CA. K. G. ACHARYA acharya@kgacharya.com

Dharmam Chara

Overview – Chapter XII – Meetings of Board & its Power

CA K G Acharya

2013 1956 Meetings of Board 173 285/286 Quorum for meetings of Board 174 287/288 Passing of resolution by circulation 175 289 Defects in appointment of directors not to invalidate actions taken 176 290 Audit Committee 177 292A Nomination & Remuneration Committee & Stakeholders Relationship 178 -- Powers of Board 179 291/292 Restrictions on powers of Board 180 293 Co., to contribute to bonafide & charitable funds, etc 181 293(1)(E) Prohibitions & restrictions regarding political contributions 182 293A

Power of Board & other persons to make contributions to national defence fund, etc 183 293B

Disclosure of interest by director 184 299 Loan to directors, etc 185 295 Loan & investment by Co., 186 372A Investments of Co., to be held in its own name 187 49 Related Party Transaction 188 297/314 Register of contracts or arrangements in which directors are interested 189 301 Contract of employment with managing or WTD 190 302

Payment to director for loss of office, etc., in connection with transfer of undertaking, property or shares 191 391/320

Restriction on non-cash transactions involving directors 192 -- Contract by OPC 193 -- Prohibition on forward dealings in securities of Co., by director or KMP 194 -- Prohibition on insider trading of securities 195 --

(

1956 2013 TITLE S. 297

Board's sanction to be required for certain C/A in which particular directors are interested

S. 314

Director, etc. not to hold Office or Place of Profit

S. 188 Related Party Transactions Notified on 26/03/2014 – WEF 1/4/14

APPROVAL Board + CG for Cos. with PUC > 1 Cr. ACB? + Board + SR for RPT beyond specified limits.

RELATED PARTY Not Defined Defined & enlarged LIST OF RELATIVES Large [23 nos.] Small [9 nos.]

IMPACT Transparency Increased Transparency RP TRANSACTIONS Narrow Wide

(Immovable property transactions included)

ARM’S LENGTH PRICE Not distinguished Cash @ prevailing market prices.

Distinguished & Defined

PENAL PROVISIONS General U/s. 629A (upto Rs. 5,000 + 500 / day of default)

Specific U/s.188(5) (25K to 5 L + Prosecution + Director

disqualified U/s.164 for 5 years) 3 OF 27 K.G. ACHARYA & CO.,

Co. entering into Contract / Arrangement with Related Party? (All Co’s, incl. Pvt. Ltd. Co’s)

YES

Ordinary Course of Business +

@ Arms Length (#)

No Action u/s. 188 but disclose in

Director’s report

YES

NO

Related Party Transaction stipulated?

Limits Breached ?

Board consent +

Prior Special Resolution

YES

YES

NO Board consent

Other Provisions Elaborate disclosure in

- Notice of BM & Expln. Statement of GM. - Director’s report.

Interested Director/member not to vote at BM / SR. Default – C/A voidable at board’s option.

NO

RPT – FLOW CHART

(#) If Co has ACB then ACB to approve All RPT [S.177(4)(iv)]

ACB reqd. for All listed Cos. & Public Cos. with PUC > 10crs, Borrowings / Deposits > 50crs or TO > 100 Crs. K.G. ACHARYA & CO., 4 OF 27

RELATED PARTY [S. 2(76)] with reference to a Co., means

a. Director or his Relative (1);

b. Key Managerial Personnel (2) or his Relative

c. Firm, in which Director, Manager or his Relative is a Partner;

d. Pvt. Co. in which Director or Manager is a Member or Director;

e. Public Co. in which Director / Manager is Director OR AND holds (along with relatives) > 2% of its PUC;

f. Any Body Corporate whose BOD / MD / Manager is accustomed to act in accordance with the Advice, Directions or Instructions of Director / Manager;

g. Any Person on whose Advice, Directions or Instructions a Director or Manager is accustomed to act (NA to directions/instructions given in professional capacity)

h. Holding Co. / Subsidiary Co. / Associate Co. / Fellow Subsidiary.

i. Director other than ID / KMP of Holding Co. or his relative (Rule 1.3)

RPT – CO’S ACT

K.G. ACHARYA & CO., 5 OF 27

(

RELATED PARTY (RP) AS PER PARA 10.1 TO AS – 18

Parties are considered to be related if at any time during the reporting period 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.

