Presentation on
Related Party Transactions
as per
Listing Agreement
BY
ILAM C. KAMBOJ
Asso. V.P. Legal & Company Secretary
Hero MotoCorp Ltd.
March 13, 2015
Table of Contents
S. No.
Topics
1
Clause 49- applicability
2
Related party as per Listing Agreement
3
Related party as per CA 2013
4
Related party as per AS 18
5
Related Party Transactions
6
Directors vis-à-vis RPT
7
Audit Committee, Board and Shareholders vis-à-vis RPT
8
Disclosures
9
Penal consequences for non compliance
10
Practical challenges
Clause 49
Applicability
 All Listed Companies
 Non Mandatory :
 Paid up capital not exceeding Rs. 10 crores and
 Net worth not exceeding Rs. 25 crores
Comply within 6 months from the date of
applicability
 Listed exclusively on SME and SME – ITP Platforms
Related Party as per
Listing Agreement
Related Party – Clause 49(VII)(B)
An entity shall be considered as related to the
company if it is a Related Party:
 under Section 2(76) of the Companies Act, 2013;
or
 under the applicable accounting standards.
Related Party as per
Companies Act, 2013
IX Director /KMP of
Holding Company &
their relatives
Related Parties 2(76)
VIII. Holding Co/
Subsidiary Co/Associate
Co. $/Sister Subsidiary
VI Body Corporate whose
Board/MD/Manager
accustomed to act in
accordance with advise,
directions or instructions of
a Director/Manger *
VII. Any person , on
whose advice, directions
or instructions
Director/Manager is
accustomed to act*
II. KMP or relative
IX. Any other prescribed
person
Company
V. Public Co.
IV. Private Co.
# Director+2%
# Director+2%
Member/Directo
r
Member/Director
Manager
Partner
I. Relative of Director
I. Director
Partner
Partner
III. Firm
Partner
II. Relative of Manager
*Except if advice given in professional capacity,
# Director+ Holds more than 2% of PSC along with relatives.
$ 2(6) “Associate Company” means a Company in which other Company has a significant influence, but which is
not a subsidiary of the Company having such influence and includes a joint venture company.
Relatives 2(77) & Rules
1
2
3
4
H.U.F
Spouse
Father/Step Father
Mother/ Step Mother
5
6
7
Son /Step Son
Daughter
Brother/Step Brother
8
Sister/Step Sister
(all the members)
Husband/Wife
Wife
Husband
Related Party as per
Accounting Standard
Related Party – AS-18…
“Related Party” means if one has ability to
control the other party or exercise significant
influence over the other in making financial
and/or operating decisions.
a. enterprises that directly, or indirectly through
one or more intermediaries, control, or are
controlled by, or are under common control
with, the reporting enterprise (this includes
holding companies, subsidiaries and fellow
subsidiaries);
Related Party – AS-18…
b. Associates and joint ventures of the reporting
enterprise and the investing party or
venturer in respect of which the reporting
enterprise is an associate or a joint venture;
Related Party – AS-18…
c. Individuals owning directly or indirectly,
an interest in the voting power of the
enterprise that gives them control or
significant influence over the enterprise.
Relatives of such individual are also related
parties.
Related Party – AS-18…
d. Key Management Personnel (KMP) and
relatives of KMP; and
e. Enterprises over which any person
described in (c) and (d) above is able to
exercise significant influence. This includes
enterprises owned by directors or major
shareholders of the enterprise or
enterprises that have common KMP.
Related Party – AS-18…
Control under AS – 18 means:
o Ownership directly or indirectly, more than ½ of
the voting power, or
o Control of the Composition of the Board of
Directors, or
Related Party – AS-18…
o Substantial Interest in voting power and the
power to direct, by statute or agreement, the
financial and/or operating policies of the company.
“Substantial Interest”
means owning, directly or indirectly, 20% or more
interest in the voting power of the other enterprise.
Related Party – AS-18…
Significant Influence under AS-18 means:
 Participation in the financial and/or
operating policy decisions of an enterprise,
but not control of those policies; or
Example:
o Representation on the Board
o Participation in the policy making process
o Material inter Company transactions
Related Party – AS-18
o Interchange of managerial personnel
o Dependence on technical information
 Shareholding directly or indirectly, through
subsidiaries, 20% or more voting power; or
 Influence by Statute or Agreements.
Related Party Transactions (RPT)…
RPT as per Clause 49
 Transfer of resources, services or obligations
between a company and a related party,
regardless of whether a price is charged.
 Transaction to include single transaction or a
group of transactions in a contract.
Related Party Transactions (RPT)…
Exception
 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.
Related Party Transactions (RPT)…
Exception u/s 188
Transaction entered into in Ordinary course of
business and on arm’s length basis
Arm’s Length basis
A transaction between two related parties that
is conducted as if they were unrelated, so that
there is no conflict of interest.
Related Party Transactions (RPT)
RPT as per AS-18
 Transfer of resources or obligations between a
company and a related party, regardless of
whether a price is charged.
Directors vis-a-vis RPT
Directors vis-à-vis RPT…
 Members of the Board and key executives to
disclose to the board whether they,
 directly,
 indirectly or
 on behalf of third parties,
have a material interest in any transaction
or matter directly affecting the company.
Directors vis-à-vis RPT…
 Monitor and manage potential conflicts of
interest of management, board members
and shareholders, including
 misuse of corporate assets and
 abuse in related party transactions.
Directors vis-à-vis RPT…
Duties of Independent Director - Code
for ID’s
 Pay sufficient attention;
 Ensure that adequate deliberations are held
before approving related party transactions;
and
 Assure themselves that the same are in the
interest of the company.
Directors vis-à-vis RPT…
Duties of Interested Director
 Not to be present at the meeting during
discussions;
 Abstain from voting in the General Meeting
Directors vis-à-vis RPT
Disqualification of a Director – U/s 164(1)(g)
Convicted of the offence dealing with
related party transactions under section 188
at any time during the last preceding five
years.
Vacation of Office
Audit Committee, Board
and Shareholders
vis-à-vis
Related Party Transactions
(RPT)
Audit Committee vis-à-vis RPT…
Composition
 2/3rd members Independent Directors
Role include:
 To review with the management, the annual
financial statements and auditor's report
thereon before submission to the board for
approval, with particular reference to
disclosure of any related party transactions
Audit Committee vis-à-vis RPT…
Mandatory Review:
 Statement of significant related party
transactions (as defined by the Audit
Committee), submitted by management;
Audit Committee vis-à-vis RPT…
Approve
 Original or any subsequent modification of
related party transactions.
 Prior approval of all RPTs;
Audit Committee vis-à-vis RPT…
 Omnibus approval for proposed RPTs subject
to the following :
 Criteria laid down by AC;
 Criteria in line with the RPT Policy;
 Applicable in respect of Repetitive RPTs
only.
Audit Committee vis-à-vis RPT…
 AC to satisfy itself that the omnibus approval
is needed and in the interest of the company
 Omnibus approval shall specify
 the name/s of the related party,
 nature and period of transaction,
 maximum amount of transaction that can be
entered into,
Audit Committee vis-à-vis RPT…
 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;
Audit Committee vis-à-vis RPT…
Exception
 Omnibus approval for transactions where the
need for RPT cannot be foreseen and aforesaid
details are not available subject to the value not
exceeding Rs.1 crore per transaction.
Audit Committee vis-à-vis RPT
Review on RPTs – Details at least on a
quarterly basis.
Validity of Omnibus approvals - Not
exceeding one year and fresh approvals after
the expiry.
Board vis-à-vis RPT
Companies Act, 2013:
 All transactions to be approved at meeting
except exempted or requiring approval of
shareholder
 Clause 49 silent
 Formulate policy on materiality of RPTs and
dealing with RPTs
Shareholders vis-à-vis RPT…
Section 188 and Rules
 Prior approval – In the form of Special
Resolution
 All Companies - irrespective of its Paid up
share capital
Shareholders vis-à-vis RPT…
Value of Transactions :
 Goods and Materials - Exceeds 10% of the
annual turnover or Rs. 100 crores (lower)
 Property – exceeds 10% of the Net worth or
Rs. 100 crores (lower)
 Leasing of Property - exceeding 10% of the
net worth or 10% of the Turnover or Rs. 100
crores (lower)
 Services - exceeding 10% of Turnover or Rs.
50 crores (lower)
Shareholders vis-à-vis RPT…
 Appointment to any office or place of profit
in
C/S/A
Company
–
Monthly
Remuneration exceeding Rs. 2.5 lac
 Remuneration for underwriting - exceeding
1% of the Net worth
Shareholders vis-à-vis RPT…
 Any member who is a related party for said
transaction– Not to vote on Special
Resolution
 Special Resolution passed by the holding
company shall be sufficient for transactions
with its wholly owned subsidiary
Shareholders vis-à-vis RPT…
By Shareholders as per Clause 49
 All Material RPT to be approved through
Special Resolution.
 All Related Parties shall abstain from voting
Shareholders vis-à-vis RPT
Material RPT:
Transaction
individually or together with
previous transactions during a financial year
exceeds
10% of the annual consolidated turnover of the
company as per the last audited financial
statements of the company.
Disclosures
Disclosure of RPT...
Disclosure as per Clause 49
 Stock Exchanges
 All material transactions on quarterly basis
alongwith the Compliance Report on
Corporate Governance
Disclosure of RPT
 Website

