In what would reduce India Inc's compliance obligations with respect to the functions and role of directors, the government has knocked off one-third of the "list of relatives" for “related-party transactions” under the new Companies Act of 2013.
In the old Companies Act of 1956, there were over 22 categories of relatives. This has now been reduced to eight. Also, the government has exempted the list of relatives of directors and key managerial persons (KMP) of subsidiaries and associate companies from the ambit of related-party transactions, leaving the definition of related party to cover the directors and KMP of a company and its holding company.
Relatives' list is crucial for determining the related party transactions as it extends to the relatives of director, key managerial persons (KMP) and a firm in which a director’s relative is a partner or a public company in which a director or manager holds along with his relatives more than 2% of its paid-up share capital.
Experts said a reduced list of relatives is significant for companies. "Shortened definition of relative will mean fewer transactions will fall within the ambit of the related party transactions," said Lalit Kumar, partner in J Sagar Associates, a leading law firm.
These rules are part of the Companies (Specification of definitions details) Rules,2014. As per the rules, a person shall not be eligible for appointment as a director of a company if he has been convicted of the offence dealing with related party transactions at any time during the last preceding five years. As per the new Companies Act, it is one of the duties of the independent directors to ensure that adequate deliberations are held before approving related-party transactions.
Such related-party transactions, also need the approval of the board of directors. As per Section 188 of the new Act, every contract or arrangement entered into with related parties of the directors/KMP (others as defined under the law) will have to be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.
However, the limits for approaching the shareholders for seeking an approval via special resolution has undergone a change after the consultative process, experts said. The government has enhanced the limits in several cases.
"This is a welcome move since lower limits could mean that for most related-party transactions that are not at an arm’s length and not in the ordinary course of business, companies would have to approach the shareholders for their prior approval,” said Sai Venkateshwaran, partner, head of accounting advisory services, KPMG, India.
Experts said the concept of related parties and list of relatives is significant for auditors as well. "For example the auditor gets disqualified if his relative has entered into certain transactions or bought certain securities from the company in which his relative, as defined in the list, is an auditor," said a company law expert.
The burden of compliance for companies has also been reduced while preparing the directors’ report as scope of internal financial controls has also been restricted to financial statements as opposed to the earlier requirement of covering operational aspects. This move is expected to reduce the compliance burden of directors, experts said.
Source : www.financialexpress.com
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