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Govt not to define ‘ordinary course of business’

The corporate affairs ministry has ruled out defining the term ‘ordinary course of business’, used several times in the Companies Act, 2013. This, experts say, might lead to confusion and litigation.

“We are not going to define the ‘ordinary course of business’. Companies will have to do it themselves,” said a senior ministry official, asking not to be named.

Though the term has been used at various places in the new companies law, it has primarily drawn attention because of its significance in cases of related-party transactions.

According to the new legislation, if a related-party transaction is not part of a company’s ‘ordinary course of business’, besides a few other conditions, it will need to get approvals from the board of directors and the audit committee. Also, if a transaction is ‘material’, it requires approval of 75 per cent of minority shareholders.

OUT OF THE ORDINARY
  • Old law
    In the Companies Act, 1956, use of the term ‘ordinary course of business’ was fewer
     
  • New law
    The Companies Law, 2013, uses the term in relation with issues like related-party transactions, loans to directors, powers of the board, insider-trading provisions, etc
     
  • Difficulty
    In the absence of a clear definition, it might become tough to see which areas of related-party transactions might need approval from the board and audit committee
     
  • ‘Material’ issue
    If a transaction is material, 75% of minority shareholders’ approval is also needed, but the term ‘material’ is not defined
     
  • Current norm
    For listed firms, Sebi currently has a broad list of material events. If a company’s decision is stock price-sensitive and has material bearing on its operations, the decision has to be notified to stock exchanges

“There is no definition for what is ordinary and what is not. So, there will be confusion over whether a particular related-party transaction, such as royalty payment, requires approval from the board of directors or minority shareholders,” says Dolphy D’Souza, partner at a member firm of EY Global.

According to an expert, the memorandum and articles of association of the company concerned will be used to interpret an ‘ordinary course of business’ in the event of litigation. This, in some cases, might lead to subjectivity.

Yogesh Sharma, partner (assurance) at Grant Thornton India LLP, says while it will be easy to identify what is ‘ordinary course of business’ in most cases, it will remain subjective and require judgement in situations where it is not so obvious. “Consider royalty payments, for example. It can be taken as ordinary course of business for a company like Maruti Suzuki but one might view it differently in the case of, say, a Tata Group company.”

While the Companies Act of 1956 used the term in reference to very few situations, the law of 2013 uses it in conjunction with situations that are far more common, Sharma adds. “For example, it is used as a reference to specify restrictions in related-party transactions. Even a slight misinterpretation might result in non-compliance.” Besides related-party transactions, the term is used in the context of loans to directors, powers of the board, insider-trading provisions, etc. The fact that the phrase has been used at different places and in reference to a variety of transactions in the Act might lead to contextual interpretations and inconsistency in application. As a result, there could ultimately be increased compliance cost for Indian companies,” says Sharma.

More cases of non-compliance would lead to more litigation in this matter, he adds. Though it was widely understood that defining ‘ordinary course of business’ would be difficult, industry was hoping for some guidelines from the ministry. But the ministry’s reluctance to give a fairer idea might cause some confusion. Apart from ‘ordinary course of business’, the Act also sheds little light on the term ‘material’, which is to be used for determining whether an approval from 75 per cent of minority shareholders is required in a related-party transaction. Manoj Kumar, managing partner at Hammurabi & Solomon, says what is ‘material’ cannot be decided from a company’s articles of association. “It will be decided from the facts and circumstances of each case based on the principles of potential conflict of interest.”

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