RELATED PARTY TRANSACTIONSOpen - house discussion

The Need!

With the growing participation of investors and other stakeholders in companies, the question of transparency in deals with related parties has often been a hot topic.

With the objective to usher increased degree of transparency in such transactions, section 188 has been introduced in the Companies Act, 2013.

Section 188 places the onus on board of directors to review, approve and explain such transactions to shareholders and in some cases seek their approval.

S.NO. NAME OF THE SCAMS YEARDAMAGES

(IN BILLIONS)1. Enron Corporation, USA

Accused: Jeff Skilling & Ken Lay, CEO2001 USD 74

2. World dotcom, USAAccused: Bernie Ebbers, CEO

2002 USD 180 & 30,000 employees lost jobs

3. Parmalat SpA, ITALYAccused: Calisto Tanzi, CEO

2002 Euro 13

4. AIG Group, USAAccused: Hank Greenberg, CEO

2005 USD 3.9

5. Apple, USAAccused: Steve Jobs

2006 USD .02

6. Lehman Brothers, USANo one prosecuted due to lack of evidence.

2008 USD 50

7. Bernard Madoff Invt Securities, LLC, USABernie Madoff, Chairman

2008 USD 64.8

8. Olympus Corporation, JAPANMicheal C Wooford

2011 YEN 376

Corporate Scams Around The World

S.NO. SCAMS YEAR DAMAGES (IN CRORES)

1. Telgi Scam 1991 Rs. 20,000

2. Securities ScamAccused: Harshad Mehta

1992 Rs. 4,000

3. Fodder ScamAccused: J and Lalu Prasad

1996 Rs. 950

4. Hawala scamAccused: LK Advani, VC Shukla

1996  Rs. 810

5. Home Trade scam Accused: Sanjay Agarwal

2002 Rs. 600

6. Satyam ScamAccused: Ramalinga Raju

2009 Rs. 24,000

7. Madhu Koda scam Accused: Madhu Koda

2009 Rs. 4,000

8. 2G spectrum scam Accused: A Raja

2008-09 Rs. 1,76,000

Indian Scams

Applicable to all companies as per Section 188 - Related Party Transactions

Transactions in the “ordinarycourse” of business orundertaken at “arm’s length” donot need any prior approval

List of related-party transactionswidened, immovable property alsobrought under the ambit of related party transactions

Shareholders who are relatedparties are restricted fromvoting on special resolution

All other contracts or arrangementsshall be approved by the board orby shareholders, through a ordinaryresolution, depending on the nature of transaction and the amount involved

Any transaction entered into without prior permission is voidable at the option of the board, if not ratified by it or by shareholders within 3 months

Companies are mandated to maintain a register with particulars of all such contracts or arrangements

Key Compliance Requirements

RPT - Exemptions

ExemptionsThe provisions shall not apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not at arm’s length.

Arm’s length transaction Transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

Ordinary Course of BusinessThe Companies Act has not defined the term “Ordinary Course of Business” The assessment of whether a transaction is in ordinary course of business is very subjective, judgmental and can vary on case-to-case basis giving consideration to nature of business and objects of the entity.

Identification of Related Party

PRIVATE COMPANIES

PUBLIC COMPANIES

OTHERS

RELATED PARTY TO A COMPANY

INDIVIDUAL

DIRECTORS, KMP’S & RELATIVES

HOLDING, SUBSIDIARY, ASSOCIATE COMPANIES

FELLOW SUBSIDIARY

BODY CORPORATE

ANY PERSON

DIRECTOR OR HIS RELATIVE IS A PARTNER

DIRECTOR OR HIS RELATIVE IS A DIRECTOR / MEMBER

DIRECTOR IS A DIRECTOR & HOLDS WITH HIS RELATIVES > 2% PAID UP CAPITAL

Any body corporate whose Board/MD/Manager is to act according to directions of director or manager.Any person on whose advice, directions or instructions the director or manager is accustomed to act. Nothing shall apply, if such advice, directions or instructions are given in professional capacity.

PARTNERSHIP

Identification Of Related Party Transactions RPT & THRESHOLD LIMITS

Sale, purchase or supply of any goods or materials.

Sale or otherwise disposing of or buying property of any kind.

Leasing of property of any kind.

Availing or rendering of any services

Appt. of agent for purchase or sale of goods, service / property

Appointment to any office or place of profit

Underwriting of securities or derivatives

Turnover > 10% or Rs. 100 Crores w.e.l

Networth > 10% or Rs. 100 Crores w.e.l

Networth>10% or Turnover > 10% or Rs.100 Crores w.e.l

Turnover > 10% or Rs.50 Crores w.e.l

Monthly remuneration> Rs. 2.5 Lakhs

Remuneration of underwriting > 1% of networth

Turnover/Net Worth shall be calculated on the basis of the Audited Financial Statements of the preceding financial year.

Provisions of RPTCA 2013 - Notification – dated 5th June ‘15

2(76) – Definition of RP with reference to company

The transactions done between a private company and following companies noted below is out of the purview of RPT :-

(a)Holding Company (b)Subsidiary Company (c)Associate Company (d) Subsidiary of a holding company (fellow subsidiary)

CA 2013 - Notification – dated 5th June 2015

Section 188 (1) proviso 2 Relaxation to Pvt. Ltd- Voting allowed on Resolution in General Meeting by Related party.

Approval Mechanism

Related Party Transactions

At Arm’s lengthNot at Arm's length price

Value of Transactions

Within threshold limits Beyond threshold limits

Audit committee approval

Approval Mechanism

Within threshold limits

Listed Public CompaniesPrivate Companies

Prior Board’s Approval Audit committee approval

Unlisted Public Companies with audit committee

Unlisted Public Companies without audit committee

Audit committee approval Board’s Approval

The requirement of passing the above resolution, both Board or Shareholder’s shall not be applicable 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 general meeting for approval.

