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M&A deals, de-mergers not to attract related party provision in new company law
July, 22nd 2014

Mergers and acquisitions transactions have been excluded from the ambit of related party transactions (RPT) provision in the new company law. A clarification to this effect has now been issued by the Corporate Affairs Ministry.

This move could bring some cheer to corporates as it brings down the compliance burden for them.

Prior to this, it was unclear whether related party provision (Section 188) in the new company law also applied to transactions arising out of compromises, arrangements, and amalgamations that are dealt with under the specific provisions of the Companies Act 1956. The MCA has clarified that such transactions — compromises, arrangements and amalgamations — will not attract the requirements of Section 188 of the Act.

“They (Corporate Affairs Ministry) have done the right thing, but in a wrong manner. The company law itself should be amended rather than issuing a circular”, Dolphy D Souza, Senior Partner, SR Batliboi & Co told Business Line.

He, however, added that there could be some misuse of this relief. Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India said that the move to exclude amalgamations, demergers and other such arrangements from the scope of related party transactions is welcome.

This is because all such transactions are already subjected to specific approvals from the shareholders and the Court before they are effective. Subjecting them to related party provision (Section 188) would have led to an additional procedural burden, he added.

Lalit Kumar, Partner, J Sagar Associates, a law firm, said there could now be an amalgamation between a holding company and a subsidiary (both related parties) without the transaction getting covered under the related party provision (Section 188) of the new company law.

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