companies act 2013 related party transactions · 2020-04-25 · companies act 2013 – related...
TRANSCRIPT
Companies Act 2013 –
Related Party
Transactions
Chinnsamy GanesanFCA DISA(ICA)
Presentation at the
Refresher Course on Company Law
organised by the
EIRC of ICAI on 25.04.2020
Procedural requirements
Related PartyRelated Party Transactions
Structure of the discussion
Powers of the shareholders
Powers of the Board and Audit Committee
Frequently asked questions
Related Parties
Laws relating to Related Party
Transactions
Companies
Act, 2013 and
Rules (Sec
188)
SEBI LODR
(Regulation
23 read with
Sch.V
Accounting Standards
3 Possible Levels
Company
level
Management
Level
Individual
Level
Related Parties
ChildrenGrandparents
3
Relative
SpouseHUFParents
Individual
Grandchildren
Firm
Directors
Key
Management
Personnel
Private
Company
2
Management Level
Relative
Public
Company
Partner
Director
Director and owner >2%
share capital
Several/Joint/ Direct/Indirect Influence
Body Corporate of Entity
influencing in non-professional
capacity
Associate
Holding
Fellow
Subsidiary
Subsidiary
1
Company Level
Related Parties
ChildrenGrandparents
3
Relative
SpouseHUFParents
Individual
Grandchildren
Parents include “step
parents”
Children include “step
children”
Brother (including step
brother)
As per rules others prescribed as relatives are
Son’s wife Daughter’s husband
Sister (including “step sister”)
A Quick referencer
Cases of Relative AS 18Cos. Act,
2013IT Act, 1961 Cases of Relative AS 18
Cos. Act,
2013
IT Act,
1961
Members of HUF No Yes Yes Mother's father No Yes No
Husband/ wife Yes Yes Yes Son's son/ daughter No Yes Yes
Father Yes Yes Yes Daughter's husband No Yes Yes
Mother (including step -
mother)Yes Yes Yes Son's daughter's husband No No No
Son (including step-son) Yes Yes Yes Daughter's son No No No
Daughter (including step
daughter)Yes Yes Yes
Daughter's Son's wifeNo No
No
Son's son's wife Yes
Brother (including step
brother)Yes Yes Yes Daughter's daughter No No No
Sister (including step sister) Yes Yes Yes Daughter's daughter's husband No No No
Son's wife No Yes Yes Son's daughter's husband No No No
Father's father No Yes Yes Daughter's Son's wife No No No
Father's mother No Yes Yes Brother's wife No No Yes
Mother's mother No Yes No Sister's husband No No Yes
Ind AS 24 also covers Domestic Partner, Children and dependents of the
Individual, Spouse and Domestic Partner
A check point
Mr. X has an investment in A Limited and B Limited
When B Limited is related party from the
perspective of A Limited
Will A Limited and B Limited be related
parties, if Mr. X has only significant
influence over both A Limited and B
Limited
When A Limited is related party from the
perspective of B Limited
Subsidiary Companies [Sec 2(87)]
Company C ('Subsidiary')
Holding
(Company A)
Company B
('Subsidiary')
Owns/ controls >50% of
total voting rights
or Board Control
Owns/ controls >50% of
total voting rights
or Board Control
Subsidiary (Company B)
Holding
(Company A)
Owns/ controls >50%
total voting rights
or Board Control
1 2
Controlling the reporting
entity (Parent and ultimate
Parent)
Controlled by the reporting
entity (Subsidiary)
Under the Common Control
(Fellow subsidiaries)
Associate Companies [Sec 2(87)]
Associate Company
Investing Company
Owns/ controls ≥ 20% total voting power
Or Controls business decisions under agreement
Check Points
Whether the definition of related party is same as that of AS 18
and Ind AS 24?
Whether the definition of related party for the purposes of
Sec 40A (2) (b) of the Income Tax Act, 1961?
Whether the definition of “Control” and “Significant Influence” is
different from the definition given in AS or Ind AS?
Check Points
▪ A Limited is a parent entity with 3 wholly owned subsidiaries, B Limited,
C Limited and D Limited
▪ Further, E Limited is an associate of A Limited
▪ F Limited is a wholly owned subsidiary of E Limited
▪ Who all are related parties to F Ltd?
