Presentation on related party transactions

Vinod Kothari
Vinod Kothari & Company
Kolkata
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www.vinodkothari.com
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Related Party Transactions (RPTs)
- Overview

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• The presentation is a property of Vinod
Kothari & Co.
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explicit prior permission.
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2

About Us
• Vinod Kothari & Co.,
▫ Based in Kolkata, Mumbai,
Delhi
• We are a team of
consultants, advisors &
qualified professionals
having over 25 years of
practice.
3
Our Organization’s Credo:
Focus on capabilities; opportunities follow

RPTs under Companies Act, 2013

Section 188, Rules 6A & 15 of
MBP Rules, 2014

Who all are related parties?-1/2
Director or KMP or
relative thereof
Director (excl. IDs) or
KMPs of the holding
company or his relative
Firm, in which a director,
manager or his relative is a
partner
Private company in which
a director or manager or
his relative is a member or
director
Related Party
6

Who all are related parties?-2/2
Public company in which a director
or manager is a director and holds
along with his relatives, more than
2% of its paid-up share capital
any body 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
any person on whose advice,
directions or instructions a director or
manager is accustomed to act
any company which is—
(A) a holding, subsidiary or an associate
company of such company; or
(B) a subsidiary of a holding company to
which it is also a subsidiary
Note- shall not apply to private companies
Related Party
7

Who all are excluded?
 Director or KMP of associate and JV companies
Investing company or venturer of the company
Being proposed under Bill, 2017
Public companies where directors hold less than 2%
share capital
Any person appointed in senior management in
the company or
its holding, or
subsidiary or
associate company
8

Related Parties and Related Party
Transactions
• Definition is specific
▫ Includes family members of HUF
• Related party transactions under the law are subject to serious
restraint
• Most transactions that a company may have with “related parties”
require approval of Board
▫ Directors are required to observe compliance u/s 184(2) with
regard to disclosure of interest and non- participation in a
particular discussion.
▫ Private company directors may participate subject to disclosure
• In the general meeting the member who is a related party shall not
vote if he is related party to the context of a particular transaction
• All transactions with related parties though not covered by section
188, shall require approval of Audit Committee in terms of sec 177.
9

10
Section 2(76) defines “related party”
• By way of Companies 1st (Removal of Difficulties) Order, 2014, the lacuna
in drafting of section 2(76)(v) has been rectified to now read as:
• public company in which a director or manager is a director AND holds
along with his relatives, more than 2% of its paid-up share capital
• The apprehension about companies having common IDs being
classified as a related party has been mitigated
• 2nd RoD Order
• a private company to be treated as related party if the director/ manger
or HIS RELATIVE is director or member
Rule 2 of Companies (Meetings of Board and its Powers)
Rules, 2014 also defines “related party”
• It reads as:
• Director or KMP of holding company or his relatives shall be related party
Related Parties

Transactions covered under Sec 188
11
Sale, purchase or supply of any goods or materials;
Note- “goods” means every kind of movable property other than actionable claims and money; and
includes stock and shares, growing crops, grass, and things attached to or forming part of the land which
are agreed to be severed before sale or under the contract of sale . (Sec 2(7) of the Sale of Goods Act*,
1930)
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
Underwriting the
subscription of any
securities or
derivatives thereof, of
the company
Such related party's
appointment to any
office or place of profit
in the company, its
subsidiary company or
associate company

Materiality of RPTs- Rule 15 of MBP Rules
• Without prior approval of company by a Resolution, a company cannot
transact with related parties where the transaction or transactions to be entered
into are for–
• sale, purchase or supply of any goods or materials directly or through
appointment of agents > 10% of the annual turnover or Rs. 100 crore; lower
one
• selling or otherwise disposing of, or buying, property of any kind directly or
through appointment of agents > 10% of net worth or rs. 100 crore; lower
one
 leasing of property of any kind > 10% of the net worth or 10% of the turnover
or Rs. 100 crore; lower one
 availing or rendering of any services directly or through appointment of
agents > 10% of the net worth or Rs. 50 crore; lower one
 appointment to any place of profit in the company, its subsidiary or associate
company at a monthly remuneration > Rs. 2.5 lakhs;
 remuneration for underwriting the subscription of any securities or
derivatives thereof of the company > 1% of the net worth
12
Type of transaction Maximum limit
sale, purchase or supply of any goods or materials directly or through
appointment of agents
10% of the annual
turnover or Rs. 100 crore;
lower one
selling or otherwise disposing of, or buying, property of any kind directly or
through appointment of agents
10% of net worth or rs.
100 crore; lower one
leasing of property of any kind 10% of the net worth or
10% of the turnover or Rs.
100 crore; lower one
availing or rendering of any services directly or through appointment of agents 10% of the net worth or
Rs. 50 crore; lower one
appointment to any place of profit in the company, its subsidiary or associate
company at a monthly remuneration
Rs. 2.5 lakhs
remuneration for underwriting the subscription of any securities or derivatives
thereof of the company
1% of the net worth

