kindly go through the article appeared in money life .
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MCA's latest order burdens private limited companies with even more stringent compliance, in case of related party transactions
The Ministry of Corporate Affairs (MCA) is leaving no stone unturned to make matters pertaining to related party and transactions clear. But is it succeeding? On 24 July 2014, the MCA, vide its Companies (Removal of Difficulties) Sixth Order, 2014 (Present Order), amended clause (iv) of Section 2(76) of Companies Act, 2013 (Act of 2013). The Present Order is most likely to create outcry from companies.
It seems that the Ministry is determined to issue weekly clarifications regarding related parties. MCA first issued Companies (Removal of Difficulties) Fifth Order, 2014, dated 9 July 2014 , amending clause (v) of Section 2(76) of the Act of 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 17 July 2014. The MCA further amended the definition of a related party by amending Companies (Specification of definition details) Rules, 2014 vide notification dated 17 July 2014, which came into force from the date of its publication in the official gazette.
Section 2 (76) (iv) of the Act of 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 the intent to expand the purview of related parties, while dealing with private companies. Earlier Section 297 of Companies Act, 1956 (old Act 1956) restricted the scope of related parties to a private company, of which the director is a member or director. However, under the new Act of 2013 there has been an inclusion of 'manager appointed' in such private company and now, vide Ministry's present order, relative of a director or manager of a private company where such relative is a member or director has also been added.
The MCA had issued a draft notification on 24 June 2014, on the in-applicability/ partial/ modified applicability of certain provisions of the Act of 2013 to private companies, in exercise of powers under section 462 of the Act 2013. Public comments were invited on the same by 1 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 the Rajya Sabha office has a slight modification in the terms of applicability of Section 188. The entire exemption from applicability of Section 188 was replaced with exemption only from applicability of the second proviso of Section 188 (1) of the Act of 2013. This means that if the related party is a member of the Company, then he shall not be dis-entitled from voting on such resolutions at the general meeting.
The MCA, without realizing the extent of compliance required in case of related party transactions 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 the Board. Further, if such a 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!
(Debolina Banerjee is an associate at Vinod Kothari & Company)
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Company Secretary
Chennai
93810 11200
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