The latest amendments to related party transaction (RPTs) norms, introduced by the Ministry of Corporate Affairs (MCA), will make life easier for mid-tier companies. Only transactions where the value is 10 % of the turnover of the company or R100 crore (the lower of the two will be considered) would require the prior approval of shareholders by way of a special resolution.
Earlier, any company having paid-up share capital of R10 crore were required to obtain prior approval of shareholders via special resolution for all RPTs that were not in the ordinary course of business and on an arm’s length basis.
Observing that the changes made to the RPTs rules are significant, Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India said the shareholder approval requirements will now apply only to transactions meeting certain thresholds. “On the whole these changes are a clear reflection of the fact that MCA continues to look into the practical challenges faced by corporates in the implementation of the new Act, and has responded with amendments to make the law more pragmatic and yet achieve its objective. 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 said.
Consequently, this created a problem for a number of companies as prior approval was required even for immaterial transactions through a special resolution. Dolphy Dsouza, Partner in a member firm of Ernst & Young Global, said the rules for related party transactions have been eased with respect to determining the materiality threshold for minority shareholders' approval. "This is a step in the right direction but more changes would be required," he said. The most important change would be to align Sebi and Companies Act requirement with respect to definition of related party and related party transactions as well as the requirements relating to the approval process, he added.
However, Venkateshwaran noted that introduction of the absolute monetary thresholds still would require several transactions -- that are not considered to be material for a large company -- to be referred to shareholders for approval.