MKB & ASSOCIATES DECODING RELATED PARTY TRANSACTIONS A COMPLICATED WEB MANOJ BANTHIA MKB & ASSOCIATES SHANTINIKETAN, 5 TH FLOOR, ROOM NO. 511 8 CAMAC STREET, KOLKATA-700017 E-MAIL : [email protected]
Sep 20, 2020
MKB & ASSOCIATES
DECODING RELATED PARTY TRANSACTIONS
A COMPLICATED WEB
MANOJ BANTHIA MKB & ASSOCIATES
SHANTINIKETAN, 5TH FLOOR, ROOM NO. 511 8 CAMAC STREET, KOLKATA-700017 E-MAIL : [email protected]
MKB & ASSOCIATES
Understanding RPTs
• Who is a Related Party? • What is the Status of the Entity? • What are Related Party Transactions? • What legal Provisions are applicable to
RPT based on status of an entity? • What are the Compliances to be done? • What are Disclosures Requirements?
MKB & ASSOCIATES
WHO IS A RELATED PARTY???
SECTION 2(76) OF COMPANIES ACT, 2013
ACCOUNTING STANDARD 18
IND-AS 24
SEBI (LISTING OBLIGATIONS & DISCLOSURE REQUIREMENTS) REGULATIONS , 2015
SEC 5(24) OF I&B CODE
MKB & ASSOCIATES
RELATED PARTY (S.2(76))A director or his relative Any body corporate whose Board of Directors,
managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
A key managerial personnel or his relative Any person on whose advice, directions or instructions a director or manager is accustomed to act:
A firm, in which a director, manager or his relative is a partner;
Any company which is - a holding, subsidiary or an associate company,
or - a fellow subsidiary; or - an investing Company or the venturer of the
Company
A private company in which a director or manager or his relative, is a member or director;
Such other persons as may be prescribed
A public company in which a director or manager is a director and holds along with his relatives, more than two per cent. of its paid-up share capital;
A director (other than ID) or KMP of the holding company or his relative; - Rule 3 of The Companies (Specification of Definition Details) Rules, 2014
Related Party, with reference to a Company, means
MKB & ASSOCIATES
Notification dt.5/6/2015 Section 2(76)(viii)
N. dt. 5/6/2015
Section 2(76)(viii) shall not apply with respect to Section 188
Impact:
➢ For the purposes of Section 188, a holding Company, Subsidiary Company, fellow subsidiaries and associate companies will not be related parties to a Private Limited Company. ➢ Thus, no Board Resolution or Special Resolution required for transaction between a Private company and its H/S/FS/ACs. ➢ No Entry of Such transaction required in MBP 4
MKB & ASSOCIATES
RELATED PARTY (S.2(76))S.2(77) “relative”, with reference to any person, means any one who is related to another, if— (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed;
Rule 4 of the Definition Details Rules. prescribed the following relations as Relatives : Father, Mother, Son, Son’s wife, Daughter, Daughter’s husband, Brother & Sister (Step included)
"associate company", in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company."significant influence" means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement;
Director or KMP of Subsidiary or Associate or Fellow Subsidiary - Not a related party.
