Presents The Power of 30!

Transcription

1 Presents The Power of 30! A web series of 30 episodes covering different areas of corporate, securities and financial laws for the corporate professionals across the country.

2 COPYRIGHT The presentation is a property of Vinod Kothari & Co. No part of it can be copied, reproduced or distributed in any manner, without explicit prior permission. In case of linking, please do give credit and full link 2

3 RELATED PARTY TRANSACTIONS (RPTS) 22 nd September, 2018 Pammy Jaiswal Vinod Kothari & Company Kolkata Krishna Building 224 AJC Bose Road Kolkata Phone: / /7715 E: New Delhi A/11, Hauz Khas, New Delhi Phone: / E: Mumbai , 175, Shreyas Chambers, D.N. Road, Fort, Mumbai Phone: / E:

4 APPLICABLE PROVISIONS Companies Act, 2013 (CA 13) RELATED PARTY TRANSACTIONS SEBI (LODR) AS/IND AS

5 RELATED PARTIES UNDER THE CA 13 Director or KMP or relative thereof Director (excl. IDs) or KMPs of the holding company or his relative Private company in which a director or manager or his relative is a member or director Any person on whose advice, directions or instructions a director or manager is accustomed to act Related parties (Section 2(76) Firm, in which a director, manager or his relative is a partner Any body corporate whose BOD, MD or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager Public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid-up share capital Any body corporate which is (A) a holding, subsidiary or an associate company of such company; (B) a subsidiary of a holding company to which it is also a subsidiary; or (C) an investing company or the venture of the company

6 RELATED PARTIES UNDER SEBI LODR Related Party (Regulation 2(1)(zb)) As defined under Sec 2(76) of the Companies Act, 2013 As defined under the applicable Accounting Standards

7 WHO ALL ARE EXCLUDED UNDER CA 13 AND SEBI LODR? Director or KMP of associate and JV companies Public companies where directors hold less than 2% share capital Any person appointed in senior management in the company or its holding, or subsidiary or associate company Any person or entity belonging to the promoter or promoter group of the listed entity and holding less than 20% of shareholding in the listed entity Distant relatives like grandchildren/grandparents are excluded from the definition of relatives.

8 RELATED PARTIES UNDER AS-18 Individuals owning, directly or indirectly, an interest in the voting power that gives them control or significant influence over the enterprise, and relatives of any such individual. KMP and relatives; Enterprises over which any related person is able to exercise significant influence- includes enterprises owned by directors or major shareholders and enterprises that have a KMPs in common with the reporting enterprise Associates and JVs Investing party or venturer One party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions RP as per AS 18 Enterprises that directly, or indirectly control, or are controlled by, or are under common control with, the reporting enterprise including holding companies, subsidiaries and fellow subsidiaries

9 WHO ALL ARE NOT RELATED PARTIES UNDER AS-18? Companies having merely common directors unless the director is able to affect the policies of both companies in their mutual dealings A single customer, supplier, franchiser, distributor, or general agent with whom transaction of a significant volume of business merely by virtue of the resulting economic dependence Parties in the course of their normal dealings with an enterprise by virtue only of those dealings providers of finance; trade unions; public utilities; government departments and government agencies including government sponsored bodies

10 RELATED PARTIES UNDER IND AS-24 (1/2) (a) A person or close member of that person s family is related to a reporting entity if that person: i) Has control or joint control of the reporting entity ii) Has significant influence over the reporting entity iii) Is a member of KMP of reporting entity or of a parent of the reporting entity

11 RELATED PARTIES UNDER IND AS-24 (2/2) The entity and reporting entity are members of the same group One entity is an associate or JV of the other entity Both entities are JV of the same third party One entity is JV and other entity is associate of the same third party The entity is controlled or jointly controlled by a person identified in (a). (b) An entity is related to a reporting entity if any of the following conditions applies: The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity. The entity is a postemployment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent

12 WHO ALL ARE EXCLUDED UNDER IND AS-24? (a) two entities simply because they have a director or other member of key management personnel in common or because a member of key management personnel of one entity has significant influence over the other entity. (b) two joint venturers simply because they share joint control of a joint venture (c) (i) providers of finance, (ii) trade unions, (iii) public utilities, and (iv) departments and agencies of a government that does not control, jointly control or influence the reporting entity, simply by virtue of their normal dealings with an entity significantly (d) a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant volume of business, simply by virtue of the resulting economic dependence.

13 RELATED PARTY TRANSACTIONS Under Companies Act, 2013 Section 177 Section 188

14 RELATED PARTY TRANSACTIONS UNDER SECTION 177 in case of transaction, other than transactions referred to in section 188, and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it

15 RELATED PARTY TRANSACTIONS UNDER SECTION 188 Sale, purchase or supply of any goods or materials; Selling or otherwise disposing of, or buying, property of any kind; Leasing of property of any kind Availing or rendering of any services Appointment of any agent for purchase or sale of goods, materials, services or property Such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company Underwriting the subscription of any securities or derivatives thereof, of the company

16 RELATED PARTY TRANSACTIONS UNDER SEBI LODR Regulation 2(1)(zc) : related party transaction means- a transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged and a "transaction" with a related party shall be construed to include a single transaction or a group of transactions in a contract. Provided that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s);

