CS Vinita Nair

Preamble

Ministry seems determined to make things ‘absolutely clear’ pertaining to related party and transactions entered into with such related parties. In a week’s time, MCA firstly issued Companies (Removal of Difficulties) Fifth Order, 2014 dated 9th July, 2014 amending clause (v) of Section 2(76) of Act, 2013 by replacing ‘or’ with ‘and’. This was followed with clarifications on matters relating to related party transactions vide general circular no. 30/2014 dated 17th July, 2014. Thereafter, MCA has now further amended the definition of related party by amending Companies (Specification of definition details) Rules, 2014 vide notification dated 17th July, 2014 (Present Notification) which shall come into force on the date of their publication in Official Gazette.

Amendment made by means of Present Notification

Rule 3 of Companies (Specification of definition details) Rules, 2014 has been amended to insert words ‘other than independent directors’. The amended rule post amendment will stand as under:

3. Related party – For the purposes of sub-clause (ix) of clause (76) of section 2 of the Act, a director other than an independent director or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party.

While the intent to exclude Independent Directors (IDs) of the holding company is evident in the drafting, it is however, uncertain whether relatives of such IDs of holding company remain excluded from the definition. The term ‘his relative’ relates to the director and Key managerial personnel of the holding company included in the definition. If IDs are excluded in case of directors, relative of such IDs cannot be said to remain included in the definition.

Thus, IDs of holding company and their relatives will not be included in the definition of related party.

However, it is important to note that in case any of the IDs of a holding company which is listed on a recognized stock exchange is appointed on the Board of its material non-listed Indian subsidiary company pursuant to clause 49 of the equity listing agreement, then such ID and his relative will be regarded as a related party pursuant to clause (i) of sub-section 76 of Section 2 of Act, 2013.

[The above post is contributed by CS Vinita Nair at Vinod Kothari & Co. She can be contacted at vinita@vinodkothari.com]

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