MCA revisits the existing cap of materiality of related party transactions u/s 188

Munmi Phukon | Vinod Kothari & Company

corplaw@vinodkothari.com

 

Ministry of Corporate Affairs (MCA) has recently come out with a Notification dated 18th November, 2019 amending the Companies (Meetings and Powers of Board) Rules, 2014. The same will be effective from the date of publication in the Official Gazette. This amendment, has the impact of removing the monetary thresholds for the various transactions listed in section 188 and keeping only the proportional thresholds related to turnover and net worth of the company. Notably, the rules under section 188 as originally framed in 2014 had put absolute thresholds, such as Rs 100/ 50 crores of transaction value etc. In case of companies of large size, these limits were obviously quite small and were very easily hit.

It is important to note that the question of shareholders’ approval under sec 188 (2) arises only in cases where the transaction does not adhere either of the two conditions – arms’ length, and ordinary course of business. While the cases of shareholders’ approval under sec. 188 are not very common, nevertheless the amendment will lead to easing out the provisions for RPT approvals.

It is also important to note that SEBI’s RPT approval requirements in terms of Regulation 23 of the Listing Regulations is even more liberal – it relates to 10% of the consolidated turnover of the entity.

Despite the amendment as above, gaps still remain between the requirements applicable to listed entities in terms of Regulation 23, and the requirements applicable under the Act u/s 188. The differences are wide-spread – from the meaning of “related party”, to the scope of “transactions”, to approval from shareholders, as also the clause disabling related parties from voting. Therefore, even with the amendments, RPT provisions remain enigmatic.

Here is a quick comparison-

Respective clause of Rule 15(3)(a) Existing Text Revised Text Remarks
(i) sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to ten per cent. or more of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188; sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to ten per cent. or more of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188; Apart from the nature of transaction as provided in clause (ii) i.e. transaction pertaining to selling and disposing/ buying of property, the threshold for all other transactions shall be based on the turnover of the company. The threshold for clause (ii) shall be based on the net worth of the company.

 

Further to note, the revised limits are still different from the limits provided under SEBI Listing Regulations which is based on the consolidated turnover of the company.

(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten per cent. or more of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188; selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten per cent. or more of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;
(iii) leasing of property of any kind amounting to ten per cent. or more of the net worth of the company or ten per cent. or more of turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (c) of sub-section (1) of section 188; leasing of property of any kind amounting to ten per cent. or more of the net worth of the company or ten per cent. or more of turnover of the company or rupees one hundred crore, whichever is lower, [amounting to ten percent or more of the turnover of the company] as mentioned in clause (c) of sub-section (1) of section 188;
(iv) availing or rendering of any services, directly or through appointment of agent, amounting to ten per cent. or more of turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188: availing or rendering of any services, directly or through appointment of agent, amounting to ten per cent. or more of turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:

 

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