The Companies Act: Reinvigorating Soon On The Related Party Front!

The Companies Bill, 2016 (Co-Bill 2016), if passed in the monsoon session of Parliament, will bring in far-reaching changes. What are they?

The Government of India (GoI) had set up a Companies Law Committee (the Committee) in June 2015 to examine the need for further amendments in Companies Act, 2013 (Co-Act 2013). The Committee invited suggestions from all stakeholders and held broad based consultations on the suggestions received, and submitted its report to the GoI in February 2016. Based thereon, in March 2016, the Companies Bill, 2016 (Co-Bill 2016) was introduced in the Lok Sabha, which was then referred to a Standing Committee on Finance (SCF) in April 2016. The SCF submitted its report in December 2016.

The proposed amendments impacting related party transactions (RPT) in the Co-Bill 2016, were largely approved by SCF, without objecting to anything specifically. Subsequently, the Union Cabinet has also recently approved the Co-Bill 2016. This being the case, there is now a high possibility of it being passed in the monsoon session of the Parliament.

There are several proposed amendments impacting RPT in the Co-Bill 2016, which are likely to be enacted “as-is”. So what has changed? What are the highlights of the amendments? Why were the amendments required? What could they imply?  

While we have attempted to briefly answer the questions, before moving to our analysis and to be able to contextualise the amendments, an understanding of the following broad underlying objectives of the amendments is important:

addressing difficulties in implementation owing to stringent compliance requirements;

facilitating ease of doing business to promote growth with employment but with continued focus on governance;

harmonisation with accounting standards, the SEBI1 and RBI2 regulations;

rectifying omissions and inconsistencies in the Co-Act 2016.

Analysing the key amendments
Our analysis takes into consideration the rationale adopted by the Committee in proposing the amendments, and also the comments of  SCF.

A related development, worth highlighting…

The Companies (Auditor’s Report) Order, 2016 (CARO 2016) has, in respect of RPTs, introduced a new reporting requirement for auditors which is as follows:  “Whether all transactions with the related parties are in compliance with Section 188 and 177 of Companies Act 2013 where applicable and the details have been disclosed in the Financial Statements etc., as required by the applicable accounting standards.”

Since auditors will need to comment on compliance with sections 177 and 188 of the Co-Act 2016 – it will lead to a more focused and stringent review by auditors of the approval process followed by a company in respect of RPTs. This will need to be adequately supported by a clear documentation trail. The intention of this amendment seems to have been to ensure an independent review around RPT.

While the Co-Bill 2016 is not a law yet – it is likely to be soon. Knowing so, it becomes important to understand the proposed amendments...

Concluding thoughts
From the amendments elucidated above, it is evident that apart from providing certain clarifications, harmonising with accounting standards and Sebi, and taking a few steps towards governance and facilitation of ease of doing business – the big changes seem to be an expansion in scope and coverage of related parties; a fair articulation of the roles and responsibilities of an Audit Committee; and a new reporting requirement for auditors on RPT in CARO, 2016.

While the Co-Bill 2016 is not law yet – it is likely to soon be. Knowing so, it becomes important to understand the proposed amendments, start assessing their impact, and be geared up for the imminent change.

Views are personal
About the authors: Eric Mehta is Partner and Ruhi Mehta is Director – Transfer Pricing, Price Waterhouse & Co. LLP

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