Voting rights of directors in related firms defined

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In a move that has implications for promoter-run business groups and multinational companies, the Union government has diluted norms on voting rights of directors in ‘related party transactions’.

Following representations made by industry bodies and top business houses, the ministry of corporate affairs said that only those having direct interest in ‘related party transactions’ were disallowed from voting on special resolutions.

Related party transactions are those between two companies, group companies or foreign corporates with their subsidiaries, service providers where individuals or some stakeholders have ‘specific interest’ in a financial or business transaction between them.

For instance, if Suzuki Motors sells cars to its joint venture listed company, Maruti Suzuki, it is treated as a ‘related party transaction’.

No Suzuki representative can cast a vote on the transaction at Maruti Suzuki's board meeting.

Hitherto, all majority stakeholders were disallowed from exercising voting rights, leaving its minority equity holders to take a call.

In case a company is availing services of another firm owned by one independent director and the transaction requires shareholder approval, even majority promoter shareholders would not have been able to vote although he or she is not interested in the transaction.

As per the latest government clarification, all shareholders other than the related party independent director would be allowed to vote on the transaction.

The latest circular has also exempt mergers, amalgamations and business restructuring proposals even under a single entity from the purview of ‘related party transactions’ provisions under Section 188 of the Companies Act, 2013.

As these transactions will have to be approved by shareholders, creditors and courts, they have been exempt from ‘related party transactions’ ambit.

“MCA clarifications on related party transactions bring a lot of relief to corporates in India. Moving from an era where promoters had full say in undertaking related party transactions, the Companies Act 2013 had tilted the scale to the other extreme, by shifting significant powers to the minority shareholders. However, today’s clarifications have brought balance to this scale that had swung from one extreme to another,” said Sai Venkateshwaran, partner and head of accounting services at independent consultancy KPMG.

Venkateshwaran added, “The latest circular also provides relief by grand-fathering all existing transactions that were previously approved under provisions of the earlier act. This has provided relief to companies that were uncertain about the validity of transactions continuing from the past.”

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