A hand chart on related party transactions (rpt)

HemSenthilRaj.D,M.B.A,ACS,CWA (Company Secretary & Legal Officer) (285 Points)

01 December 2014

A HAND NOTE ON RELATED PARTY TRANSACTIONS (RPT)

UNDER COMPANIES ACT, 2013

AND

REVISED CLAUSE 49 OF THE LISTING AGREEMENT

BY CS K VINOTH AND CS D HEM SENTHIL RAJ

DEFINITIONS

Related Party

*Under Companies Act, 2013*	*Under Clause 49 of Listing Agreement*
As per Section 2(76)	As per 49(VII)(B)

What is a Related Party Transaction?

Under Section 188 of Companies Act, 2013

Under Clause 49 of Revised Listing Agreement

Entering into any contract or arrangement with a related party with respect to:-

a) Sale, purchase or supply of any goods or materials;

b) Selling or otherwise disposing of, or buying, property of any kind;

c) Leasing of property of any kind;

d) Availing or rendering of any services;

e) Appointment of any agent for purchase or sale of goods, materials, services or property;

f) Such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and

g) Underwriting the subscripttion of any securities or derivatives thereof, of the company.

A related party transaction is a transfer of resources, services or obligations between a Company and a related party, regardless of whether a price is charged.

Authority/Approval Required as per CA, 2013

*Particulars*	*Approval Required*	*Type of Resolution*
Where transaction value is within the prescribed limit.	Audit Committee*	Ordinary Resolution
Where transaction value is within the prescribed limit.	Board of Directors	Ordinary Resolution
Where transaction value is exceeding the prescribed limits.	Audit Committee*	Ordinary Resolution
	Board of Directors	Ordinary Resolution
	Shareholders	Special Resolution

* Prior Approval of Audit Committee is not required under CA, 2013, However as a matter of good corporate governance practice, it is advisable to place the related party transactions in the Audit Committee of the Company

We have listed out the type of related party transaction which requires approval from shareholders:

*Type of Related Party Transaction*	*Limits on Transaction* *(Based on Value)*
Sale, purchase or supply of any goods or materials, directly or through appointment of agent	> 10% of Annual Turnover or 100 Crores w.e.l.
Selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent	> 10% of Net Worth or 100 Crores w.e.l.
Leasing of property of any kind	> 10% of Net worth or Turnover or 100 Crores w.e.l.
Availing or rendering of any services, directly or through appointment of agent	> 10% of Net Worth or 50 Crores w.e.l.
Appointment to any office or place of profit in the company, its subsidiary company or associate company	>2.5Lakhs Per Month.
Remuneration for underwriting the subscripttion of any securities or derivatives thereof of the company	> 1% of Net Worth.

The Turnover or Net Worth referred in the above sub-rules shall be on the basis of the Audited Financial Statement of the preceding Financial year.

Note: Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a special resolution in the general meeting and if it is not ratified by the Board or shareholders at a meeting, as the case may be, within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board.

TRANSACTION LIMITS AS PRESCRIBED UNDER LISTING AGREEMENT

*Particulars*	*Limit*	*Approval Required*	*Type of Resolution*
Transactions of Material Nature *	Exceeds 5% of Annual Turnover or 20% of Networth, w.e.h. (As per last audited Balance sheet)	Shareholders	Special
All Related Party Transactions	-Not Applicable-	Audit Committee	Ordinary

* Transaction of Material Nature refers to those transaction/transactions to be entered into individually or taken together with previous transactions during a financial year.

Disclosures Required Under Listing Agreement

1. Details of all “Material Transactions” with related parties shall be disclosed quarterly along with the compliance report on corporate governance.

2. The Company shall disclose the policy on dealing with Related Party Transactions on its website and also in the Annual Report.

Exemption Under CA, 2013 and Listing Agreement

Companies Act, 2013:

“There is an exemption provided under the Companies Act, 2013, wherein the approval of board or shareholders are not required if the Company has related party transactions as per the prevailing market price and on arm’s length basis irrespective of transaction value.”

Provided the Company need to justify and should have necessary proof evidencing that the transactions are made on arm’s length basis.

Listed Companies:

Listed companies are required to follow the provisions as envisaged under the revised Clause 49 of the Listing Agreement.

