Companies will now be required to send fewer and more material (in terms of value) related party transactions (RPTs) to shareholders for special resolution approval.
All the RPTs won’t need minority shareholders’ nod.
The Corporate Affairs Ministry has amended the rules governing RPTs so as to ease the “materiality” threshold for minority shareholders’ approval.
This will effectively reduce the number of transactions that needs to go to shareholder for approval through a special resolution.
However, the jury is still out on whether the latest changes strengthen the scrutiny process around RPTs or have ended up diluting it.
Prior to the latest change, there were two thresholds—the first being that all RPTs in the case of a company with paid-up-share capital of ₹ 10 crore or more required minority shareholders approval, if those were not at arm’s length or in ordinary course.
The second threshold was stipulation of separate limits by types of transactions.
Now, in the latest revised rules, the threshold of ₹ 10 crore has been completely done away with and the transaction limits have been revised.
“This is a step in the right direction and the transaction threshold limits have been revised to make them more logical”, said Dolphy D Souza, Partner in a member firm of Ernst & Young Global.
Shareholder approval will apply only for transactions meeting certain specified transaction thresholds and not to all transactions that are not in the ordinary course of business or on an arm’s length basis.
Welcoming these changes, Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India, said this was a clear reflection of the fact that Corporate Affairs Ministry continues to look into the practical challenges faced by corporates in the implementation of new company law.
“While the latest rule change does not do away with all the practical challenges, it is still a major step in the right direction”, he said.
After the latest rule change, related party transactions involving as sale of goods, renting of properties or rendering of services for more than ₹ 100 crore will require shareholders’ approval through special resolution.