BY ILAM C. KAMBOJ

Asso. V.P. Legal & Company Secretary

Hero MotoCorp Ltd.March 13, 2015

Presentation on Related Party Transactions

as per Listing Agreement

S. No. Topics

1 Clause 49- applicability

2 Related party as per Listing Agreement

3 Related party as per CA 2013

4 Related party as per AS 18

5 Related Party Transactions

6 Directors vis-à-vis RPT

7 Audit Committee, Board and Shareholders vis-à-vis RPT

8 Disclosures

9 Penal consequences for non compliance

10 Practical challenges

Table of Contents

Clause 49 ApplicabilityAll Listed Companies Non Mandatory :

Paid up capital not exceeding Rs. 10 crores and

Net worth not exceeding Rs. 25 croresComply within 6 months from the date of

applicability

Listed exclusively on SME and SME – ITP Platforms

Related Party as per Listing Agreement

Related Party – Clause 49(VII)(B)

An entity shall be considered as related to the company if it is a Related Party:

under Section 2(76) of the Companies Act, 2013; or

under the applicable accounting standards. 

Related Party as per Companies Act, 2013

Related Parties 2(76)

Manager III. Firm

I. DirectorIV. Private Co.

V. Public Co. I. Relative of Director

II. KMP or relative IX. Any other prescribed person

Company

VII. Any person , on whose advice, directions or instructions

Director/Manager is accustomed to act*

VIII. Holding Co/ Subsidiary

Co/Associate Co. $/Sister Subsidiary

VI Body Corporate whose

Board/MD/Manager accustomed to act in

accordance with advise, directions or

instructions of a Director/Manger *

Member/Director

Member/Director

Partner

Partner

*Except if advice given in professional capacity, # Director+ Holds more than 2% of PSC along with relatives.$ 2(6) “Associate Company” means a Company in which other Company has a significant influence, but which is not a subsidiary of the Company having such influence and includes a joint venture company.

# Director+2%

IX Director /KMP of Holding Company &

their relatives

# Director+2%

II. Relative of ManagerPartn

er

Partner

Relatives 2(77) & Rules

1 H.U.F (all the members)

2 Spouse Husband/Wife

3 Father/Step Father

4 Mother/ Step Mother

5 Son /Step Son Wife

6 Daughter Husband

7 Brother/Step Brother

8 Sister/Step Sister

Related Party as per Accounting Standard

Related Party – AS-18…“Related Party” means if one has ability to control the other party or exercise significant influence over the other in making financial and/or operating decisions. a. enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries);

Related Party – AS-18…b. Associates and joint ventures of the

reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture;

Related Party – AS-18…c. Individuals owning directly or

indirectly, an interest in the voting power of the enterprise that gives them control or significant influence over the enterprise. Relatives of such individual are also related parties.

Related Party – AS-18…d. Key Management Personnel (KMP)

and relatives of KMP; ande. Enterprises over which any person

described in (c) and (d) above is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the enterprise or enterprises that have common KMP.

Related Party – AS-18…

Control under AS – 18 means:

o Ownership directly or indirectly, more than

½ of the voting power, or

o Control of the Composition of the Board of

Directors, or

Related Party – AS-18…

o Substantial Interest in voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the company.

“Substantial Interest” means owning, directly or indirectly, 20% or

more interest in the voting power of the other enterprise.

Related Party – AS-18…Significant Influence under AS-18

means:Participation in the financial and/or

operating policy decisions of an enterprise, but not control of those policies; or Example:oRepresentation on the BoardoParticipation in the policy making processoMaterial inter Company transactions

Related Party – AS-18o Interchange of managerial personneloDependence on technical information

Shareholding directly or indirectly, through subsidiaries, 20% or more voting power; or

Influence by Statute or Agreements.

Related Party Transactions (RPT)…

RPT as per Clause 49Transfer of resources, services or

obligations between a company and a related party, regardless of whether a price is charged.

Transaction to include single transaction or a group of transactions in a contract.

Related Party Transactions (RPT)…

Exceptiontransactions entered into between two

government companies;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.

Related Party Transactions (RPT)…Exception u/s 188Transaction entered into in Ordinary course of business and on arm’s length basisArm’s Length basisA transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

Related Party Transactions (RPT)RPT as per AS-18Transfer of resources or obligations

between a company and a related party, regardless of whether a price is charged.

Directors vis-a-vis RPT

Directors vis-à-vis RPT…Members of the Board and key

executives to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the company.

Directors vis-à-vis RPT…Monitor and manage potential

conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

Directors vis-à-vis RPT…Duties of Independent Director - Code for ID’s

Pay sufficient attention; Ensure that adequate deliberations

are held before approving related party transactions; and

Assure themselves that the same are in the interest of the company.

