Changes in limits of Related party transactions
On 18th November 2019, MCA
has made amendments and has come up with the Companies (Meetings of Board and
its Power) Second Amendment Rules, 2019. However, this amendment shall come
into force from the date of publication in official gazette.
Related Section: 188 of Companies Act 2013
Changes
Introduced:
In the
rule with regard to ‘Contract or Arrangement with a Related Party’, that is
rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 the
following changes have been notified.
Changes in rules introduced
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Extant Rule
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New Rule
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Rule
15(3)(a)(i) and 15(3)(a)(ii) the words “or rupees one hundred crore,
whichever is lower” shall be omitted.
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(i) sale, purchase or supply of any goods or
material, directly or through appointment of agent, amounting to ten percent
or more of the turnover of the company
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(i) sale, purchase or supply of any goods or
material, directly or through appointment of agent, amounting to ten percent
or more of the turnover of the company as mentioned in clause (a) and clause
(e) respectively of sub-section (1) of section 188;
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(ii) selling or otherwise disposing of or buying
property of any kind, directly or through appointment of agent, amounting to
ten percent or more of net worth of the company
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(ii) selling or otherwise disposing of or buying
property of any kind, directly or through appointment of agent, amounting to
ten percent or more of net worth of the company as mentioned in clause (b)
and clause (e) respectively of sub-section (1) of section 188;
|
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Rule 15(3)(b) in sub-clause (iii), for
the words "amounting to ten per cent or more of the net worth of the
company or ten per cent or more of turnover of the company or rupees one
hundred crore, whichever is lower", the words "amounting to ten per
cent or more of the turnover of the company'' shall be substituted; and
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(iii)
leasing of property any kind
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(iii)
leasing of property any kind, amounting
to ten per cent or more of the turnover of the company as mentioned in clause (c) of sub-section
(1) of section 188;
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Rule 15(3)(c) in sub-clause (iv),
the words "or rupees fifty crore, whichever is lower" shall be
omitted.
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(iv)
availing or rendering of any services, directly or through appointment of
agent, amounting to ten percent or more of the turnover of the company
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(iv)
availing or rendering of any services, directly or through appointment of
agent, amounting to ten percent or more of the turnover of the company as
mentioned in clause (d) and clause (e) respectively of sub-section (1) of section
188:
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Author Analysis:
The Ministry
has amended certain conditions, wherein the requirement of prior approval of
company was required. In Rule 15 sub-rule 3 the limits specified in all the sub
clause(s) of clause (a) have been either omitted or modified.
To
conclude, the new limits and there implications are as under:
1) If the company is involved in sale, purchase or supply of any goods or
material, either directly or through appointment of agent, which amounts to 10% or more of the turnover of
the company the consent of members will be required.
2) In case the
company is selling or otherwise disposing of or buying property of any kind, either
directly or through appointment of agent, amounting to 10% or more of net worth of the company the consent of members
will be required.
3) If the
company is into leasing of property any kind, amounting to 10%
or more of the turnover of the company the consent of members will be required.
4) If the company is availing or rendering of any services, either
directly or through appointment of agent, amounting to 10% or more of the turnover of the company the consent of
members will be required.
Example: A company having a Turnover of Rs. 1200 Crore and
Networth of Rs. 100 Crore, wants to involve in following related
party transactions with one of its directors, state whether consent of members
of the company is required or not.
1) Sale of Goods amounting to Rs. 110
Crores
In the extant provision, the criterion
was sale of goods exceeding 10% of Turnover or Rs. 100 crore whichever is lower.
Therefore, Rs. 120 Crore or Rs. 100
Crore whichever is lower = Rs. 100 Crore. Thus approval of members was required
if sale of goods amounted to Rs. 110 Crore. And in case sale of goods amounted
to Rs. 90 Crore, approval of members was not required.
Now with the removal of lower limit of
Rs. 100 Crore, company is not required to take members approval as this
transaction is less that 10% of turnover of company.
2) Company to buy a property through its
agent for Rs. 50 Crores
In the extant provision, the criteria
was 10% or more of Net Worth or Rs. 100 crore whichever is lower,
Therefore, Rs. 10 Crore or Rs. 100
Crore whichever is lower = Rs. 10 Crore i.e. the company to buy this property
required members approval.
Even after amendment, in this case
approval of members will be required as the consideration of Rs. 50 Crores is
exceeding the criteria of 10% of Net worth.
3) Leasing of property for Rs. 200 Crores
In the extant provision, the criteria
was 10% or more of the net worth of company or 10% or more of turnover of the
company or Rs. 100 crore, whichever is lower
Therefore, Rs. 10 Crore or Rs. 120
Crore or Rs. 100 Crore whichever is lower = Rs. 10 Crore. Thus approval of
members was required.
Even after amendment, the approval of
members is required as the value is in excess of 10% of turnover of company.
4) The company to avail services from its
associate company for Rs. 115 Crores
In the extant provision, the criterion
was sale of goods exceeding 10% of Turnover or Rs. 50 crore whichever is lower.
Therefore, Rs. 120 Crore or Rs. 50
Crore whichever is lower = Rs. 50 Crore. Thus approval of members was required
if sale of goods amounted to Rs. 115 Crore.
Now with the removal of lower limit of
Rs. 50 Crore, company is not required to take members approval as this
transaction is less that 10% of turnover of company.
The major impact is that the company
can undertake transactions for value more than Rs. 100 / Rs. 50 Crore. There is
no need of limiting transactions upto Rs. 100/ Rs. 50 Crore.
