CS Vinita Nair
The Ministry is leaving no stone unturned to leave matters pertaining to related party and transactions lucid. But is it so is the biggest question. On 24th July, 2014 MCA vide its Companies (Removal of Difficulties) Sixth Order, 2014 (Present Order) amended clause (iv) of Section 2(76) of Companies Act, 2013(Act, 2013). The Present Order is certain to create large amount of outcry among all the companies.
It seems that the Ministry is determined to issue weekly clarifications regarding related parties. 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 ‘and’ with ‘or’. This was followed with clarifications on matters relating to related party transactions vide General Circular no. 30/2014 dated 17th July, 2014. Thereafter, MCA further amended the definition of related party by amending Companies (Specification of definition details) Rules, 2014 vide notification dated 17th July, 2014 which came into force from the date of its publication in the official gazette.
Section 2 (76) (iv) of the Act, 2013 has been amended to insert words ‘or his relative’. The amended rule post amendment will stand as under:
2(76) (iv) Related Party: a private company in which a director or manager or his relative is a member or director;
This is done with an intent to expand the purview of related parties while dealing with private companies. Earlier Section 297 of Companies Act, 1956 (Act, 1956) restricted the scope of related parties to a private company of which the director is a member or director. However, under the Act, 2013 there has been an inclusion of manager appointed in such private company and now vide Ministry’s Present Order relatives of a director or manager of a private company where such relatives is a member or director have also been added.
MCA had issued a draft notification on 24th June, 2014 on the inapplicability/ partial/modified applicability of certain provisions of Act, 2013 to the Private Companies in exercise of powers under section 462 of Act, 2013. Public comments were invited on the same by 1st July, 2014. The same was to be placed before both the houses of parliament. The notification altogether exempted private companies from the applicability of Section 188.
However, the draft notification obtained from Rajya Sabha office has slight modification in terms of applicability of Section 188. The entire exemption from applicability of Section 188 was replaced with exemption only from applicability of second proviso of Section 188 (1) of Act, 2013. This means that if the related party is a member of the Company, then he shall not be disentitled from voting on such resolutions at the general meeting.
MCA without realizing the extent of compliance required in case of related party transaction has simply expanded the scope of definition. This means any company entering into a transaction with a private limited company in which relatives of director or manager is a member or director will be a related party transaction. This means it will require prior approval of the Audit committee, wherever applicable. Further, if the transaction is not in the ordinary course of business and not being done on arms length basis, the same will require approval by Board. Further, if such transaction exceeds the limits specified under Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014, prior approval of shareholders will also be required.
The Present Order will lead to everything but removal of any difficulty!
[The above post is contributed by CS Vinita Nair and Debolina Banerjee at Vinod Kothari & Co. They can be contacted at firstname.lastname@example.org and email@example.com respectively]