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Corporations may soon find it easier to implement the provisions on ‘related party transactions’ (RPT) in the new Company Law.
In a bid to increase the ease of doing business in India, the Narendra Modi-led Government has decided to move a slew of amendments to the existing RPT provisions, which will form part of the Companies (Amendment) Bill 2014 that received the Cabinet approval on Tuesday.
However, the jury is still out on whether the proposed changes will dilute minority shareholder rights in RPTs.
Likely changes The new Company Law — enacted in 2013 — stipulates the approval of both the board and shareholders for contracts with related parties for sale of goods or supply of services, such as leasing of property.
Now, it is proposed that the requirement of passing a “special resolution” of disinterested shareholders be changed to an “ordinary resolution”.
Also, there is a proposal to exempt transactions between holding companies and wholly-owned subsidiaries from the ambit of RPT provisions.
The Centre also plans to allow audit committees to provide omnibus approvals to RPTs annually.
Experts’ take Sharanya Ranga, Partner in law firm Advaya Legal, said the proposed changes are small but critical to reducing the burden of companies in India and are aimed at facilitating business. Aseem Chawla, Partner, MPC Legal, said it is proposed that instead of requiring a special resolution (3/4{+t}{+h} majority), an ordinary resolution would suffice.
“The proposed move will particularly help in situations where companies are closely held,” Chawla told BusinessLine .
Lalit Kumar, Partner, J Sagar Associates, said that on an overall basis, the amendment (requiring only an ordinary resolution) strikes the right balance.
“While it continues to disallow interested shareholders to vote, it does not give abundant super majority voting rights to non-related party shareholders to stop a resolution,” Kumar said.
Sai Venkateshwaran, Partner and Head of Accounting Services, KPMG in India, said the proposed changes would come as a “great relief” to companies.
The changes suggested largely address the concerns of companies on implementation of new requirements, he said. In doing so, these seek to partly align the requirements of Company Law with SEBI norms.
In some other aspects, the changes seek to provide greater relaxation than SEBI requirements.
On transactions that require shareholder approval, Venkateshwaran said the divergence between SEBI requirements and those under Company Law seems to be widening. SEBI requires a special resolution for material transactions and only non-related party shareholders are permitted to vote on such transactions.
As per the proposed amendments, only an ordinary resolution would be required and all related parties who are not interested in the specific transaction would also be permitted to vote.
This move seems to be emanating from the hardship faced by companies that may not have been able to get minority shareholders’ approval on proposed transactions, said Venkateshwaran. For listed companies, the stricter of the two norms would apply.
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