Section 188 of Companies Act, 2013 & AS-18

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Section 188 of Companies Act, 2013 & AS-18

The companies act, 2013 and Accounting Standard-18 (AS-18) are the regulatory structure in the corporate governance and financial reporting. Each one of them is addressing distinct features of corporate conduct. The section 188 of the Companies Act, 2013 is a provision for related party transactions, and helping in the legal landscape for corporate dealings. Meanwhile, the AS-18 is launched by the Institute of Chartered Accountants of India, which aim is to disclosure aspects of related party relationships in financial statements. In the present article, we are doing a comparative analysis of section 188 of Companies Act, 2013 and AS-18.

Table of Content

Brief Note about the Related Party 

Section 188 of the Companies Act, 2013 applicability and related to a related party means to individuals and businesses are closely associated with a company, either it is an ownership, management and importance influence. The recognition and understanding of related parties are vital for maintain integrity and transparency in the transaction of business. This kind of relationship may influence decision making procedure and essentially effect the financial health of a company. 

On the other hand, AS-18 is issued by the Institute of Chartered Accounts of India (ICAI), which an aim is on disclosure aspects of related party relationships and transactions in financial statements.  

Significance features of related parties are:

  • Directors and key managerial personnels are often consider as related parties;
  • Companies are under common control;
  • The close family members are also chosen as the related parties;
  • Associates and joint ventures.

Overview on the Related Party Transactions (RPT)

Related Party Transactions is RPT, which is significant for the corporate landscape, interactions between a company, and encompassing several financial dealings. These transactions are not inherently irrelevant, need scrutiny as per the potential for conflicts of interest and impact that they can have on corporate governance and financial reporting. 

Related parties are bodies or individuals, which have the capability to influence or be influenced by a company in its decision-making processes. This may include the close family members; key management personnel; and entities are under common control. 

There are certain types of related party transactions:

  • Sales and purchases: It means selling and buying of products, assets, or services between the company and its related parties.
  • Employment Agreement: Benefits, compensation or other arrangements with key management personnel or their close members of family.
  • Financial transactions: Advances, loans, guarantees, or other financial assistance given to or received from related parties.
  • Leasing Arrangements: Rental agreements for equipment or property involving related parties.

As per the provision of section 188 of the companies act, 2013, provides the rules and process governing related party transactions, such as disclosure needs and approval mechanisms. On the other side, the AS-18 issued by accounting standard boards or regulatory bodies, gives guidance on the accounting treatment and disclosure of related party transactions in financial statements.

Significance of Related Party Transactions (RTP)

There is certain significance of related party transactions for companies:

  • Related parties are generally interested in the guarantees of companies, in which the transactions are happened efficiently.
  • As there is existing relationship, the parties are having their confidence and trust about the transactions is improved.
  • Its outcome is to fruitfully negotiates over the terms and conditions of an agreement and contract, which reduces the costs.

Comparative study about the Section 188 of Companies Act, 2013 and AS-18

The comparative analysis of the section 188 of Companies Act, 2013 and AS-18 are:

S. No. Particulars Section 188 of the Companies Act, 2013 AS-18
Mandatory disclosure is needed to be created by the Companies Each contract or arrangement entered by the company should be mentioned in the report of board and shown to shareholders with explanation for entering into some kind of contract and arrangements. This provision is mentioned under section 188 of the Companies Act, 2013. As per AS-18, any transactions occurred between the related parties, parties name and nature of their relationship must be mentioned in the company’s financial statements.

In case, there is any transactions going through between the related parties as the time of existing relation then the reporting company must disclose the following details:

  1. Name of the transacting related party;
  2. In detail information about transaction’s nature;
  3. Description about the party’s relationship;
  4. Transactions volume, either it is a relevant proportion or an amount;
  5. Other elements of the related party transactions, which are necessary to understand the financial statements;
  6. Mentioned amounts written back and written off during period in relation to debts due from or to related parties;
  7. The amounts giving to related parties on the balance sheet date and provisions for doubtful debts pending from such parties during date. 
In the given cases, the disclosure is not required According to the MCA general Circular No. 30/2014, dated 17th July, 2014, it is mentioned that if transactions increasing out of compromises, amalgamations and arrangements taken place as per under provision of the Companies Act, 2013, then it will not attract the need of Companies Act, 2013.   The company’s financial statements are not consistent as per the accounting standards provided in sub-section (1). Then the company is needed to reveal the deviation from the accounting standards in its financial statements, along with the reasons behind it and their financial impact.

  • In case the regulator, statute, or similar competent authority governing a company may prohibit the company from disclosing specific data that is confidential.
  • No disclosure is needed in the financial statements of state-controlled companies as in relation to party relationships with other state-controlled companies and transactions with such companies;
  • The transactions related to intra-group, there is no requirement for disclosure in the consolidated financial statements.

Discuss penalties for violation of Section 188 of Companies Act, 2013

In case any recover loss happened through the result of the arrangement or contract, the company may take legal action against the director or any other employee who entered into the contract or such arrangements in violation of section 188 of the Companies Act, 2013.

Any company’s employee or director, who violates the terms and conditions of this section by entering into arrangement or contract will be liable to the certain penalties such as:

  • If listed company, a penalty will be charged of Rupees 20 Lakhs; and 
  • In any other company, a penalty will be of Rupees 5 Lakhs.

In the case of Needle Industries Ltd. V. Needle Industries Newey (India) Holding Ltd. (1982), whether it is required to comply and scrutinize with Section 188 of the Companies Act, 2013 for each transaction between related parties. The answer is given from the exemption clause of the sub-section (1) of 188 of the Companies Act, 2013. Except for those transactions, which are not follow an arm’s length agreement, it excludes any transaction, which the company entered into at the ordinary course of business. 

Final Thoughts

In the final thoughts, we just want to add up that the Section 188 of the Companies Act, 2013 and AS-18 provides the different objectives. As the Section 188 of the Companies Act, 2013 is a legal provision to make sure the regulatory compliance about the related party transactions. Meanwhile, the AS-18 is an accounting standard focusing on disclosing the financial statement aspects. Both are playing a significant role in promoting accounting and transparency in corporate dealings. Companies require making sure about the compliances with both sets of requirements for financial reporting and comprehensive governance.

CS Urvashi Jain is an associate member of the Institute of Company Secretaries of India. Her expertise, inter-alia, is in regulatory approvals, licenses, registrations for any organization set up in India. She posse’s good exposure to compliance management system, legal due diligence, drafting and vetting of various legal agreements. She has good command in drafting manuals, blogs, guides, interpretations and providing opinions on the different core areas of companies act, intellectual properties and taxation.

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