2752021_rpt_-_indore_chapter_of_icsi_pptx.ppsx

AN INSIGHT INTO
RELATED PARTY TRANSACTIONS
INDORE CHAPTER OF ICSI – 27.05.2021
SUDHAKAR SARASWATULA
VICE-PRESIDENT (CORPORATE SECRETARIAL)
RELIANCE INDUSTRIES LIMITED
MOB - 9967651570
S.SUDHAKAR VICE-PRESIDENT (CORPORATE SECRETARIAL) RELIANCE INDUSTRIES
LIMITED
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May 27, 2021

Disclaimer
Views expressed are of my own and not of the organisation in which I am
employed
This presentation is to the best of my understanding of the subject which
is complex in nature
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S.SUDHAKAR VICE-PRESIDENT (CORPORATE SECRETARIAL) RELIANCE INDUSTRIES LIMITED

Related Party Transactions
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S.SUDHAKAR VICE-PRESIDENT (CORPORATE SECRETARIAL) RELIANCE INDUSTRIES LIMITED May 27, 2021

• ‘Every transaction with a related party’ may not be a related party transaction, but
‘every related party transaction’ is necessarily a transaction with a related party
• There is a general presumption that transactions reflected in financial statements
are consummated on an arm’s length basis between independent parties.
• However, this presumption may not be valid when related party relationships
exist
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• Whenever or wherever there is a transaction with a ‘Related Party’ there is a scope
to give benefit or undue advantage and the same is presumed to be given, unless
established otherwise
• Transactions with related parties need not always be disadvantageous to the
parties concerned, but the only concern is when they are abused
• Therefore, transparency in case of related party transaction is essential and crucial
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APPLICABLE PROVISIONS
• Companies Act, 2013 - Applicable to all Companies i.e. public as well as private
companies
• Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015
• Accounting Standards
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HOW TO DETERMINE A RPT
• To determine that whether a transaction is a Related Party Transaction or not following three
checks are to be made
• Whether the party with whom the transaction being entered is a Related Party? – Refer Section 2 (76)
and Regulation 2 (1) (zb) of LODR (if applicable)
• Whether the transaction being entered is a Related Party transaction under Section 188 (1) and
Regulation 23 of LODR (if applicable)
• Whether such transaction being entered is in the ordinary course of business, and on an arm’s length
basis or not – for listed companies this exemption is not available
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RELATED PARTY DEFINITION – SECTION 2(76)
• Related party with reference to a company means:
• A director or his relative
• A KMP or his relative
• A firm in which a director, manager or his relative is a partner
• A private company in which a director or manager or his relative is a member or director
• A public company in which a director or a manager who is a director, and holds along with his relatives, more than
two per cent 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 (not applicable to professional capacity)
• Any person on whose advice, directions or instructions a director or manager is accustomed to act (not applicable
to professional capacity)
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ACCUSTOMED TO ACT
• There should be instances or documents indicating advice, directions or
instructions by a director or manager of a company, to the board, managing
director or manager of the body corporate
• The board, manager or directors of the body corporate act in accordance with
such advice, directions or instructions
• Hence it is to be established that there have been series of events in which they
were accustomed to act and a single isolated event or two would not be sufficient
• There must be an evidence and not based on presumption
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DEFINITION – SECTION 2(76) CONTD…..
• Any company Body Corporate which is
• Holding, subsidiary or an associate company of such company; or
• A subsidiary of a holding company to which it is also a subsidiary (fellow subsidiary)
• This means that an overseas holding, subsidiary or associate companies are not related parties
• An investing company or the venturer of the company
• The investing company or venturer of a company means a body corporate whose investment in the
company would result the company becoming an associate company of the body corporate (two way
relationship)
• This sub-section is not applicable to a private company (notification dated June 5, 2015)
• A director other than an independent director or KMP of the holding company or his relative
• This means a director or KMP of a subsidiary or associate company or his relatives are not related parties
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RELATED PARTY DEFINITION – REG-2(1)(ZB)
• An entity shall be considered as a Related Party if:
• Such entity is a related party under section 2(76) of the Companies Act, 2013; or
• Such entity is a related party under the applicable accounting standards – AS 18 or Ind AS
24
• All promoter / promoter group entities that hold 20% or more shareholding in a listed
entity to be considered as ‘related parties – Kotak Committee recommendation
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RELATED PARTY DEFINITION – AS 18
• Parties are considered to be related if at any time during the reporting period
• one party has the ability to control the other party or
• one party exercise significant influence over the other party
in making financial and / or operating decisions
• Significant influence – participation in the financial and / or operating policy decisions
of an enterprise but not control of those policies
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CONTROL
• Ownership directly or indirectly, of more than one half of the voting power (not
share capital) of an enterprise, or
• Control of the composition of the board of directors in the case of a company or
of the composition of the corresponding governing body in case of any other
enterprise, or
• A substantial interest in voting power and the power to direct, by statute or
agreement, the financial and / or operating policies of the enterprise
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RELATED PARTY - IND-AS 24
• A related party is a person or entity that is related to the ‘reporting entity’
a. A person or a close member of that person’s family is related to a reporting
entity if that person
i. has control or joint control of the reporting entity;
ii. has significant influence over the reporting entity; or
iii. is a member of the key management personnel of the reporting entity or of
a parent of the reporting entity.
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RELATED PARTY - IND-AS 24 CONTD…….
b. An entity is related to a reporting entity if any of the following conditions
applies :
i. The entity and the reporting entity are members of the same group (which
means that each parent, subsidiary and fellow subsidiary is related to the
others). Fellow subsidiaries
ii. One entity is an associate or joint venture of the other entity (or an
associate or joint venture of a member of a group of which the other entity
is a member).
iii. Both entities are joint ventures of the same third party.
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RELATED PARTY - IND-AS 24 CONTD…..
iv. One entity is a joint venture of a third entity and the other entity is an associate
of the third entity
v. The entity is a post-employment benefit plan for the benefit of employees of
either the reporting entity or an entity related to the reporting entity. If the
reporting entity is itself such a plan, the sponsoring employers are also related
to the reporting entity.
vi. The entity is controlled or jointly controlled by a person identified in (a).
vii. A person identified in (a)(i) has significant influence over the entity or is a
member of the key management personnel of the entity (or of a parent of the
entity).
viii. 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.
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Essence of Related Party
Definition

