The Court was dealing with the issue of whether the reappointment of the Managing Director was a related party transaction or whether it was protected under arm’s length transaction. One of the very few cases which have tried to give some clarity regarding arm’s length transaction is Madhu Ashok Kapur v. The Courts had met with several occasions to deal with the existing ambiguity but no satisfactory results have come out.Ĭases dealing with Arm’s Length Transactions: Hence, there is a need of clarity regarding the criterion when a transaction despite being related does not cause conflict of interest. However, there is no consistent application of any of abovementioned interpretation. On the other hand, it can also be construed in a more liberal sense, by looking at the intent of the transaction and comparing it with the market conditions rather than stressing on the procedural requirement. It can be interpreted as one forming strict procedural requirement given under Section 188.
Such casus omissusopens the space for different interpretations. There is a serious dearth of the interpretation to the meaning of arm’s length transactions and there seems to be a contradiction in the provisions when they use related party and lack of conflict of interest at the same time. A very little effort has been put to provide clarity as to what exactly arm’s length transactions mean. Īrm’s Length Transaction: An Unsolved Ambiguous Concept.Īrm’s length transactions are those which are conducted between two related parties as if they were unrelated, so that there is no conflict of interest. Secondly, transactions which are entered on an arm’s length basis. Firstly, transactions where prior consent from the Board of Directors have been taken and the procedural requirement has been fulfilled. It is pertinent to note that not all related party transactions are prohibited per se. Such transactions diminish the transparency and disclosures norms in the company and are against the spirit and objectives of the Companies Act.Įxceptions to the related party transactions: More often than not, the related party transactions are considered to be influenced by ulterior motives of profiting the persons who are involved in such transactions. Hence, it is very much clear that the rationale behind having a provision like Section 188 is to prevent any conflict of interest in the functioning of the company. Hence, it is important to examine whether there exists a conflict between the personal interests and the duty of a director. The director of a company has a fiduciary relationship with the company. Among these, the transactions related to the appointment of related party to an office of profit has been always the most contentious and has raised several legal and practical issues with regard to the transparency in the company. Section 188(1) of the Act specifies seven types of transactions which require prior approval of the Board of Directors. Section 188 of the Act bars the related party transactions except when such transaction is made after taking consent from the Board of Directors or when the transaction is an arm’s length transaction. A related party means any person who is relative of the director or the key managerial personnel in a company. The authors have tried to highlight the existing paradox and vagueness in the law related to related party transaction with the help of various judicial precedents.īefore understanding related party transactions, we must know who is a related party.
However, the concept of related party transactions is still shrouded under ambiguity and nebulousness.
However, with the increasing challenges in the field of corporate affairs, related party has been specifically dealt under Section 188 of the Act. In the previous Act of 1956, this concept was not dealt specifically. One such important concept which requires more importance is related party transactions. Keeping the abovementioned view in mind, the Companies Act, 2013 was enacted to ensure reliability and confidence in the corporate world. With the advent of globalization and boom in India’s economy, as ease of doing business has escalated to a great rank, it is very much imperative to have an efficient regime governing the corporate affairs. The authors are Second and First-year students respectively, of NLU Jodhpur.
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