After the Ministry’s clarification last week on related party transactions the Indian Inc has got some relief from the stringent provisions contained in the related party transactions.
To begin with, a circular issued by the ministry of corporate affairs exempted contracts entered before the commencement of the act from the conditions. Contracts of related parties or persons with significant shareholding with the company were scanned by the government under the old act. The clarification has now cleared the air by providing utmost clarification.
Similarly, under Section 188 of the Companies Act, 2013, all related parties would have been precluded from voting on any transaction with another related party, even if they weren’t a party to that transaction. This proposal was causing a lot of obstacles to companies where all the shareholders were related parties especially in the case of private companies. There were also cases where the shareholders would have been denied voting rights to secure their interests on transactions in which they weren’t a party.
The new companies act also stated that every member of the company who is a related party cannot vote for the special resolution. If all the members in a company are related parties, there would be no shareholder left to vote for the resolution. Several companies, especially the smaller ones, have all members as related parties, putting them in a deadlock. The provision before the clarification had completely shut the doors for related party transactions in such companies. The obstacle has now been removed.