Other pointers
The turnover or net worth shall be on the basis of the Audited
Financial Statement of the preceding financial year
Any transaction entered into ordinary course of business or
transactions on ‘arm’s length basis’ shall not require any
approval of Board or of members of the company.
However the same shall still require the approval of Audit
Committee
However, one has to consider the provisions under sec 166 also
‘arm’s length’ transaction would mean a transaction between
two related parties that is conducted without any conflict of
interest
13

Determination of transaction to be
at arm’s length
• Illustrative tests-
▫ prices/ discounts/ premiums and on such terms which are offered to
unrelated parties of similar category/ profile
▫ commercially negotiated transaction
▫ pricing is arrived at as per the rule/guidelines that may be issued by or
acceptable for the purpose of Ministry of Corporate Affairs,
Government of India/ Income Tax Act, 1961, Securities and Exchange
Board of India as applicable to any of the contract/ arrangements
contemplated under the Companies Act, 2013, Rules framed
thereunder or Listing Regulations
▫ terms of contract/arrangement other than pricing are generally on a
basis similar to those as may be applicable for similar category of goods
and services or similar category/ profile of counterparties
▫ may also apply the most appropriate method from any of the following
methods as prescribed under Section 92C(1) of the Income Tax Act,
1961 read with Rule10B of the Income Tax Rules, 1962
▫ May seek professional opinion
14

Pricing methods- Sec. 92C(1) of IT Act
Comparable Uncontrolled Price Method(CUP):
Cost Plus Method
Resale Price Method(RPM)
Transactional Profit Method
Profit Split Method
Transactional Net Margin Method
15

Related party & related party
relationships-1/3
• Considered 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
• enterprises that
▫ directly, or indirectly through one or more intermediaries,
▫ control, or are controlled by, or are under common control
▫ with, the reporting enterprise
▫ including
 holding companies,
 subsidiaries and
 fellow subsidiaries
17

relationships-2/3
• associates and JVs
• investing party or venturer
• individuals owning,
▫ directly or indirectly,
▫ an interest in the voting power
▫ that gives them control or significant influence over the
enterprise, and
▫ relatives of any such individual
• KMP and relatives; and
• enterprises over which any related person as mentioned
above is able to exercise significant influence-
▫ includes enterprises owned by directors or major
shareholders and
▫ enterprises that have a member of key management in
common with the reporting enterprise
18

relationships-3/3
• Not related parties-
▫ Companies having merely common directors
▫ unless the director is able to affect the policies of both
companies in their mutual dealings
• a single customer, supplier, franchiser, distributor, or
general agent with whom transaction of a significant
volume of business merely by virtue of the resulting
economic dependence
• Parties in the course of their normal dealings with an
enterprise by virtue only of those dealings
▫ providers of finance;
▫ trade unions;
▫ public utilities;
▫ government departments and
▫ government agencies including government sponsored
bodies
19

Related Party- Act, 2013 & AS 18 -1/2
Particulars Whether related party under
Act, 2013
Whether related party under
AS-18
Director or relative Yes If only common then no. If the
director can affect policies, then yes.
KMP or relative Yes. KMP defined to include
persons with authority and
responsibility for planning,
controlling activities
Yes. KMP defined to mean
MD/CEO/manager, WTD, CS, CFO.
Director , KMP and his relatives of
holding company
Yes No
Firm in which director, manager or
his relative is a partner
Yes No
Private company in which director
or manager or his relative is a
member or director
Yes No
Public company with common
director and holds along with
relatives 2% of paid up capital
Yes No
20

