Govt tweaks company rules; experts seek clarity

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SME Times News Bureau | 19 Aug, 2014
Welcoming the new norms exempting corporates from need to get shareholders' nod in the case of related party transactions valued lower than Rs.100 crore or 10 percent of net worth, experts say there are still some grey areas which should be clarified.

Simply put, related party transactions are those business transactions between the company and another in which a board member or board members are interested. The ministry of corporate affairs (MCA) Thursday notified the amended rules for Companies (Meetings of Board and its Powers) Rules, 2014.

"These changes are welcome, since the shareholder approval requirements will now apply only to transactions meeting certain transaction thresholds, rather than to all transactions that are not in the ordinary course of business and on an arm's length basis," said Sai Venkateshwaran, partner and head, Accounting Advisory Services, KPMG India.

"While this amendment does not do away with all the practical challenges that corporates are facing, it is still a major step in the right direction," he added.

Under the earlier rules, shareholders' permission in the form of a special resolution was needed in the case of related party transactions for all companies with a paid up capital of Rs.10 crore or more.

As per the new norms, the paid up capital criteria has been scrapped while threshold limits for various transactions for getting shareholders' nod has now been stipulated.

"However, it cannot be gainsaid that these amendments to the aforesaid Rules would make small and medium sized companies smile, while larger companies with high net worth and turnover grin, if not weep," D.Varadarajan, a Supreme Court advocate and an expert in company and insurance laws, told IANS.

"The threshold limits of, say, 10 percent of the turnover of the company or Rs. 100 crore, which ever is lower, for regulation of related party transactions under section 188 of the New Companies Act, 2013, would be woefully low for larger companies with high net worth and turnover, and that they would be compelled now to get the nod of the shareholders by passing a special resolution," he added.

According to Venkateshwaran, the original rules as well as the amended ones are unclear on the shareholder's approval in respect of transactions between two wholly owned subsidiaries of a company.

He said MCA should now consider making the executive directors of the company primarily responsible for approval of related party transaction, rather than the Audit Committee.

Venkateshwaran said transactions that are not at arm's length or in the ordinary course of business or material, are to be brought to the Audit Committee for their additional approval.

On the other hand Varadarajan wondered whether the stipulation for arriving at the threshold limits based on the audited financial statement of the previous financial year is logical or a realistic one, if a company had shown poor results that year.

"Therefore, it would be in the fitness of things, to take the average of three financial years," he said.

"Be that as it may, the third proviso to Section 188(1) gives the needed breather to companies by stating that the contract or arrangement with a related party, would be outside the purview if (i) the same is in the ordinary course of business; and (ii) if the transaction is on arm's length," Varadarajan remarked.

Shareholders' special resolution is needed for:

- Sale, purchase or supply of goods or material if transaction value is 10 percent of turnover or Rs.100 crore whichever is less.

- Selling, disposing of or buying property if value is 10 percent of net worth or or Rs.100 crore whichever is less.

- Leasing of any property if the value is more than 10 percent of the net worth, 10 percent of the turnover or Rs.100 crore