The Ministry of Corporate Affairs, on 14th August, 2014, issued a notification relating to amendment of the Companies (Meetings of Board and its Powers) Rules, 2014. Prior to the amendment, companies having paid-up share capital of Rs 10 crores (Rs. 100 million) or more were required to obtain prior shareholder approval for all related party transactions that were neither in the ordinary course of business or at an arm’s length basis, irrespective of the amount involved. This resulted in onerous obligation on companies to take approval of their shareholders for even trivial and routine related party transactions which may have potentially impacted the efficiency of their business.
The amendment made to Company Rules liberalizes the above restrictions by imposing monetary thresholds on related party transactions which would require prior shareholder approval. The amendment also removes the Rs. 10 crore threshold and make the rules applicable to all companies, irrespective of their paid-up share capital.
Post amendment, related party transactions would require prior approval only in the following circumstances: (1) When the RPT relates to sale, purchase or supply of goods or materials, if the transaction exceeds 10% of the turnover of the company or Rs. 100 Crores, whichever is lower; (2) When the RPT relates to sale, purchase or lease of property, if the transaction exceeds 10% of the net worth of the company or Rs. 100 Crores, whichever is lower; and (3) When the RPT relates to offering or receiving services, if the transaction exceeds 10% of the turnover or Rs. 50 Crores, whichever is lower.