ESSENCE OF RELATED PARTY DEFINITION
• The definition under the Act is explicit
• Definition under the Act is not covering ‘Promoter’ as a Related Party
• Under AS -18 and Ind AS -24 the definition is extensive
• Under Accounting Standards the definition covers
• all direct and indirect subsidiaries, enterprises under common control and
• enterprises over which any key managerial personnel or their relatives exercise significant
influence.
• Listing Regulations prescribe a much broader definition of related parties covering all
the above aspects.
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RELATED PARTY TRANSACTIONS – SECTION 188
• Any contract or arrangement with a Related Party with respect to the following transactions:
• Sale, purchase or supply of any goods or materials
• 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;
• Such related party’s appointment to any office or place of profit in the company, its subsidiary company
or associate company; and (holding company is not covered)
• Underwriting the subscription of any securities or derivatives thereof, of the company;
Above transactions are not to be entered into, except with the consent of the Board, given by a resolution at
a meeting of the board (no circular resolution)
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RELATED PARTY TRANSACTIONS – AS 18
• Following are examples of the related party transactions in respect of which disclosures may be made
by the reporting enterprise:
• Purchases or sales of goods (finished or unfinished)
• Purchases or sales of fixed assets
• Rendering or receiving of services
• Agency arrangements
• Leasing or hire purchase arrangements
• Transfer of research and development
• Licence agreements
• Finance (including loans and equity contributions in cash or in kind)
• Guarantees and collaterals and
• Management contracts including for deputation of employees
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GOODS
• ‘Shares’ fall under the definition of ‘Goods’ under the “Sale of Goods Act”
• Hence ‘purchase’ or ‘sale’ of shares from or to any Related Party fall under section
188
• Purchase or Sale of any security other than ‘shares’ does not fall under section
188
• Even in case of purchase or sale of shares only ‘purchase’ or ‘sale is covered i.e.
• subscription of shares is not purchase of shares.
• Transmission of shares is not sale of shares.
• Transfer of shares by way of gift is not sale of shares
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ALLOTMENT OF SHARES TO RELATED PARTY
• Whether allotment of shares to a related party is a related party transaction under
section 188?
• NO
• Issue and allotment of shares is not considered as a related party transaction under
section 188, because the ‘shares’ come into existence only after allotment
• Hence though issue and allotment of shares is a transaction with a related party,
which requires prior approval of audit committee, but not a ‘related party
transaction’ under section 188 and Board approval is not required
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RELATED PARTY TRANSACTIONS – REG-2(1)(ZC)
• A related party transaction is a transfer of resources, services or obligations between a
listed entity and a related party, regardless of whether a price is charged
• Transfer of resources, services or obligations – ‘transfer’ has a different meaning to
‘availing’. There may be a question whether ‘availing’ comes under ‘transfer’
• A transaction shall be construed to include single transaction or a group of
transactions in a contract
• Very wide in scope in comparison to the transaction under Companies Act, 2013
• More or less similar to the definition of related party transactions under AS 18
The above definition is same as in Ind-AS - 24
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SERVICE
• ‘Service’ is not defined by Companies Act, 2013
• Section 2(102) of the Central Goods and Services Tax Act, 2017 defines the term
‘services’ to mean anything other than goods, money and securities
• but includes activities relating to the use of money or its conversion by cash or by any
other mode from one form, currency or denomination to another form, currency or
denomination
• for which a separate consideration is charged
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PROVIDING CORPORATE GUARANTEE IS A RPT?
• Whether providing a corporate guarantee to the bank by the holding company
on behalf of its subsidiary for providing a loan is RPT under section 188?
• Providing corporate guarantee is not rendering any ‘service’
• Hence this is a transaction with a related party, which requires prior approval of
audit committee, but not a ‘related party transaction’ under section 188 and
Board approval is not required
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OFFICE OR PLACE OF PROFIT
• ‘office or place of profit’ means an office or place or position, which gives the
person holding such office some pecuniary gain or advantage or benefit
• The amount of such profit or benefit is not relevant
• Purpose is
• to prevent a director or his relative from holding any office or place of profit
• carrying a total monthly remuneration beyond the prescribed limits under the
company and
• thereby put in his pocket, directly or indirectly, additional profit over and above the
remuneration to which he is entitled as such director, without obtaining the requisite
permission
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DEFINITION OF ‘OFFICE OR PLACE OF PROFIT’
• Explanation to section 188 (1) defines office or place of profit means where such
office or place is held by
• a Director, if the director holding it receives from the company anything by way of
remuneration over and above the remuneration to which he is entitled as director, by
way of salary, fee, commission, perquisites, any rent-free accommodation, or
otherwise;
• where such office or place is held by an individual other than a director or by any firm,
private company or other body corporate, if the individual, firm, private company or
body corporate holding it receives from the company anything by way of
remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or
otherwise;
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EXAMPLE
• Mr A is the MD of XYZ Ltd, which is engaged in manufacturing of medicines
• Mr A is a qualified software expert
• XYZ Ltd after following the due process of tendering engages the services of Mr A