Related Party- Act, 2013 & AS 18 -2/2
Particulars Whether
related party
under Act,
2013
Whether related party under AS-18
BoD accustomed to act in
accordance with directions of
director or manager
Yes Yes
Holding company, subsidiary
or associate
Yes Yes
Fellow subsidiary Yes Yes
Joint venture Yes Yes
Fellow associate No Yes, if an individual controls or exercises
significant influence over both the enterprises
A person on whose advice a
director or manager
accustomed to act
Yes Yes. In case of individual , there must be an
interest in the voting power that gives them
control or significant influence. Relatives of
such individuals shall also be related party.
21

Comparison between AS- 18 &
IND-AS 24

Related Party- AS 18 & IND AS 24
Particulars AS- 18 IND AS 24
Relative/ Close
member of a
person’s family
• Spouse • spouse or domestic partner;
• children and dependants of person’s
spouse or domestic partner are an
addition to the list.
KMP • who have the authority and
directing and controlling the
activities of the reporting
enterprise.
• having authority and responsibility
for planning, directing and
controlling the activities of the
entity, directly or
indirectly, including any
director (whether executive or
otherwise)
Person as a related
party
• individuals owning, directly
or indirectly, an interest in
the voting power of the
reporting enterprise that
gives them control or
significant influence over
the enterprise, and relatives
of any such individual;
• A person or a close member of that
person’s family is related to a
reporting entity if that person:
• has control or joint control of the
reporting entity;
• has significant influence over the
reporting entity; or
23

KMP as related party • key management personnel
and relatives of such
personnel shall be related
party
• Same as AS-18 ,KMP of parent entity
and close member of that person’s
family included under IND-AS 24
• KMP includes directors( executive or
otherwise)
Entities as related
party
• holding companies,
subsidiaries and fellow
subsidiaries
• Group companies are an addition
Both entities are Joint
Ventures of the same
third party
• No such provision • Yes. Eg. If A ltd has JV1 (formed by A
& B) and JV2 (formed by A & C) then
JV 1 and JV2 are related parties
One entity is a joint
venture of a third
entity and the other
entity is an associate
of the third entity.
• No such provision • Yes. Eg. If A ltd has JV1 (formed by A
& B) and A ltd holds 25% in Z Ltd
then JV1 and Z Ltd are related parties
24

The entity, or any
member of a group of
which it is a part,
provides key
management personnel
services to the reporting
entity or to the parent of
the reporting entity.
• No such provision • IND AS 24 has included such entity
in the definition of related party
Two companies because
they have a director in
common
• No, it shall not be
considered as RP
• The exclusion has been expanded to
include directors and KMP
Two joint venturers
simply because they
share joint control of a
joint venture.
• No such exclusion • While co-venturers are not expressly
covered under the definition, it has
been expressly excluded.
25

Definition of “control” & “Joint Control”
IND-AS 110 provides for control as under:
▫ An investor controls an investee when it is exposed, or has
rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through
its power over the investee.
IND-AS 111 provides for Joint control as under:
▫ Joint control is the contractually agreed sharing of control
of an arrangement, which exists only when decisions
about the relevant activities require the unanimous
consent of the parties sharing control.
26

Definition of “Significant Influence”
• IND-AS 28 defines significant influence as
under:
▫ power to participate in the financial and operating
policy decisions of the investee
▫ but is not control or joint control of those policies.
27

Related Party- Act, 2013 & IND-AS 24 (1/3)
Particulars Whether related party
under Act, 2013
Whether related party under IND-AS
24
Director or relative Yes Yes if the director or relative has control or
joint control over the reporting entity or
has significant influence over the reporting
entity.
KMP or relative Yes. KMP defined to include
persons with authority and
controlling activities
Yes. KMP defined to include persons with
authority and responsibility for planning,
controlling activities, directly or indirectly,
including any director of the entity
Director , KMP and his relatives of
holding company
Yes No
Firm in which director, manager
or his relative is a partner
Yes No
Private company in which director
or manager or his relative is a
member or director
Yes No
Public company with common
director and holds along with
relatives 2% of paid up capital
Yes No
28

Related Party- Act, 2013 & IND-AS 24-
(2/3)
Particulars Whether
related party
under Act,
2013
Whether related party under IND-AS 24
BoD accustomed to act in
accordance with directions of
director or manager
Yes Yes
Holding company, subsidiary
or associate
Yes Yes
Fellow subsidiary Yes Yes
Joint venture Yes Yes
Fellow associate No Yes, if an individual controls or exercises
significant influence over both the enterprises
A person on whose advice a
director or manager
accustomed to act
Yes Yes. In case of individual , there must be an
interest in the voting power that gives them
control or significant influence. Relatives of
such individuals shall also be related party.
29

