By now it should be obvious even to those of you who don’t follow law and policy developments closely. The new company law—the Companies Act 2013—has introduced a raft of governance boosting measures. The three key ones are Auditor Rotation, Independent Director Rotation & Related Party Transaction (RPT) scrutiny and approval!
All three have prompted India Inc into an unending whine, about the implementation difficulties and compliance burdens. Some of the pain can be attributed to the reluctance to change. Some changes are burdensome but desirable nonetheless. And, admittedly, in some cases, companies are justifiably cranky. This weekend then gave companies reason to smile.
Why India Inc dislikes Section 188
For the uninitiated, Section 188 requires specified RPTs entered into by a company, and not at arm’s length or in the ordinary course of business, to be approved by the board/audit committee. The Rules accompanying the section specify certain categories of these RPTs that also need shareholder approval via a special resolution (75% approval). Section 188 also prohibits the interested ‘related party’ from voting on such a special resolution. So, in cases where the promoter is an interested related party, it cannot vote and the special resolution needs approval from a majority of the minority (public shareholders).
This is the first time company law has gone so far to regulate RPTs and raise the governance standard. The vigilance is borne out of years of watching promoters undertake abusive RPTs in which companies transacted with promoter and related entities with little or no need for shareholder approval or oversight. Section 188 promises to check these malpractices.
But many companies say the law has gone too far. The M&M CFO, V Parthasarathy, indicated that his company’s RPTs would cover approximately 20 pages of single line entries. The Tata Group General Counsel, Bharat Vasani, said one group company has over a 1,000 related parties, thanks to a wide definition of the term. Imagine minority shareholders having to scrutinise such large numbers of transactions and decide whether to approve them or not. Many well meaning CFOs believe this will hinder shareholders from focusing on the more material, possibly abusive, RPTs!
Armed with that complaint, India Inc has been lobbying hard with MCA to relax the Rules that determine which transactions need shareholder approval. This weekend they succeeded.
Section 188 rules amended
The MCA amended the Rules, deleted one threshold and diluted the provision. But it also reduced transaction thresholds and thereby strengthened.