A LLP in which the Director is a Partner - No details
A Significant Non corporate shareholder ?? - unless he falls under clause (vii)Fellow Associate, Subsidiary’s associate or Fellow Subsidiary’s associate or Associate’s associate - Not a related partyA person on whose instructions the board of a company is accustomed to act, also has similar influence over the board of another company
Some Important Points to be noted
MKB & ASSOCIATES
RELATED PARTY REG 2(zb) SEBI Listing Obligations Disclosure Requirements
Regulations
“Related Party” means
a related party as defined under sub-section (76) of
section 2 of the Companies Act, 2013 or under the applicable Accounting
Standards
APPLICABILITY of IND AS 24: - ALL LISTED COMPANIES - ALL UNLISTED COMPANIES HAVING NETWORTH OF RS. 250 CRORES OR MORE - HOLDING, SUBSIDIARY, JOINT VENTURE OR ASSOCIATES OF ABOVE
MKB & ASSOCIATES
RELATED PARTY RELATIONSHIP(As per AS-18)
PARA 3(a) of AS-18: Enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise. [Intermediary = Subsidiary (Explanation below Para 13)]
PARA 3(b) of AS-18: 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;
PARA 3(c) of AS-18: Individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any such individual; [Shareholding SI = 20% or more Voting Power]
PARA 3(d) of AS-18: Key Management Personnel and relatives of such personnel; [KMP = MD, WTD and any persons in accordance with whose directions or instructions the Board is accustomed to act.] {NED not a KMP}
PARA 3(e) of AS-18: Enterprises over which any person described in (c) or (d) is able to exercise significant influence;
MKB & ASSOCIATES
- “Control” has been defined in Para 10.3 of AS-18 - Ownership of more than 50% of the Voting Power - Control of composition of Board of Directors / Governing Body - a substantial interest in voting power and a power to direct, by statute ‘or agreement, the financial and/or operating policies of the enterprise.
- ASI 19 describes “intermediaries” as subsidiaries. Explanation to AS also states the same.
- Clause 10.5 of AS 18 defines “Associate” as an enterprise in which an investing reporting party has significant influence and which is neither a subsidiary nor a joint venture of that party.
- As per clause 10.4 of AS 18 “Significant Influence” means participation in the financial and/or operating policy decisions of an enterprise , but not control of those policies.
- “Significant Influence” can be exercised in several ways. It may be gained by share ownership, statute or agreement. Significant influence through Share ownership can be manifested by the investing party holding, directly or indirectly through intermediaries, 20% or more of the voting power.
SOME IMPORTANT DEFINITIONS
RELATED PARTY RELATIONSHIP
(As per AS-18)
MKB & ASSOCIATES
- Under the Companies Act 2013, a shareholder (irrespective of his shareholding) is not a related party, unless he his also a director.
- Relatives of “Major Shareholders” are not related parties under Section 2(76) of the 2013 Act.
- A non-executive Director or a Director simpliciter and their relatives are not “Related Party” under AS-18.
- “Relatives” as per AS 18 means spouse, son, daugther, brother, sister, father and mother.
- Under the Companies Act, Son’s wife and Daughter’s husband are also Relatives.
RELATED PARTY RELATIONSHIP
(As per AS-18) SOME POINTS TO BE NOTED
MKB & ASSOCIATES
RELATED PARTY RELATIONSHIP[As per Ind AS 24 - Para 9 cl (a)]
Control : Power over Investee Rights to variable returns Ability to affect Variable returns through its power over the investee. (Ind AS 110)
Joint Control : Contractually agreed sharing of control of an arrangement (Ind AS 111)
KMP: Persons having authority and responsibility for planning, directing and controlling the act iv it ies of the ent ity, i n c l u d i n g a n y d i r e c t o r (executive or otherwise)
Significant Influence: Power to participate in the financial and operating policy decisions of an entity. [Shareholding SI = 20% or more Voting power]
PERSON
CLOSE MEMBER
Control or Joint Control over RE [cl.(a)(i)]
Significant Influence over RE [cl.(a)(ii)]
Is a KMP of RE or its Parent [cl.(a)(iii)]
Family Members who may be expected to influence or be influenced by a person: Person’s Children, Spouse or Domestic Partner Brother , Sister, Father and Mother Children of Spouse or Domestic Partner Dependants of that person’s spouse or domestic partner
MKB & ASSOCIATES
RELATED PARTY RELATIONSHIP(AS PER IND-AS 24)
REPORTING ENTITY
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
[cl 9(b)(v)]
One entity is a joint
venture of a third entity
and the other entity is an associate of
the third entity
[cl 9(b)(iv)]
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.
[cl 9(b)(viii)]
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 of the
entity).
