lodr proposed changes on related party transactions
TRANSCRIPT
LODR proposed changes on
Related Party Transactions
Vinod Kothari & Company
www.vinodkothari.com
Email: [email protected] / [email protected]
Kolkata
1006-1009 Krishna Building
224 AJC Bose Road
Kolkata – 700017
Phone: 033- 2281 7715/ 3742
Delhi
A-467, First Floor, Defence Colony,
New Delhi (110024)
Phone: 011-4131 5340
Mumbai
403-406,
175, Shreyas Chambers,
D.N. Road, Fort, Mumbai – 400001
Phone: 022 – 22614021 / 6237 0959
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HighlightsExpanding the scope of RPs -
Any person or entity belonging to the promoter or promoter group- current 20% is req.
Any person or any entity holding 20% or more of the equity shareholding
To consider and indirect relatives also
Expanding the scope of RPTs-
Transactions between company and RP of subsidiary
Transactions between subsidiary and RP of company
Transactions between company/ subsidiary and their own RP
Transactions between company with unrelated party to benefit of its own/ subsidiary’s RP
Transactions between subsidiary with unrelated party to benefit of its own/ hold co’s RP
Exclusion to RPTs
payment of dividend,
issue of rights/ bonus shares, subdivision/ consolidation of securities,
buy back of securities, preferential allotment as per ICDR
Revision in the threshold of determining materiality of RPTs
Lower of: INR 1000 cr; or 5% of consolidated revenue, assets or net worth
Amendments in the current approval mechanism
Prior approval of audit committee and shareholders
for subsequent material modification (Material modification not defined)
For transactions involving an unlisted subsi./ exempted listed subsi. carrying value of 10% of standalone turnover/ assets/ networth of the subsi.
Elaborate disclosure before Audit Committee and shareholders
Fix tenure for recurring RPTs
Value of RPT as a % to the turnover/ asset/ net worth of the company & of the counterparty
RPT involving loan/ ICD etc.
Source of fund, details of indebtedness incurred if any, for the same eg. Cost of fund, tenure, interest
Terms of loan incl. interest, tenure, security, covenants
Proposed utilisation by the recipient
Status of long-term or recurring RPTs on an annual basis
Additional disclosure requirements in annual report;
Loans to firms/ companies in which directors are interested by name and amount’ for a listed entity and its subsidiaries
Introduction
SEBI constituted a Working Group (WG) under the chairmanship of Mr. RameshSrinivasan on Related Party Transactions.
The report of the Working Group was issued on 27th January, 2020.
Report provides for amendments in the provisions pertaining to RPTs under theListing Regulations, 2015
Need for such review of existing provisions:
complex/ innovative corporate structures
circular transactions, continuous intra-group lending
inadequate information to audit committee/ shareholders
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Coverage of the Recommendations
Expanding the scope of related party and related party transactions;
Revision in the threshold of determining materiality of RPTs;
Amendments in the current approval mechanism;
Additional disclosure requirements in annual report;
Elaborate disclosure before Audit Committee and shareholders.
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Proposed addition to the definition of related party
The following would get covered in the proposed definition
The promoters irrespective of their shareholding
Existing definition requires 20% holding also
Significant Shareholder/ Investor (holding 20%)
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Proposed definition of related party
Related Parties
Any person or entity belonging to the
promoter or promoter group
As per IND AS
Any person or any entity holding 20% or more of the equity shareholding
As per in CA 13
Definition of Related Party TransactionsProposed Changes
Broadly to cover the following
all circular transactions
on the face of it, the transaction is with an unrelated party but actual benefits flow to arelated party
the transactions at consolidated level
swap transactions
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Proposed definition of RPTs
Transaction between the listed company and its own RP
Transaction between the listed company and RP of the subsidiary
Transaction between the subsidiary and RP of the subsidiary
Transaction between the subsidiary and RP of the listed company
Transaction between the listed company and an URP, purpose and effect of which is to benefit an RP of the listed company/ of subsidiary
Transaction between the subsidiary and an URP, purpose and effect of which is to benefit an RP of the listed company/ of the subsidiary
Existing definition:
“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.
