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