Amended rules of chapter XII

RELATED PARTY TRANSACTIONS (RPTS) ………….. Went to the operation theatre once again and came back with ………….some additions, some deletions, some clarity and a lot of confusion

 

The Ministry of Corporate Affairs, Government of India has issued the Companies (Meetings of Board and it's Powers) second amendment Rules 2014, on 14/08/2014, which, inter alia, makes a lot of modifications to the provisions of "Related Party Transactions" in the Companies Act 2013.

 

THE NET EFFECT OF THE AFORESAID MODIFICATIONS ARE AS FOLLOWS:

 

The Rule 15(3) of the Companies (Meetings of Board and It's Powers) Rules 2014, which came into effect on 01/04/2013, has been thoroughly revamped, as mentioned below;

 

a. Earlier Rule 15(3)(i) has been deleted, which means that the requirement under first proviso  to section 188(1) read with rules 15(3)(i) that "a Company having paid up capital of Rs 10 crore and above has to necessarily pass a special resolution prior to entering into a contract or arrangement with a related party" has been done away with. As such, on these amended rules coming into effect, the need to pass a special resolution prior to entering into a contract or arrangement would depend on whether or not the prescribed ceilings (as modified) are hit.

 

Observation--  With the aforesaid modification the industry has received a big relief because now onwards, only when the threshold, that is 10% of Turnover or 10% of Net Worth or Rs 100 Crore or Rs 50 Crore, as the case may be are touched, in a year, a company has to prepare to get a prior approval of the members by a special resolution. In fact, with this modification, a specific provision in the Act itself has been made inactive, in the sense that the first proviso to Section 188(1) specifically mentions that "without a prior special resolution a company having a paid up capital of not less than such amount AS MAY BE PRESCRIBED". The MCA first prescribed the said threshold as Rs 10 crore, when the rules were first notified but with this modification this part of the Section has been made ineffective.

 

b. In case of a contract or arrangement for sale, purchase or supply of goods or material, directly or through agents, the threshold was 25% of Annual Turnover, which has now been reduced to 10% of Turnover and another threshold, that is, Rs 100 crore has been added. Hence the revised threshold is the lower of 10% of Turnover and Rs 100 Crores. As such, Companies with a huge turnover, say Rs. 1,100/- crores will not be able to take the benefit of their huge turnover. Even if, the turnover is huge, say, Rs 1200/ crore and 10% of it is Rs. 120/ crores, the moment the volume of contracts or arrangement in a year exceeds, the threshold of Rs 100 Crores, they will need a prior special resolution. 

 

First Observation --- Calculation of Turnover remains confusing, as under the new definition of Turnover in the Companies Act 2013

 

Second Observation --- The earlier rules specifically mentioned Annual Turnover as the threshold but the amended rules just mention Turnover. We do not know, whether annual or half yearly or quarterly, even though we understand it to be annual turnover.

Third Observation --- For listed companies, there would hardly be any difference, with effect from 01/10/2014

 

c. In cases of contracts and arrangements related to sale, disposal off or buying of property or leasing of property, in addition to the existing threshold 10% of Net Worth, 10% of Turnover etc. another threshold of Rs 100 Crores has been added and the lower would be the threshold. As such, Companies with a huge turnover, or huge net worth, say Rs. 1,200/- crores will not be able to take the benefit of their huge turnover/net worth. Even if, the turnover/networth is huge, say, Rs 1200/ crore and 10% of it is Rs. 120/ crores, the moment the volume of contracts or arrangement in a year exceeds, the threshold of Rs 100 Crores, they will need a prior special resolution. 

 

First Observation --- Calculation of Turnover remains confusing, as under the new definition of Turnover in the Companies Act 2013

 

Second Observation --- The earlier rules specifically mentioned Annual Turnover as the threshold but the amended rules just mention Turnover. We do not know, whether annual or half yearly or quarterly, even though we understand it to be annual turnover.

 

Third Observation --- For listed companies, there would hardly be any difference, with effect from 01/10/2014

 

d. In cases of contracts and arrangements related to rendering or availing of services, in addition to the existing threshold 10% of Turnover, another threshold of Rs 50 Crores has been added and the lower would be the threshold. As such, Companies with a huge turnover, say Rs. 1,200/- crores will not be able to take the benefit of their huge turnover. Even if, the turnover is huge, say, Rs 1200/ crore and 10% of it is Rs. 120/ crores, the moment the volume of contracts or arrangement in a year exceeds, the threshold of Rs 50 Crores, they will need a prior special resolution. 

 

First Observation --- Calculation of Turnover remains confusing, as under the new definition of Turnover in the Companies Act 2013

 

Second Observation --- The earlier rules specifically mentioned Annual Turnover as the threshold but the amended rules just mention Turnover. We do not know, whether annual or half yearly or quarterly, even though we understand it to be annual turnover.

 

Third Observation --- For listed companies, there would hardly be any difference, with effect

 

AS PER THE MCA NOTIFICATION DATED 14/08/2014, THESE AMENDED RULES ARE TO BE EFFECTIVE ON THEIR NOTIFICATION IN THE GAZETTE. BUT THESE AMENDENTS HAVE BEEN MADE UNDER SECTION 469 OF THE COMPANIES ACT 2013 AND AS PER THE SPECIFIC PROVISION OF THE SAID SECTION THESE RULES CAN BE EFFECTIVE ONLY ON APPROVAL BY BOTH THE HOUSES OF THE PARLIAMENT OF INDIA, AFTER IT IS LAID BEFORE THE RESPECTIVE HOUSES WHEN THEY ARE IN SESSION/SESSIONS FOR AN AGGREGATE PERIOD OF THIRTY DAYS.

 

THE UNDERSIGNED DOES NOT HAVE THE KNOWLEDGE OR INFIORMATION, AS TO WHETHER OR NOT THESE AMENDMENTS HAVE BEEN APPROVED BY THE PARLIAMENT OF INDIA.

 

CS ANJAN KUMAR ROY

FCS

PAST CHAIRMAN, ICSI - EIRC