What is Section 188 of Companies Act 2013?

Section 188 of COMPANIES ACT 2013 states all the details of sales, supply or purchase of related party transactions. It is applicable to both private as well as public sector. It also provides all related approvals as well as disclosures. It includes following important identifications for Related Party transactions:

• Any kind of sale, purchase or supply of material
• Disposing or selling of any kind of property
• Any kind of property lease
• Services availed or rendered
• Appointment of related party to any office or profits in Company
• Companies security undertakings or usage of derivatives
• Sale of goods or any agent’s appointment.

Under Section 188(2) of Companies Act 2013, every contract agreed in accordance to Section 188(1) must be mentioned in annual board report along with proper justification.

In few scenarios special approvals are also needed along with general approvals. Such Cases includes:

• Company having paid up shares of ten crores or more.
• Appointment in place of profit in the company or to any office, associate or subsidiary company at a monthly remuneration exceeding Rs. 2.5 Lakhs
• Remuneration cost for underwriting the subscription of any derivatives or securities exceeding 1% of the net worth
• If sales or purchase via self or agent exceeds 25% of annual turnover.
• Sale/purchase/supply of any goods/materials directly or indirectly through an agent, exceeding 10% of the turnover of company or Rs. 100 crore/-, whichever is lower
• Selling/disposing of/buying property of any kind, directly or indirectly or through an agent exceeding 10% of net worth of the company or Rs. 100 crore/-, whichever is lower
• Leasing any property via self or agent exceeding 10% of its turnover or Rs 100 crore/-, whichever is lower
• Availing/rendering of any services via self or agent exceeding 10% of its turnover or 50 crore/-, whichever is lower.

Penalty for Contravention under Section 188

For Directors or any other employee in default:

Listed Company

• Imprisonment – Maximum 1 Year months;

and/or

• Fine – Minimum Rs. 25,000/- and Maximum Rs. 5 Lakhs.

Other than Listed Company

• Fine – Minimum Rs. 25,000/- and Maximum Rs. 5 Lakhs.

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