Article compares disclosure required under Companies Act, 2013, Accounting Standard 18 and IND AS 24.It Further explains Related Party Transactions under the Companies Act and Revised Clause 49 of SEBI Listing Agreement.
|Related Party||As per s 2(76) of the CA, 2013||As per AS 18||As per IND AS 24|
|Related party Includes||Section 2(76) “related party”, with reference to a company, means—
1. a director or his relative;
2. a key managerial personnel or his relative;
3. a firm, in which a director, manager or his relative is a partner;
4. a private company in which a director or manager or his relative is a member or director;
5. a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital;
6. anybody corporate whose Board of Directors, managing director or manager is accustomed to act
in accordance with the advice, directions or instructions of a director or manager;
7. any person on whose advice, directions or instructions a director or manager is accustomed to act:
that nothing in sub-clauses (6) and (7) shall apply to the advice, directions or instructions given in a professional capacity;
8. any company which is— – a holding, subsidiary or an associate company of such company; or – a subsidiary of a holding company to which it is also a subsidiary; * ** included in Amendment 2017
9. such other person as may be prescribed;
*An investing company or the venturer of the company.
**private companies & units of an unlisted public company in an International Financial
Services Centre in SEZs the above mentioned relationships (given in point 8) are outside the scope of RPTs.
Now Father incl. step father, Mother incl. step mother Son incl. step son, Son’s wife, Daughter Daughter’s husband, Brother incl. step brother, Sister incl. step sister are included
|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.
Significant Influence can be by
Relative – in relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings
the Owner of 50% or more Shares,
Controlling Composition of the BoD
Gaining Substantial (26%) in the voting power
It also incl.:
An Associate, An JV, Joint Control, KMP, Fellow Company, Holding and Subsidiary Co., State Controlled Enterprise.
|Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party, directly or indirectly, in making financial and/or operating decisions.
The concept of Relative in broaden in Ind AS 24 as ‘relative’ is now “Close members” of the family and concept of Domestic partner is introduced. Further KMP of parent entity and close member of that person’s family included under IND-AS 24.
Significant influence is the power to participate in the financial and operating policy decisions of an entity, but is not control over those policies. Significant influence may be gained by share ownership, statute or agreement.
Per Listing Agreement As per the Listing Regulations (Regulation 2(zb)), an entity should be considered as related to the
a. Such entity is a related party under Section 2(76) of the 2013 Act, or
b. Such entity is a related party under AS or Ind AS.
|Related Party excludes||
|Disclosure related to related party
||As per AS 18 and Sch III the following needs to be disclosed
1. The name of the transacting related party;
2. A description of the relationship between the parties;
3. A description of the nature of transactions;
4. Volume of the transactions either as an amount or a part thereof;
5. Any elements of the related party transactions which is necessary for an understanding of the financial statements;
6. Outstanding amount from related parties at the balance sheet date;
7. Provisions for doubtful debts due from related parties at the balance sheet date; and
8. Amounts written off or written back of debts due from or to related parties.
|(a) the amount of the transactions;
(b) the amount of outstanding balances, including commitments, and: (i) their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and (ii) details of any guarantees given or received;
(c) provisions for doubtful debts related to the amount of outstanding balances
(d) the expense recognised during the period in respect of bad or doubtful debts due from related parties.
Further disclosures shall be made separately for each of the following categories:
(a) the parent;
(b) entities with joint control or significant influence over the entity;
(e) joint ventures in which the entity is a venturer;
(f) key management personnel of the entity or its parent; and
(g) other related parties
|Approval||CA 2013||Revised Clause 49 of the Listing agreement SEBI|
|Transactions||Section 188(1) states except with the consent of BoD given by a resolution in a BM no company shall enter into any contract or arrangement with a related party with respect to transactions depicted in table below||In contrast, RC49 defines the related party transactions as a transaction involving “transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged.|
|Approval in Special Resolution where the Share Capital of the Company equal to or exceeds Rs. 10 Cr and enters into transaction mentioned the table||
To claim exemption from special resolution of disinterested shareholders (this provision shall not apply to a private company, vide Notification No. GSR 464(E) dated 5th June 2015) either the transaction has to be in the ordinary course of business and at arm’s length or below the prescribed threshold. Based on the criteria above, it needs to be ensured that the transaction value does not exceed threshold given in table. If either of the two criteria is breached, a company will not be eligible to avail exemption unless the transaction entered into by the company is in its ordinary course of business and it has been entered into on an arm’s length basis.
*No approval by way of resolution is required for transactions between the holding company and its wholly-owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.
all related party transactions require prior approval of the Audit Committee, irrespective of whether they are material or not.
RC49 also requires all material related party transactions to be approved by the shareholders through special resolution.
Related parties should abstain from voting on such resolutions. Unlike the 2013 Act, RC49 does not exempt material related party transactions from special resolution of disinterested shareholders based on the criteria, viz., (i) transaction is in the ordinary course of business and at arm’s length, or (ii) prescribed thresholds regarding transaction value and share capital are not breached.
RC49 does not make any reference to the board approval for related party transactions.
Also, under RC49, one of the functions of the board is to “monitor and manage potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.” This suggests that the board also need to approve all material related party transactions entered into by a listed company.
A transaction with a related party is considered to be material if the transaction/transactions to be entered into individually or taken together with previous transactions during a financial year, exceeds 10% of the annual turnover of the company as per its last audited financial statement
To comply with RC49, a listed company needs to get all related party transactions approved (including grant of an omnibus approval) by the Audit Committee.
It also needs to get all material related party transactions approved by the Board and Special Resolution of Disinterested Shareholders. The exemptions given under the 2013 Act will not apply.
*Omnibus Approval (OA):- Audit Committee may grant omnibus approval for a transaction not exceeding 1 crore rupees per transaction.
OA shall be valid for a period of 1 year and after expiry of 1 year, fresh approval is required.
A related party transaction which is not repetitive in nature may not get omnibus approval even if such transaction takes placed more than one time
|Disclosure||Section 188 (2) of the 2013 Act requires that every contract / arrangement entered into under section 188 (1) will be referred to in the board report along with justification.||RC49 prescribes the following additional disclosures for listed companies: Policy on dealing with related parties on its website and in the annual report
Details of material related party transactions on a quarterly basis along with the compliance report on corporate governance
Disclosure by senior management to the Board of all material financial and commercial transactions where they have a personal interest that may have a potential conflict with the interest of the company
|Remedy||if a contract/arrangement has been entered into by a director or any other employee, without obtaining the consent of the BoD or approval by a resolution and such a contract/arrangement has not been ratified by the BoD or by the shareholders within three months from the date on which such contract or arrangement was entered into, then such contract or arrangement should be voidable at the option of the BoD or of the shareholders.||A transaction (involving an amount up to INR1 crore) is voidable at the option of the audit committee if it has been entered without its approval and has not been ratified subsequently by it as per the Companies (Amendment) Act, 2017.|
|Offence & Penalty||in case of listed company, Director or any other employee shall be punishable with imprisonment for a term which may extended to one year or fine which shall not be less than twenty-five thousand but which may be extended to five lakh rupees or with both;
and in case of any other company, be punishable with fine which shall not be less than twenty-five thousand but which may be extended to five lakh rupees.
|Companies (Amendment) Act, 2017||Additional relaxation under the Companies (Amendment) Act, 2017 A related party who is a member is allowed to vote on a resolution of a company to approve a contract/ arrangement entered into by the company in which 90 per cent or more members are relatives of promoters or are related parties.
Further, RPTs between a holding company and its wholly-owned subsidiary that do not require board’s approval under Section 188, would not require approval of the audit committee