Updated as on 15 September 2014 Related party Navigating through challenges Companies Act, 2013 and SEBI s Revised Clause 49
Related party (RPT) now need to meet significant disclosure and compliance requirements 1 Immediate impact Increased transparency for RPTs, which are now more aligned with the arm s length principle : Transfer pricing is already a focus area for tax authorities globally Enhanced accountability for key management New responsibilities for the board of directors and audit committees Key implications under Companies Act 2013 All RPTs require audit committee approval Audit committee empowered to obtain external professional advice RPTs not in the ordinary course or not at arm s length require: approval of board approval of shareholders (special resolution) where RPTs exceed specified thresholds Disclosure required in board s report Related parties in the context of the contract are to abstain from voting Applicable to private company more clarity expected Key additional implications for listed companies under SEBI s clause 49 Related parties to additionally include parties defined under applicable accounting standard All RPTs require prior audit committee approval All material RPTs require approval of shareholders All related parties to abstain from voting Audit committee could grant one-time approval subject to conditions Policy on dealing with RPTs to be disclosed on website Provisions do not apply to: Transactions between Hold Co. and wholly owned subsidiary provided their accounts consolidated Companies with paid up equity share capital not exceeding INR 10 crores and net worth not exceeding INR 25 crores 1. Section 188 of the Companies Act, 2013 (CA, 2013) effective 1 April 2014 & Revised Clause 49 of the SEBI Equity Listing Agreement to be effective from 1 October 2014
Ordinary course of business and arm s length Ordinary course of business In ordinary course may mean, undertaken: In normal course, i.e. not undertaken in extra-ordinary or exceptional circumstances, or As part of customary business practices, or As part of long standing conduct In ordinary course may not necessarily mean: Infrequent, or Restricted to core business In ordinary course could have different meanings for different entities Arm s length Transaction at arm s length if conducted as if parties are unrelated, so that there is no conflict of interest Use of the term conducted emphasizes focus on substance Focus on arm s length basis indicates importance of underlying price setting policy Support can be drawn from Income Tax Act, 1961 and international guidance to justify arm s length Steps to manage the change Identification of related parties & Pricing policy Mapping of parties under multiple regulations to help identify and manage requirements and drive synergies Focus on identifying which are presently not charged Scope under new requirements to typically cover all One-time risk assessment of all RPTs to ensure consistent approach Policy based approach for recurring Deviations and basis for the same to be documented Guidance Guidance to business team to explain requirements and ensure real-time synergies with finance and tax teams Training materials to explain one-time and ongoing documentation Documentation Maintain detailed documentation to comply with arm s length requirements Identify one-time documentation and ongoing documentation, aligned with pricing policy Systems and controls System controls to track related parties and Automating pricing policy implementation and documentation requirements Regular system audits
Where we can assist Identify Identification and mapping of related parties Identification of RPTs / contracts Review, analyse and assess Design, develop and advise Intra-group contracts to determine the current position of compliance Functional, asset and risk (i.e. sharing of risks and rewards) profile of related parties Internal processes / controls maintained Present methodology used and documentation maintained Board policy on dealing/disclosure of RPTs Appropriate transfer pricing methodology with supporting external benchmarking studies, as necessary Process/template of reporting RPTs to audit committee Automated process / approach / methodology to monitor changes in contracts / arrangements / Internal documentation framework for intra-group
Key terms explained Related parties 2 CA, 2013 SEBI Holding and Subsidiary companies (direct or indirect) Associate Company(>20% or control of business decisions under an agreement) Directors and Key Management Personnel (including their relatives) of the company or its holding company Firms and private companies in which directors, managers or relatives are partner, director or members Any person on whose advice, unless given in a professional capacity, a director or manager of the company is accustomed to act Public company in which the director or manager is a director and holds along with his relatives more than 2 % of the paid up share capital Related parties as defined above Parties covered under the applicable accounting standards RPT CA, 2013 SEBI Sale, purchase, leasing or supply of goods or property of any kind Availing or rendering of any service Appointment of agent for the above Underwriting of securities Transfer of resources, services or obligations between a company and a related party Transaction to include single transaction or a group of in a contract Specified threshold CA, 2013 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 to any office or place of profit in the company, subsidiary company or associate company Remuneration for underwriting of securities 10 percent of the annual turnover or INR 100 crores, whichever is lower 10 percent of the net worth or INR 100 crores, whichever is lower 10 percent of the net worth or INR 50 crores, whichever is lower Monthly remuneration exceeding INR 250,000 One percent of the net worth SEBI Material RPT: Transaction (together with previous with a related party) exceeds 10% of the annual consolidated turnover 2. Illustrative, not exhaustive
Contacts Shyamal Mukherjee Leader, Tax and Regulatory Services Phone: + 91 124 3306000 Email: shyamal.mukherjee@in.pwc.com Ketan Dalal Managing Partner (West), Tax and Regulatory Services Phone: + 91 22 66891000 Email: ketan.dalal@in.pwc.com Sanjay Tolia Country Leader, Transfer Pricing Phone: +91 22 66891000 Email: sanjay.tolia@in.pwc.com Transfer Pricing contacts Ahmedabad Sanjay Tolia Phone: +91 79 30917000 Email: sanjay.tolia@in.pwc.com Bangalore/ Hyderabad Indraneel R Chaudhury Rakesh Mishra Eric Mehta Phone: +91 80 40796000 Email: indraneel.r.chaudhury@in.pwc.com rakesh.mishra@in.pwc.com eric.mehta@in.pwc.com Chennai Kunj Vaidya Phone: +91 44 42285000 Email: kunj.vaidya@in.pwc.com Delhi Rahul K Mitra Sandeep Puri Phone: +91 124 3306000 Email: rahul.k.mitra@in.pwc.com sandeep.puri@in.pwc.com Kolkata Rahul K Mitra Phone: +91 124 3306000 Email: rahul.k.mitra@in.pwc.com Mumbai Sanjay Tolia Bipin Pawar Dhaivat Anjaria Jayant Jain Darpan Mehta Phone: +91 22 66891000 Email: sanjay.tolia@in.pwc.com bipin.pawar@in.pwc.com dhaivat.anjaria@in.pwc.com jayant.jain@in.pwc.com darpan.mehta@in.pwc.com Pune Dinesh Supekar Phone: +91 20 41004444 Email: dinesh.supekar@in.pwc.com Data Classification: DC0 2014 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity. AK 256 - September 2014 Related party.indd Designed by Corporate Communications, India