Related Party- Act, 2013 & IND-AS
24(3/3)
Particulars Whether
related party
under Act,
2013
Whether related party under IND-AS 24
Two joint venturers No Co-venturers have been excluded from the
definition of RPTs.
Two entities having a common
KMP or a member of KMP of
one entity has significant
influence over another entity
No No
30

Taxation Aspect
Section 40A(2)

Section 40A(2)
Any excess or unreasonable payment made to a
related person shall be disallowed
To be compared to the fair market value of the
goods, services or facilities for which payment is
made;
Legitimate business needs of the business;
Benefit derived by or accruing as a result of
expenditure
32

Sequence of Approvals for RPTs

Sequence of approvals required u/s 188
• Contract in Ordinary Course of business and on arm’s length
basis
▫ Only Audit Committee approval
 Need not be prior approval
 However, prior omnibus approval may be granted
• Contracts not in the ordinary course of business
▫ may be approved by Audit Committee and
▫ will be recommended to Board for approval.
• Contracts in Ordinary Course of business not on Arm’s Length
basis
▫ Audit Committee cannot approve
▫ Considering provisions under Sec 166 (duties of directors), Board to take
necessary action subject to the approval of the shareholders
• If approval of Board or prior approval of S/H not obtained
▫ Needs to be ratified within 3 months from date.
34

Rule 6A of MBP Rules
- Omnibus Approval

Criteria for omnibus approval
• Audit Committee to set criteria for granting
omnibus approval
▫ Such criteria are subject to approval of the Board
• The criteria to include-
▫ maximum value of the transactions, in aggregate and
per transaction, which can be allowed under the
omnibus route in a year;
▫ extent and manner of disclosures to be made at the
time of seeking such approval;
▫ review, at such intervals, as decided by the committee
of RPTs entered into by the company pursuant to each
of the omnibus approval made;
▫ transactions which cannot be subject to the omnibus
approval
36

Consideration of Audit Committee
• Committee to consider the following-
▫ repetitiveness of the transactions (in past or in
future);
▫ justification for the need of omnibus approval
▫ need of the omnibus approval
▫ in the best interest of the company
37

Foreseen & unforeseen transactions
• For foreseen transactions the approval shall contain
the following-
▫ name of the related parties;
▫ nature and duration of the transaction;
▫ maximum amount of transaction that can be entered
into;
▫ the indicative base price or current contracted price
and the formula for variation in the price, if any; and
▫ any other information relevant or important for the
Audit Committee to take a decision on the proposed
transaction
• For unforeseen transaction-
▫ Value shall not exceed 1 crore per transaction
38

Other pointers
Validity of omnibus approval is one financial year.
shall require fresh approval after the expiry of such
financial year.
No omnibus approval for transactions in respect of
selling or disposing of the undertaking of the
company.
▫ Further, transactions which are not at arm’s length
cannot be approved by the Audit Committee
Additional conditions may be set out by Audit
Committee as may deem fit.
39

Section 188 – other provisions -1/6
40
Will related party transactions entered into in the ‘ordinary
course of business’ require to be passed by such resolutions of
shareholders?
• The third proviso to Section 188 (1) of the Act, 2013 provides that the company
will not require the approval of the Board and / or shareholders provided the
transactions are entered into by the company with the related party:
• in the ordinary course of business; and
• such transactions are on an arms’ length basis
• Accordingly, any transaction which takes place in the ordinary course of business,
but is not on an arms’ length basis will be covered under the provisions of Section
188 (1) of the Act, 2013.
• However, one has to still observe Section 166
Has any criteria been prescribed for determining which RPTs has
been entered into on an arms’ length basis?
• No. The Act, 2013 does not prescribe any criteria for determining whether the RPT
was entered into on an arms’ length basis. It would, therefore, be a subjective
decision to be decided upon by the Board of Directors of every company.

Section 188 – other provisions – 2/6
41
Has any exemption been given to transactions between holding and
subsidiary companies, considering that most of the transactions
between them can never be on arms’ length basis?
• Exemption of obtaining shareholders resolution is only granted to
transactions entered into between a holding company and wholly owned
subsidiary companies
• Hence, approval of Board and Audit Committee shall still be required.
• The very concept of a holding subsidiary relationship is that the
subsidiaries mainly thrive on the transactions with their holding
companies.
• However, no exemption has been given to holding subsidiary transactions
which are not on an arms’ length transactions.

