Exemtion to Private Companies with respect to Related Party Transactions Under Section 188 of Companies Act 2013
Definition of “Related Party”
- Sec. 2(76)(viii) provides that a “related party” with reference to a company means-
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;”
- Section 2(76) (viii) shall not apply to a Private Company with respect to Sec.188
With respect to Section 188, a private company shall not be deemed to be a related party of:
a) its holding, subsidiary or an associate company;
b) a subsidiary of a holding company to which the private company is also a subsidiary [subsidiaries of a common parent].
Any contract or arrangement by a private company with:
a) its holding, subsidiary or an associate company; or
b) a subsidiary of a holding company to which the private company is also a subsidiary shall not be treated as a “related party transaction” and will not require approval u/s 188
The second proviso to Section 188(1) which provides as under shall not apply to a private company:
One of the special features of general meeting approval in case of RPTs is that related parties are not allowed to vote on such a resolution. This provision shall not apply in case of private companies. If a private company enters into any contract or arrangement with a related party requiring prior approval of the company, the related parties are now allowed to vote on such a resolution.
Most of the contracts or arrangements by a private company with its other related parties like its directors, a firm in which its director is a partner, a private company in which its director is a member or director will still require either consent of the Board or a resolution of the general body depending upon the threshold of the transaction.
But related parties will be allowed to vote on such resolutions
MCA may soon amend Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 regarding contract or arrangement with a related party.