in his capacity of a software expert, for which an amount of Rs 50 lakhs was paid
and the next lowest quotation was for Rs 2 crores.
• Whether this transaction is a related party transaction and requires approval
under section 188?
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ANSWER
• Yes, this transaction is a related party transaction
• Its in the ordinary course of business and on an arm’s length price hence
exempted under section 188
• Prior approval of audit committee is required
• Approval under section 197 (4) and NRC approval is required
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EXAMPLE
• X Ltd has two subsidiaries one in UK and another one in US.
• Both the subsidiaries are related parties to X ltd.
• The two subsidiaries have a transaction among themselves which gets
consolidated with X limited accounts.
• Any Board approval of X ltd required?
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ANSWER
• No, transaction is not with X ltd. However disclosure under accounting standards
is required
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BUY-BACK OF SHARES
• Is buy-back of shares by a company is a Related Party Transaction?
• Shareholders are not related parties, however directors are related parties.
• The shares offered by directors becomes a RPT.
• However the scheme of buy-back allows equal opportunity to all shareholders, hence
this will not be treated as a RPT
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SOME EXAMPLES
• Directors giving their land on lease, or building on rent
• Yes, this is RPT. However since hiring premises is in the ordinary course of business and if it
pass ‘arm’s length’ test, then board approval is not required. But audit committee approval
is required
• Company A ltd is holding 49% shares in B ltd and both companies have a common
director. B Ltd pays a commission to the director. Is it a RPT for A?
• No. Because this is not a transaction between A ltd and the director
• A ltd is hiring a relative of a director with a salary of Rs 5 lakhs per month
• Hiring is in the ordinary course of business. If it does not pass the ‘arm’s length’ test board
approval is required.
• AC approval anyway is required
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APPROVAL MECHANISM
• Section 188 – approval of the Board of directors – applicable to both Public and
Private companies
• Section 188 – approval of shareholders – once the threshold limits are crossed
• Section 177 – approval of Audit committee – applicable to all listed companies and
certain class of companies, which have to constitute Audit Committees
• Regulation 23 of Listing Regulations – applicable to only where the companies have
listed their Specified Securities i.e. Equity shares and convertible securities into equity
shares
• In case any company fall into any regulated sector, in addition to the above, such
company has to comply with such sector regulatory requirements also
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BOARD APPROVAL
• Prior Consent of the Board Directors is to be obtained by a resolution at a
meeting of the Board unless the related party transaction falls under the
exempted category
• The resolutions shall be passed at a meeting of the Board, hence the resolution
cannot be passed by way of a circular resolution
• The agenda for the board meeting shall disclose certain details pertaining to the
related party and the proposed transaction as prescribed in the Rules
• Any Director who is interested in the transaction shall not be present at the Board
Meeting during its discussion
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FAQ ON BOARD APPROVAL
• Whether the director who is a related party, has to physically vacate the board
room while board is discussing the RPT
• Yes, at least the minutes shall be so recorded
• Is payment of commission to a non-executive director is a RPT
• Payment of commission is not over and above what a director is entitled for.
• Hence it is not an office or place of profit and not a RPT.
• However since they are interested such directors cannot participate and counted for
the purpose of quorum
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APPROVAL BY THE AUDIT COMMITTEE
• All transactions with related parties require approval of the Audit Committee under Section 177
and this approval is not restricted to only related party transactions under section 188
• There is a difference between “Related party transactions” and “transactions with Related
parties”
• Though the transactions are in the ordinary course of business and on an arm’s length basis, still
they require approval of audit committee
• All companies which are required to constitute or which have voluntarily constituted shall
require prior approval of audit committee
• Only transaction up to one crore entered into by a director or office, can be ratified by the audit
committee
• Audit committee can give omni bus approval
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FAQ ON AUDIT COMMITTEE APPROVAL
• Where board meeting is held prior to audit committee meeting, can the board
approve such RPT and AC approve the same subsequently
• Yes, it can be done. AC approval after board approval is irregular but not illegal. However
AC approval to be obtained before the transaction is entered into
• Where constitution of audit committee is not mandatory, whether such transaction
which does not require 188 approval, to be placed before the Board
• Not mandatory, but as a good practice it may be put up
• Can AC approval be obtained by circular resolution
• Yes.
• However its up to the directors to decide. Advisable thorough discussion on RPTs of sizable
nature
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SHAREHOLDER APPROVAL
• where ever shareholder approval is required it should always be prior approval
• When the RPT cross the prescribed threshold limits shareholder approval is
required
• In case of listed companies for material related party transaction shareholder
approval is required
• In case of a wholly owned subsidiary the resolution passed by the holding
company shall be sufficient for entering into transactions between the WOS and
its holding company
• Where subsidiary accounts are consolidated with the holding company and
placed before AGM prior approval of shareholder is not required
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FAQ ON SHAREHOLDER APPROVAL
• Will remuneration proposed to be paid to a director is a RPT?