42
>The 3rd proviso says so. However, one has to take care of the provisions of
Sec166 also.
>Further, all RPTs entered into by a company alongwith any modifications
to the same will require approval of the Audit Committee of the company, if
any.
>Therefore, it seems that while all arms’ length transactions in ordinary
course of business with related parties are not required to be approved by the
Board or shareholders, they would still require approval of the Audit
Committee, if any and considering the provisions of Sec 166, of the Board
also.
Does it mean that RPTs which are in the ordinary course of
business and on an arms’ length basis will not be required to be
passed by the Board?

43
Are directors liable for any loss suffered by the company with
respect to RPTs?
Any RPTs entered into by a company without prior approval of the Board
or shareholders, needs to be ratified within 3 months of entering into such
RTPs. Otherwise-
The RPT shall become voidable at the instance of the Board; and
If the same is with any director, or is authorised by any other director,
the director(s) concerned shall be required to indemnify the company
against any loss incurred by it.
The company has power to initiate any proceeding against director or
employee who has entered into such contract or arrangement.
In terms of section 164, he shall be disqualified for appointment as a
director of any other company for 5 years.

• All companies are not required to form an Audit Committee. Therefore
companies not having Audit Committees are not required to get its RPTs
approved by the Audit Committee.
• However, where a company has an Audit Committee, approval of the RPT
by the Audit Committee is necessary since the Committee is required to act
in accordance with its terms of reference.
• Once approved by the Audit Committee, the same may be recommended to
the Board for its approval.
44
Is it mandatory for a company to get its RPTs approved by an Audit
Committee?

45
Does lending/guarantee to/from subsidiary come under
related party contract? Does the issue or subscription of
securities covered?
•A subsidiary is certainly a related party as per section 2(76).
•However section 188 does not cover either loans or guarantees or issue
or subscription of securities.
•But section 177(4)(iv) will certainly cover such contracts which requires
Audit Committee approval.

Procedure to be followed for
entering into RPTs -1/2
Seria
l No
Particulars Remarks
Mandatory Provisions
1 The RPT will first need to be approved by
the Audit Committee , if any.
In case the company does not have any
Audit Committee, this provision will not
apply.
As per the Rules, only:
(i) listed companies,
(ii) Every public company having :
•paid up capital of 10 crore or more;
or
•turnover of Rs. 100 crore or more
•in aggregate outstanding loans and
borrowings, debentures or deposits
exceeding Rs. 50 crore or more.
are mandatorily required to form an
Audit Committee.
2 Once approved by the Audit Committee, if
any, the Board of Directors of the
Company will need to pass the resolution
at a meeting of the Board
Such resolutions cannot be passed by a
resolution by circulation.
46

Procedure to be followed for
entering into RPTs -2/2
For companies with paid up capital of Rs. 1 crore or more
3 The RPT will additionally need
to be passed by the
shareholders of the company
Members who are also related party to the
particular contract cannot vote on such
resolutions.
This is not required for transactions
between holding company and wholly
owned subsidiary companies
RPTs entered in ordinary course of business and on an arms’ length
basis
4 None of the provisions u/s 188
will apply to such transactions.
However, approval by Audit
Committee, if any would still
be applicable.
47

Contravention of Sec 188
• Punishment for violation of provisions of the section
▫ Listed Company
 Imprisonment extending to 1 year or
 Fine Rs. 25,000 – Rs. 5 lakhs or with both
▫ Any other company
 Fine Rs. 25,000 – Rs. 5 lakhs
▫ Penalty on any director or employee who enters into or
authorizes the contract in contravention of provisions
of the section
▫ Punishment levied even if no loss has been incurred by
Company from such RPT.
48

RPTs under Listing Regulations

transaction
• Regulation 2(1)(zb)- related party means a related party as defined
under
▫ section 2(76) of CA, 13, or
▫ under the applicable accounting standards
• Regulation 2(1)(zc)-
• “related party transaction” means
▫ a transfer of resources,
▫ services or
▫ obligations
▫ between a listed entity and a related party,
▫ regardless of whether a price is charged and
• In terms schedule II of LODR Audit Committee to madatorily
review a statement of significant RPTs as defined by Audit
Committee
▫ For this purpose, possible meaning of significant transaction may be
transaction of above 1 crore.
51

