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Related Party Transactions

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To understand various issues and concerns faced by the entrepreneurs/top management on the key aspects of Related party transactions and to support them in implementing better governance in organizations.

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Related Party Transactions

  1. 1. RELATED PARTY TRANSACTIONS Open - house discussion
  2. 2. 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.
  3. 3. S.NO. NAME OF THE SCAMS YEAR DAMAGES (IN BILLIONS) 1. Enron Corporation, USA Accused: Jeff Skilling & Ken Lay, CEO 2001 USD 74 2. World dotcom, USA Accused: Bernie Ebbers, CEO 2002 USD 180 & 30,000 employees lost jobs 3. Parmalat SpA, ITALY Accused: Calisto Tanzi, CEO 2002 Euro 13 4. AIG Group, USA Accused: Hank Greenberg, CEO 2005 USD 3.9 5. Apple, USA Accused: Steve Jobs 2006 USD .02 6. Lehman Brothers, USA No one prosecuted due to lack of evidence. 2008 USD 50 7. Bernard Madoff Invt Securities, LLC, USA Bernie Madoff, Chairman 2008 USD 64.8 8. Olympus Corporation, JAPAN Micheal C Wooford 2011 YEN 376 Corporate Scams Around The World
  4. 4. S.NO. SCAMS YEAR DAMAGES (IN CRORES) 1. Telgi Scam 1991 Rs. 20,000 2. Securities Scam Accused: Harshad Mehta 1992 Rs. 4,000 3. Fodder Scam Accused: J and Lalu Prasad 1996 Rs. 950 4. Hawala scam Accused: LK Advani, VC Shukla 1996  Rs. 810 5. Home Trade scam Accused: Sanjay Agarwal 2002 Rs. 600 6. Satyam Scam Accused: 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
  5. 5. Applicable to all companies as per Section 188 - Related Party Transactions Transactions in the “ordinary course” of business or undertaken at “arm’s length” do not need any prior approval List of related-party transactions widened, immovable property also brought under the ambit of related party transactions Shareholders who are related parties are restricted from voting on special resolution All other contracts or arrangements shall be approved by the board or by shareholders, through a ordinary resolution, 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
  6. 6. RPT - Exemptions Exemptions The 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 Business The 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.
  7. 7. 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
  8. 8. 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.
  9. 9. Provisions of RPT CA 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.
  10. 10. 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
  11. 11. 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.
  12. 12. Approval Mechanism Beyond 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.
  13. 13. Omnibus Approval of Audit Committee - Cl. 49 The 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"
  14. 14. Consequences of Non - Compliance Transactions without prior approval Contracts Not ratifiedRatified 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 arrangement 3. 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)
  15. 15. 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 arrangement 3. 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)
  16. 16. 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 proportions of 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
  17. 17. Loans to Directors A 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.
  18. 18. 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.
  19. 19. 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 Directors Define 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
  20. 20. SOY JOSEPH 09-884-212-845 SONY GEORGE MATHEW 09-884-656-382 ALEX T KOSHY 09-884-904-699