[cl 9(b)(vii)]
The entity is controlled or
jointly controlled by
a person who has
control or joint control
of the reporting
entity
[cl 9(b)(vi)]
Entity and RE are members
of same Group
(Same Group = Parent,
Subsidiary & Fellow
Subsidiary
[cl 9(b)(i)]
One entity is an associate
or joint venture of the other
entity (or an
associate or joint venture of a member of a group of
which the other entity is a member)
[cl 9(b)(ii)]
Both entities are joint
ventures of the same
third party
[cl 9(b)(iii)]
MKB & ASSOCIATES
RELATED PARTY RELATIONSHIP(clause 9(b)(i)
Entity and RE are members of same Group (Same Group = Parent, Subsidiary & Fellow Subsidiary
Reporting Entity
HOLDING COMPANY SUBSIDIARY
FELLOW SUBSIDIARY
MKB & ASSOCIATES
RELATED PARTY RELATIONSHIP(clause 9(b)(ii)
One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of
which the other entity is a member)
Reporting Entity
HOLDING COMPANY SUBSIDIARY
FELLOW SUBSIDIARY
ASSOCIATE or JV ASSOCIATE
or JV
MKB & ASSOCIATES
RELATED PARTY RELATIONSHIP(clause 9(b)(iii) & (iv))
Both entities are joint ventures of the same third party
One entity is a joint venture of a third entity and the other entity is an associate of the third entity
THIRD COMPANY
A LTD
JV AX
JV AY
THIRD COMPANY
A LTD
JV AX
ASSOCIATE
MKB & ASSOCIATES
RELATED PARTY RELATIONSHIP(clause 9(b)(vi)
The entity is controlled or jointly controlled by a person who has control or joint control of the reporting entity
Person “A”
A LTD B PVT LTD
REPORTING ENTITY
MKB & ASSOCIATES
RELATED PARTY RELATIONSHIP(clause 9(b)(vii)
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 of the
entity).
Person “A”
A LTD B PVT LTD
REPORTING ENTITY
KMP
SIGNIFICANT INFLUENCE
CON
TRO
L
X LTD (HOLDING
CO)
MKB & ASSOCIATES
Exemptions under AS
Not Related
Two joint venturers
MKB & ASSOCIATES
RELATED PARTIES AS PER I&B CODEA director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor;
any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor;
a key managerial personnel of the corporate debtor or a relative of a key managerial personnel of the corporate debtor;
any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act;
a limited liability partnership or a partnership firm in which a director, partner, or manager of the corporate debtor or his relative is a partner;
a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;
a private company in which a director, partner or manager of the corporate debtor is a director and holds along with his relatives, more than two per cent. of its share capital;
any person who controls more than twenty per cent. of voting rights in the corporate debtor on account of ownership or a voting agreement;
a public company in which a director, partner or manager of the corporate debtor is a director and holds along with relatives, more than two per cent. of its paid- up share capital;
any person in whom the corporate debtor controls more than twenty per cent. of voting rights on account of ownership or a voting agreement;
anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor;
any person who can control the composition of the board of directors or corresponding governing body of the corporate debtor;
Related Party, in relation to a Corporate Debtor, means
MKB & ASSOCIATES
RELATED PARTY AS PER I & B CODE
2(24)…contd. …. m) any person who is associated with the corporate debtor on account of-
(i) participation in policy making processes of the corporate debtor; or (ii) having more than two directors in common between the corporate debtor and such person; or (iii) interchange of managerial personnel between the corporate debtor and such person; or (iii) provision of essential technical information to, or from, the corporate debtor;
MKB & ASSOCIATES
WHAT ARE RELATED PARTY TRANSACTIONS?
