The Ministry of Corporate Affairs is continuing its drive to ease India's company law procedures. Following up on the recent announcements making company incorporation and director identification simpler, it will soon also be easier for Indian companies to obtain government approval for related party transactions.
Privately held Indian companies with a paid-up share capital of at least Rs. 10 million currently require government approvals to enter into various related party transactions. In practice, obtaining these approvals can take months.
Under the new procedures, which go into effect on September 24, 2011, companies will be required to provide certain types of specific information to their boards and shareholders when seeking board or shareholder approval for these contracts (e.g., on the arms' length nature of the transaction).
Thereafter, based on the corporate approvals obtained, the company can apply for and obtain government approval online. The companies will be required to submit the supporting documents (contracts and resolutions) online and the veracity of the information contained in the application and documents will have to be certified by a practising company secretary or chartered accountant. (Providing false information could result in penal action.)
These procedural changes are welcome. But even so, one can't help but wonder why such government approval should be required at all. Instead, related party transactions should be subject to stronger disclosure and audit requirements so that boards and shareholders can make informed decisions when approving the transactions and so that the fiscal authorities can ensure that such transactions are not used to dodge taxes. However, changes that dispense with the need for central government approval altogether would require legislative action and, despite years of promising a new law, the proposed companies bill remains a draft that is being discussed by the various government ministries. One only hopes a new companies bill will be taken up by parliament when it reconvenes next month.