Companies Act amendments to make related party deal norms easier

NEW DELHI: The proposed amendments to the companies law will make it easier for corporates to get shareholders' nod for related party transactions.

The Cabinet yesterday approved 14 changes to various provisions of the Companies Act, 2013, including those pertaining to related party transactions and fraud reporting requirement for auditors.

It has been proposed to replace "special resolution with ordinary resolution" for approval of related party transactions by non-related shareholders.

This would address problems faced by large stakeholders who are related parties.

Special resolutions require approval of at least 75 per cent shareholders while for ordinary resolutions the requirement is a minimum of 50 per cent.

Besides, related party transactions between holding companies and wholly-owned subsidiaries have been exempted from the requirement of approval of non-related shareholders.

There have been demands from various stakeholders, including corporates, for certain changes in the new companies law, most of whose provisions came into effect from April 1.

Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India said the proposed amendments to the Act within such a short time shows the intent of the government to improve the ease of doing business in India.

According to him, the amendments seeks to partly align the provision of the Act with that of Sebi norms but in some other aspects, it has sought to provide greater relaxation.

"The amendment exempting transactions with wholly owned subsidiaries and allowing companies to obtain omnibus approvals from the Audit Committee for related party transactions seeks to align the Act with similar changes that have been introduced by Sebi," he said in a statement today.

Capital market regulator Sebi requires a special resolution for material transactions and only non-related party shareholders are permitted to vote where the amendment proposed in the Act is that only an ordinary resolution would be required.

Besides, all related parties who are not interested in the specific transaction would be permitted to vote.

"...this move seems to be emanating from the hardship being faced by corporates who may not have been able to get minority shareholders' approval on proposed transactions. However, in the case of listed companies, the stricter of the two norms would apply," Venkateshwaran said.

The Cabinet has approved 14 proposed amendments to the companies law.

The Corporate Affairs Ministry has shown its positive intent to correct the anomalies in the Companies Act 2013 and difficulties faced by the corporate sector in implementing norms such as those pertaning to related party transactions, said Harinderjit Singh, Partner at Price Waterhouse.

"I hope that the Ministry of Corporate Affairs will continue its journey to correct the pain points of the stakeholders including mandatory firm rotation for private limited companies including subsidiary of foreign companies," he said in a statement.