Related party Transactions (RPT) in the Companies Act, 2013 is a subject of great importance. This gains further importance in the case of Listed Companies, wherein the Regulation 23 of SEBI (LODR) further lays down the compliance requirement for RPTs. While preparing the Audit Report under CARO, 2016 and verifying the disclosures in the Financial statements for AS-18 /Schedule III, the Author as a Statutory Auditor has conducted detailed examination from every angle.
This company is engaged in healthcare services and paid-up capital as on 31/03/2020 is Rs. 25 Crore. Turnover of the Company for FY 2018-19 was Rs. 150 Lacs and for 2019-20 was Rs. 1300 Lacs. Auditor has come across three parties with whom RPTs were conducted. Each party is being discussed in detail:
1. Case of Dr Healthman
FACTS:
a) Payment Details:
| S. No | Date of Transaction | Nature of Payment | Amount Paid |
| 1. | 01/04/2019 | Professional Fees | 50000/- |
| 2. | 21/05/2019 | Professional Fees | 150000/- |
| 3. | 31/03/2020 | Professional Fees | 300000/- |
| TOTAL | 500000/- |
b) Relation:
i) Son-in-Law of Dr. Good Health – Non-independent Director since 30/09/2019
Since son-in law falls in the definition of `Relative’ as defined under section 2(77) read with Rule 4 of the Companies (Specification of Definition Details) Rules, 2014, Dr. Healthman is a `relative’ for the Companies Act, 2013
ii) Son of Shri Ram Pal, Independent Director since 30/09/2019. Being son, Dr. Healthman is relative of Shri Ram Pal also.
SECRETARIAL ACTIONS:
a) Transactions with Dr. Healthman satisfy following tests:
i) Professional Fees paid in the capacity of a Medical Professional is in the ordinary course of business of the company
ii) Terms and conditions of the transactions i.e. fees paid to other doctors of similar experience / expertise are on `Arm Length Basis’
Therefore, the provisions of section 188 are not attracted in such transactions
b) Company is covered by the provision of Section 177(1) and hence audit committee. Audit Committee approval is required which need not be a prior approval. However, prior omnibus approval valid for 1 financial year may be granted.
Particulars which need to be mentioned in Omnibus Approval Resolution:-
- Name of Related Parties, Nature & Duration of Transaction
- Maximum Amount of Transaction
- Indicative base price and formula for variation
However, in cases where the above information is not available & need for obtaining approval cannot be foreseen, then approval may be given subject to value not exceeding Rs. 1 crore.
c) Disclosure in Annual Report:
i) Directors’ report requires the disclosure of `Material transaction at Arm Length’ in annexure (AOC-2). `Materiality’ has not been defined under the Companies Act, 2013 and hence following the Regulation 23 of SEBI (LODR) Regulations, transactions in excess of 10% of turnover of the company as per the last audited financial statement may be taken as material.
Last audited turnover (FY 2018-19) of the company was Rs. 150 Lacs and transaction value is Rs. 5 Lacs, hence the transaction does not warrant disclosure in AOC-2.
ii) Accounting Standard -18:
a) AS-18 does not treat the Son-in-Law as `Relative’
b) AS-18 treats the relationship of son-father as `Relative’
Hence, nature of relationship, payment made and balance outstanding would be disclosed in the `Notes to the Accounts’ of Audited Financial statements.
d) Particulars to be entered in RPT Register:
Required particulars should not be entered in the RPT Register kept pursuant to Section 189, as the value of transaction does not exceed Rs. 5 Lacs.
e) Whether Independence of Shri Ram Lal is affected by the payments to Healthman , his son ?
As per the section 149(6)(d)(iv), none of relatives of Independent Director
“ has any other pecuniary transaction or relationship with the company or its subsidiary or its holding or associate company amounting to 2% or more of its gross turnover or total income …..”
Total payment made to Dr Healthman was Rs. 5 Lacs and turnover for FY 2018-19 was Rs. 150 Lacs i.e. in excess of 2% of turnover. Thus, Shri Ram Pal does not satisfy the requirements of being independent director.
2. Case of Dr. Good Health:
FACTS:
a) Nature of Transaction/ Payment Details:
| S. No | Date of Transaction | Nature of Transaction | Amount Paid |
| 1. | 06/02/2020 | Loan Received from Director | 25,00,000/- |
b) Good Health is a promoter-director of company since 30/09/2019.