RP= Related Party
URP= Unrelated Party
Threshold for determining material RPTsProposed Materiality Threshold
To be lower of the following:
INR 1000 cr; or
5% of
Total consolidated revenue
Total consolidated assets
Total consolidated net worth
to be considered only in case of positive net worth of the listed company
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Approval of Audit Committee & ShareholdersProposed inclusion in the listPrior approval of audit committee & shareholders to be applicable
For subsequent material modifications of RPTs
What would constitute a material modification not defined
Transactions involving the following as a party
unlisted subsidiary; or
listed subsidiary which is exempted from the CG requirements
If the transaction carries a value which is lower of the following:
more than 10% of annual standalone turnover of the subsidiary or
more than 10% of total standalone assets of the subsidiary or
more than 10% of standalone net worth of the subsidiary
To be considered only where the net worth is positive
Approval of shareholders in all cases proposed to be changed to a prior approval
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Approval of RPTs by Audit Committee & Shareholders
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Whether the transaction is an
RPT as per definition?
Whether listed entity is a party? Prior approval is required
Whether listed subsidiary is a party and exempted from Reg. 23 & from other CG requirements u/r 15(2)?
Whether the transaction can be considered as Significant Transaction?
Whether unlisted subsidiary is a party?
Whether the transaction can be considered as Significant Transaction?
Whether listed subsidiary is a party and not exempted from Reg. 23 & from other CG requirements u/r
15(2)? Prior approval is not required
Whether none of the above applies?
Yes
Yes
Yes
Yes
Significant transaction= value of which is more than 10% of
turnover or assets or net worth, whichever is lower, of the subsidiary
on a standalone basis
Disclosures before Audit CommitteeThe long listType, material terms and particulars of RPT;
Name of RP and its relationship with the listed entity or its subsidiary, including nature of its concern or interest (financial or otherwise);
Tenure (should not be indefinite or open ended);
Value along with an upper limit and for recurring transactions, the aggregate value and the time period within which such limit will be exhausted;
The value of the proposed transaction as the percentage of the listed entity’s annual total revenues, total assets and net worth;
If subsidiary involved, the value of the proposed transaction as a percentage of the subsidiary’s annual total revenues on a standalone basis;
Justification as to why the related party transaction is in the interest of the listed entity;
A copy of the valuation or other external report, if any such report has been relied upon;
Value of the proposed RPT as a percentage of the counter-party’s annual total revenues, total assets and net worth;
Status of long-term or recurring RPTs on an annual basis. 16
Disclosure reg. Financial Transactions
If the transaction relates to any loans, ICDs, advances or investments made or given by thelisted entity or its subsidiary:
details of the source of funds in connection with the proposed RPT;
where any financial indebtedness is incurred to make or give loans, inter-corporate deposits,advances or investments,
nature of indebtedness;
cost of funds; and
tenure;
applicable terms, including covenants, tenure, interest rate and repayment schedule, whethersecured or unsecured and if secured, the nature of security; and
the purpose for which the funds will be utilised by the ultimate beneficiary of such fundspursuant to the RPT.
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Disclosure before shareholdersDisclosure in explanatory statementSummary of the information provided to the audit committee pursuant to paragraph B(2)ofPart C of Schedule II;
Recommendation of the audit committee w.r.t. proposed transaction, specifying justificationfor why the transaction is in the interest of the listed entity;
Where the transaction relates to any loans, inter-corporate deposits, advances or investmentsmade or given by the listed entity or its subsidiary, the details specified under paragraph B(2) (f) of Part C of Schedule II;
Whether the approval of the RPT by the audit committee was unanimous;
A statement that the valuation or other external report, if any, relied upon by the listed entityin relation to the proposed transaction will be available for inspection at the registered officeof the listed entity;
value of the proposed RPT as a percentage of the counter-party’s annual total revenues,total assets and net worth;
Any other relevant information.18
Disclosure in Annual Report
Disclosure of ‘Loans and advances in the nature of loansto firms/ companies in which directors are interested byname and amount’ for a listed entity and its subsidiaries.
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Disclosure to Stock Exchanges
Current framework for half yearly reporting:
Disclose RPTs on consolidated basis within 30 days from the date ofpublication of its standalone and consolidated financial results in the formatspecified in the relevant accounting standards for annual results to the stockexchanges.
Proposed framework for reporting every six months:
Disclose RPTs on the date of publication of its standalone and consolidatedfinancial results in the format prescribed by SEBI.
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