Do material related party transactions conducted in the ordinary course of business at an arm's length price require shareholder approval?

The answer can be both yes and no.

 

To determine the need for approval, we must first consider the type of company involved.

 

Companies Act,2013:

According to the proviso to Section 188(1):-

 

Related Party Transactions

 

188. (1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company:

 

Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a [resolution]:

Provided further that no member of the company shall vote on such [resolution], to approve any contract or arrangement which may be entered into by the company, if such member is a related party:

 

Provided also that nothing contained in the second proviso shall apply to a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties

 

Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.

 

Hence it is clear that under Companies Act, it is exempt.

 

SEBI LODR Regulations,2015:

 

However, the same exemption does not apply to listed companies. Regulation 23 of SEBI LODR:

 

(4) All material related party transactions and subsequent material modifications as defined by the audit committee under sub-regulation (2), shall require prior approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.

 

(5)   The provisions of sub-regulations (2), (3) and (4) shall not be applicable in the following cases:

(a) transactions entered into between two government companies;

 

(b) transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

 

(c) transactions entered into between two wholly-owned subsidiaries of the listed holding company, whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval

 

Explanation.-For the purpose of clause (a), “government company (ies)” means Government company as defined in sub-section (45) of section 2 of the Companies Act, 2013.

 

The exemption given under companies act for ordinary course of Business is not given for listed entities under SEBI LODR.

 

CONCLUSION:

Therefore, for listed companies, shareholder approval is required for material related party transactions conducted at an arm's length basis, even if they are in the ordinary course of business.

 

Note: Under Regulation 15(2) of SEBI LODR, certain listed entities are exempt from corporate governance provisions.

 

DISCLAIMER: THE CONTENTS OF THIS DOCUMENT ARE PROVIDED BASED ON CURRENT PROVISIONS AND INFORMATION AVAILABLE. WHILE EVERY EFFORT HAS BEEN MADE TO ENSURE ACCURACY AND RELIABILITY, NO RESPONSIBILITY IS ASSUMED FOR ANY ERRORS OR OMISSIONS. USERS ARE ENCOURAGED TO REFER TO APPLICABLE LAWS AND REGULATIONS. THIS INFORMATION IS NOT TO BE CONSTRUED AS LEGAL ADVICE, AND NO LIABILITY IS ACCEPTED FOR ANY CONSEQUENCES ARISING FROM ITS USE.

 

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