RELATED PARTY – AS 18

Who are not Related Parties under AS-18 …. Two companies having a common director who cannot

influence the mutual dealings;

Relationship where there is a Common customer, distributor, Provider of finance, Trade union

State controlled enterprises

K.G. ACHARYA & CO., 6 OF 27

RELATED PARTY – Descriptive explanation (Para 3)

K.G. ACHARYA & CO.,

RELATED PARTY – AS 18

a) Enterprises that directly or indirectly control or are controlled by or are under common control [H /S & Fellow Subsidiaries]

b) Associates and JVs

c) Individuals & their relative, owning an interest in voting power of reporting enterprise, giving them control or significant influence over the enterprise

d) KMP & their relatives; and

e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. Includes enterprises owned by directors or major shareholders of the reporting enterprise & enterprises that have a member of KMP in common with the reporting enterprise.

7 OF 27

( RPT-COS. ACT

(1) RELATIVE – UNDER S. 2(77) OF CO’S ACT 2013 PARA 10.9 OF AS 18

(i) Husband / Wife Relatives if in relation to an individual, (i) to (vii) may be expected to influence / be influenced by, that individual in his dealings with reporting enterprise.

(ii) Father (incl. Step father)

(iii) Mother (incl. Step Mother)

(iv) Son (incl. Step Son)

(v) Daughter

(vi) Brother (incl. Step Brother)

(vii) Sister (incl. Step Sister)

(viii) Son’s Wife

(ix) Daughter’s Husband

(x) Members of a HUF K.G. ACHARYA & CO., 8 OF 27

( RPT –COS ACT.

(2) KEY MANAGERIAL PERSONNEL (KMP)

UNDER S. 2(51) OF CO’S ACT 2013 PARA 10.8 OF AS 18

1. CEO / MD / Manager; Those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise.

2. CS

3. WTD

4. CFO

K.G. ACHARYA & CO., 9 OF 27

RELATED PARTY TRANSACTIONS MEANS – Contracts or Arrangements (C/A) with Related Parties w.r.t –

188(1) (a) Sale, Purchase or Supply of Goods / Materials;

188(1) (b) Selling / Disposing / Buying property of any kind;

188(1) (c) Leasing of property of any kind;

188(1) (d) Availing / Rendering of Services;

188(1) (e) Appt. of Agent for Purchase / Sale of Goods / Materials / Services / Property;

188(1) (f) Appt. to any office or place of profit in CSA;

188(1) (g) Underwriting Subscription of Securities / Derivatives of Co.

RPT

NEW

Note: Transactions reg. Loans / Guarantees/ Securities to Directors / Any other person in whom director is interested are prohibited with certain exceptions u/s. 185 – Hence not covered u/s. 188.

NEW

NEW

NEW

RELATED PARTY TRANSACTION (RPT) AS PER PARA 10.2 TO AS – 18

A transfer of Resources or Obligations b/w RP, regardless of whether or not a Price is charged.

K.G. ACHARYA & CO., 10 OF 27

LIMITS REQUIRING SPECIAL RESOLUTION . . .

Type of RPT u/s. 188 (1) Prior SR required if

[Rule 12.15(3) as amended 14.08.2014]

Cumulatively more than (#)

(a) & (e) SALE / PURCHASE / SUPPLY OF GOODS / MATERIALS (DIRECTLY OR THROUGH APPOINTMENT OF AGENTS)

10% Turnover OR Rs. 100 Cr. (Whichever is Lower)

(b) & (e) SELLING / DISPOSING / BUYING PROPERTY OF ANY KIND (DIRECTLY OR THROUGH APPOINTMENT OF AGENTS)

10% NW OR Rs. 100 Cr. (Whichever is Lower)

(c) LEASING OF PROPERTY OF ANY KIND 10% of NW OR 10% of T/o OR Rs. 100 Cr. (Whichever is Lower)

(d) & (e) AVAILING / RENDERING OF SERVICES (DIRECTLY OR THROUGH APPOINTMENT OF AGENTS)

10% of NW OR Rs. 50 Cr. (Whichever is Lower)

(f) APPOINTMENT TO ANY OFFICE OR PLACE OF PROFIT IN CSA Monthly Remuneration Rs. 2.5L

(g) UNDERWRITING SUBSCRIPTION OF SECURITIES / DERIVATIVES Remuneration 1% of NW

11 OF 27

(#) Note:

