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Who qualifies as a Key Managerial Personnel (KMP) ?

The CEO, Managing Director, Manager, company secretary, a whole-time director, the CFO and any other person who may be prescribed by the Central Government will qualify as the KMP. As of 19 August 2014, the Central Government has not prescribed any other designation of persons as a related party.
Under the 1956 Act, related party transactions entered into by companies which have more than Rs. 1 crore paid up capital (under the 1956 Act) were only permitted if Central Government approval was taken. The new Companies Act has introduced certain modifications to this –

1.The requirement of taking Central Government approval has been replaced under the 2013 Act with the requirement to obtain a special resolution of the company in a general meeting. Interestingly, even members of the company who qualify as related parties are not allowed to vote under the 2013 Act – under the 1956 Act, voting restrictions were not applicable to members but only to directors.

2. A company cannot enter into transaction exceeding prescribed sums (see Rule 15(3) of Companies (Meetings of Board and its Power) Rules, 2014 for more details) except with the prior approval of the company by a special resolution. The limits specified in the provision would be applicable for both individual as well as all transactions taken together during a financial year. No member of the company will be allowed to vote on a special resolution for approving any contract or arrangement entered by the company if such a member is a related party to that particular agreement or arrangement.


Note on paid-up capital: Paid-up capital does not include premium paid on the shares. Therefore, if a company has issued 100,000 shares of INR 10 each at a premium of INR 990 per share, its paid-up capital will be INR 10,00,000, and it will not need Central Government approval for entering into restricted contracts.

Exception:  However, the above restrictions do not apply and no prior approval is required if:

  • Purchase/sale is for cash and at prevailing market prices –the new Companies Act calls this an ‘arms-length transaction’, that is, a transaction that is conducted on the same basis as though the parties are unrelated. However, such arm’s legth transactions may be subjected to approval of the audit committee, if applicable (all listed companies and all public companies having a paid up capital of more than INR 10 crores, or having turnover more than INR 100 crores or loans or borrowings are more than INR 50 crores).
  • Any transaction arising out of restructuring, mergers or acquisition will also not be considered as related party transaction.

The word relative is defined under the Companies Act 2013 to include members of a Hindu Undivided Family (HUF), husband and wife and such other persons as may be prescribed by the government.
The 1956 Act included the following persons within the ambit of relatives:
1. Father
2. Mother (including step-mother)
3. Son (including step-son)
4. Son's wife
5. Daughter (including step-daughter)
6. Father's father
7. Father's mother
8. Mother's mother
9. Mother's father
10 Son's son
11 Son's Son's wife
12 Son's daughter
13 Son's daughter's husband
14 Daughter's husband
15 Daughter's son
16 Daughter's son's wife
17 Daughter's daughter
18 Daughter's daughter's husband
19 Brother (including step-brother)
20 Brother's wife
21 Sister (including step-sister)
22 Sister's husband
iii) Manner of undertaking a related party transaction

As seen above, they are not prohibited but merely regulated under the law to ensure that interest of the shareholders is not compromised due to the possibility of the underlying personal interest of a director.
In practical situations, transactions are common – let’s examine the duties of directors who are interested and see how a company must enter into a related party transaction.
Disclosure of interest: Section 184 of the Companies Act, 2013 / Section 299 of the Companies Act, 1956 imposes duty on directors to disclose their interest in other concerns to the Board of Directors before entering into any contract with the related parties. It covers any contract or arrangement with entities in which director is concerned or interested.

Which entities are captured within this restriction?

  • Corporate bodies of which the director is a promoter, manager, CEO, shareholder or
  • Other bodies (e.g. non-profits, proprietorships, private trusts, LLPs, partnerships) of which the director is an owner, member or partner.
Only exception is where directors of one company taken together have less than 2 % of paid up capital of another company.
Modes of disclosure: Under the Companies Act 1956, a director could give notice annually (for example, listing out the companies in which he owns shares or is a director) or on a case to case basis (i.e. at a board meeting at which a matter in which he is interested is discussed). If the notice was generally given, it was valid for a year (and could be renewed).

This notice was
customarily given in Form 24AA, but the form is not required to be filed with the Registrar of Companies. The general notice for renewal should also be given in the Board Meeting.

As per the Companies Act 2013, this disclosure must be mandatorily made by giving a notice in writing in Form MBP 1, on an annual basis, beginning from the first meeting of the Board from when the director assumes office. Any periodical changes must be made at the next board meeting.

Abstinence from voting
Section 184 of the Companies Act, 2013 / Section 300 of the Companies Act, 1956, prohibits the director from voting when the board resolution is passed relating to any business in which he is interested.

What are the consequences of violation of these requirements? 
Under the Companies Act, 2013, a contract entered into without such disclosure is voidable at the option of the company. Further the director who is culpable of violating the provision can be sentenced to imprisonment of 1 year or fine between INR 50,000 – 100,000.

The director must notice may be specially given when a matter in which a director is interested is raised.

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