Government Provides More Clarity on 'Related Party' Norms

The government has said relatives of directors or managers at private firms would be considered as related party under the new companies law.

The Companies Act, 2013, has stringent provisions for related party transactions under Section 188.

"... In section 2 of the Companies Act, 2013, in clause (76), in sub-clause (iv), after the word 'manager', the word 'or his relative' shall be inserted," the Corporate Affairs Ministry said in an order dated July 24.

Prior to this, sub-clause (iv) read, "a private company in which a director or manager is a member or director".

The Ministry has made the change through Companies (Removal of Difficulties) Sixth Order, 2014.

"The amendment enhances the definition of related party to include private companies in which relatives of directors or managers are members or directors," Sudhir Soni, partner in a member firm of Ernst & Young Global said.

According to Mr Soni, the change was required as this is an important class of related parties with whom transactions should be within the approval mechanism of Section 188.

Earlier this month, the ministry had eased related party norms, exempting corporate restructuring activities, including amalgamations, will be excluded from the ambit of related party transactions.

Only 'interested related parties' with regard to a particular transaction would be precluded from voting on the same deal.

As per second proviso to Section (1) of Section 188, a member of the company, who is a related party, is not allowed to vote on a special resolution to approve a contract or arrangement.

"It is clarified that 'related party' referred to in the second proviso has to be construed with reference only to the contract or arrangement for which the said special resolution is passed," the Corporate Affairs Ministry had said in a circular.

Under Section 188, 'all related parties' in a company would have been precluded from voting any transaction with 'any related party', even if they weren't a party to that specific transaction.

"It is clarified that transactions arising out of Compromises, Arrangements and Amalgamations dealt with under specific provisions of the Companies Act, 1956/Companies Act, 2013, will not attract the requirements of section 188 of the Companies Act, 2013," the ministry had said.