Evaluating the Compliance of Related Party Transactions under Companies Act, 2013 in Indian Public Companies
Introduction
Understanding and managing of related party transactions (RPTs) is one of the most important models in corporate governance for those countries where business groups and especially the family businesses play an important role as in the case of India. Subsequently, Section 188 of the Companies Act, 2013 sparked controversy as a measure to prevent RPTs and safeguard minorities’ interest through regulations and notifications. The aim of this article is discussed to determine the degree of Companies Act 2013 compliance in Indian public companies especially in provisions that relate to RPTs, the specific legislation, implementation, and problems encountered in meeting the requirements thereof.
Legislative Framework
The Companies Act, 2013 deals with RPTs under section 188.Glancing through this Companies Act, 2013, one comes across section 188 which outlines the legalities of RPTs. It presupposes that any related party transaction shall be approved in writing by the Board of Directors and in some cases by the shareholders. Section 2(76) of the Act lays down a general meaning for the term ‘related party’ and it includes directors, the Key Managerial Personnel or their relatives and every associate of such a person, director or Key Managerial Personnel, that holds an interest in the concerned business in the corporate.
Key Provisions of Section 188:Key Provisions of Section 188:
1. Board Approval: Every RPT must be approved by the Board of Directors as the case is preceded by a resolution of the board.
2. Shareholder Approval: In respect of transactions where the consideration received or which is to be paid exceeds predetermined thresholds, share holder approval is prescribed through a special resolution. The voting right procedure also cancels for all other interested parties.
3. Disclosure Requirements: The Board report and the financial statements of the RPT must contain specific disclosure of such arrangements In addition, the disclosures must be made to the stock exchange in which the company’s securities are traded.
4. Arm’s Length Transactions: Any dealing in the shares or securities of the Company and on an arm’s length basis and where such dealing is in the ordinary course of the business of the Party, does not require the approval of the shareholders.
Implementation and Compliance
The RPT regulations are implemented by SEBI for the listed companies and for unlisted companies it is implemented by the Ministry of Corporate Affairs. Depositors’ compliance is exercised through the filing of reports, regular examination, and evaluation recommended by legal bodies.
Board and Shareholder Approval
Thus, merely getting Board’s approval for RPTs is relatively followed by most of the Indian public companies. It is common practice for many firms to have internally set up committees particularly audit committees to scrutinize and endorse RPTs before they are presented to the Board. Shareholder approval is a more intricate problem, however, especially in regards to the transactions that go beyond the set thresholds. It requires that the resolutions should be approved by a vote and that persons interested in the investment should not vote on the matter.
Disclosure Practices
One can also state that increased transparency is another key factor that distinguishes the contemporary picture of RPTs due to the strict regulation of financial activities within the company. There are rules for preparing and presenting applied RPTs; all material RPTs must be reflected in the annual reports and financial statements of the company. Also, SEBI’s Listing Obligations and Disclosure Requirements (LODR) require entities to disclose to stock exchanges material RPTs on the occurrence of the event.
Challenges in Compliance
Despite the robust regulatory framework, several challenges hinder the effective compliance of RPT regulations in Indian public companies: Despite the robust regulatory framework, several challenges hinder the effective compliance of RPT regulations in Indian public companies:
1. Complexity of Transactions: The number and complexity of business transactions and the list of parties as related creates difficulties in identification and reporting all RPTs.
2. Corporate Culture: This may explain why several Indian firms have the potentiality of conflicting interest considering the fact that many firms have family related interests, and may not fully conform to the general compliance standards.
3. Enforcement Issues: The laws are quite clear on the matters of employment, but the compliance with such laws is still an issue. The legal enforcement agencies are usually poor in terms of financial might and knowledge to conduct an extensive investigation and audit.
4. Stakeholder Awareness: At the same time, the awareness and knowledge of RPT regulations among directors, shareholders, and auditors are grossly missing or insufficient. This could result in accidental noncompliance.
Case Studies
To have an understanding of practical challenges, level of compliance, etc., let us pick up the few of Indian public companies and make an attempt to carry out a case study
1. Tata Sons and Tata Motors: Tata Motors is part of the Tata Group. It has large related party transactions with its parent company Tata Sons and with other group companies. The company has well-set mechanisms of identification and approval of RPT. The same is looked over by a dedicated audit committee. At the same time, the structure of Tata Group is very complex to make compliance with a higher volume of transactions. But still, Tata Motors have substantially complied with the high standard of compliance for proper disclosures and seeking shareholders’ approvals of major transactions.
2. Reliance Industries Limited: It happens to be one of the largest groups in India, hence engaging in RPTs with subsidiaries and associates many times more often. There have been apprehensions as to the compliance by RPTs on the part of the company. ~matters pertaining to the fairness in pricing of the transactions and the extent of disclosures have also been raised. It has addressed concerns relating to transparency through detailed disclosures in its annual reports; it has also obtained independent valuations for major transactions.
3. Satyam Computer Services: The Satyam saga brought to the world face-on the grim consequences that could befall by not having RPT regulations in line with requirements. Founder Ramalinga Raju was enabled to perpetrate fraudulent transacting across related-group entities that then delivered massive financial discrepancies and the eventual ruin of the company. This case dragged along to its grave fold the fact on taut enforcement and the role of independent directors surveying RPTs.
Better compliance recommendations
Below are the recommendations that should be taken note of to enhance compliance by Indian public companies with the provisions of RPT as per Companies Act 2013:
1. Internal Controls: To detect, review and approve related party transactions there ought to be effective internal control systems. Audit committees made up of independent directors who may not act in self-interest will be required for this purpose.
2. Training and Awareness: Regular training programs for top management executives, directors, and auditors need to be organized so that they can understand better the RPT systems and their associated obligations.
3. Independent Valuation: Getting independent valuations for such major RPTs will help ensure that these are truly at arm’s length and also provide a fair process towards all shareholders especially the RPTs which are necessarily put before shareholders for approval.
4. Periodic audits: From time to time internal as well as external audits would be done in relation to RPTs to test their compliance with diverse provisions of law and regulations. Therefore, major steps of external auditing should focus primarily on identifying potential conflicts of interest and ensuring that all disclosures made are correct.
Conclusion
Related-party transaction regulation under the Companies Act, 2013, comes as one of the most important concerns of corporate governance in Indian public companies. These cast it as the entire legislative regime on the provisions’ effective working, devolving to the existence of rigorous internal controls, awareness by the stakeholders, and their strict enforcement. In light of this, with these hurdles surmountable, best practices put in for transparency and good corporate governance generally in Indian public companies shall then be able to protect minority shareholders.
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