Govt not to define 'ordinary course of business'

The corporate affairs ministry has ruled out defining the term 'ordinary course of business', used several times in the Companies Act, 2013. This, experts say, might lead to confusion and litigation.

"We are not going to define the 'ordinary course of business'. Companies will have to do it themselves," said a senior ministry official, asking not to be named.

Though the term has been used at various places in the new companies law, it has primarily drawn attention because of its significance in cases of related-party transactions.

According to the new legislation, if a related-party transaction is not part of a company's 'ordinary course of business', besides a few other conditions, it will need to get approvals from the board of directors and the audit committee. Also, if a transaction is 'material', it requires approval of 75 per cent of minority shareholders.

  • Old law
    In the Companies Act, 1956, use of the term 'ordinary course of business' was fewer

  • New law
    The Companies Law, 2013, uses the term in relation with issues like related-party transactions, loans to directors, powers of the board, insider-trading provisions, etc

  • Difficulty
    In the absence of a clear definition, it might become tough to see which areas of related-party transactions might need approval from the board and audit committee

  • 'Material' issue
    If a transaction is material, 75% of minority shareholders' approval is also needed, but the term 'material' is not defined

  • Current norm
    For listed firms, Sebi currently has a broad list of material events. If a company's decision is stock price-sensitive and has material bearing on its operations, the decision has to be notified to stock exchanges