SECTION 188 OF COMPANIES ACT, 2013
ACCOUNTING STANDARD 18 IND-AS 24
REGULATION 2(ZC) OF LODR
MKB & ASSOCIATES
RELATED PARTY TRANSACTIONS (188)
SPECIFIED CONTRACTS BETWEEN A COMPANY & RELATED PARTY
✓Sale, purchase or supply or any goods or materials ✓Selling , buying property of any kind ✓Leasing of property of any kind ✓Availing or rendering of any services ✓Appointment of agent for purchase or sale of goods, materials, services or property ✓Appointment to any office or place of profit in the company/AC/SC ✓Underwriting of securities
MKB & ASSOCIATES
Related Party Transaction as per LODR
MKB & ASSOCIATES
Examples of RPT as per IND AS 24
• Purchase or Sale of Goods • Purchases or Sales of Property and other assets • Rendering or receiving of services • Leases • Transfer of research and development • Transfers under licence agreements • Transfers under finance arrangements (loan & equity
contributions) • Provisions of Guarantees or Collateral • Commitments to do something if a particular event occurs or
does not occur in future • Settlement of liabilities on behalf of the entity • Management Contracts including deputation for employees
MKB & ASSOCIATES
RELATED PARTY TRANSACTIONS
The following transactions do not fall within the ambit of Related Party Transactions
Reporting EntityA LTD B PVT LTD
Subsidiary
TRANSACTION
TRANSA
CTIO
N
RELATED PARTY
RELATED PARTY
RELATED PARTY
MKB & ASSOCIATES
STATUS OF THE COMPANY?
MKB & ASSOCIATES
COMPANY STATUS – RELEVANT TO DETERMINE EXTENT OF APPLICABILITY
PUBLIC COMPANY
PRIVATE COMPANY
OR
MKB & ASSOCIATES
PUBLIC COMPANY – DIFFERENT YARDSTICKS
PUBLIC COMPANY
LISTED
UNLISTEDPUC < =10 Cr & NW <=25 cr
SME Listed Entity
Other Listed Entity
PUC>=10 Cr
TO >= 100 Cr
L/B/D/ dep >50
Cr
Other Unlisted Public
Company
MKB & ASSOCIATES
PRIVATE COMPANY
• Provisions of Companies Act, 2013 applicable.
• All Private Companies, irrespective of size, treated alike.
PRIVATE COMPANY
OTHER UNLISTED
PUBLIC COMPANY
MKB & ASSOCIATES
LISTED COMPANY – LODR APPLICABILITY
PLC <= 10 cr & NW < =25 cr or SME Listed ??
YES
REGN 23 OF LODR NOT APPLICABLE.
CLAUSE 34(3) & SCH V (A)
APPLICABLE.
NO
LODR APPLICABLE.
RP means RP as per Section 2(76) or under
IND AS 24
MKB & ASSOCIATES
COMPANY STATUS & APPLICABLE PROVISIONS
STATUS OF THE COMPANY COMPLIANCE OF
LISTED PUBLIC COMPANY : -HAVING PAID UP CAPITAL OF LESS THAN RS. 10 CR ,AND -NET WORTH OF LESS THAN RS. 25 CRORE
SECTION 177 SECTION 188 LODR - CLAUSE 23 NOT APPLICABLE CLAUSE 34 AND SCH V APPLICABLE
SME LISTED COMPANY SAME AS ABOVE
OTHER LISTED PUBLIC COMPANY SECTION 177 & 188 LODR APPLICABLE
UNLISTED PUBLIC COMPANY: - HAVING PUC OF RS. 10 CR OR MORE, OR -TURNOVER OF RS. 100 CR OR MORE, OR - HAVING IN AGGREGATE LOANS/BORROWINGS/DEBENTURES/DEPOSITS OF NOT LESS THAN 50 CROES
SECTION 177 & 188
OTHER UNLISTED PUBLIC COMPANY AND PRIVATE COMPANY
SECTION 188
MKB & ASSOCIATES
COMPLIANCE PROVISIONS
THE COMPANIES ACT, 2013 &
RULES THEREUNDER
SECURITIES AND EXCHANGE BOARD OF INDIA (LISTING
OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015
ACT, 2013
MKB & ASSOCIATES
APPROVAL OF AUDIT COMMITTEE SECTION 177
Section 177(4)(iv): (4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include,— **** (iv) approval or any subsequent modification of transactions of the company with related parties;
Provided that the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed;".