Format Calculations of Networth as per Clause 49 of Listing Agreement for Related Party Transactions (RPT)

*Related Party Transaction Value With X Vendor : Rs. 152 Crores*
*Networth Calculations*
		*(In Rupees)*
*Particulars*	*Mar-14*	*Mar-13*
Share Capital	445,190,670	445,190,670
Reserves & Surplus	8,983,715,984	10,508,457,596
*Networth*	*9,428,906,654*	*10,953,648,266*

*Networth in Crores*	942.89	1095.36
*20% of Networth*	188.58	219.07

*Turnover Calculations*
		*(In Rupees)*
*Particulars*	*Mar-14*	*Mar-13*
Turnover	5,582,311,208	14,304,430,014
[Sales Income + Other Income]


*Turnover in Crores*	558.23	1430.44
*5% of Turnover*	27.91	71.52

Conclusion:

Based on the review and on the above said calculations, the Company’s related party transactions are well within the limits as prescribed under revised Clause 49 of the Listing Agreement.

However, it is advisable and as a matter of good corporate governance, the related party transactions shall be placed before the board on a periodical basis.

FAQ’S

1. What are the penal provisions in case of non-compliance of Section 188 of the CA, 2013?

Listed Company/Entity:

Imprisonment for a term which may extend to One year or fine which shall not be less than Rs.25,000/-, which may extent to Rs.5,00,000/- or both as the case may be.

Other than Listed Company/entity:

Fine which shall not be less than Rs.25,000/-, which may extent to Rs.5,00,000/-

2. What are the implications of revised clause 49 of Listing Agreement in terms of RPT?

The implications are:

a. The Company shall frame and adopt a policy on materiality of related party transactions and dealing with related party transactions. The same shall be filed with the stock exchanges and also be updated in the Company’s website. Further the company shall include the policy in its Annual Report every year.

b. Any related party transactions irrespective of transactional values requires the prior approval of Audit Committee.

c. The company shall have a periodical review of the related parties and the transactions entered or to be entered into with the related parties.

3. What happens if a listed entity does not formulate a policy on materiality of related party transaction and dealing with RPT?

SEBI shall issue a notice to the Company for violation of Revised Clause 49 of the Listing Agreement and all the Related Party Transaction entered by the Company will remain Void.

4. Whether ratification of RPT is permitted both under CA 2013 & Listing Agreement?

Under CA, 2013:

Ratification of RPT can be done in Board Meeting or General Meeting by passing a Special Resolution is available under the Proviso of CA, 2013 and which shall be done on or after three months from the date of entering into Related Party Transaction.

Under Listing Agreement;

Ratification of RPT is not available as per Revised Listing Agreement.

5. What is the position of a relative of a director or KMP holding an office or place of profit in the company, and what will be the compliance to be met under CA 2013 & Listing Agreement?

Under CA, 2013:

Prior Approval has to be sort through Board Meeting or General Meeting as the case may be. However if the transaction has been entered into before obtaining the approval, the same shall be approved by the shareholders by way of a Special Resolution to be passed at the General Meeting/Postal Ballot as the case may be within three Months from the date of entering into such transaction.

Listing Agreement:

Listing Agreement doesn’t specifically provide for compliances pertaining to office or place of profit. However any transactions falls within the meaning of material transaction and related party transactions it shall require the prior approval of shareholders and Audit Committee as the case may be.

6. Whether it is mandatory to have an agreement to be entered into with the Related Party? Or a Letter of Engagement is sufficient?

Any Contracts or arrangements entered into with the related party (ies) mandates for entering into agreements between the parties.

7. Whether a RPT entered or to be entered with a foreign party viz. foreign body corporate, firm, LLP or an individual requires the compliance of CA 13 & LA?

Any transactions entered into with a foreign party doesn’t require any compliance under CA, 13 and Listing Agreement.

However, there is certain compliance to met with as per the Income Tax Act and RBI Regulations.

8. What are the compliances to be met with in case of RPT entered or to be entered with WOS, JV’s and Associates abroad?

Any transactions entered with WOS, JV’s and Associates abroad requires compliance under Income Tax Act and RBI Guidelines and does not requires approval under CA, 2013 and Listing Agreement.

9. Whether employees of the Company can be penalized for entering into contracts or arrangements in violation of Companies Act, 2013?

Yes, the employees of the company are also liable under the penal provisions of the CA, 2013.

10. Whether quorum is required for approval of related party transactions in the Board Meeting?

No, Quorum is not required.

CS D HEM SENTHIL RAJ

CS K VINOTH