Amendments in limits of Related Party transactions dated 18th Nov 2019

Changes in limits of Related party transactions

On 18^th 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	Extant Rule	New Rule
Rule 15(3)(a)(i) and 15(3)(a)(ii) the words “or rupees one hundred crore, whichever is lower” shall be omitted.	(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 or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;	(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;
	(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 or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;	(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;
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	(iii) leasing of property any kind amounting to ten percent  or more of the net worth of company or ten per cent or more of turnover of the company or rupees one hundred crore, whichever is lower as mentioned in clause (c) of sub-section (1) of section 188;	(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;
Rule 15(3)(c) in sub-clause (iv), the words "or rupees fifty crore, whichever is lower" shall be omitted.	(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 or rupees fifty crore, whichever is lower as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:	(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:

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.