Rule 6A for Omnibus Approval of Related Party Transactions on Annual basis
2nd Proviso: Provided further that 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:
3rd Proviso: Provided also that in case any 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:
4th Proviso Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.".
MKB & ASSOCIATES
RELATED PARTY TRANSACTIONS (188)
RELATED PARTY TRANSACTIONS
✓Sale, purchase or supply or any goods or materials ✓Selling , buying property of any kind ✓Leasing of property of any kind ✓Availing or rendering of any services ✓Appointment of agent for purchase or sale of goods, materials, services or property ✓Appointment to any office or place of profit in the company/AC/SC ✓Underwriting of securities
RELATED PARTY as defined in Section 2(76)
Prior approval by SR(OR wef 25.5.2015) required if:
Paid-up Share Capital of the Company not less than specified sum
OR
Value of transaction during a FY exceeding specified sum
➢Related Party not entitled to vote on Members’ Resolution ➢If 90% of members are either related parties or relatives of Promoters, RPs can vote on Resolution. ➢Section not to apply to transactions entered in ordinary course of business and are on Arm’s length basis.
Except with the consent of the Board of Directors given by a resolution at a meeting of the Board, no company shall enter into any contract or arrangement with a related party with respect to Related Party Transactions
MKB & ASSOCIATES
APPROVAL PROCEDURE UNDER COMPANIES ACTA company shall not enter into a contract or arrangement with any related party except with the prior approval of company by Ordinary Resolution (Rule 15(3))
FOR
sale, purchase or supply of any goods or m a t e r i a l s d i r e c t l y o r t h r o u g h appointment of agents
10% or more of Turnover of the company
selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents
10% or more of Networth of the company.
leasing of property of any kind 10% or more of turnover of the company
availing or rendering of any services directly or through appointment of agents
10% or more of turnover of the company
appointment to any office or place of profit in the company, its subsidiary company or associate company
at a monthly remuneration exceeding two and half lakh rupees
remuneration for underwriting the subscript ion of any securit ies or derivatives thereof of the company
exceeding one percent. of the net worth
Turnover or Net Worth shall be on the basis of the Audited Financial Statement of the preceding Financial year. (Expn 1)
Approval of Audit Committee of transactions with related parties or their subsequent modifications.’
Committee may grant Omnibus approvals for RPTs as per Rules.
All RPTs u/s 188 require approval by Board of Directors of the Company.
Al l t ransact ion(s) exceeding specif ied value require prior approval of shareholders by way of Ordinary Resolution.
N o s h a r e h o l d e r s a p p r o v a l necessary for transactions entered into between a HC and its WOS whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval
APPROVAL PROCEDURE
MKB & ASSOCIATES
APPROVING AUTHORITY
REGN NO
COMPLIANCE REQUIREMENT
AUDIT COMMITTTEE 23(2)
23(3)
• All related party transactions shall require prior approval of the audit committee.
• Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions
BOARD OF DIRECTORS
4(2)(f)(ii)(6)
• No specific requirement of taking approval of Board. • Key function of the Board to monitor and manage potential conflict of
interest including abuse in RPTs.
SHAREHOLDERS 23(4)
23(7)
Explanation 23(1)
23(1A)
• All material related party transactions shall require approval of the shareholders
• All entities falling under the definition of related parties shall not vote to approve the relevant transaction irrespective of whether the entity is a party to the particular transaction or not.
• A transaction shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds 10%of the annual consolidated turnover as per the last audited financial statements of the listed entity.
• Brand usage payment or Royalty - 5% (Material)
EXEMPTIONS 23(5) • Transactions 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.
COMPLIANCE UNDER LODR
MKB & ASSOCIATES
COMPARISON OF APPROVAL MECHANISM
MKB & ASSOCIATES
OMNIBUS APPROVALCOMPANIES ACT 2013 LODR (23(3))
Audit Committee may make Omnibus Approval for Related Party transactions
Audit Committee may grant Omnibus Approval for RPT after satisfying itself regarding the need for such approval and that such approval is in the interest of the listed entity
AC may, after obtaining approval fromBOD specify the criteria for making Omnibus approval
AC to lay down criteria for granting OA in line with RPT policy of the Company & such approval shall be applicable in respect of transactions which are repetitive in nature;
Omnibus approval to indicate the following: -Name of related Party -Nature & duration of transaction -Maximum amount of transaction -Indicative base price & formula for variation -Any other information relevant or important for AC to take decision on proposed transaction??????
