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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