Requirements under regulation 23
in brief
 Formulation of policy on “materiality” and on dealing with RPT
 Material RPT
 Previous +proposed transaction during FY exceeds 10% of annual consolidated
turnover
 All RPT shall require prior approval of the audit committee
 Audit committee may grant omnibus approval
 Quarterly review of RPTs pursuant to omnibus approval
 Resolution valid for 1 year
 Material RPT shall require approval of shareholders
 Earlier it was Special Resolution
 Now ordinary resolution
 All related party to abstain from voting
 Existing transactions may be continued only after approval of shareholders at the
general meeting held after these regulations
 Exceptions
▫ transactions entered into between two government companies;
▫ transactions entered into between a 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.
52

Corporate Governance Provisions
• Company to frame a policy on materiality of Related Party
Transactions and on dealing with Related Party Transactions
• Who would approve the policy
▫ Logically, audit committee, followed by the board
• Policy on dealing with material transaction to be put on the
website of the company and a web link thereto should be
mentioned in the Annual report
• Contract or arrangement with related parties to be disclosed in the
Board Report with the justification for entering into such contract
or arrangement
• Listed entity to make disclosure in compliance with AS 18 on
“related party disclosures” in its annual report
• Details of material transactions with related parties to be disclosed
in quarterly compliance report on corporate governance
53

Recommended contents of RPT
Policy
• Terms of the Policy
▫ Requirement of approval of Audit Committee, Board, shareholders
▫ Arm’s length transactions
▫ Transactions u/s 188 and LODR
• Governance Structure
▫ Identification of related parties and related party transactions
 Who and how to identify
▫ How to ascertain a transaction to be at arm’s length
 methods thereon
▫ How to ascertain a transaction to be in ordinary course of business
▫ Procedure for approval and review of RPTs
• Omnibus Approval by Audit Committee
▫ Criteria for such approval
▫ Other conditions
• Dissemination of information
▫ Where, to whom and how to report
54

Omnibus approval under
Regulation 23

Conditions for omnibus approval
• Audit committee
▫ to lay down the criteria for granting the omnibus
approval in line with the policy on related party
transactions
▫ such approval shall be applicable in respect of
transactions which are repetitive in nature
▫ to satisfy itself
 the need for such omnibus approval and
 that such approval is in the interest of the listed
entity
56

Foreseen & unforeseen transactions
• For foreseen transaction the approval to specify-
▫ the name(s) of the related party,
▫ nature of transaction,
▫ period of transaction,
▫ maximum amount of transactions that shall be entered
into,
▫ the indicative base price / current contracted price and
the formula for variation in the price if any; and
▫ such other conditions as the audit committee may
deem fit
• For Unforeseen transaction-
▫ Value shall not exceed 1 crore per transaction
57

Other pointers
• Review on quarterly basis
• Validity for one year
▫ Year is not defined
• Exemption to transactions between
▫ govt. companies
▫ holding and wholly owned subsidiaries
58

Comparison CA,13 & Listing
Regulations

60
RPTs under Act, 2013 & SEBI LODR
summarised-1/3
Basis Companies Act, 2013 SEBI LODR
Scope of Related
Party
As defined under Section 2 (76) As defined under Section 2 (76) and
AS-18/ IND AS 24
Scope of
Transaction
Transactions covered under Section
188 (1)
Transfer of resources, services or
obligations between a company and a
related party, regardless of whether a
price is charged
Hierarchy of
approvals
Approval of Audit Committee, Prior
approval of Board and Shareholders
Prior approval of Audit Committee and
Shareholder’s approval
Carve-out for
ordinary course
and arm’s length
transactions
Excluded from the purview of
Section 188 (1)
No such carve-outs
Materiality As provided under Rule 15 10% of annual consolidated turnover

61
Exclusions while
computing materiality
Transactions in ordinary
course and on arm’s length
basis
No such exclusion
Need for prior
approval by
shareholders
Prior approval required for
material transactions
No such requirement.
Voting by related
parties
Related party who are
parties to the transaction to
abstain from voting
All related parties to abstain from voting
Applicability to
existing transactions
Applicable only to
transactions entered into
on or after April 1, 2014
All existing material related party
contracts or arrangements entered into
prior to 2nd September and which may
continue beyond such date.
Policy on Material
RPTs
No such requirement Regulation 23
Exemption to
government
From the shareholders
resolution
From the approval of Audit committee as
well as shareholders
summarised-2/3