Omnibus Approval to specify: -Name of Related Party - Nature of transaction - Period of transaction - Maximum amount of transaction - Indicative base price & variation formula - Such Other condition as deem fit
-Where need for RPT unforeseen and details not available, AC may make OA for such transactions subject to their value not exceeding Rs. 1 crore per transaction
Where need for RPT unforeseen and details not available, AC may grant OA for such transactions subject to their value not exceeding Rs. 1 crore per transaction
-Validity – One Financial Year -Review Period – As deem fit
Validity Period – One Year Review Period – Quarterly basis
-No omnibus approval in respect of selling or disposing of the undertaking
MKB & ASSOCIATES
REQUIREMENT CLAUSE NO
COMPLIANCE REQUIREMENT
Policy on materiality o f r e l a t e d p a r t y transactions
23(1) • The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions.
• Such policy shall be reviewed by the board of directors at least once every three years
POLICY ON RELATED PARTY TRANSACTIONS
23(3)(a) • Audit Committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions
POLICY ON DEALING WITH RELATED PARTY TRANSACTIONS
46(2)(g) • Listed entity shall disseminate Policy on Dealing with Related Party Transactions under a separate section on its website
RPT POLICY UNDER LODR
MKB & ASSOCIATES
HOLDING SUBSIDIARY RPT PROVISIONS
MKB & ASSOCIATES
PROVISION REQUIREMENT
PRIVATE COMPANY Section 2(76)(viii) shall not apply with respect to Section 188 to a Private Limited company.
fourth proviso to section 177 (4)(iv)
AC approval not necessary for Non-Section 188 transactions between a Holding Company and its WOS.
fifth proviso to Section 188(1)
Shareholders resolution not necessary for 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.
Explanation 2 to Rule 15
In case of wholly owned subsidiary, the resolution is passed by the holding company shall be sufficient for the purpose of entering into the transaction between the wholly owned subsidiary and the holding company.
Regulation 23(5)(b) Audit Committee or Omnibus or Shareholders’ approval not needed in case of 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.
SPECIAL PROVISIONS HOLDING - SUBSIDIARY
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SOME VIEWS FROM GUIDANCE NOTE
MKB & ASSOCIATES
VIEWS FROM GUIDANCE NOTE• In case of preferential allotment although it is a transaction with a related
party, the same is not a related party transaction. (pg 15) • A Leave and Licence agreement is not treated as equivalent to leasing of
property. A licence creates limited rights with respect to use of immovable property. However, it will be a transaction with a related party covered under Section 177. (pg 27)
• Shares are treated as goods once allotted. Hence, issue of shares and debentures will not fall under the purview of Section 188. However, transfer of shares to a related party would be considered as a related party transaction. (pg 27)
• Buyback of shares, since, it is a part of a scheme and not a contract or arrangement with any individual director; it will not be treated as a related party transaction.
• In view of the explanation given under Section 188( ), the appointment of a Managing Director of a holding company as Chairman in a subsidiary company, without any remuneration, will not be treated as a related party transaction and will not require approval of the Board/ shareholders as provided in Section 188 of the Act.
• The Audit Committee should discuss related party transactions which are not in the ordinary course of business or which are not on arm’s length basis at its meetings and not through circulation.
MKB & ASSOCIATES
DISCLOSUREREQUIREMENTS
MKB & ASSOCIATES
PROVISION REQUIREMENT
188(2) Every contract or arrangement entered into under sub-section (1) shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.
