Clarification on Applicability on matters relating to Related party Transactions

The Ministry of Corporate Affairs has issued a circular no. 30/2014 dated 17.07.2014 in order to provide clarification with respect to the matters relating to Related Party transactions as specified under section 188 of the Companies Act, 2013.

The provision as laid down in section 188(1) of the Companies Act, 2013 is contained herein below:

The section contemplates that except with the consent of the Board obtained by a resolution at a duly convened Meeting and subject to such conditions as may be prescribed, a company cannot enter into any contract or arrangement with a Related Party with respect to:

a)    Sale, purchase or supply of any goods or materials;

b)    Selling or otherwise disposing of, or buying, property of any kind;

c)    Leasing of property of any kind;

d)    Availing or rendering of any services;

e)    Appointment of any agent for purchase or sale of goods, materials, services or property;

f)     Such related party™s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

g)    Underwriting the subscription of any securities or derivatives thereof, of the company.

Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a special resolution.

Provided further that no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.

According to the interpretation of the second proviso, the stakeholders were facing lots of difficulties :

It is hereby clarified that related party as specified in the second proviso has to be construed with reference only to the contract or arrangement for which the said special resolution is being passed. Thus, the term related party in the above context refers only to such related party as may be a related party in the context of contract or arrangement for which the said special resolution is being passed.

Now, secondly it is clarified that Related Party Transactions to corporate restructuring, amalgamations, arrangements dealt under specific provisions of the Companies Act 1956/2013 will not attract the requirement of section 188 of the Companies Act, 2013.

Further clarification has been made for the difficulties arising out of requirement of fresh approvals for past contracts under section 188 which is hereby clarified that Contracts entered into by the companies, after making necessary compliances under the Companies Act, 1956 which was already in existence before the commencement of the section 188 of the CA 2013, will not require fresh approval under the said section 188 till the expiry of the original terms of such contracts. Thus, if any modification is made on or after 1^st April, 2014 then the same has to be in compliance with the Companies Act, 2013.

The Circular containing the above details can also be accessed below.

Clarification on matters related to Related Party Transactions