Clarification on ‘Clause V’ of the Related Party under CA 2013

The Ministry of Corporate Affairs has issued Companies (Removal of Difficulties) Fifth Order, 2014 dated 09.07.2014 with respect to clarification on Clause V in the definition of Related Party Transactions in which the word ‘or’ shall be substituted with ‘and’ as the stakeholders were facing a lot obstacles in Clause V contained in the definition.

The provision before the amendment was as follows:

‘Related Party’ with reference to a company, means –

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager is a member or director;

(v) a public company in which a director or manager is a director ‘or’ holds along with its relatives, more than two percent of its paid-up share capital;

(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing contained in clause (vi) and (vii) shall apply to the advice, directions or instructions given a in a professional capacity;

(viii) any company which is-

(A) a holding, subsidiary or an associate company of such company; or

(B) a subsidiary of holding company to which it is also a subsidiary;

(ix) such other person as may be prescribed.

Interpretation of the old provision (before amendment): The provision explains the related parties with reference to a company means the any of the following contained in Clause (i) to (ix) shall be considered as a related party, but the clause V of the definition which says that a public company in which the director or manager is a director ‘or’ holds along with its relatives more than two percent of its paid-up capital defeated the true spirit of the law because of which the difficulties have arisen regarding the compliance to be made with this provision.

Now, when the MCA issued the Companies (Removal of Difficulties) Fifth Order, 2014 the new clause V is hereby amended as follows:

Clause (v) amended: A public company in which a director or manager is a director ‘and’ holds along with its relatives, more than two percent of its paid-up share capital;

Interpretation of the new provision (after amendment): After taking into consideration the implication of the order, the word ‘or’ shall be substituted with ‘and’ and thereby making the provision more clear and simplified in the true letter and spirit of the law and further clarifying the intention of the law. 

The Companies (Removal of Difficulties) Fifth Order, 2014 containing the above details can also be accessed at the link given below:

Companies (Removal of Difficulties) Fifth Order, 2014