Related Party Transactions
Transactions Covered
Sale, purchase or supply of any goods
or materials
Selling or otherwise disposing of, or
buying, property of any kind
Leasing of property of any kind Availing or rendering of any services
Appointment of any agent for purchase
or sale of goods, materials, services or
property
Appointment to any office or place of
profit in the company, its subsidiary
company or associate company
Underwriting the subscription of any securities or
derivatives thereof, of the company
Un-authorised contract – Penalty Rs.25,000 to Rs.5 Lacs with/ without 1 year
imprisonment (loss can also be recovered)
Exempted Transactions
Nothing in section 188 (1) shall apply to any transactions entered into
by the company in its ordinary course of business other than
transactions which are not on an arm’s length basis
Such transaction needs no approval of the Board of directors and
shareholders
Exemption for a private limited company
Proposed transactions to be entered by a private company with its holding,
subsidiary, associate and subsidiary of its holding company shall not require
requisite approval under section 188
If the counter-party to such a transaction is a public company, then such
counter-party will be under obligation to comply with the provisions of
section 188
By virtue of the amendment vide the MCA Notification
dated 5 June 2015
A related party who is a member of a private company is eligible to vote on
ordinary resolutions approving the contract or arrangement which may be
entered into by the private company
Some focus points
The scope of existing provisions has been widened to include selling, buying
and leasing
An arms length transaction entered into in the ordinary course of business of
the company is an exception to the related party transaction rule
Shareholder’s approval for non-cash transactions with Directors of the
company, its holding, its associated company, or a person connected with
him would be required
Company should not acquire assets from directors of the Company, its
holding and its associates company
Approval process
Transaction with Related Party?
Specified transaction? No further action required
Transactions in ordinary
course of business?No further action required
ALP? Transactions > specified amount
OR capital > Rs.10 Cr
Approval of shareholders by
ordinary resolution and
board approvalNo prior approval
Only board
approval
required
Yes
Yes
YesYes
No
No
No Yes
No
Prior approval of shareholders required by ordinary resolution, if
Related Party Transactions
Share capital is Rs.10 Cr
or more
Sale of goods > 10% of
annual turnover or Rs.100
Cr whichever is lower
Sale of services > 10% of
annual turnover or Rs.50
Cr whichever is lower
Leasing > 10% of net
worth or 10% of annual
turnover or Rs.100 Cr
whichever is lower
Sale/ purchase of property
> 10% of net worth or
Rs.100 Cr whichever is
lower
Underwriting commission
> 1% of net worth
Appointment of place of profit > Rs. 2.50 Lac p.m. in the Company or n
its subsidiary or associates
Resolution for related party transactions
Name and nature of relationshipMaterial terms of the contract or
arrangement
Any advance paid or received for
the contract or arrangement
Any other information that maybe
relevant for the Board to take a
decision
In respect of contracts not at arms’ length, justification for entering into
such contracts/ arrangements or transactions shall also be included
Section 180 (1) read with Rule 8 (2) of Companies (Accounts) Rules
2014 requires minimum information about the RPT
Frequently asked questions
Whether interested director be present/ vote at the meeting?
Whether interested member vote in a resolution relating to
related party transactions?
Where a Board meeting is held prior to the Audit Committee
meeting and the Board approves a transaction with a related
party. Can the Audit Committee approval be taken subsequently?
Frequently asked questions
Whether issue of “shares and debentures” to a related party, covered under
the ambit of Section 188?
When a transaction takes place between two foreign subsidiaries which are
consolidated in the accounts of the holding company, whether Sec 188 for
such transactions between subsidiaries will be applicable?
If a company has taken an immovable property from a HUF in which a
director is member, will it be regarded as a transaction with a related party?
Would the appointment of a Managing Director of a holding company as
Chairman in a subsidiary company be treated as related party transaction
even if he is not getting any remuneration from subsidiary?
Frequently asked questions
How Arms’ Length transaction can be determined?
Whether transactions to be seen in aggregate with previously
entered transaction which is less than the threshold limits?
If transactions are between holding and WOS – whether both
parent and subsidiary to pass approving resolutions?
Can approval of the Audit Committee, to a related party
transaction, be granted by passing a circular resolution?
Frequently asked questions
Will payment of commission to non-executive directors be
treated as a related party transaction?
If not, should they vacate the room where the Board meeting is
conducted while the item considering their commission is
discussed? Or can they participate on this item of agenda?
Where a director is nominated by a related party, whether the
nominee director can be present at a Board meeting where a
related party transaction is being considered?
Will remuneration by way of salary proposed to be paid to a
director amount to a related party transaction?