62
Review of transactions under
omnibus approval
Audit committee may
decide
Quarterly
Transactions which cannot be
entered into under omnibus
approval
Audit committee to decide No such requirement.
Selling and disposing of
undertaking
Cannot grant omnibus
approval
No such restriction
Criteria for omnibus
approval
Prescribed in Rule 6A of
MBP Rules
Not prescribed
Validity of omnibus approval One financial year One year
Authority to set criteria for
granting omnibus approval
Audit Committee subject to
approval of Board
Audit Committee
summarised-3/3

Consolidated requirements under
CA,13 & Listing Regulations

64
Scope of Audit
Committee approval
Mandatory prior
approval (Listing
Regulations)
Specific
approval
Omnibus
approval
Recurring foreseen
transactions
No limit
on value
Unforeseen
transactions
Transactions of
value not exceeding
1 crore
Each transaction a separate
contract, then each
transaction value
Several transactions in a
single contract, the
contract value
Omnibus
approval (Act)
Same as omnibus
approval under Listing
Regulations except selling
and disposing of
undertaking
Post facto
Ratifying the
RPTs already
undertaken

65
Scope of Board
approval
Transactions covered
under Sec 188
Transaction is in
ordinary course of
business and at arm's
length
No approval
required
Transaction is NOT
in ordinary course
of business and at
arm's length
Transactions not
covered under sec 188
No approval
required

66
Scope of shareholder's
approval
Material RPT as
defined under
Listing Regulations
Entered into
with wholly
owned
subsidiary
No approval
required
Entered into
with any other
Related Party
Approval of
shareholders
required by way
of an Ordinary
Resolution
All related parties to abstain
from voting
Value exceeds the limits under
Rule 15 of MBP Rules, 2014 and
the transaction is not in ordinary
course of business and not at
arm's length
Prior approval of
shareholders is
required by way of an
Ordinary Resolution
Related parties
that are parties
to the contract
shall abstain
from voting
Entered into with
wholly owned
subsidiary
No approval
required

RPTs & AC approval
Transaction Listed Company Unlisted/ Debt Listed
Reimbursement of expenses Not an RPT. Not required
Allotment of company flat to
director along with maintenance
Not required if rent free accommodation is part of
remuneration structure
Subscription to equity of WOS No. Not an RPT u/s 188. AC
approval reqd as no
exemption exists u/s 177
(4) .
Subscription to equity/ security
of subsidiary or associate
Yes. Not an RPT u/s 188. AC
approval reqd u/s 177 (4)
Appointment of Director/ KMP Not an RPT unless the appointee is a related party prior to
appointment.
Granting of ESOP to Directors/
KMP
Is an RPT, approval not
required if granting of ESOPs
are part of Rem structure.
Not an RPT u/s 188
Guarantee for Loan taken by
subsidiary
Yes Not an RPT u/s 188. AC
approval reqd u/s 177 (4)
67

Transaction Listed Company Unlisted/ Debt Listed
Increase in remuneration of
Managing Director
Is an RPT. Can be excluded under
RPT policy as approval of Board
and S/H is reqd u/s 196.
Not an RPT u/s 188.
AC approval reqd u/s 177 (4),
Can be excluded under RPT
policy as approval of Board
Payment of Dividend to all S/H
including Related Party
Not an RPT as the dividend is
distributed to all S/H.
Not an RPT u/s 188.
Increase in remuneration of KMP Is an RPT. AC may delegate power
to determine increments to MD.
Not an RPT u/s 188.
AC approval reqd u/s 177 (4),
AC may delegate power to
determine increments to MD
Re-appointment of MD/ WTD
before expiry of the term
Is an RPT. Can be excluded under
RPT policy as approval of Board
Will not be an RPT u/s 188
(1) (f) if the MD/ WTD will
receive remuneration
entitled to as director.
Increase in sitting fees Is an RPT. AC approval can be
excluded under RPT policy as
approval of NRC and Board will be
required.
Will not be an RPT u/s 188
(1) (f) as directors will
receive fees entitled to as
director. AC approval can be
excluded as approval of NRC
and Board will be required.
68

Provisions under Secretarial
Standards & Guidance notes
thereon

SS-1
• Director shall not be
▫ reckoned for quorum in respect of an item in which he is
interested and
▫ present during discussions and voting on such item.
▫ Section 184(2) and Rule 15 of MBP Rules also talks about
the same
• In case of all the directors are interested
▫ To be decided at general meeting
▫ In general meeting voting entitlement shall be decided in
terms of Section 188, Rule 15 of MBP Rules and SS-2
70