17 MATERIAL RPT Under Companies Act Material RPT Under SEBI LODR

18 RULE 15 OF MBP RULES Without prior approval of company by a Resolution, a company cannot transact with related parties where the transaction or transactions to be entered into are for Type of transaction Material limit sale, purchase or supply of any goods or materials directly or through appointment of agents >10% of the annual turnover or Rs. 100 crore; lower one selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents >10% of net worth or rs. 100 crore; lower one leasing of property of any kind >10% of the net worth or 10% of the turnover or Rs. 100 crore; lower one availing or rendering of any services directly or through appointment of agents >10% of the net worth or Rs. 50 crore; lower one appointment to any place of profit in the company, its subsidiary or associate company at a monthly remuneration >Rs. 2.5 lakhs remuneration for underwriting the subscription of any securities or derivatives thereof of the company >1% of the net worth

19 MATERIAL RPTS UNDER SEBI LODR MEANING: Previous transaction Proposed transactions during FY Exceeds 10% of Annual Consolidated Turnover

20 RPT APPROVAL HIERARCHY UNDER SEBI LODR All RPT shall require prior approval of the audit committee Material RPT shall require approval of shareholders Exceptions: 1. transactions entered into between two government companies; 2. 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.

21 OTHER POINTERS The turnover or net worth shall be on the basis of the Audited Financial Statement of the preceding financial year Any transaction entered into ordinary course of business or transactions on arm s length basis shall not require any approval of Board or of members of the company. However the same shall still require the approval of Audit Committee However, one has to consider the provisions under sec 166 also arm s length transaction would mean a transaction between two related parties that is conducted without any conflict of interest

22 DETERMINATION OF TRANSACTION TO BE AT ARM S LENGTH Illustrative tests- prices/ discounts/ premiums and on such terms which are offered to unrelated parties of similar category/ profile commercially negotiated transaction pricing is arrived at as per the rule/guidelines that may be issued by or acceptable for the purpose of MCA, GOI, Income Tax Act, SEBI, as applicable. terms of contract/arrangement other than pricing are generally on a basis similar to those as may be applicable for similar category of goods and services or similar category/ profile of counterparties may also apply the most appropriate method from any of the following methods as prescribed under Section 92C(1) of the Income Tax Act, 1961 read with Rule10B of the Income Tax Rules, 1962 May seek professional opinion

23 SEQUENCE OF APPROVALS Contracts in ordinary course of business At arm s length Only Audit Committee approval Need not be prior approval However, prior omnibus approval may be granted (if repetitive) Contracts not in the ordinary course of business May be approved by Audit Committee and Will be recommended to Board for approval. Not at arm s length Audit Committee should not approve Considering provisions under Sec 166 (duties of directors), Board to take necessary action subject to the approval of the shareholders If approval of Board or prior approval of S/H not obtained Needs to be ratified within 3 months from date. Otherwise voidable at the option of the approving body.

24 OMNIBUS APPROVAL (1/2) Reg. 6A of Companies (Meetings of Board and its Powers) Rules, 2014 and Reg. 23 of SEBI LODR Omnibus Approval Valid for 1 year Criteria for approval Forseen Unforseen Contents name(s) of the related party nature of transaction period and max amount of transaction indicative base price / current contracted price Value shall not exceed 1 crore per transaction review, at such intervals, as decided by the committee of RPTs entered into by the company pursuant to each of the omnibus approval made maximum value of the transactions, in aggregate and per transaction, which can be allowed under the omnibus route in a year extent and manner of disclosures to be made at the time of seeking such approval

25 OMNIBUS APPROVAL (2/2) Other pointers: Review on quarterly basis Exemption to transactions between: i) govt. companies; ii) holding and wholly owned subsidiaries Validity of omnibus approval is one financial year and shall require fresh approval after the expiry of such financial year. No omnibus approval for transactions in respect of selling or disposing of the undertaking of the company. Further, transactions which are not at arm s length should not be approved by the Audit Committee

26 CORPORATE GOVERNANCE PROVISIONS Company to frame a policy on materiality of Related Party Transactions and on dealing with Related Party Transactions Who would approve the policy Logically, audit committee, followed by the board Policy on dealing with material transaction to be put on the website of the company and a web link thereto should be mentioned in the Annual report Contract or arrangement with related parties to be disclosed in the Board Report with the justification for entering into such contract or arrangement Listed entity to make disclosure in compliance with AS 18 / IND AS 24 on related party disclosures in its annual report Details of material transactions with related parties to be disclosed in quarterly compliance report on corporate governance Review by the Board once in every three years

27 RECOMMENDED CONTENTS OF RPT POLICY Terms of the Policy Requirement of approval of Audit Committee, Board, shareholders Arm s length transactions Transactions u/s 188 and LODR Governance Structure Identification of related parties and related party transactions Who and how to identify How to ascertain a transaction to be at arm s length methods thereon How to ascertain a transaction to be in ordinary course of business Procedure for approval and review of RPTs Clear thresholds for approval Omnibus Approval by Audit Committee Criteria for such approval Other conditions Dissemination of information Where, to whom and how to report

28 READ OUR RELATED RESOURCES HERE Implication Of Definitional Change In Related Parties- As Per The Companies (Amendment) Act, 2017 click here MCA Attempts To Realign Rpts With Listing Regulations- click here To read our other resources on Corporate Laws click here To read other resources on Listing Regulations click here To read our other resources Accounting Standards click here

29 ABOUT US Vinod Kothari & Co., Based in Kolkata, Mumbai, Delhi We are a team of consultants, advisors & qualified professionals having over 30 years of practice. Our Organization s Credo: Focus on capabilities; opportunities shall follow 29

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