One of the most debated aspects of the Companies Act, 2013, has been the introduction of a revised regime pertaining to related party transactions. To introduce transparency and fairness, the law has prescribed multiple prior approvals for specific categories of transactions with related parties. To align the equity listing agreement with the provisions of the new Act, the Securities & Exchange Board of India has also amended clauses 35B and 49 of the listing agreement.
The apparent inconsistencies between the provisions pertaining to related-party transaction under the law and the listing agreement raise implementation issues for listed companies.
Scope
The primary difference between the company law and the listing agreement is the definition of 'related party' and 'related-party transaction'. These definitions are important to determine whether a particular transaction is required to comply with the approval requirements prescribed by regulatory regimes.
Section 2(76) of the Companies Act has listed categories of entities/persons who fall within the ambit of a related party. The listing agreement also includes the definition prescribed under the relevant accounting standards (Accounting Standard-18) issued by the Institute of Chartered Accountants of India. While the definition under the Act is explicit, that under Accounting Standards-18 is extensive and covers all direct and indirect subsidiaries, enterprises under common control, enterprises over which any key managerial personnel or their relatives exercise significant influence and fellow subsidiaries. As such, the listing agreement prescribes a much broader definition of related parties.
Also, there is a difference in the definition of 'related-party transactions' under the two. Section 188(1) of the Companies Act cites some transactions that fall under related party transactions; these include contracts or arrangements relating to the sale or supply of goods and services, selling, buying or leasing property, appointment of a related party to an office of profit or a selling agent, underwriting of subscription of any securities, etc. However, the listing agreement provides for a broader definition - transaction for "any transfer of resources, services or obligations".
Therefore, to check whether a transaction is a 'related party transaction' or not, a listed entity has to analyse it separately under the Companies Act and the listing agreement.
Prescribed threshold
The Companies Act, read with the rules prescribed by the corporate affairs ministry, provides for individual thresholds for each type of related party transaction for securing a shareholder approval through special resolution. However, Clause 49 of the listing agreement prescribes a common threshold for all such transaction taken together. In some cases, this might lead to a situation in which a transaction which otherwise would be exempt from shareholder approval under the Companies Act, might have to be approved by shareholders under the listing agreement, or vice versa.
Exemption
While the listing agreement provides an exemption from board, audit committee and shareholder approval for transactions among government companies and between a holding and its wholly-owned subsidiary, the Act does not prescribe any such exemption. The only exemption provided under the Act is for transactions by a company in its ordinary course of business and on an "arm's length basis". However, such transactions have to be approved by the audit committee under Section 177 of the Act.
Right to vote
Another difference pertains to the right to vote given to related parties for passing a special resolution approving related-party transactions. Under the Act, only the related parties in the context of the contract or arrangement for which the special resolution is being passed are restrained from voting on such resolution. However, under the listing agreement, all entities qualifying as related parties have to abstain from voting on the special resolution, even if they are party to the particular transaction.
Proposed amendments in the Act
Following various representations from industry, the government decided to move the Companies (Amendment) Bill 2014, passed by the Lok Sabha on December 12, 2014, and awaiting the Rajya Sabha's approval. According to the amendments proposed in the Bill pertaining to related party transactions, the categories of related party transactions that required approval through a special resolution (more than 75 per cent of the voting members) will now need only an "ordinary resolution" (more than half the voting members). The listing agreement stipulates a special resolution requirement for transactions exceeding the listing agreement threshold.
Another proposed amendment in the Bill is transactions between a holding company and its wholly-owned subsidiary will be exempt from obtaining the approval of shareholders. The amendment Bill also proposes an approval of the audit committee for related party transactions, subject to prescribed conditions, intending to bring the provision in line with Clause 49 of the listing agreement.
It is important to ensure while protecting the interest of the minority, shareholders' democracy is not compromised. By broad-basing the scope of related parties under the listing agreement, the entire class of related party shareholders has been precluded from voting. This might lead to a scenario in which important transactions will depend on the decision of minority shareholders.
Inder Mohan Singh, partner, and Sridevi VS, associate, Amarchand & Mangaldas & Suresh A Shroff & Co (The views expressed are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas)
