With new proposals on related party transactions, India will turn back on corporate governance reform

DeekshaSinghThe Companies Act, 2013 (“Act”), the statute that transformed India’s six-decade-old company law and containing provisions geared towards a stronger corporate governance regime, was almost unanimously welcomed. Most of its provisions were notified last year. Earlier this month however, even before all the provisions of the Act could be notified, the Union Cabinet, announced through a press release, its approval for the introduction of amendments to this Act. Some of the proposals in the Companies (Amendment) Bill, 2014 (“Amendment Bill”), if they end up becoming law, will dilute the impact of India’s corporate governance reforms.

The press release lists the proposed amendments along with a rationale and they are categorised below.

Proposals that will increase the ease of doing business

1. Omitting the requirement for minimum paid up share capital and consequential changes.

2. Making a common seal optional and consequential changes for the authorisation for the execution of documents.

3. Empowering the Audit Committee to give omnibus approvals for related party transactions on an annual basis. (This amendment was made to align the provision with SEBI policy and to increase the ease of doing business.)

Proposals to meet corporate demand

1. Prohibiting public inspection of Board resolutions filed in the Registry.

2. Rectifying the requirement of transferAPCCLP_CompanyLaw-Bannerring equity shares for which unclaimed or unpaid dividend has been transferred to the IEPF even though subsequent dividend(s) has been claimed.

3. Replacing ‘special resolution’ with ‘ordinary resolution’ for the approval of related party transactions by non-related shareholders. (The specific rationale provided here is that this amendment is to meet the problems faced by large stakeholders who are related parties.)

4. Exempt related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related shareholders.

Proposals to address errors

1. Prescribing specific punishment for deposits accepted under the new Act.

2. Including provision for writing off past losses or depreciation before declaring dividend for the year.

3. Exemption under Section 185 (Loans to Directors) provided for loans to wholly owned subsidiaries and guarantees or securities on loans taken from banks by subsidiaries.

4. Winding up cases to be heard by a two-member bench instead of a three-member Bench.

Other proposals

1. Enabling provisions to prescribe thresholds beyond which fraud shall be reported to the Central Government (below the threshold, it will be reported to the Audit Committee). Disclosures for the latter category are also to be made in the Board’s Report. (This amendment is being introduced as a result of demand from auditors.)

2. Bail restrictions to apply only for offence relating to fraud under Section 447.

3. Special Courts to try only offences carrying imprisonment of two years or more. (This amendment is being made to allow magistrates to try minor violations.)

It appears that the BJP government is demonstrating its adherence with its ‘development’ manifesto. The amendments ostensibly made “for ease of doing business” and “to meet corporate demand” are probably a response to the lobbying that the corporate sector commenced shortly after the Act was notified.

Proposals dilute regime governing related party transactions

Some of the proposals however, may have the effect of reversing the positive steps towards sound corporate governance that the Act had introduced. One such proposal is that of diluting the requirement for a special resolution of disinterested shareholders for the approval of material related party transactions (“RPTs”). The amendment proposes to change this to only an ordinary resolution. A second proposal in relation to RPTs proposes to exclude RPTs between holding companies and wholly owned subsidiaries from the requirement of disinterested shareholder approval.

The provisions relating to the regulation of RPTs were key corporate governance reforms introduced by the Act. If these proposals become law, they will dilute the impact of these reforms.

The Amendment Bill is an opportunity for the government to address some errors and essential requirements. While evaluating these proposals, it is crucial that the interests of all stakeholders, large and small, and indeed, the principles of sound corporate governance are given as much importance by our legislators as “corporate demand” and “ease of doing business”.

Deeksha Singh is part of the faculty on