• If such person is proposed to be appointed as a director, before such appointment he is not
a related party and such salary is not a RPT
• However is such person is already a director payment of such remuneration is a RPT
• Such payment requires the following approvals
• NRC approval under section 178
• Audit committee approval under section 177
• Board approval under section 197
• Shareholder approval under section 196 and 197
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DETAILS TO BE GIVEN IN THE BOARD AGENDA
• Pursuant to Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 the following details shall be
disclosed in the Board agenda for obtaining approval for any related party transaction
• Name of the related party and nature of relationship
• Nature, duration and particulars of the contract or arrangement
• Material terms of the contract or arrangement including the value, if any
• Any advance paid or received for such contract or arrangement, if any
• Manner of determining the price and other commercial terms
• Whether all factors relevant to the contract have been considered or not
• Factors not considered, if any, with the rationale for not considering those factors
• Any other relevant information
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RIGHT TO VOTE BY RELATED PARTY
• The interested director shall not be present at the meeting during discussions on such
related party contract or arrangement
• No member of the company shall vote on such resolution, if such member is a related
party
• This provision shall not be applicable to a private company
• MCA has clarified that the concerned related party with the transaction shall not vote
on such shareholder resolution. (General Circular No 30 dated July 17, 2014)
• A company in which 90% or more members, in number, are relatives of promoters or
are related parties this provision is not applicable – Companies (Amendment) Act,
2017
• However under Regulation 23 of the Listing Regulations, all related parties shall not
vote
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SHAREHOLDER’S APPROVAL
• Except with the prior approval of the Company by an Ordinary Resolution a company shall not
enter into a transaction with the below mentioned criteria
• Sale, purchase or supply of any goods or materials directly or through appointment of agents
amounting to 10% or more of the turnover of the Company or Rs 100 crore which ever is lower –
• Selling or otherwise disposing of or buying, property of any kind directly or through appointment of
agents amounting to 10% or more of net worth of the Company or Rs 100 crore which ever is lower –
• Leasing of property of any kind amounting to 10% of the net worth or amounting to 10% or more of
turnover of the company or Rs 100 crore which ever is lower
• Availing or rendering of any services directly or through appointment of agents amounting to 10% or
more of the turnover of the Company or Rs 50 crore which ever is lower -
• Limits specified above are applicable to one or more transactions during a financial year
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SHAREHOLDER’S APPROVAL – CONTD….
• Appointment to any office or place of profit in the company, its subsidiary or
associate company at a monthly remuneration exceeding Rs 2.50 lac - clause (f) of
section 188 (1);
• Remuneration for underwriting the subscription of any securities or derivatives
thereof of the company exceeding 1% of the net worth - clause (g) of section 188
(1);
• Turnover or Net worth to be computed based on the audited financial statements
of the preceding financial year
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COMPLIANCES UNDER REGULATION 23
• Applicable to an entity which has listed its specified securities i.e. equity shares
and convertible securities
• Company shall formulate a policy on materiality of RPT and also on dealing with
RPTs including clear threshold limits duly approved by the Board of Directors
• Such policy shall be reviewed at least once in three years
• Company shall disclose such policy on its website and web link thereto shall be
provided in the annual report
• All RPTs shall require prior approval of the Audit Committee
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MATERIAL RELATED PARTY TRANSACTION
• A transaction with a related party shall be considered material
• if the transaction 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 latest
audited financial statements)
• transaction involving payments made to a related party with respect to brand
usage or royalty shall be considered material if the transaction(s) to be entered
into exceed five percent of the annual consolidated turnover of the listed entity
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APPROVAL OF SHAREHOLDERS
• All material related party transactions shall require approval of the shareholders
through resolution and no related party shall vote to approve such resolutions (this
means they can vote against) whether the entity is a related party to the particular
transaction or not
• This sub-regulation shall not apply in respect of a resolution plan approved under
section 31 of the Insolvency Code, subject to the event being disclosed to the
recognized stock exchanges within one day of the resolution plan being approved
• The listed entity shall submit within 30 days from the date of publication of its
standalone and consolidated financial results for the half year, disclosures of related
party transactions on a consolidated basis, in the format specified in the relevant
accounting standards for annual results to the stock exchanges and publish the same
on its website
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COMPLIANCE - COMPANIES ACT AND LODR
• In case of listed companies they have to comply with both Companies Act 2013 and
Listing Regulations
• Which ever are the stricter provisions that should be complied with
• For example for seeking shareholders approval Companies Act 2013 provides
exemption for RPTs up to 10% of net worth or turnover or Rs 100 crore whichever is
less. Regulation 23 provides a blanket exemption up to 10% of the annual
consolidated turnover
• All related parties shall abstain from voting on related party transactions as per
Regulation 23
• Arms length and ordinary course of transactions are not exempted under Regulation
23
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OMNIBUS APPROVAL - AUDIT COMMITTEE
58
LIMITED
May 27, 2021