1. TURNOVER” or “NW” – As per Audited FS of preceding FY. 2. For WOS: [R. 12.15 Expl. (2)] - SR by H is sufficient for entering into RPT between WOS & H. 3. All SR incl. S.188 requires MGT-14 to be filed with RoC. 11 OF 27

EXPLN. (a) TO S. 188

“OFFICE OR PLACE OF PROFIT” (OoP) means any office or place—

where such OoP is held by a director, if he receives from Co. by

way of remuneration over and above remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any RFA, or otherwise;

where such OoP is held by individual other than a director, or by any firm, private company or other body corporate, if they receive from Co. anything by way of remuneration, salary, fee, commission, perquisites, any RFA, or otherwise;

OFFICE OR PLACE OF PROFIT.

K.G. ACHARYA & CO., 12 OF 27

“ARM’S LENGTH TRANSACTION” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

ALP in relation to International Transaction or SDT [also for S.40A, 80A/IA] shall be determined by any of following methods, being Most Appropriate, having regard to Nature or class of transaction or class of Associated Persons or Functions performed or other relevant factors, viz.: (a) Comparable Uncontrolled Price Method - CUP; (b) Resale Price Method - RPM; (c) Cost Plus Method – Cost +; (d) Profit Split Method- PSM; (e) Transactional Net Margin Method- TNMM; (f) Any Other Method.

Fair Market Value & Fair Value

ARM’S LENGTH TRANSACTION . . . .

CO’S ACT 2013 EXPLN. (B) TO S. 188

INCOME TAX ACT,

1961 S. 92C(1)

AS - 18 RELATED PARTY DISCLOSURES

Next

K.G. ACHARYA & CO., 13 OF 27

FMV is the price that would be agreed to in an open & unrestricted market between knowledgeable & willing parties dealing at arm’s length who are fully informed and are not under any compulsion to transact.

Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction.

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

Fair value of an asset is the amount for which that asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

ARM’S LENGTH TRANSACTION . . . .

AS - 10

AS – 13 & 14

AS – 15, 16, 19 & 20

AS –26

K.G. ACHARYA & CO., 14 OF 27

Whether RPT is at arm’s length would be a Subjective decision.

Co’s to demonstrate what is arm's length. This would need to be in sync with Transfer Pricing Requirements, as well.

What the Board may regard to be at arm’s length may not

be so to others, such as a TPO.

No clarity whether Board’s / Committee’s decision should be Final or whether Subsequent Development will result in transaction being treated as violation of S. 188.

ARM’S LENGTH TRANSACTION . . . . ISSUES

K.G. ACHARYA & CO., 15 OF 27

OTHER PROVISIONS – Agenda of BM to disclose [R. 12.15 (1)] -

o Name & nature of relationship; o Nature, duration, particulars & material terms of C/A (incl. value); o Advance paid/received for C/A. o Manner of determining pricing & other commercial terms. o Whether all factors relevant to contract have been considered?

(if not, details of factors not considered with the rationale) & o Any other info. relevant for decision making.

Explanatory Statement annexed to Notice calling GM to contain [R. 12.15 Expl. (3)]

o Name of Related Party ; o Name of Director / KMP who is related, o Nature of Relationship; o Nature, Material Terms, Monetary Value and Particulars of C&A; o Other info. Relevant for members to decide on Proposed Resolution.

RPT- OTHER PROVISIONS

K.G. ACHARYA & CO., 16 OF 27

RPT- OTHER PROVISIONS

Interested Directors not to participate / be present at BM during discussions on C/A. S.184(2) & R.12.15.

Applies to Private Ltd. Cos. also.

S.167 (1)(c) (s.283 – 1956) Vacation of Office of director IF – • He contravenes S.184 relating to entering into C/A in which he is interested.

S.184(1): Every director to disclose his interest in any other Co., firm or any other association of Individuals – along with share holding Pattern in:

• First BM in which he participates, AND • First BM of every FY, or • Whenever there is any change in disclosure already made.

Disclosure required

Whether or not any transaction with such entity is done. in Form MBP-1 and Co. to file this fact in MGT-14 with RoC.

