With the changes effected by the Corporate Affairs Ministry, only certain class of related party transactions whose value is over Rs 100 crore would require shareholders' prior approval by way of a special resolution. (Agencies)
Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India, said some significant changes have been made in the context of related party transactions.
"These changes are welcome, since the shareholders' approval requirements will now apply only to transactions meeting certain transaction thresholds...
"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 in a statement.
Earlier, companies having paid-up share capital of Rs 10 crore were required to get prior shareholders' approval through special resolution for all related party transactions that were not in the ordinary course of business and on an arm's length basis.
"Through the amendment, the over-arching limit of Rs 10 crore paid-up share capital has been dispensed with, and instead (the Ministry) introduced transaction limits for all companies," Venkateshwaran said.
Special resolutions require at least 75 percent shareholders' nod to get passed.
The Ministry, which is implementing the new Companies Act, has brought the changes through Companies (Meetings of Board and its Powers) Second Amendment Rules, 2014.
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... that is not enough and more changes would be required," he said in a separate statement.
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.
Besides, the Ministry has reduced the transaction specific thresholds, defined as a percentage of turnover or networth, from the previous levels.
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.
There are strict norms for related party transactions under Section 188 of Companies Act, 2013.
With the changes effected by the Corporate Affairs Ministry, only certain class of related party transactions whose value is over Rs 100 crore would require shareholders' prior approval by way of a special resolution.