WILL THE MCA ISSUE FURTHER CLARIFICATION OR REMOVAL OF DOUBT ON SECTION 2(76) (IV) OF THE 2013 ACT AS REGARDS TO RELATED PARTY TRANSACTIONS AS IT CREATES AMBIGUITY AND ACT AS AN ANOMALY?

WILL THE MCA ISSUE FURTHER CLARIFICATION OR REMOVAL OF DOUBT  ON SECTION 2(76) (IV) OF THE 2013 ACT AS REGARDS TO RELATED PARTY TRANSACTIONS AS IT CREATES AMBIGUITY AND ACT AS AN ANOMALY?

The Ministry of Corporate Affairs ("MCA") notified on June 5, 2015 that certain provisions of the Companies Act, 2013 ("2013 Act") shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification (the "Notification").

The above MCA notification dated exempts private limited companies from the following provisions of the Companies Act as regards to related party transactions (RTP).

Exemption is given to Section 2(76) (viii) of CA 2013. 2(76) “related party”, with reference to a company, means—

(viii) Any company which is—

(a) A holding, subsidiary or an associate company of such company; or

(b) A subsidiary of a holding company to which it is also a subsidiary;

Exemption is given private limited companies to section 188 (1) which states 

188. Related party transactions

(1) Except with the consent of the Board of Directors given by a resolution at a

meeting of the Board and subject to such conditions as may be prescribed, no company shall

enter into any contract or arrangement with a related party with respect to—

(a) Sale, purchase or supply of any goods or materials;

(b) Selling or otherwise disposing of, or buying, property of any kind;

(c) Leasing of property of any kind;

(d) Availing or rendering of any services;

(e) Appointment of any agent for purchase or sale of goods, materials, services

or property;

(f) Such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and

Due to the above exemptions of section 2(76)(viii) and Section 188 (1) of CA 2013, now, private limited companies shall not be required to obtain the approval of the board or the shareholders, for the purpose of entering into a contract/ arrangement with a Group Company.

The above notification states that, in relation to a private company, the entities specified in Section 2(76)(viii) of the 2013 Act (i.e., the Group Companies) would not be considered related parties for the purposes of Section 188.

 Further, this exemption will permit members of the company interested in the contract/ arrangement to vote on the resolution for authorizing the related party transaction.

Since the Notification does not exempt private companies from the applicability of Section 2(76) (iv) of the 2013 Act, if the directors or members in one private company are directors or members in another private company, a transaction between the two such companies would be considered as a related party transaction despite the exemption granted from Section 2(76) (viii) as no exemption is granted for the applicability of Section 2(76) (iv) of the 2013 Act to private limited companies

This is clearly an anomaly. While exempting private companies from the related party transactions but not providing exemption to section 2(76) (iv) of the 2013 Act results in ambiguity as the directors or members in one private company are directors or members in another private company, a transaction between the two such companies would be considered as a related party transaction despite the exemption granted from Section 2(76) (viii).

Will the MCA and Government come forward to issue clarification or removal of doubt about the exemption of section 2(76) (iv) of the 2013 Act for the purpose of related party transactions as this will remove the confusion and offers more clarity to the business community .