129 Financial Statements to comply with Accounting Standards - DISCLOSURE OF RELATED PARTY TRANSACTIONS IN FINANCIAL STATEMENTS OF A COMPANY TO BE MADE AS PER APPLICABLE ACCOUNTING STANDARD
134(3)(h) BOARD’S REPORT TO INCLUDE PARTICULARS OF CONTRACTS OR ARRANGEMENTS WITH RELATED PARTIES REFERRED TO IN SEC 188(1) IN AOC 2
RULE 15(2) WHERE ANY DIRECTOR IS INTERESTED IN ANY CONTRACT WITH RELATED PARTY, SUCH DIRECTOR SHALL NOT BE PRESENT AT MEETING DURING DISCUSSION
COMPLIANCE WITH SEC 184/189
DISCLOSURE/REPORTING REQUIREMENTS UNDER COMPANIES ACT
MKB & ASSOCIATES
OTHER DISCLOSURES UNDER THE COMPANIES ACT
Agenda of Board Meeting (Rule 15(1)) Explanatory Statement of GM (Expln 3 to Rule 15(3))
Name of the Related Party and nature of relationship Name of the related party
Nature, duration of the contract and particulars of the contract or arrangement
Name of the Director/KMP who is related
Material terms of the contract including the value Nature of relationship
Any advance paid or received for the contract Nature, material terms, monetary value and particulars of contract
The manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
Any other information relevant or important for members to take a decision
Whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors;
Any other information relevant or important for the Board to take a decision on proposed transaction
MKB & ASSOCIATES
DISCLOSURE/REPORTING REQUIREMENTS UNDER LODR
REGN REQUIREMENT48 The listed entity shall comply with all the applicable and notified Accounting
Standards
23(9) The listed entity shall submit within 30 days from the date of publication of its standalone and consolidated financial results for the half year, disclosures of related party transactions on a consolidated basis, in the format specified in the relevant accounting standards for annual results to the stock exchanges and publish the same on its website.
34(3) READ WITH SCH V
Annual report shall contain RPT disclosures as specified in Para A of Schedule V of these regulations
46(2)(g) Listed Entity to disseminate on its Website Policy on dealing with RPTs.
S C H V p a r a C Disclosure 10 (a)
Report on Corporate Governance shall disclose disclosures on materially significant related party transactions that may have potential conflict with the interests of listed entity at large
S C H V p a r a C Disclosure 10 (f)
Report on Corporate Governance shall disclose web link where policy on dealing with related party transactions is disclosed.
MKB & ASSOCIATES
RAMESH SRINIVASAN WORKING GROUP ON RPT
MKB & ASSOCIATES
DISCLOSURE/REPORTING REQUIREMENTS UNDER LODR
REGN REQUIREMENTRelated Party Definition 2(1)(zb)
(i) any person or entity belonging to the promoter or promoter group of the listed entity(ii) any person or any entity, directly or indirectly (including with their relatives), holding 20% or more of
the equity shareholding in the listed entity, shall be deemed to be a related party.
Definition of RPT 2(zc) “related party transaction” means a transaction involving a transfer of resources, services or obligations between(i) the listed entity or any of its subsidiaries on the one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or(ii) the listed entity or any of its subsidiaries on the one hand, and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries,
23(2) to provide for approval of following RPTs as well
Provided that a related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity only if the value of such transaction (whether entered into individually or taken together with previous transactions during a financial year) exceeds 10% of the annual total revenues, total assets or net worth of the subsidiary, on a standalone basis, for the immediately preceding financial year, whichever is lower, provided that the criterion relating to net worth shall not be applicable if the net worth of the subsidiary is negative.Provided further that prior approval of the audit committee of the listed entity shall not be required for a related party transaction to which the listed subsidiary is a party but the listed entity is not a party, if such listed subsidiary is not exempt from regulation 23 and the other corporate governance provisions of these regulations specified in regulation 15(2)
23(4) Shareholders’ approval recommended prior approval.
Material RPT 23(1) Transaction exceeds 1000 crores or 5% of annual total revenues, or total assets or total net worth on a consolidated basis, whichever is lower.
MKB & ASSOCIATES