Tuesday 6 January 2015

Ensuring The Transparent Regime For Related Party Transaction with “Revised Clause 49 Of Listing Agreement”



With two time amendments in clause 49 of listing agreement SEBI tried to align the provisions under clause 49 with Companies Act, 2013 in respect of woman director, independent director, related party transaction etc. The revised Clause 49 updates and brings into line the Listing Agreement with standard on corporate governance enlightened under Companies Act, 2013. There are also certain changes which are stricter than that mandated in the Companies Act, 2013 for instance disclosures, all RPTs to be preapproved by the Audit Committee,  passing of all related party transactions with the approval of Board of Directors and shareholders irrespective of same in the ordinary course of business and on arm’s length price etc. 

Related Party Transactions As per Clause 49 of Listing agreement

A related party transaction means a transaction for transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged, which means a "transaction" with a related party as a single transaction or a group of transactions in a contract. A ‘Related Party’ is a PERSON or ENTITY that is related to the company. 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 and includes the following:
Ø  Related party under section 2(76) of Companies Act, 2013 or such entity is a related party under the applicable accounting standards."
Ø  The entity and the company are members of the same group
Ø  One entity is an associate or joint venture of the other entity
Ø  Both entities are joint venture of the same third party.
Ø  One entity is controlled or jointly controlled by a person identified in (1)
Ø  One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
Ø  The entity is a post-employment benefit plan for the benefit of employees of either the company or an entity related to the company. If the company is itself such a plan, the sponsoring employers are also related to the company; or
Ø  The entity is controlled or jointly controlled by a person identified in (1).
Ø  A person identified in (1)(b) has significant influence over the entity (or of a parent of the entity);

Note: The term “control” shall have the same meaning as defined in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Function of Board of Director:
One of key function added by the amendment is related to monitoring and managing of potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions, similarly Companies Act, 2013 has prescribed the duties of directors of the company to prevent conflict of interest of management, abuse of related party transaction etc.

Role of Audit Committee
The audit committee shall review with the management, the annual financial statements and auditor's report thereon before its submission to the board of the company, with particular reference to items listed in the clause which includes disclosure of any related party transactions as one of such item along with the mandatory review of statement of significant transactions submitted to it by management of the company. However, the clause 49 left on the audit committee to make company specific definition of term significant related party transaction. 

Policy on materiality of Related Party and Disclose of Material RPTs
The company shall formulate a policy on materiality of Related Party Transactions and also on dealing with Related Party Transactions.  The transaction with a related party shall be considered 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 consolidated turnover of the company as per the last audited.  Also, discourse of details of all material transactions with related parties shall be on quarterly basis with the compliance report on corporate governance. The company shall disclose the policy on dealing with Related Party Transactions on its website and a web link thereto shall be provided in the Annual Report.
                                                                                        
Prior approval of all RPTs:
All Related Party Transactions shall require prior approval of the Audit Committee. However, to ensure the hassle free compliance the SEBI has come out with the new concept of Omnibus Approval of RPTs, where the Audit Committee may grant omnibus approval for proposed RPTs to be entered into by the company subject to certain conditions as follows:
Ø  The Audit Committee shall lay down the criteria for granting the omnibus approval in line with the policy on Related Party Transactions of the company and such approval shall be applicable in respect of transactions which are repetitive in nature.
Ø  The Audit Committee shall satisfy itself the need for such omnibus approval and that such approval is in the interest of the company;
Ø  Such omnibus approval shall specify  the prescribed particulars for instance name/s of the related party, nature of transaction, period of transaction, the indicative base price / current contracted price and the formula for variation in the price if any. Review of details of all RPTs entered into with such Omnibus approval by Audit Committee on quarterly basis.
Note:
(1)   Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year".
(2)   Also, where the need for Related Party Transaction cannot be foreseen and aforesaid details are not available, Audit Committee may grant omnibus approval for such transactions subject to their value not exceeding Rs.1 crore per transaction.

Companies Bill, 2014 passed in Lok Sabha – Key highlight of changes pertaining to Related Party Transaction:
Ø  The bill proposed to Empowered the  Audit Committee to give omnibus approvals for related party transactions on annual basis to align with the provisions provided under SEBI Listing Agreement

Ø  The amendment proposed to replace "special resolution approval" with "ordinary resolution approval" from non-related shareholders on related party transactions, the amendment would remove the difficulties faced by Corporates as the ordinary resolution will be suffice for the compliance of the provision of section 188 of the Act, 188.

Ø  The Companies Bill, 2014 exempted related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related shareholders. The Act, 2014 required companies to obtain special resolution for loans given by a holding company to a wholly-owned subsidiary or guarantee/security given for its loans. 

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