Act, 1956. The rules have brought clarity on 'related party' transactions, independent directors and imposes stiff norms on companies taking deposit.

The "related party" under the Act, which earlier included a number of company executives, now leaves out all the functional heads in a company as related parties. Experts believe it is positive that multiple layers of relatives have been cleared and only select family members like mother, father, son, daughter among others will qualify as relatives.

Section 188 of the Act defines who qualifies as related party. "The definition of related party now covers directors and key managerial personnel (KMP) only in relation to the company and its holding company and excludes directors and KMP of subsidiary and associate companies”.

Companies will get grace period of two weeks to comply with all the rules and sections of the Act that have been notified in the current fiscal.

The rules have also brought clarity on loans to subsidiaries. The rules, which define the limits for any company in terms of loan grants etc, say that companies are now allowed to grant loans and guarantees to their wholly owned subsidiary. However, guarantees to subsidiaries are not permissible.

Section 186 of the Act prohibited companies from granting loans and guarantees to their subsidiaries without defining the types of subsidiaries.

The limit for appointment of internal auditor, appointment of women director, independent director and setting up of committees has undergone a change according to the new rules.

The number of independent directors required on boards has been reduced to two members or such higher number as required to comply with other regulatory requirements or for audit committee composition.

The vigil mechanism is a established procedure in developed nations to give employees an opportunity to report any misdoings in the company. Audit committee of the company would oversee the mechanism.

The rules also provide that companies accepting public deposits and those that have borrowed above Rs 50 crore from financial institutions will have to establish a vigil mechanism to safeguard interests directors and employees.

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