NEW

K.G. ACHARYA & CO., 17 OF 27

2nd Provisio to S. 188

“Provided further that No Member of the company shall vote on such Special Resolution, to approve any contract or arrangement which may be entered into by the company, if such Member is a Related Party”

RPT- OTHER PROVISIONS

GC No. 30/2014

Interested Members to abstain from voting on SR approving C/A with RP. NEW

K.G. ACHARYA & CO., 18 OF 27

RPT to be disclosed in Board Report with justification in AOC-2 [S.188(2)]

RPT- OTHER PROVISIONS

Form No. AOC – 2 (Pursuant to clause (h) of sub-section (3) of section 134 of the Act and Rule 8(2) of the Companies (Accounts) Rules, 2014)

1. DETAILS OF C/A OR TRANSACTIONS NOT AT ARM’S LENGTH BASIS

2. DETAILS OF MATERIAL(#) C/A OR TRANSACTIONS AT ARM’S LENGTH BASIS

(i) Name(s) of RP & Nature of Relationship (i) Name(s) of RP & Nature of Relationship

(ii) Nature of C/A or Transactions (ii) Nature of C/A or Transactions

(iii) Duration of C/A or Transactions (iii) Duration of C/A or Transactions

(iv) Salient Features of C/A/T, incl. Value (iv) Salient Features of C/A/T, incl. Value

(v) Justification for entering into C/A/T ---

(vi) Date(s) of approval by Board (v) Date(s) of approval by Board, if any

(vii) Amount paid as advances, if any (vi) Amount paid as advances, if any

(viii) Date on which SR passed in GM ---

(#) “Material” – Not defined in Co’s Act. Under SEBI - If aggregate transactions in FY > 10% of Annual Consolidated TO.

NEW

K.G. ACHARYA & CO., 19 OF 27

(

Disclosure as per AS-18…

AS 18

IF there are NO Related Party transactions:

If relationship is due to control Name of the related party Nature of related party relationship

If relationship is due to significant influence No Disclosure is required

K.G. ACHARYA & CO., 20 OF 27

cont….

(

Disclosure as per AS-18 …

AS 18

If there are Related Party Transactions : (in case of control or of significant influence)

Name of the related party Description of relationship Description of Nature of transaction Volume of transactions [Amount-wise or as appropriate proportion]

Outstanding items and provision for doubtful debts Amount written off/ written back in respect of debts

Above DISCLOSURE REQUIRED even if it is an ‘Arms Length Transaction’.

K.G. ACHARYA & CO., 21 OF 27

S. 189: Register of C/A in which directors are interested. [1956: S.301]

• Maintained - containing prescribed particulars.

• Placed before next BM, after entering particulars & signed by all directors present at BM.

• Kept at Regd. office and open for inspection.

• Produced at every AGM and shall remain open & accessible during the meeting to any

person having right to attend the meeting.

RPT- OTHER PROVISIONS

Particulars related to sale / purchase or supply of goods, material & services for < Rs. 5 lacs in a year [as opposed to Rs.1000/- in 1956 Act], not required to be entered

K.G. ACHARYA & CO., 22 OF 27

RPT C/A entered into by Director / Other employee, without obtaining Board’s Consent / SR and if not ratified by BOD / SH at a meeting within 3 Months(#), such C/A shall be voidable at Board’s option.

Violation - Director / other Employee - To indemnify loss sustained by Co. [S. 188(4)]

- Penal Consequences [S. 188(5)]

[Director to be disqualified if convicted of offence dealing with RPT u/s 188 at any time during last preceding 5 yrs S. 164(1)(g)] with immediate effect U/s.167.

RPT- OTHER PROVISIONS

Fine Imprisonment Listed Co. Rs. 25,000 to 5 Lacs Upto 1 year Other Co. Rs. 25,000 to 5 Lacs -

(#) PROBABLY FOR URGENT CASES WHICH WAS CLEARLY TOLD IN 1956 ACT

K.G. ACHARYA & CO., 23 OF 27

Identifying Related Parties, updating/ maintaining the database of

such persons / entities

Identifying “ordinary course of business” of the company.

Identifying “Related Party Transactions”

Obtaining prior internal approvals & documentations for entering into any transaction with such persons / entities

Documenting Arms’ Length transaction including pricing

(Scope of related parties > AS-18 - Related Party Transaction and IT Act, 1961)

RELATED PARTY TRANSACTIONS . . . CHALLENGES

RPT- CHALLENGES

K.G. ACHARYA & CO., 24 OF 27

STEPS TO MANAGE THE CHANGE

To explain requirements & ensure real-time synergies with finance & tax teams

To comply with arm’s length requirements

To identify one-time documentation & ongoing documentation, aligned with pricing policy.

