Section 188 of the Companies Act 2013 is an important provision that deals with related party transactions. Section 188 of The Companies Act,2013 reads as follows:
Provided further that no member of the company shall vote on such 1 [resolution], to approve any contract or arrangement which may be entered into by the company, if such member is a related party.
Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm‘s length basis.
Section 188 of the Companies Act relates to transactions between a company and its related parties, such as directors, firms, or other companies that have a connection to the company. The law says that such transactions must be conducted fairly, without any conflict of interest, and at arm's length, which means that they should be carried out as if the parties involved were unrelated. Any such transactions must be approved by the company's board or its shareholders, and details of the transaction and its justification must be included in the company's annual report to its shareholders. If a director or other employee enters into a transaction without obtaining the necessary approval, the company may take action to recover any losses incurred as a result. The director or employee involved may also face penalties, including fines or imprisonment, depending on the severity of the violation. It's important to ensure that related party transactions are conducted fairly and transparently to protect the interests of the company and its shareholders.
In essence, this section seeks to ensure that transactions between a company and its related parties are carried out in a transparent and fair manner, with no scope for any conflict of interest. The provision applies to all companies registered under the Companies Act 2013, regardless of their size or nature of business. It defines related parties as individuals or entities that are connected to the company in some way, such as directors, key managerial personnel, holding or subsidiary companies, and their respective directors or key managerial personnel. Under Section 188, any transaction between a company and its related parties that involves a significant amount of money must be approved by the board of directors. In addition, the transaction must also be approved by the shareholders of the company, through a resolution passed at a general meeting. The approval process is designed to ensure that the transaction is in the best interests of the company and its shareholders, and that there is no conflict of interest or undue influence involved. In addition, the board of directors must disclose all relevant details of the transaction to the shareholders, including the nature of the transaction, the identity of the related party, and the terms and conditions of the transaction. This information must be provided in a clear and concise manner.
If the transaction is not approved by the board of directors and the shareholders, or if it is found to be in violation of any of the provisions of Section 188, the company and its directors can be held liable for any losses or damages suffered by the company or its shareholders as a result of the transaction. In addition, the directors may be subject to penalties and fines imposed by the regulatory authorities.
The purpose of Section 188 is to promote transparency and accountability in related party transactions, and to protect the interests of the company and its shareholders. By requiring the approval of both the board of directors and the shareholders, the provision seeks to ensure that related party transactions are conducted in a fair and reasonable manner, with no scope for any conflict of interest or undue influence.
In conclusion, Section 188 of the Companies Act 2013 is an important provision that seeks to ensure that related party transactions are conducted in a transparent and fair manner, with no scope for any conflict of interest. Companies must comply with the provisions of this section by establishing clear and transparent procedures for the approval of related party transactions, and by implementing effective systems of internal controls to monitor and report on these transactions. By doing so, companies can protect the interests of their shareholders.