Directors vis-à-vis RPT…Duties of Interested DirectorNot to be present at the meeting

during discussions;Abstain from voting in the General

Meeting

Directors vis-à-vis RPT

Disqualification of a Director – U/s 164(1)(g)

Convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years.

Vacation of Office

Audit Committee, Board and

Shareholders vis-à-vis

Related Party Transactions (RPT)

Audit Committee vis-à-vis RPT…Composition2/3rd members Independent DirectorsRole include:To review with the management, the

annual financial statements and auditor's report thereon before submission to the board for approval, with particular reference to disclosure of any related party transactions

Audit Committee vis-à-vis RPT…Mandatory Review: Statement of significant related

party transactions (as defined by the Audit Committee), submitted by management;

Audit Committee vis-à-vis RPT…Approve Original or any subsequent

modification of related party transactions.

Prior approval of all RPTs;

Audit Committee vis-à-vis RPT…Omnibus approval for proposed RPTs

subject to the following : Criteria laid down by AC;Criteria in line with the RPT Policy; Applicable in respect of Repetitive RPTs only.

Audit Committee vis-à-vis RPT…AC to satisfy itself that the omnibus

approval is needed and in the interest of the company

Omnibus approval shall specify the name/s of the related party, nature and period of transaction, maximum amount of transaction that can

be entered into,

Audit Committee vis-à-vis RPT…the indicative base price/current

contracted price and the formula for variation in the price, if

any; and such other conditions as the Audit

Committee may deem fit;

Audit Committee vis-à-vis RPT…Exception Omnibus approval for transactions

where the need for RPT cannot be foreseen and aforesaid details are not available subject to the value not exceeding Rs.1 crore per transaction.

Audit Committee vis-à-vis RPTReview on RPTs – Details at least on a

quarterly basis.Validity of Omnibus approvals - Not

exceeding one year and fresh approvals after the expiry.

Board vis-à-vis RPTCompanies Act, 2013:All transactions to be approved at

meeting except exempted or requiring approval of shareholder

Clause 49 silentFormulate policy on materiality of

RPTs and dealing with RPTs

Shareholders vis-à-vis RPT…Section 188 and Rules Prior approval – In the form of Special Resolution All Companies - irrespective of its Paid up share capital

Shareholders vis-à-vis RPT…Value of Transactions :

Goods and Materials - Exceeds 10% of the annual turnover or Rs. 100 crores (lower)

Property – exceeds 10% of the Net worth or Rs. 100 crores (lower)

Leasing of Property - exceeding 10% of the net worth or 10% of the Turnover or Rs. 100 crores (lower)

Services - exceeding 10% of Turnover or Rs. 50 crores (lower)

Shareholders vis-à-vis RPT…Appointment to any office or place of

profit in C/S/A Company – Monthly Remuneration exceeding Rs. 2.5 lac

Remuneration for underwriting - exceeding 1% of the Net worth

Shareholders vis-à-vis RPT…Any member who is a related party

for said transaction– Not to vote on Special Resolution

Special Resolution passed by the holding company shall be sufficient for transactions with its wholly owned subsidiary

Shareholders vis-à-vis RPT…By Shareholders as per Clause 49

All Material RPT to be approved through Special Resolution. All Related Parties shall abstain from voting

Shareholders vis-à-vis RPTMaterial RPT:Transaction individually or together with previous transactions during a financial year exceeds 10% of the annual consolidated turnover of the company as per the last audited financial statements of the company.

Disclosures

Disclosure of RPT...

Disclosure as per Clause 49 Stock Exchanges

All material transactions on quarterly basis alongwith the Compliance Report on Corporate Governance

Disclosure of RPTWebsite

Policy on dealing with RPT

Annual Report Web link of the RPT Policy

Penal consequences for non-compliance For any Director or employee involved in

contravention, penalty would be For Listed Company:

Imprisonment, which may extend up to one year; or

Fine, ranging between Rs 25,000 and Rs 500,000; or

Both For others:

Fine ranging between Rs 25,000 and Rs 500,000

Practical Challenges…Identification of Related parties –

lack of timely informationTransactions to be covered – Some

typical transactionsTransactions Working Capital LoanLease Rent Recovery On Behalf of

RPTWarranty Charges

Practical Challenges…Freight ChargesDebit On account of Advertisement

Exp.Die Maintenance chargesSegregation ChargesComponent SalesCapital Assets sent on OSP basis

Practical Challenges…Services/obligations provided but

not documentedCommon use of facilitiesLack of knowledge at operating level Large number of departments/

individuals involved in transactionsInadequate monitoring systems

Practical Challenges…Business exigenciesVery large number of transactions Arm’s length pricing/ Terms –

Expertise to analysePressuresPriorities of non secretarial

departments

Practical ChallengesTough scrutiny by Audit Committee

& Independent DirectorsShareholder’s activism

Thank you