Presents The Power of 30! - Vinod Kotharivinodkothari.com/wp-content/uploads/2018/09/RPT-2-1.pdf ·...
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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.
COPYRIGHT•The presentation is a property of Vinod Kothari & Co.
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Pammy JaiswalVinod Kothari & Company
Kolkata
1006-1009 Krishna Building224 AJC Bose RoadKolkata – 700017
Phone:033-22811276/ 22813742/7715E: [email protected]
New Delhi
A/11, Hauz Khas,New Delhi 110016
Phone:011-41315340/ 65515340
Mumbai
403-406, 175 , Shreyas Chambers,
D.N. Road, Fort, Mumbai – 400 001
Phone: 022 22614021/ 62370959
www.vinodkothari.comEmail: [email protected]
RELATED PARTY TRANSACTIONS (RPTS)
22nd September, 2018
APPLICABLE PROVISIONS
RELATED PARTY
TRANSACTIONS
Companies Act,
2013 (CA’13)
SEBI (LODR)
AS/IND AS
RELATED PARTIES UNDER THE CA’13
Related parties
Director or KMP or
relative thereof
Director (excl. IDs) or
KMPs of the holding
company or his relative
Firm, in which a
director, manager or
his relative is a partner
Private company in
which a director or
manager or his relative is
a member or director
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 whose BOD,
MD or manager is accustomed to
act in accordance with the advice,
directions or instructions of a
director or manager
Any person on whose advice,
directions or instructions a
director or manager is
accustomed to act
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
(Section 2(76)
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
WHO ALL ARE EXCLUDED UNDER CA’13 AND SEBILODR?
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.
RELATED PARTIES UNDER AS-18
RP as per AS
18
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
Investing party or venturer
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
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
Associates and JVs
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.
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
RELATED PARTIES UNDER IND AS-24 (1/2)
• 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
(a) A person or close member of
that person’s family is related to a reporting entity
if that person:
RELATED PARTIES UNDER IND AS-24 (2/2)
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
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 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 a post-employment benefit plan
for the benefit of employees of either the reporting entity or an entity related to the
reporting entity.
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:
WHO ALL ARE EXCLUDED UNDER IND AS-24?
(a) two entities simply because they have a director or other member of key management personnel incommon or because a member of key management personnel of one entity has significant influence overthe 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 significantlyinfluence the reporting entity, simply by virtue of their normal dealings with an entity
(d) a customer, supplier, franchisor, distributor or general agent with whom an entity transacts asignificant volume of business, simply by virtue of the resulting economic dependence.
RELATED PARTY TRANSACTIONS
Under Companies Act, 2013
Section 177 Section 188
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
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;
Availing or rendering of any services
Appointment of any agent for purchase or
sale of goods, materials, services or
property
Underwriting the subscription of any
securities or derivatives thereof, of
the company
Such related party's appointment to any
office or place of profit in the company, its
subsidiary company or associate company
Leasing of property of any kind
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);
MATERIAL RPT
Under Companies
Act
Under SEBI LODR
Material
RPT
RULE 15 OF MBP RULESWithout 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
MATERIAL RPTS UNDER SEBI LODR
MEANING:
Previous transaction
Proposed transactions during FY
Exceeds 10% of Annual
Consolidated Turnover
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.
OTHER POINTERS
The turnover or net worth shall be on the basis of the Audited Financial Statement ofthe preceding financial year
Any transaction entered into ordinary course of business or transactions on ‘arm’slength 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 isconducted without any conflict of interest
DETERMINATION OF TRANSACTION TO BE AT ARM’S LENGTH
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
Illustrative tests-
SEQUENCE OF APPROVALS
At arm’s length
• Only Audit Committee approval
• Need not be prior approval
• However, prior omnibus approval may be granted (if repetitive)
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
Contracts in
ordinary course
of business
Contracts not in the
ordinary course of
business
If approval of Board
or prior approval of
S/H not obtained
• May be approved by Audit
Committee and
• Will be recommended to
Board for approval.
• Needs to be ratified
within 3 months from
date.
• Otherwise voidable at
the option of the
approving body.
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
Forseen Unforseen
Criteria for
approval
Contents
name(s) of the
related partynature of
transaction
period and max
amount of
transaction
indicative base price /
current contracted
price
Value shall not
exceed 1 crore per
transaction
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
review, at such intervals, as decided
by the committee of RPTs entered
into by the company pursuant to
each of the omnibus approval made
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
CORPORATE GOVERNANCE PROVISIONS
Company to frame a policy on materiality of Related Party Transactions and on dealing with RelatedParty 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 linkthereto should be mentioned in the Annual report
• Contract or arrangement with related parties to be disclosed in the Board Report with thejustification for entering into such contract or arrangement
• Listed entity to make disclosure in compliance with AS 18 / IND AS 24 on “related partydisclosures” in its annual report
• Details of material transactions with related parties to be disclosed in quarterly compliance reporton corporate governance
• Review by the Board once in every three years
RECOMMENDED CONTENTS OF RPT POLICYTerms 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
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
ABOUT USVinod Kothari & Co.,
Based in Kolkata, Mumbai, Delhi
We are a team of consultants, advisors & qualified professionals having over 30 years of practice.
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Our Organization’s Credo:
Focus on capabilities; opportunities shall follow