To track related parties & transactions (recurring as well as non-routine)

Automating pricing policy implementation & documentation requirements to ease burden & ensure compliance.

Regular system audits critical to strengthen processes

GUIDANCE

DOCUMENTATION

SYSTEMS & CONTROLS

K.G. ACHARYA & CO., 25 OF 27

( S. 188 VIS-À-VIS AS 18

RELATED PARTY TRANSACTIONS S. 188 OF CO’S ACT 2013

RELATED PARTY DISCLOSURES AS – 18

Specific Definition Broad Principles

Objective Subjective

Disclosures in Form AOC – 2 annexed to Board Report

Disclosure in Gen. Purpose Financial Statements

Compliance + Disclosure Disclosure

No Disclosure required if no RPT entered into

Disclosure required if control exists irrespective of RPT

Subsidiary: >Half of Total Shares (Paid up Eq. + Conv. Preference Share Capital)

Subsidiary: > Half of Equity Shares

Associates Includes JV over which significant influence is exercised

Associate Excludes JV

K.G. ACHARYA & CO., 26 OF 27

CA K. Gururaj Acharya acharya@kgacharya.com www.kgacharya.com

Success is Relative The more the successful you are - The more the relatives, you have.

27 OF 27

“Subsidiary co.” S. 2(87) in relation to any other company (that is to say the holding company), means a co. in which the holding company—

i. controls the composition of the Board of Directors; or ii. exercises or controls more than one-half of the total share capital (*) either at its

own or together with one or more of its subsidiary companies: (*) [AS-18 refers only Eq. Share capital –like in 1956 Act]

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

K.G. ACHARYA & CO.,

ACCOUNTS – CH. IX

Explanation.—For the purposes of this clause, a. a co. shall be deemed to be a subsidiary co. of the holding co. even if control referred

to in sub-clause (i) or (ii) is of another subsidiary co. of the holding co.; b. the composition of a co.’s BoD shall be deemed to be controlled by another co. if that

other co. by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

c. the expression “company” includes any body corporate; d. “layer” in relation to a holding company means its subsidiary or subsidiaries;

Rule 1.2(r) “Total Share Capital”, means the aggregate of the - (a) paid-up equity share capital; and (b) convertible preference share capital;

28 OF 27

S. 2(27) – “Control” shall include the right to appoint majority of the directors

or to control the management or policy decisions exercisable by a person or

persons acting individually or in concert, directly or indirectly, including by

virtue of their shareholding or management rights or shareholders agreements

or voting agreements or in any other manner;

AS 18 – Para 10.3 - “Control” -

a. Ownership (Directly or indirectly) > 50% voting power, or

b. control over composition of BODs of the Co., or

c. a substantial interest (Generally > 20%) in voting power AND power to

direct, financial and/or operating policies of enterprise. K.G. ACHARYA & CO.,

ACCOUNTS – CH. IX

S. 2(46) – “Holding company”, in relation to one or more other companies,

means a company of which such companies are subsidiary companies;

29 OF 27

S. 2(6) – “Associate company”, in relation to another co., means

a co. in which that other co. has a significant influence, but

which is not a subsidiary co. of the co. having such influence

and includes a joint venture company. AS 18 – Para 10.5 –

“Associate” - an enterprise in which an investing reporting party has

significant influence and which is neither a subsidiary nor a joint venture

of that party.

K.G. ACHARYA & CO.,

ACCOUNTS – CH. IX

30 OF 27

Significant influence (AS 18) – participation in financial and/or operating

policy decisions of an enterprise, but not control of those policies.

Significant Influence is presumed:

By representation on the BODs,

Participation in the policy making process,

Material inter-company transactions,

Interchange of managerial personnel, or

Dependence on technical information.

Share ownership / voting power of > 20% [Rebuttable either way]

Expln. to S. 2(6) Cos. Act 2013

“Significant influence” means control of at least 20% of total share capital, or of

business decisions under an agreement;

K.G. ACHARYA & CO.,

ACCOUNTS – CH. IX

31 OF 27

K.G. ACHARYA & CO.,

ACCOUNTS – CH. IX

PROMOTER [S. 2(69)]

(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;

32 OF 27