APPROVAL BY THE AUDIT COMMITTEE
• Every transaction with a Related Party or any subsequent modification to such
transaction shall be approved by the Audit Committee
• The approval required is a prior approval
• The provisions are not applicable to a transaction, other than a transaction referred to
in section 188, between a holding company and its WOS
• Audit Committee may make omnibus approval for related party transactions, subject
to certain conditions
• Both Companies Act, 2013 and LODR prescribed more or less similar conditions for
granting omnibus approval
59

OMNIBUS APPROVAL
• Audit committee shall after obtaining approval of the Board of Directors specify the
criteria for making the omnibus approval which shall include the following
• Maximum value of the transactions in aggregate in a year
• Maximum value per transaction
• Extent and manner of disclosures to be made while seeking the approval
• Review of such transactions at periodic intervals
• Transactions which cannot be subject to the omnibus approval by audit committee
• While specifying the criteria the following factors shall be considered
• Repetitiveness of the transactions (in past or future)
• Justification for the need of omnibus approval
60

OMNIBUS APPROVAL – COMPANIES ACT, 2013
• Audit committee while giving the omnibus approval shall satisfy itself that
• The transactions are repetitive in nature and
• Such approval is in the interest of the company
• Omnibus approval shall contain or indicate 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
• Any other relevant information
• Where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may
make omnibus approval not exceeding rupees one crore per transaction
• Omnibus approvals are valid for a period not exceeding one financial year
• Omnibus approval shall not be given for transactions in respect of selling or disposing of undertakings
61

