• Section 188 of the Companies Act, 2013 (‘2013 Act’) deals with related party transactions. Sub-clause (3) of Rule 15 of the Companies (Meetings of the Board and its Powers) Rules, 2014 (‘Meetings Rules’) prescribes two criteria for the related party transactions under Section 188 of the 2013 Act, which require shareholders’ approval by way of a special resolution: (i) companies with a paid-up share capital of INR 100m and higher; and (ii) monetary thresholds for the specific transactions including: (a) sale, purchase or supply of goods; (b) selling or buying of property; (c) leasing of property; and (d) availing of services of any kind. 

The Ministry of Corporate Affairs, Government of India (‘MCA’), by way of a notification dated August 14, 2014 has made certain amendments to the Meetings Rules. As per the amendments, the criteria relating to the paid-up capital has been done away with, and the monetary thresholds for related party transactions have been increased to either INR 1bn or 10% of the company’s net turnover, whichever is lower for transactions under (ii)(a), (ii)(b) and (ii)(c) above, and to INR 500m or 10% of the Company’s net turnover, whichever is lower, in case of transactions under (ii)(d) above. The monetary thresholds apply to transaction(s) taken individually or together with previous transactions in a financial year.

• MCA, by way of Companies (Removal of Difficulties) Sixth Order dated July 24, 2014 has clarified that the scope of the definition of ‘related party’ under Section 2(76)(iv) of the 2013 Act covers private companies in which the relatives of a director/ manager is a member or director. MCA has also amended Rule 3 of the Companies (Specification of definitions details) Rules, 2014 to exclude independent directors (and their relatives) of the holding company of a company from the ambit of ‘related party’.

• The second proviso to Section 188 of the 2013 Act prohibits a member of a company from voting on a special resolution to approve a “related party contract or arrangement”, if such member is a related party as defined under the 2013 Act. MCA, by way of its circular dated July 17, 2014 (‘July 17 Circular’) has clarified that the term “related party” used in the proviso refers only to any such party as may be considered a related party in the context of the specific contract or arrangement for which the special resolution is being passed.

The July 17 Circular has also clarified that contracts entered into by companies after satisfying necessary requirements in accordance with Section 297 of the Companies Act, 1956 (‘1956 Act’), which have come into effect before the commencement of Section 188 of the 2013 Act, will not require fresh approval under Section 188 of the 2013 Act, until the expiry of the original term of such contracts. However, if any modification is made to such contract on or after April 1, 2014, the requirements under Section 188 of the 2013 Act will have to be complied with.

Lastly, the July 17 Circular has clarified that transactions arising out of compromises, arrangements and amalgamations dealt with under specific provisions of the 1956 Act and/or the 2013 Act will not require compliance with Section 188 of the 2013 Act.

• MCA has, by way of its circular dated July 23, 2014 (‘July 23 Circular’), issued a clarification regarding resolutions passed by companies during the financial year 2013 – 14 under the relevant provisions of the 1956 Act, which were at various stages of implementation after coming into force of the corresponding sections of the 2013 Act. The July 23 Circular clarifies that any resolutions approved or passed by companies under the applicable provisions of the 1956 Act during the period from September 1, 2014 to March 31, 2014 (‘Effective Resolutions’), may be implemented in accordance with the provisions of the 1956 Act, even if the relevant provisions of the 1956 Act have been repealed, (i) subject to the implementation of the Effective Resolution having been commenced prior to April 1, 2014, and (ii) provided that the transitional period for the Effective Resolutions will be available up to the expiry of one year from the date on which the Effective Resolution was passed or six months from the commencement of the corresponding provision of the 2013 Act, whichever is later. However, any amendment to such Effective Resolution must be in accordance with the corresponding notified provisions of the 2013 Act.

• Section 203 of the 2013 Act deals with appointment of key managerial personnel. The first proviso thereto provides that an individual is not to be appointed or re-appointed as the chairperson of a company, as well as the managing director or chief executive officer of such company, at the same time, after the commencement of the 2013 Act, unless (i) the articles of such a company provide otherwise, or (ii) such company does not carry on multiple businesses. The second proviso to Section 203(1) of the 2013 Act provides that nothing contained in the first proviso to Section 203 applies to such class of companies as are engaged in multiple businesses and that have appointed one or more chief executive officers for each business (as may be notified by the Central Government).

MCA has, by way of a notification dated July 25, 2014 notified that the ‘class of companies’ referred to in the second proviso to Section 203(1) of the 2013 Act means public companies (i) having a paid-up share capital of ¤ 1 billion or more; and (ii) annual turnover of INR 10bn or more, which, in each case, are engaged in multiple businesses and have appointed a chief executive officer for each such business. The paid-up share capital and the annual turnover of such companies must be decided on the basis of the latest audited balance sheet.

For further information, please contact:

Zia Mody, AZB & Partners

[email protected]

Abhijit Joshi, AZB & Partners 

[email protected]

Shuva Mandal, AZB & Partners 

[email protected]

Samir Gandhi, AZB & Partners

[email protected]

Percy Billimoria, AZB & Partners 

[email protected]

Aditya Bhat, AZB & Partners 

[email protected]