Policy on dealing with RPT
 Annual Report

Web link of the RPT Policy
Penal consequences for non-compliance
 For any Director or employee involved in
contravention, penalty would be
 For Listed Company:



Imprisonment, which may extend up to one
year; or
Fine, ranging between Rs 25,000 and Rs
500,000; or
Both
 For others:

Fine ranging between Rs 25,000 and Rs 500,000
Practical Challenges…
 Identification of Related parties – lack of
timely information
 Transactions to be covered – Some typical
transactions
 Transactions Working Capital Loan
 Lease Rent Recovery On Behalf of RPT
 Warranty Charges
Practical Challenges…
 Freight Charges
 Debit On account of Advertisement Exp.
 Die Maintenance charges
 Segregation Charges
 Component Sales
 Capital Assets sent on OSP basis
Practical Challenges…
 Services/obligations
provided
but
not
documented
 Common use of facilities
 Lack of knowledge at operating level
 Large number of departments/ individuals
involved in transactions
 Inadequate monitoring systems
Practical Challenges…
 Business exigencies
 Very large number of transactions
 Arm’s length pricing/ Terms – Expertise to
analyse
 Pressures
 Priorities of non secretarial departments
Practical Challenges
 Tough scrutiny by Audit Committee &
Independent Directors
 Shareholder’s activism
Thank you