Related Party Voting explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Read literally, the proviso would have silenced people with no connection at all to the transaction being approved.
The related party voting clarification
The MCA vide General Circular No. 30/2014 dated 17 July 2014 has clarified that related party referred to in the second proviso has to be construed with reference to the contract or arrangement for which the said ordinary resolution is being passed. Thus, the term related party in the above context refers only to such related party with whom the contract or arrangement is being proposed and for which the said ordinary resolution is being passed.
The second proviso says no member who is a related party may vote on the ordinary resolution approving a contract or arrangement. "Related party" is defined in section 2(76), and the definition is wide — directors, key managerial personnel and their relatives, firms in which a director is a partner, private companies in which a director is a member or director, holding, subsidiary and associate companies, and more.
Read literally, every member who falls anywhere within that definition would have been barred from voting on every section 188 resolution.
Work through what that means. The company proposes a contract with Director A's firm. Director B, a member with no connection to the contract, is a related party of the company by virtue of being a director. Under the literal reading, B cannot vote — even though B is precisely the kind of person whose independent judgement the resolution was designed to capture. The same would exclude the holding company, an associate company, and every relative of every director, on a transaction none of them had anything to do with.
The proviso would have removed from the vote the very people best placed to scrutinise the transaction, leaving it to members with the least knowledge of the company.
Circular No. 30/2014 corrects the reading by tying the term to the transaction: construed with reference to the contract or arrangement for which the said ordinary resolution is being passed. Only the counterparty abstains. Everyone else votes, including other related parties of the company.
This is what the proviso was always for. A person cannot approve their own contract with the company; a person can vote on somebody else's.
The FAQ then records a proposal in the Companies (Amendment) Bill, 2016 to relax the restriction for a public company where 90% or more members, in number, are relatives or promoters of related parties. That proposal was enacted by the Companies (Amendment) Act, 2017 — it addresses the closely held public company, where the same paralysis arises as in a private company. Confirm the current text of the proviso before applying it.
Related party voting: who may vote
| Member | May vote on the resolution? |
|---|---|
| The counterparty to the contract being approved | No |
| Another related party of the company, unconnected to the contract | Yes |
| Any other member | Yes |
| Interested member of a private company | Yes, per the June 2015 notification |
| Public company where 90%+ of members are relatives or promoters of related parties | Per the amended proviso — verify the current text |
Practical steps
- Identify the counterparty to the specific contract before the meeting.
- Exclude only that member from the vote on that resolution.
- Put each related party contract as a separate resolution, since the excluded member differs by contract.
- Record in the minutes who abstained and on which item.
- Check the current form of the proviso, which has been amended.
Common mistakes
- Excluding every related party of the company from related party voting on every resolution.
- Bundling several related party contracts into one resolution, making the exclusion unworkable.
- Applying the pre-2017 form of the proviso to a closely held public company.
- Failing to minute which member abstained and why.