Approval MechanismBeyond threshold limits

Listed Public CompaniesPrivate Companies

Shareholders approval by passing ordinary

resolution

Unlisted Public Companies with audit committee

Unlisted Public Companies without audit committee

Audit committee & shareholders approval by

passing ordinary resolution

Shareholders approval by passing ordinary

resolution

Audit committee & shareholders approval by

passing ordinary resolution

No member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party. However, the above provision shall not apply to private limited companies.

Omnibus Approval of Audit Committee - Cl. 49The Audit Committee may grant omnibus approval for RPT proposed to be entered into by the company:

In line with the policy of related party transaction.In respect of transactions of repetitive nature.In the interest of the Company.

Such omnibus approval shall specify

The name/s of the related party, nature of transaction, period of transaction.Maximum amount of transaction that can be entered into.The indicative base price / current contracted price and the formula for variation in the price, if any.Such other conditions as the Audit Committee may deem fit.

Where the need for RPT cant be foreseen and aforesaid details are not available, Audit Committee may grant omnibus approval for such transactions subject to their value not exceeding Rs 1 Crore/ transaction.

Audit Committee shall review, at least on a quarterly basis, the details of RPTs entered into by the company.

Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year"

Consequences of Non - Compliance

Transactions without prior approval

Contracts Not ratified Ratified within 3 months

Valid Transactions Voidable at the option of the

Board

Contract with a RP to any Director/

authorised by any other Director

1. Directors concerned shall indemnify against any loss incurred by the Company.2. The Company can proceed against any director or employee in respect of any loss sustained by it due to such contract or arrangement3. Disqualified if convicted u/s 188 during last preceding 5 years u/s 164(1) (g)4. Office of director becomes vacant in case of disqualification u/s 164(1)(g)

Penal Provisions

Non - Compliance by any Directors

Other than Listed CompaniesListed Companies

Imprisonment for a term which may extend to one year

Or Fine >25000<Rs. 5 Lakhs or Both

Fine>Rs.25000<Rs.5Lakhs

1. Directors concerned shall indemnify against any loss incurred by the Company.2. The Company can proceed against any director or employee in respect of any loss sustained by it due to such contract or arrangement3. Disqualified if convicted u/s 188 during last preceding 5 years u/s 164(1) (g)4. Office of director becomes vacant in case of disqualification u/s 164(1)(g)

CA, 2013

LISTING AGREEMENT

AS - 18

All transactions shall be referred to Board’s Report along with justification for entering into the contract or arrangement which is either not at arm’s length basis or not in ordinary course of business.

Policy on dealing with Related Party Transactions on its website and a web link thereto shall be provided in the Annual Report. Disclosure to be given in AoC 2, which shall be a part of the Board’s Report. Details of all “Material Transactions” with related parties shall be disclosed quarterly along with the compliance report on corporate governance as per Clause 49 of the listing agreement.

Name of the related party;

Relationship between the parties;

Nature of transactions.

Volume of the transactions either as an amount or as an appropriate proportion

Any other elements as may be necessary.

The amounts or appropriate proportionsof outstanding items pertaining to related parties at the balance sheet date

Provisions for doubtful debts due from such parties at that date amounts written off or written back in

Disclosure Requirements

Loans to DirectorsA Company shall not directly/indirectly, advance any loan to any Director/any person in whom director is interested, give any guarantee, provide any security in connection with any loan taken.

Exceptions/Exemptions:

1. Loan to MD/Manager as a part of conditions of services to all employees.2. Loan/Guarantee/Security by Holding Company to WoS or JV.3. Guarantee/Security by Holding Company in respect of loan by Banks/FIs to Subsidiary, provided such loans are utilised for their principal business activities.4. The provisions of this Act is exempted to Private Limited Companies, upon fulfilment of certain conditions.5. In case of Nidhis, Loan given to directors/relatives in the capacity as members & the same is disclosed in Annual Accounts.6. Loans does any advances, as it is a pre payment against goods / services which is likely to become due at a later period.

The essential requirement of loan is the advance of money or some article, upon the understanding that it shall be returned, and it may or may not carry interest.

Is book debt a Loan??Yes, if it's prolonged beyond the usual credit period to allow more time to the debtor for payment.

Investments by a Company

Includes:Includes subscription or purchase of shares/share warrants/Debentures, Bonds & similar debt securities.

Does not include:

Deposits, any acquisition made by a NBFC/ by a Company whose principal business activity is acquisition of securities.Acquisition of shares allotted on rights basis pursuant to Section 62(1)(a).Any investment in Mutual funds, as they are managed by trusts & not body corporates. However investment in UTI attracts these provisions as they constituted under UTI Act & is a body corporate.

A Company shall make investments not more than 2 layers of investment companies by way of subscription or purchase of securities by of any body corporate.

Approval mechanism for loans & investments:Prior approval of the Shareholders is required if loan/guarantee/security/investments exceeds the threshold limits.

Implementation of road map

Identification of a related party.Set Disclosure framework.One time evaluation of existing contracts.

How SAS Partners can help?Policy Formulation

Define a policy and underlying procedures on RPT as well as responsibilities of management and Board of DirectorsDefine Arm’s Length Policy in line with defined regulations

Training

Training sessions to corporates on key provisions of the Companies Act along with potential implications.

Review

Periodic evaluation to identify any unreported RPT.

Testing of RPT to review compliance with Arm’s Length Policy

SOY JOSEPH09-884-212-845

SONY GEORGE MATHEW09-884-656-382

ALEX T KOSHY09-884-904-699