Related party transactions - PwC India · 1. Section 188 of the Companies Act, 2013 (CA, 2013) &...
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Related party transactions Managing new requirements under Companies Act, 2013 and SEBI Guidelines
Transcript of Related party transactions - PwC India · 1. Section 188 of the Companies Act, 2013 (CA, 2013) &...
Related party transactionsManaging new requirements under Companies Act, 2013 and SEBI Guidelines
1. Section 188 of the Companies Act, 2013 (CA, 2013) & Revised Clause 49 of the SEBI Equity Listing Agreement (SEBI)
Starting 2014, related party transactions will need to meet significant disclosure and compliance requirements1
Immediate impact
• Increased transparency for related party transactions (RPT), 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
All companies
•RPTs to be at arm’s length•RPTsandsubsequentmodificationrequirepriorauditcommittee
approval•Audit Committee have the power to obtain professional advice from
external sources/ full access to information contained in the records of the company
•RPTstobedisclosedinboard’sreportalongwiththejustificationforentering into such transactions
•RPTs not in the ordinary course or not at arm’s length require * Prior approval of board * Prior approval of shareholders (special resolution) exceeding specifiedthresholds
* Interested members abstain from voting on special resolution
•DetailsofRPTstobefiledwithRegistrarofCompanies(ROC)
Additional requirement for listed companies
•Prior approval of shareholders required for all material RPTs
•Policy of dealing with RPTs to be disclosed on website and in annual report
Steps to manage the change
Entity related
Price related
Transaction related
Justifying arm’s length pricing
• Profileofcompany• Profileofgroup• Profileofindustry• Profileofrelatedparties
• Scope of related parties >AS-18 - Related Party Transaction and Income-tax Act, 1961
•Mapping of parties under multiple regulations to help identify and manage requirements and drive synergies
• Scope under new requirements to typically cover all transactions
• Focus also on identifying transactions which are presently not charged
•Clarity awaited on meaning of transactions not in the ordinary course of business
• One-timeriskassessmentofallRPTstoensureconsistent approach going forward
• Policy based approach for recurring transactions to drive consistency
•Deviations and basis for the same, also to be documented
•Guidance to business to explain requirements and ensurereal-timesynergieswithfinanceandtaxteams
• Training materials to explain one-time and ongoing documentationrequirementstofinanceandtaxteams
•Detailed documentation to comply with arm’s length requirements
•Approach to identify one-time documentation and ongoing documentation, aligned with pricing policy will help manage requirements
• System controls to track related parties and transactions (recurring as well as non-routine)
•Automating pricing policy implementation and documentation requirements to go a long way to ease burden and ensure compliance
•Regular system audits critical to strengthen processes
• Price setting process• Terms of the transaction• Role and risks of each party• Internal and external comparables
including industry and local benchmarks• Forecasts, budgets, etc
• Agreements• Invoices• Pricing related correspondence (letters,
emails, etc)
Identification of related parties
Identification of transactions
Pricing policy
Guidance
Documentation
Systems and controls
Voidable
Indemnity
Disqualification
Recovery
Penalty
Attheoptionoftheboard,unlessratifiedwithinthreemonths, as the case may be, by board or shareholder
Directors to indemnify for any losses where transactions are with directors (or related party of such director)
Incaseofconviction,thedirectorsliabletobedisqualifiedtoactasdirectorforafive-yearperiod
The company and its shareholders to initiate recovery of losses from director or any employee who had entered into any unauthorized transactions
• Fine from 25,000 to 5,00,000 INR (public and private company)
• Imprisonmentuptooneyearorfineasaboveorboth(listed company)
Appendix B: Consequence of non-compliance with the CA, 2013
Appendix A: Details to be filed with ROC2
• Details of material contracts or arrangements or transactions at arm’s length basis
* Name(s) of the related party and nature of relationship
* Nature of contracts, arrangements, transactions
* Duration of the contracts, arrangements, transactions
* Salient terms of the contracts, arrangements or transactions including the value, if any
* Date(s) of approval by the board
* Amount paid as advances, if any
• Details of contracts or arrangements or transactions not at arm’s length basis
* In addition to the above, date on which the special resolution was passed in general meeting, and
* Justificationforenteringintosuchcontracts,arrangementsortransactions
2. Form AOC-2 & Form AOC-4
Appendix C: Key terms explained3
Related parties
CA, 2013 •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 and4
holds along with his relatives more than 2 % of the paid up share capital
SEBI • Relatedpartiesasdefinedabove• Fellow group entities, joint ventures of same third party and
combinations thereof• Post-employmentbenefitplans
3. Illustrative, not exhaustive4. To be notified
RPT
CA, 2013 • 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
SEBI • Transfer of resources, services or obligations between a company and a related party
Material RPT
CA, 2013 • Notdefined• FormAOC-4howeverrequiresdisclosureofdetailsofmaterial
contracts or arrangement or transactions at arm’s length basis
SEBI •Material RPT: Transaction (together with previous transactions with a related party)
– exceeds 5% of the annual turnover; or – exceeds 20% of the net worth of the company as per last year’s auditedfinancials
Ordinary course of business
CA, 2013 • Notdefined• Standard on Auditing 550: Related parties issued by ICAI provides
examples of transactions outside the normal course of business• E.g. corporate restructurings or acquisitions, sales transactions with
unusually large discounts or returns, rendering of management services by the entity to another party for no consideration, etc.
SEBI •Not relevant (since all RPTs require audit committee approval and all material RPTs require shareholder approval)
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 197 - May 2014 Related party transactions.inddDesigned by: PwC Brand and Communications, India
Contacts
Shyamal MukherjeeJoint Leader, Tax and Regulatory ServicesPhone: + 91 124 3306000Email: [email protected]
Ketan DalalManaging Partner (West) and Joint Leader, Tax and Regulatory ServicesPhone: + 91 22 66891000Email: [email protected]
Sanjay ToliaCountry Leader, Transfer PricingPhone: +91 22 66891000Email: [email protected]
Transfer Pricing contacts
Ahmedabad
Sanjay Tolia Phone: +91 79 30917000Email: [email protected]
Bangalore/ Hyderabad
Indraneel R Chaudhury | Rakesh Mishra | Eric Mehta Phone: +91 80 40796000 Email: [email protected] | [email protected] | [email protected]
Chennai
Kunj VaidyaPhone: +91 44 42285000 Email: [email protected]
Delhi
Rahul K Mitra | Sandeep PuriPhone: +91 124 3306000 Email: [email protected]| [email protected]
Kolkata
Rahul K Mitra Phone: +91 124 3306000 Email: [email protected]
Mumbai
Sanjay Tolia | Bipin Pawar | Dhaivat Anjaria Phone: +91 22 66891000 Email: [email protected] | [email protected] | [email protected]
Pune
Dinesh SupekarPhone: +91 20 41004444 Email: [email protected]
