The Government has issued a Circular on 17th July, 2014 on matters relating to related party transactions under the Companies Act, 2013 (Act) and rules made thereunder. The Circular, inter-alia, clarifies that the term ‘related party’ appearing in the second proviso to section 188(1) of the Companies Act, 2013 refers only to such related parties as may be related party in the context of the contract or arrangement for which the relevant special resolution is being passed. It has also been clarified that contracts entered into by companies, after complying with section 297 of the Companies Act, 1956, before commencement of section 188 of the Companies Act, 2013 will not require fresh approval under the latter provision till the expiry of original term of such contracts. The Circular also clarifies that transactions arising out of compromise, arrangements and amalgamations dealt with under specific provisions of the Companies Act, 1956 or Companies Act, 2013 would not attract the provisions of section 188 of the Companies Act, 2013.

This information was given by Smt. Nirmala Sitharaman, MoS in the Ministry of Corporate Affairs in written reply to a question in the Lok Sabha today.

Related party transactions scope limited to parties tied to the specific contract; prior approved contracts and scheme transactions excluded. The circular confines related party for the second proviso to section 188(1) to parties related in the context of the specific contract or arrangement for which a special resolution is passed. It further provides that contracts previously approved under the earlier statutory regime will not require fresh approval until their original term expires, and that transactions arising from statutory compromise, arrangements or amalgamations do not attract the section 188 provisions.