There’s more to related party transactions

The Bill to amend the Companies Act, 2013 has been passed by the Lok Sabha. The amendments proposed seem to make it easier for companies to do business. Perhaps, the crucial amendment is the one on related party transactions (RPT which will be approved with an ‘ordinary resolution’ instead of a ‘special resolution’.

The interested shareholders (read promoter shareholders) will be overjoyed.

However, for disinterested or non-related party shareholders, the amendment will dilute their voting right; the present rule of ‘super majority’ will become the rule of ‘simple majority’.

But to take a holistic view the amended provision will strike the right balance — while it will continue to disallow interested shareholders to vote, it will not give abundant ‘super majority’ voting rights to non-related party shareholders to stop a resolution. The rule of ‘simple majority’ approval in RPTs seems more reasonable than ‘super majority’.

Despite this impetus provided by the government, what has perhaps escaped notice is that the relief will only be available to private companies and public unlisted companies, not to public listed companies.

This is because SEBI regulations on RPTs are quite different from the company law provisions.

As SEBI regulations are stricter than the corresponding company law provisions, they will nullify any relief under the Companies Act.

Therefore, listed companies may not benefit despite the government’s best efforts to ease business for them unless SEBI mirrors the government’s proposal in its regulations — but that seems unlikely.

Companies are of three kinds: private , public unlisted and public listed. For private companies, there is already a separate exemption notification which will completely exempt private companies from RPTs. Once the exemption notification is implemented, this amendment to the Companies Act will become inconsequential.

Public unlisted companies are not governed by SEBI regulations but only by the Companies Act. Therefore, they will be the real beneficiaries of the amendment. Public listed companies are governed both by the Companies Act and SEBI regulations — that is, they are subject to two sets of contrary provisions which complicate matters for them.

To begin with, the very meaning of RPT is different in the two statutes. While the Companies Act clearly lays down an exhaustive list of RPTs, SEBI regulations provide a more generic definition (borrowed from the accounting standard) which states that “a RPT is a transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged”. The generic definition makes RPTs much wider in SEBI regulations compared to the Companies Act.

For instance, while a fresh issue of shares by a subsidiary company to its holding company is not an RPT under the Companies Act, it could be an RPT within the generic definition of SEBI regulations.

The two statutes differ also on who qualifies as related parties. SEBI regulations are wider in this aspect as they not only include related party as defined in the Companies Act but also those entities which qualify as related parties under the accounting standards.

Another critical difference is that unlike the Companies Act, SEBI does not exempt RPTs conducted in the ordinary course of business and at arm’s length.

So there is no room for any exemption for even genuine RPTs conducted at arm’s length.

Further, the exemptions from seeking the shareholders’ nod are based on different parameters. The Companies Act provides exemption for RPTs up to 10 per cent of ‘net worth’ or ‘turnover’ of the company or ₹100 crore, whichever is less. SEBI regulations have a blanket exemption based on a single parameter, that is, RPTs up to 10 per cent of the ‘annual consolidated turnover’ are exempted from seeking shareholders’ nod.

Interestingly, SEBI’s exemption on the turnover criterion is a lenient provision. So, will it apply to listed companies the same way they are subject to stricter ones?

If you question SEBI on this, it will reply in the negative saying the stricter provision prevails — in this case the Companies Act being stricter will prevail.

RPTs are a complicated affair. The ambiguous laws only add to the miseries of companies implementing them.

Real ease of doing business will come only when the laws are simple and clear.

The writer is a partner at J Sagar Associates. The views are personal