SECRETARIAL ACTIONS:
a) Giving Loan to company is not covered u/s 188(1). Therefore, the provisions of section 188 are not attracted in this transaction
b) Company is covered by the provision of Section 177(1) and hence audit committee. Audit Committee approval is required which need not be a prior approval. However, prior omnibus approval valid for 1 financial year may be granted.
c) Disclosure in Annual Report:
i) Directors’ report requires the disclosure of `Material transaction at Arm Length’ in annexure (AOC-2). `Materiality’ has not been defined under the Companies Act, 2013 and hence following the Regulation 23 of SEBI (LODR) Regulations, transactions in excess of 10% of turnover of the company as per the last audited financial statement may be taken as material.
Last audited turnover (FY 2018-19) of the company was Rs. 150 Lacs and transaction value is Rs. 25 Lacs, hence the transaction warrants disclosure in AOC-2.
ii) Accounting Standard -18: Nature of relationship, payment made and balance outstanding would be disclosed in the `Notes to the Accounts’ of Audited Financial statements.
iii) Separate disclosure under Schedule III for C. Long-Term Borrowings – Loans and advances from related parties; is required.
iv) Disclosure in Board Report pursuant to Proviso to Rule 2(c )(viii) of the Companies (Acceptance of Deposits) Rules, 2014 would also made
d) Particulars to be entered in RPT Register:
Required particulars should be entered in the RPT Register kept pursuant to Section 189. It should be signed be all directors present in the Board Meeting and further should be available for inspection at the AGM.
3. Case of Dr. Remedy:
FACTS:
a) Payment Details:
| S. No | Date of Transaction | Nature of Payment | Amount Paid |
| 1. | 01/03/2020 | Professional Fees | 350000/- |
| 2. | 31/03/2020 | Professional Fees | 250000/- |
| TOTAL | 600000/- |
b) Relation:
i) Son-in-Law of Dr. Natural Health, a promoter-director since 08/03/2003
Since son-in law falls in the definition of `Relative’ as defined under section 2(77) read with Rule 4 of the Companies (Specification of Definition Details) Rules, 2014, Dr. Remedy is a `relative’ for compliance with RPT provisions
SECRETARIAL ACTIONS:
a) Transactions with , Remedy satisfy following tests:
i) Professional Fees paid in the capacity of a Medical Professional is in ordinary course of business of the company
ii) Terms and conditions of the transactions i.e. fees paid to other doctors of similar experience / expertise are on `Arm Length Basis’
Therefore, the provisions of section 188 are not attracted in such transactions
b) Company is covered by the provision of Section 177(1) and hence audit committee. Audit Committee approval is required which need not be a prior approval However, prior omnibus approval valid for 1 financial year may be granted. Particulars which need to be mentioned in Omnibus Approval Resolution are :-
- Name of Related Parties, Nature & Duration of Transaction
- Maximum Amount of Transaction
- Indicative base price and formula for variation
However, in cases where the above information is not available & need for obtaining approval cannot be foreseen, then approval may be given subject to value not exceeding Rs. 1 crore.
c) Disclosure in Annual Report:
i) Directors’ report requires the disclosure of `Material transaction at Arm Length’ in annexure (AOC-2). `Materiality’ has not been defined under the Companies Act, 2013 and hence following the Regulation 23 of SEBI (LODR) Regulations, transactions in excess of 10% of turnover of the company as per the last audited financial statement may be taken as material.
Last audited turnover (FY 2018-19) of the company was Rs. 150 Lacs and transaction value is Rs. 6 Lacs, hence the transaction does not warrant disclosure in AOC-2.
ii) Accounting Standard -18:
AS-18 does not treat the Son-in-Law as `Relative’. Hence, nature of relationship, payment made and balance outstanding would not be disclosed in the `Notes to the Accounts’ of Audited Financial statements.
d) Particulars to be entered in RPT Register:
Required particulars should be entered in the RPT Register kept pursuant to Section 189, as the value of transaction exceeds Rs. 5 Lacs. It should be signed be all directors present in the Board Meeting and should be available for inspection in the AGM.
(The author is a Jaipur based practicing Chartered Accountant and can be reached on 09829063908, indu123@hotmail.com)
Author Bio
Excellent article sir, thanks