Making it easier for companies, the government today said that corporate restructuring activities, including amalgamations, will be excluded from the ambit of related party transactions.
Further, only 'interested related parties' with regard to a particular transaction would be precluded from voting on the same deal.
There are strict norms for related party transactions under Section 188 of the new Companies Act, which is being implemented by the Corporate Affairs Ministry.
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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 said in a circular.
Under Section 188, 'all related parties' in a company would have been precluded from voting an 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 said.
Besides, the Ministry said that contracts -- entered into by companies and already in effect before the commencement of Section 188 -- would not require approval under this provision.
This exemption would be applicable till the expiry of the original term of such contracts.
"Thus, if any modification in such contract is made on or after April 1, 2014, the requirements under Section 188 will have to be complied with," the circular said.
According to the Ministry, the clarifications have been issued after receiving representations from stakeholders.
Leading consultancy KPMG in India's Partner and Head of Accounting Advisory Services Sai Venkateshwaran said the clarifications "brings a lot of relief to corporates in India".
"The clarification to exclude amalgamations, demergers, and other such arrangements from the scope of related party transactions is also welcome, as all such transactions are already subject to specific approvals from shareholders and the court before they are effective, and subjecting it to approvals under section 188 would have led to an additional procedural burden," he said.
