A Related Party is a person or entity that is related to the entity that is preparing its financial statements. Person referred here, can be any legal person such as individual, company, firm, LLP, Non-Profit Organization, body corporate etc.
Section 2(76): Related party to a company, means
- a director or his relative
- key managerial personnel or his relative
- a firm, in which a director, manager or his relative is a partner
- a private company in which a director or manager or his relative is a member or director
- a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital
- 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
- any person on whose advice, directions or instructions a director or manager is accustomed to act.
The appointment of any such related party to any office or place of profit in the company, its subsidiary company or associate company shall be subject to the prior approval of its Board and members by a resolution passed to this effect.
RELEVANT SECTIONS AND RULES
- Section 149, 152, 164, 188 of Companies Act, 2013
- Rule 8, 14 of Companies (Appointment and Qualification of Directors) Rules, 2014
- Rule 15 of Companies (Meetings of Board and its Powers) Rules,2014
- The Board of Directors shall pass a resolution in a duly convened Board Meeting for appointment of a Related Party 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 subject to the prior approval of the company by a resolution. (Section 152, 188(1) of Companies Act, 2013 and Rule 15 of the Companies (Meeting of Board and its Powers) Rules, 2014)
- The members/ shareholders shall pass a resolution in a duly convened General Meeting for appointment of a Related Party to any office or place of profit in the company. (Rule 15(2) of Companies (Meetings of Board and its Powers) Rules, 2014)
- Authorization by the Articles of Association (AoA) of the company for appointing a Related Party to any office or place of profit in the company.
- Total number of directors in the company after appointment of Related Party as a Director, shall not exceed the maximum limit specified in the Act. (Section 149(1))
- The respective person or entity i.e., Related Party who will be appointed as a Director shall hold an active DIN. (Section 152(3))
- The respective person or entity i.e., Related Party shall furnish their DIN and declaration that they are not disqualified from becoming a director under the provisions of this Act. (Section 164)
- The appointment of Related Party Director and justification for entering into such contract or arrangement shall be referred to in the Board’s report to the shareholders. (Section 188(2))
Note: Where any contract is entered without obtaining the consent of board or resolution in the general meeting than it shall be ratified by board or by shareholders with in three months from date of contract otherwise contract will be voidable at the option of board or shareholders as the case may be. (Section 188(3))
FOLLOWING PROCEDURE IS TO BE FOLLOWED
- Check the Articles of Association of the Company
Refer the Articles of Association (AOA), if not authorized by the Articles of Association (AOA) then it needs to be altered for the appointment of Related Party as a Director. [Refer Procedure for Alteration of Articles]
- Obtain Written Consent, Declaration and Form MBP-1 from the Proposed Director:
The company shall obtain the following from Related Party who is proposed to be appointed as a director:
- Form DIR-8 (Intimation by Director about his disqualification)
- Declaration to the effect that the conditions specified in the relevant provisions of the Act, for appointment as a director is duly fulfilled by him/ her
- Disclosure of interest in Form MBP-1.
- Obtaining DIN and Digital Signature Certificate [Section 153]
Refer Obtaining Directors Identification Number (DIN) for detailed procedure.
- If the person does not have Digital Signature, he shall obtain Digital Signature from Certifying Authority in India.
- Next step is to obtain Director’s Identification Number (DIN).
- Obtain Security Clearance from Ministry of Home Affairs:
- Meeting of Nomination and Remuneration Committee
Where a Company is required to constitute a Nomination and Remuneration Committee under section 178, shall receive a recommendation from the committee for the appointment of Related party as a Director by the Board of Directors of the Company.
Refer the Procedure for Conducting Nomination and Remuneration Committee Meeting for detailed procedure.
- Convene a Meeting of Board of Directors [As per section 173 & Secretarial Standard-1 (SS-1)]
A Board resolution shall be passed in a duly convened board meeting approving the appointment of such Related Party as a director in the company.
Refer to the Procedure for Conducting Board Meeting of the Directors for detailed procedure.
- Convene Extra Ordinary General Meeting [Section 96, 100 and Secretarial Standard (SS-2)]:
The company shall convene a General Meeting of its Members to pass resolution for approving the appointment of Related Party as a director on the board.
Refer Procedure for Conducting Extraordinary General Meeting (EGM) for a detailed procedure.
Note: The appointment of such related party in the position of Director can also be made in the Annual General Meeting (AGM).
- Filing of Return of Appointment of Director with the ROC
After the Board meeting, a Return of Appointment of such Directorship in Form DIR-12 is required to be filed with the Registrar within 30 days of such appointment together with the copy of Board Resolution and the consent and declaration furnished by such Related Party to act in such capacity. In case of Companies other than OPC and Small Company, the return is also to be certified by a Company Secretary/Chartered Accountant/Cost Accountant. Following documents shall be appended with Form DIR-12:
- Certified True Copy of the Board Resolution passed
- Certified True Copy of the Special Resolution passed
- Disclosure of Interest furnished by Director in Form MBP-1
- DIR-8 Declaration by Director
- Letter of Appointment.
The Ministry of Corporate Affairs had notified Companies (Appointment and Qualification of Directors) Amendment Rules, 2023 (dated: 20th January, 2023) by which in Form DIR-12:
- Form DIR-2 which appended as an attachment is not required to be separately attached to the said form, instead Form DIR-12 is to be certified by the director himself/ herself.
- The director is now required to inform about the disqualifications as specified under sub-section (1) and (2) of Section 164 of the Act in Form DIR-8 as under:
- Section 164(1): A person shall not be eligible for appointment as a director of a company, if
- he is of unsound mind and stands so declared by a competent court
- he is an undischarged insolvent
- he has applied to be adjudicated as an insolvent and his application is pending
- he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence.
- Section 164(2): No person who is or has been a director of a company which
- has not filed financial statements or annual returns for any continuous period of three financial years
- has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more.
- File Form DIR-9 with the Registrar [Rule 14 of Companies (Appointment and Qualification of Directors) Rules, 2014]:
The company shall file Form DIR-9 with the Registrar in the following scenarios:
- upon receipt of the information in Form DIR-8, the company shall file Form DIR-9 within thirty days of such receipts
- Whenever a company fails to file the financial statements or annual returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures, as specified in sub-section (2) of section 164, Form DIR-9 is to be filed with the Registrar specifying therein the names and addresses of all the directors of the company during such relevant financial years.
- Making Necessary entries in Register of Directors:
The company shall make necessary entries in the Register of Director and Key Managerial Personals and registers of contract and arrangements in which Directors are interested in Form MBP-4.
- File Necessary Amendment Application under following Acts:
- Goods and Services Act
- Shops & Establishment Act
- Factories Act
- Foreign Exchange Management Act
- Inter-State Migrant Workmen Act
- Private Security Agency Act
- Other Labour Laws
- Industry Specific Laws.
All the entities entering into contracts or arrangements with any Related Party shall ensure making requisite disclosures to this effect in their annual financial statements and all other documents as required in terms of the applicable laws. Indian Accounting Standard (Ind AS) 24 provides detailed provisions in respect of disclosures required to made pertaining to related party relationships, transactions and outstanding balances including commitments in the consolidated and separate financial statements of a parent entity, venturer or investor.