Under amended rules, if a company has Rs 10 crore or more in paid-up share capital, it does not have to take all its related party transactions (RPT) to shareholders for approval.
The Corporate Affairs Ministry has amended the Companies Act rules for related party transactions (RPT) which is is good news for most companies. Explaining the circular, Menaka Doshi of CNBC-TV18 says it effectively reduces the number of transactions that needs to go to shareholder for approval via a special resolution.
Delving deep into the matter, Doshi says: "The earlier set of rules had put down two thresholds. The first threshold was that all related party transactions (RPTs) transacted by companies having a paid-up share capital of Rs 10 crore or more would need shareholder approval via a special resolution. As you already know in that shareholder approval, the interested related party cannot vote. So if the promoter were a related party, it will end up being a majority of the minority kind of vote.
"The second threshold that the earlier rules have laid down were transaction thresholds for instance the sale of goods. If it exceeded 25 percent of the turnover, it would need to go to shareholders for special resolution approvals.
"So essentially what happened is if a company had a paid-up share capital of Rs 10 crore or more, which pretty much is the case with most listed companies in our country, all related party transactions would have had to go to shareholders for approval under the earlier rule."
Doshi says this specific rule has now been dropped in the amended rules and only transaction thresholds have been retained except that the transaction thresholds have been lower. So now if you have Rs 10 crore or more in paid-up share capital, you don't have to take all your RPTs to shareholders for approval.
However she clarifies that if RPT looks good, exceeds, for instance, 10 percent of turnover or is more than Rs 100 crore in value, then that comapnay has to go to shareholders for special resolution approvals. For a variety of transactions, they have put in percentage thresholds as well as a minimum threshold of Rs 100 crore which is common to all transactions.
So the simple takeaway is most transactions such as sale of goods, renting of properties, rendering of services that are more than Rs 100 crore, will now have to go to shareholders for special resolution approval. This is good news because companies will have to report less transactions to shareholders and it is also good news for shareholders because the earlier possibility was that they would be inundated with a large number of RPTs and shareholders would not have the wherewithal to understand all of these and approve all of these. Now you will get fewer more material RPTs to have to approve.
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