Govt eases related party norms for corporates

Govt eases related party norms for corporates

The ministry of corporate affairs has clarified that companies need not bother about whether a shareholder is a related party.

Providing a huge relief to corporates, the government on Thursday clarified the scope and applicability of provisions for related party transactions in Companies Act.

The ministry of corporate affairs has clarified that companies need not bother about whether a shareholder is a related party when deciding on voting for mergers or de-mergers. Under the new Act, the ministry had put stringent conditions to ensure such connections like being a relative or being the chief of a holding company did not affect such decisions.

The ministry’s new rules say that disallowing related party members from voting in special resolution will not apply in cases where the member is not related to the particular contract or arrangement on which the said resolution is being passed.

Taking example of a holding company and subsidiary company, which are related parties, “suppose, the subsidiary enters into a contract with a third party (not with its holding company) for which special resolution of shareholders is needed. In this case, although the holding company is a related party to the subsidiary company but still it will be allowed to vote on that special resolution since the contract by the subsidiary company is with a third party and not with its holding company,” Lalit Kumar, partner, J Sagar Associates, said.


As per second proviso to Section (1) of the 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.
Further, in case of corporate restructuring, the ministry has said 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.”

“Moving from an era where promoters had full say in undertaking related party transactions, the Companies Act 2013 had tilted the scale to the other extreme, by shifting significant powers to the minority shareholders. Today’s clarifications have  brought some balance,” Sai Venkateshwaran, head of accounting advisory services, KPMG, said.

He added that the clarification to exclude amalgamations, demergers, and other such arrangements from the scope of related party transactions is welcome, as all such transactions are already subject to specific approvals before they are effective.