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.

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Pammy JaiswalVinod Kothari & Company

Kolkata

1006-1009 Krishna Building224 AJC Bose RoadKolkata – 700017

Phone:033-22811276/ 22813742/7715E: corplaw@vinodkothari.com

New Delhi

A/11, Hauz Khas,New Delhi 110016

Phone:011-41315340/ 65515340

E: delhi@vinodkothari.com

Mumbai

403-406, 175 , Shreyas Chambers,

D.N. Road, Fort, Mumbai – 400 001

Phone: 022 22614021/ 62370959

E: bombay@vinodkothari.com

www.vinodkothari.comEmail: pammy@vinodkothari.com

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