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RPTs and related exemptions in the context of Government companies

Munmi Phukon and Tanvi Rastogi

corplaw@vinodkothari.com

Introduction

Ministry vide its Notification[1] dated 5th June, 2015 issued certain modifications/ exemptions/ exceptions for Government Companies on certain provisions of the Companies Act, 2013. One such exemption was with respect to the provisions pertaining to related party transactions (RPTs). Vide the said Notification, Government Companies were provided relaxation from obtaining the prior shareholders’ approval as required under the first proviso to section 188(1) and consequently, from the restriction on the affirmative voting by the related parties for (a) contracts/ arrangements with other Government Company(ies) and (b) where the Government Company is not a listed company, contracts/ arrangements with related parties other Government companies as mentioned above, if prior approval of the Ministry/ Department of the Central Government (CG) or State Government (SG) administrative in charge of the Company is obtained.

The aforesaid Notification has been revisited by the Ministry by issuing a further Notification[2] dated 2nd March, 2020 (2020 Notification) whereby the said exemptions have been extended to the contracts/ arrangements by the Government Companies with CG/ SG/ any combination thereof.

Before analysing the relevance of the 2020 Notification, one has to understand the related parties from a Government Company’s perspective. This article analyses the provisions of the Companies Act, 2013 (Act) only, considering the Notification has been brought in by the Ministry of Corporate Affairs.

Related parties for a Government Company

As per clause (76) of section 2 of the Act following shall be a related party with reference to a company:

  1. a director or his relative;
  2. a key managerial personnel or his relative;
  3. a firm, in which a director, manager or his relative is a partner;
  4. a private company in which a director or manager or his relative is a member or director;
  5. a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital;
  6. any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
  7. any person on whose advice, directions or instructions a director or manager is accustomed to act:                                                            Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
  8. any body corporate which is—
    • a holding, subsidiary or an associate company of such company;
    • a subsidiary of a holding company to which it is also a subsidiary; or
    • an investing company or the venturer of the company
  9. a director other than an independent director or key managerial personnel of the holding company or his relative as prescribed under Rules

Accordingly, to consider someone as related party, he/ she/ it shall have to strictly fall under any of the aforesaid sub-clauses. Seemingly, the Government of India or any State Government having controlling stake in the company does not get fit in any of the said clauses as the CG/ SG is neither considered as a person nor an entity/ body corporate. Accordingly, CG/ SG is not a related party to a Government Company as per the aforesaid definition.

Similarly, to consider another Government Company as a related party for a Government Company, the former shall also be required to fall under the definition. Accordingly, one will have to determine whether the former Government Company is a related party or not, based on its structure i.e. private company, public company, body corporate, and also based on its relationship with the subject Government company i.e. holding company, subsidiary company, associate company etc.

Position before and after 2020 Notification

 Transaction between Government companies and CG / SG

 The position with respect to transactions between the Government Company and the CG/ SG before and after the 2020 Notification remains same as CG/ SG, as discussed above, does not get covered under the purview of the definition of related party provided under the Act. Therefore, until and unless there is a related party on the other side, any transactions with any other party cannot be considered as RPT. Accordingly, where the transaction itself is not an RPT, exemption from the provisions pertaining to RPTs does not arise.

Transaction between two Government Companies

As discussed above, for considering another Government Company as related party one has to consider the status of such company. Accordingly, for a Government Company, the following Government Companies may be considered as related party:

  1. A Government Company which is a private company in which a director, manager or relative thereof of the first mentioned Government Company is a member or director;
  2. A Government Company which is a public company in which a director or manager of the first mentioned Government Company is a director and holds along with his relatives, more than two per cent. of its paid-up share capital;
  3. A Government Company which is either the holding company or subsidiary or associate company of the first mentioned Government Company;
  4. A Government Company which is a fellow subsidiary of the first mentioned Government Company;
  5. A Government Company to which first mentioned Government Company is an associate company

Considering the structure of the Government Companies, it is very unlikely to have related parties covered under point (a) and (b) above. Coming to the position before or after the 2020 Notification, there is no change, as the 2015 Notification already covered transactions between two Government Companies.

Transactions between the Government Companies and other related parties including non- Government Companies

From the definition provided in the Act, the following persons/ entities may also be considered as related parties for a Government Company:

  1. Individuals who are director, key managerial personnel (KMP), relatives of director/ KMP (s), a director other than an independent director or KMP of the holding company or his relative;
  2. Firm in which a director or manager or relative thereof is a partner;
  3. Non- Government Companies such as:
    • Private companies in which a director or manager or relative thereof is member or director;
    • Public companies in which a director or manager is a director and holds > 2% of its paid-up share capital, singly or jointly with his relatives;
  4. Body corporate whose Board/ managing director/ manager accustomed to act in accordance with the advice, directions or instructions of a director or manager;
  5. Any person on whose advice, directions or instructions a director or manager is accustomed to act.

While the parties mentioned in point (d) and (e) above, cannot be determined without analysing the proper facts and considering these are purely circumstantial in nature, it is very unlikely to have such related parties. As regards the position before and after the 2020 Notification, the transactions between these related parties will still require the prior approval of the administrative Ministry in charge, if the company is not obtaining prior shareholders’ approval. Accordingly, there is no change in the position after 2020 Notification.

Conclusion

While the 2020 Notification is an extended version of the 2015 Notification, however, it seems that it does not carry any relevance at all. The reason for the same is that CG/ SG, as discussed above, does not get covered under the purview of the definition of related party provided under the Act. Therefore, until and unless there is a related party on the other side, any transactions with any other party cannot be considered as RPT. Accordingly, where the transaction itself is not an RPT, exemption from the provisions pertaining to RPTs does not arise.

[1]http://ebook.mca.gov.in/notificationdetail.aspx?acturl=6CoJDC4uKVUR7C9Fl4rZdatyDbeJTqg3XHmN4i4mFb+v2wWhMvQoFsXKgJTHtRr9VmNjj/XQUFc9vZ6tRKIi2gIhxfNI2SOK

[2]http://www.mca.gov.in/Ministry/pdf/Notification_02032020.pdf

 

Our other articles on related party transactions:

http://vinodkothari.com/2020/02/proposed-changes-in-rpts-ppt/

http://vinodkothari.com/2019/11/mca-revisits-the-existing-cap-of-materiality-of-related-party-transactions-u-s-188/

http://vinodkothari.com/2017/09/presentation-on-related-party-transactionrpts-an-overview/

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