COMPANIES (AMENDMENT) ACT, 2017
• In case of transactions other than transactions referred to in section 188, where audit
committee does not approve the transactions, it shall make its recommendations to
the Board
• In case of any transaction involving any amount not exceeding one crore rupees is
entered into by a director or officer of the company without obtaining the approval of
audit committee and is not ratified by the audit committee within three months, such
transaction shall be voidable at the option of the audit committee
• This amendment clearly indicates that the approval of the audit committee is a prior
approval and not a post facto approval
• Such Director shall indemnify the company against any loss incurred by it
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EXEMPTIONS
63
LIMITED
May 27, 2021

EXEMPTED TRANSACTIONS
• Board and shareholders approvals are not required for transactions entered in the
ordinary course of business on an arm’s length basis
• There is no exemption from obtaining the approval of the audit committee
• This exemption is not available under LODR
• Transactions which doesn’t exceed the threshold limits are exempted from
obtaining shareholders approval
• In case of listed companies only material related party transaction requires
shareholders approval
64

EXEMPTED TRANSACTIONS
• In case of a private company the restriction that related parties shall not vote on a
resolution approving the related party transaction is not applicable
• In case of wholly owned subsidiary, the resolution passed by the holding company
shall be sufficient for the purpose of entering into the transaction between the wholly
owned subsidiary and the holding company
• Shareholders’ approval is not required in case of the following transactions
• Transactions between two Government companies
• Transaction between the holding company and its wholly owned subsidiary company,
provided the accounts of WOS are consolidated with that of the holding company and
placed before the general meeting for approval
65

ORDINARY COURSE OF BUSINESS
• Ordinary course of business – not defined.
• Black’s Law Dictionary defines ‘ordinary course of business’ as the ‘normal routine in
managing trade or business’.
• Ordinary course of business –
• any transaction which is usually entered into by the company while carrying on its business
or promoting or furtherance of its business;
• which is not of extraordinary or unusual nature or which is directly connected to its
business can be said to be a transaction entered into by the company in its ordinary course
of business
• This is very subjective, judgemental and can vary on case to case basis giving
consideration to the nature of business and objects of the entity
66

HOW TO DETERMINE ‘ORDINARY COURSE OF BUSINESS’
• To decide on the “ordinary course of business” the following may be considered
• Whether the activity is covered in the objects clause of Memorandum
• Whether the activity is in furtherance of business
• Whether is activity is a regular transaction or a one off transaction
• Whether the transactions are common in that particular industry
• Whether the revenue generated is shown as part of business income
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WHO DETERMINE THE ORDINARY COURSE OF BUSINESS
• Who determine the ordinary course of business – is it Board or Audit Committee?
• It’s the company’s policy on transactions with related parties which should specify the
parameters to guide the audit committee
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ARM’S LENGTH TRANSACTION
• Arm’s length transactions means – a transaction between two related parties that is
conducted as if they were unrelated so that there is no conflict of interest
• Arm’s length price shall be any method
• which considers the price which has been charged or paid or
• would have been charged or paid
• for the same or similar uncontrolled transaction,
• with or between non-associated enterprises,
• under similar circumstances, considering all the relevant facts
• The term ‘arm’s length’ basis means a bundle of terms and conditions including price
and not price alone, in isolation of other terms and conditions
69