SS-2
• Related party not entitled to vote in a resolution in
which he is a related party.
• However, shall be counted for the purpose of quorum.
• In case of public companies chairman is-
▫ not entitled to propose a resolution in which he is
interested
▫ not entitled to conduct proceeding of the meeting
▫ required to entrust the conduct of the proceeding of the
meeting to un-interested director or to other member
▫ to resume only after the matter is transacted
 This restriction is applicable only if the interest w.r.t only a
particular transaction.
71

Reporting Requirements of RPTs

Authority of reporting
• By Statutory Auditor
• By Secretarial Auditor
• By Cost Auditor
• By the Board
73

By Statutory Auditor
Financial Reporting framework requires adequate
disclosure of RPTs to enable users of financial
statements to understand their nature and actual or
potential effects in the financial statements.
SA 550 deals with reporting on related party
transaction when performing audit of financial
statements;
Auditor shall inspect the following for indications of
the existence of RPTs
▫ Bank, legal and third party confirmations obtained as part of
the auditor’s procedures;
▫ Minutes of meeting of shareholders and of those charged
with governance
▫ Such other records or documents as the auditor considers
necessary in the circumstances of the entity
74

By Secretarial Auditor
• The Secretarial Auditor of the Company to
provide observations in MR-3
▫ Regarding non- compliances for entering into
RPTs.
• Auditor to ensure compliances and seek for
necessary clarification.
• The Auditor must also keep a check that such
relevant RPTs have been made on arm’s length
price
75

By Cost Auditor (1/2)
• Cost Audit Rules, 2011 requires disclosures and
subsequent reporting in the cost audit report for
related party transactions;
• Details of related party transaction are required
to be provided in respect of each related party
and each product/service for the year as a whole
and not transaction-wise in Para D-5 of the Cost
Audit Report
76

By Cost Auditor (2/2)
Auditor to determine normal price for RPTs
The basis used to determine normal price
includes:
 Comparable uncontrolled price method
Resale price method
Cost plus method
Profit Split method
Transactional Net Margin method
77

Records under Cost Audit Rules
• Cost Audit Rules cover the following transactions for
which the company needs to maintain records–
▫ purchase and sale of raw materials, finished goods, rendering of
services, process materials and rejected goods including scraps and
other related materials;
▫ utilisation of plant facilities and technical know-how;
▫ supply of utilities and any other services;
▫ administrative, technical, managerial or any other consultancy
services;
▫ purchase and sale of capital goods including plant and
machinery; and
▫ any other payment related to the production of goods or
rendering of services under reference
78

By the company
• Board’s Report [ sec. 134]
▫ In AOC- 4
▫ Material transactions
▫ RPTs not at arm’s length
▫ Only sec. 188 transactions
• Annual report
▫ Material significant RPTs having potential with
the interests of the company
79

Restriction on participation &
voting

Restriction for Board members
81
Type of Company Relevant provisions
Public Company • Restriction on participation & voting in the
resolution. [sec. 184(2), 166)
Private Company • No restrictions on voting provided the concerned
related party makes adequate disclosures. [sec.
184(2)
Listed Company • RPTs not required Board approval
• However, Board’s has its own responsibility of
monitor and manage potential conflicts of
interest.[reg. 4]

Restriction for shareholders
Type of Company Relevant provisions
Public Company • Restriction on shareholder in the context
of the particular transaction only. [MCA
Circular dtd. July 17, 2014]
Private Company • No restrictions on voting provided the
concerned related party makes adequate
disclosures. [MCA notification dtd. June 5,
2015]
Listed Company • Restriction on voting for all related parties.
[reg. 23]
82

Companies(Amendment)Bill, 2017

Changes in brief
W.r.t restriction on voting by interested
shareholders-
▫ Restriction shall not apply where 90% or more of
members, in number, are relatives of promoters or
related parties.
Sec. 177
RPT not covered u/s 188 to be recommended to Board
if AC does not approve the same;
Ratification of RPTs not exceeding 1 cr. within 3
months
Exemption to a transaction not covered in sec. 188
between Hold and subsidiary co.
This can be interpreted that though sec. 188 exempts
such transactions however, 177 shall still apply.
84

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