Section 134(3)(h) of the Companies Act, 2013 (“the Act”) requires the board's report to include the particulars of contracts or arrangements with related parties referred to in Section 188(1) in the prescribed form. The disclosure is made in Form AOC-2, and it is a key element of the related party transaction regime.
The Contents of Form AOC-2
Form AOC-2 requires the company to disclose the name of the related party, the nature of the relationship, the nature, duration, and salient terms of the contract, the justification for entering into the contract, and the amount involved. The form must be signed by the company secretary, or by a director where there is no company secretary.
The Interface with Section 188
Section 188 governs the transactions that require the approval of the board or the shareholders. The transactions that are not at arm's length or that exceed the prescribed thresholds require the prior approval of the shareholders by an ordinary resolution. The board's report must disclose the transactions that were entered into during the year, and it must explain why the transactions were in the interest of the company.
The LODR Overlay
A listed company must also comply with Regulation 23 of the SEBI (LODR) Regulations, 2015. The regulation requires the company to obtain the approval of the audit committee and, where the transaction is material, the approval of the shareholders. The board's report must disclose the related party transactions in accordance with the LODR, and the company must maintain a policy on the materiality of the transactions.
The Consequences of Non-Disclosure
The failure to disclose a related party transaction in the board's report is an offence. The company and its officers are liable to penalty, and the auditor must report the non-compliance. The NCLT can also set aside a transaction that was entered into without the required disclosure or approval.
Call to Action
Anuj Desai & Associates advises companies on the related party transaction disclosure—from the identification of the related parties and the AOC-2 preparation to the audit committee and shareholder approvals. If your company has entered into related party transactions, we can help you ensure that the disclosure is complete.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
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