Background

The Companies Act, 2013 (2013 Act) became largely effective from 1 April 2014. The Ministry of Corporate Affairs (MCA) has been issuing various amendments and clarifications to the 2013 Act and to the corresponding Rules to remove practical impediments faced by companies while implementing certain provisions of the 2013 Act.

New development

On 30 March 2017, MCA issued a notification relating to Related Party Transactions (RPTs).

Existing requirements

• First proviso to Section 188 of the 2013 Act requires prior approval of the shareholders by an ordinary resolution for RPTs prescribed under Section 188(1) of the 2013 Act that are neither in the ordinary course of business nor at an arm’s length basis.
• Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014 (the Rules) specifies the limits for transactions beyond which RPTs would require shareholders’ approval.

Amendment

Prescribed transaction  categories	Existing requirements	Amended Rules
Sale, purchase or supply of any goods or material (directly or through an agent)	Exceeding 10 per cent of turnover or INR1 billion, whichever is lower*	Amounting to 10 per cent or more of turnover or INR1 billion, whichever is lower* (Emphasis added to present changes)
Selling or otherwise disposing of, or buying, property of any kind (directly or through an agent)	Exceeding 10 per cent of net worth or INR1 billion, whichever is lower*	Amounting to 10 per cent or more of net worth or INR1 billion, whichever is lower* (Emphasis added to present changes)
Leasing of property of any kind	Exceeding 10 per cent of net worth or 10 per cent of turnover or INR1 billion, whichever is lower*	Amounting to 10 per cent or more of net worth or 10 per cent or more of turnover or INR1 billion, whichever is lower* (Emphasis added to present changes)
Availing or rendering of any services (directly or through an agent)	Exceeding 10 per cent of turnover or INR500 million, whichever is lower*	Amounting to 10 per cent or more of turnover or INR500 million, whichever is lower* (Emphasis added to present changes)
Appointment to any office or place of profit in the company, subsidiary company or associate company	Remuneration exceeding INR0.25 million per month	No change
Underwriting the subscription of any securities or derivatives of the company	Remuneration exceeding one per cent of net worth	No change

(*Applies to transaction or transactions to be entered into either individually or taken together with the previous transactions during a Financial Year.)

Source: KPMG in India’s analysis, 2017

Applicability

The above notification is applicable from 30 March 2017.

Our comments

The MCA has marginally lowered the limit for transactions to 10 per cent or more beyond which RPTs would require shareholders’ approval (that are neither in the ordinary course of business nor at an arm’s length basis) while the earlier limit was exceeding 10 per cent. It seems to have been done to cover RPTs that meet the threshold of 10 per cent.

While under the Securities Exchange Board of India (SEBI) requirements, all RTPs are required to be approved by an audit committee including grant of an omnibus approval on the conditions similar to Section 188 of the 2013 Act. Additionally, all material RPTs are required to be approved by the shareholders through an ordinary resolution.

To access the text of MCA’s notification on Companies (Meetings of Board and its Powers) Amendment Rules, 2017, please click here