CONFLICT OF INTEREST
• Simple way to demonstrate is to prove ‘conflict of interest’ is
• showing that existence of special relationship between contracting parties has not
affected the transaction and
• its critical terms, such as price, quantity, quality and other terms and conditions
governing the transaction, by following industry benchmarks, past transactions
entered etc
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TRANSACTION ON AN ARMS LENGTH BASIS
• Arms length price may be determined by any of the following methods having regard to nature
and class of transactions, class of persons and such other relevant factors
• Burden to establish that the transaction was on arm’s length would be on the company. The
company should create and maintain appropriate and adequate documentation with regard to
price and terms of supply
• Though arm’s length transaction is defined, the methodologies and approaches for determining
the ‘arm’s length transactions’ have not been prescribed
• In such absence the methodologies / approaches existing under ‘Indian Transfer Pricing
Guidelines’ contained in the Income Tax Act 1961 may be adopted
• Arms length assessment is subjective exercise and requires judgement after considering various
parameters
71

METHODS TO DETERMINE ‘ARM’S LENGTH’
• Comparable Uncontrolled Price method (CUP method)
• Resale price method
• Cost plus method
• Profit split method
• Transactional net margin method
• Such other method as may be prescribed by the Board
72

DISCLOSURES
73
LIMITED
May 27, 2021

DISCLOSURE BY DIRECTORS & KMP
• Every director must disclose to the company, details of his relatives preferably
along with disclosure of his interest, as under
• At the first meeting of the Board in which he participates as a Director
• Whenever there is any change, disclosure shall be made within thirty days or next
meeting of the Board which ever is earlier
• KMPs other than directors shall also disclose details of their relatives within thirty
days of their joining or upon any change thereafter
• The company shall develop a system to capture the above details
74
May 27, 2021

DISCLOSURES – COMPANIES ACT, 2013
• Under the Companies Act, 2013
• Every contract or arrangement entered into under Section 188(1) shall be referred to in
the Board’s report to the shareholders along with the justification therefor in Form
AOC2
• AOC-2 shall disclose
• RPT entered into not on arm’s length basis and
• material RPT entered into on arm’s length basis
• Where the Board has not accepted the audit committee recommendations, the same
shall be disclosed with reasons
75

REGISTER IN MBP-4
• Contracts or arrangements with a related party in pursuance with Section 188 are to
be entered in the register maintained under Section 189(1) in MBP-4
• Register shall be placed before the next meeting of the Board and shall be signed by
all Directors present at the meeting
• Such entries shall be authenticated by the Company Secretary or any other person
authorised by the Board
• Such register shall be preserved permanently
• Register shall be open for inspection and extracts may be taken there from
• Shall provide extracts to any member upon his request within seven days
76
May 27, 2021

DISCLOSURES - LODR
• Under the Listing Regulations
• Details of all material related party transactions need to be disclosed to Stock
Exchanges along with the quarterly compliance report on Corporate Governance.
• Under the Accounting Standards
• Name and transactions during the year with related party to be disclosed in a manner
specified under the applicable Accounting Standards.
77

PENAL PROVISIONS
78
LIMITED
May 27, 2021

PENAL PROVISIONS – COMPANIES ACT, 2013
• Any violation of section 188 lead to disqualification for appointment as a director u/s164(g)
• 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 resolution in the general meeting under
sub-section (1) and if it is not ratified by the Board or, as the case may be, by the shareholders at
a meeting 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 or, as the case may be, of the
shareholders and if the contract or arrangement is with a related party to any director, or is authorised
by any other director, the directors concerned shall indemnify the company against any loss incurred by
it.
• The company can also proceed against a director or any other employee who had entered into
such contract or arrangement in contravention of the provisions of this section for recovery of
any loss sustained by it as a result of such contract or arrangement.
79
May 27, 2021

PENAL PROVISIONS – COMPANIES ACT, 2013
• Any director or any other employee of a company, who had entered into or
authorised the contract or arrangement in violation of the provisions of this
section shall,—
• (i) in case of listed company, be punishable with imprisonment for a term which may
extend to one year or with fine which shall not be less than twenty-five thousand
rupees, but which may extend to five lakh rupees, or with both; and
• (ii) In case of any other company, be punishable with fine which shall not be less than
twenty-five thousand rupees, but which may extend to five lakh rupees.
80
May 27, 2021

THANK YOU
81
May 27, 2021

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