Getting related-party transactions right

May 19 2014, 21:40 IST
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SummaryThe question of transparency in deals with related parties has often been a topic of debate and discussion

The question of transparency in deals with related parties has often been a topic of debate and discussion. The enactment of the Companies Act, 2013 (Cos Act) has sweeping implications on compliance requirements for related party transactions (RPTs). Recently, Sebi also amended certain clauses of the Listing Agreement (LC49) to align the same with the Cos Act. To ensure stricter compliance with the provisions, the Cos Act and LC29 contain provisions for personal liability on directors/officials for loss suffered by the company, imposition of penalty or prosecution and disqualification from acting as director in the case of non-compliance.

The Cos Act requires a Board resolution where a related parties transaction (RPT) has not been entered in the ‘ordinary course of business’ and/or the transaction is not on ‘an arm’s length basis’. Additionally, an approval of the company through a special resolution by disinterested shareholders is also required where the share capital of the company exceeds R10 crore or the transaction value exceeds the prescribed threshold. To sum up, exemption from Board resolution and special resolution is provided if the RPT is entered in the ‘ordinary course of business’ and is on ‘an arm’s length basis’

Unlike the Cos Act, LC49 does not exempt RPTs from special resolution based on the aforesaid criteria. The only exemption from special resolution under LC49 is that the transaction does not breach materiality threshold. A listed company needs to consider the two requirements carefully and apply stricter of the two. Considering the impact of the Cos Act and LC49, the approval requirements will operate as discussed here.

To comply with LC49, a listed company needs to get all RPTs approved by the Audit Committee. It also needs to get all material RPTs approved by the special resolution. The exemptions given under the Cos Act will not apply.

For immaterial transactions of listed companies and all RPTs of unlisted entities, approval requirements of the Cos Act apply. It may be noted that due to differences in criteria, even an immaterial RPT (as per LC49) may still need board/ shareholder approval under the Cos Act. For example, this may arise because transaction is not in the ordinary course of business and/or not on arms’ length basis, and the share capital or transaction value thresholds are breached.

Ordinary course of business

The phrase ‘ordinary course of business’ is not defined under the Cos Act. It seems that the ordinary course of business will

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