Shareholders' prior nod needed for related party transactions

The government has clarified that related party transactions valued in excess of Rs 100 crore would require prior approval of shareholders by way of a special resolution under the new Companies Act.

The corporate affairs ministry has also said that companies should provide detailed explanation about related party transactions, including the nature of the deal, while seeking approval.

The new rules would be applicable to contracts and arrangements coming under related party transactions.

"Sale, purchase or supply of any goods or materials-directly or through appointment of agent-that exceeds 10 per cent of the company's turnover or Rs 100 crore would require approval through special resolutions," the ministry said in the latest Companies (Meetings of Board and its Powers) Second Amendment Rules, 2014. This was issued on August 14.

With respect to selling or otherwise disposing of or buying property of any kind, directly or indirectly through appointment of agent, the same norms would be applicable only if the value exceeds Rs 100 crore or 10 per cent of the company's net worth.

In case of leasing of property, only those transactions where the value exceeds Rs 100 crore or ten per cent of the company's turnover or ten per cent of its net worth would require nod through a special resolution.

The norms would be applicable for availing or rendering of any services, directly or through appointment of agent in case the value is more than ten per cent or the company's turnover or Rs 50 crore. For this purpose, the ministry said that turnover and net worth would be computed on the basis of audited financial statement of the preceding financial year.

Special resolutions require, at least, 75 per cent shareholders' nod to get passed. Besides, the company has to annex an explanatory statement about related party transactions in general meeting notice. The statement should include details such as name of the related party, key managerial personnel who are related to the transaction and nature of relationship, among others.