Related Party Transactions: Disclosure & Transparency

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It deals with the concept and need of disclosures and transparency in corporate affairs. It further enumerates the provisions of related party transactions and insider trading.

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Related Party Transactions: Disclosure & Transparency

  1. 1. CORPORATE GOVERNANCE Disclosure & Transparency <br />Related Party Transactions <br />& <br />Insider Trading<br />Virender Jain & Pavan Kumar Vijay <br />
  2. 2. Disclosures & Transparency in Corporate Affairs<br />Concept & Need<br />It is the responsibility of corporate houses to keep the stake holders aware of all major corporate events to help them to take informed decisions<br />It is the duty of directors to not to place themselves in a position when their fiduciary duties towards the company conflict with their personal interests<br />
  3. 3. Disclosure And Transparency OECD Principles <br />“Timely and Accurate Disclosure should be made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.”<br />
  4. 4. Disclosure And Transparency Advantages<br />Increased access to external capital<br />Lower cost of capital<br />Improved operational performance<br />Reduced risk of corporate crises, scandals<br />Enhanced trust<br />
  5. 5. Related Party Transactions <br /><ul><li>Under Companies Act, 1956
  6. 6. Under Accounting Standard – AS 18
  7. 7. Listing Agreement – Clause 49 – Audit Committee
  8. 8. SEBI DIP Guidelines</li></ul>Insider Trading <br /><ul><li>Prohibition of Insider Trading Regulations
  9. 9. Listing Agreement with Stock Exchanges – Cl. 36</li></ul>Transparency & Disclosures Indian Legal Context <br />
  10. 10. Related Party Transactions & Disclosures <br />
  11. 11. Disclosures & Transparency in Corporate Affairs<br />Meaning of Related Party Transaction<br />“A business deal or arrangement between two parties who are joined by a special relationship prior to the deal.”<br />
  12. 12. Related Party Disclosures Companies Act, 1956<br />Section 297: Approval of Contracts by Board of Directors<br /><ul><li>Applicable to all Companies, Public & Private
  13. 13. Both direct & Indirect interests contracts for goods or services or underwriting are covered
  14. 14. Disclosure at Board & Approval of contracts
  15. 15. Prior approval of Central Government in case of Paid-up capital of more than Rs 1 cr.
  16. 16. Penalty – Fine upto Rs 5000 + Rs. 500 per day</li></li></ul><li>Related Party Disclosures Companies Act, 1956<br />Section 295: Loans to Director<br /><ul><li>applicable only on public companies
  17. 17. Both direct & Indirect Loans & Guarantees are covered
  18. 18. Prior approval of Central Government is required;
  19. 19. Penalty – Fine up to Rs 50 Thousand or Imprisonment up to 6 months + Vacation of Office by the interested Director
  20. 20. Special Disclosure of outstanding amount & Maximum amount in Balance Sheet</li></li></ul><li>Related Party Disclosures Companies Act, 1956<br />Section 299: Disclosure of Interest by Directors<br /><ul><li> Applicable to all Companies, Public & Private
  21. 21. Both direct & Indirect interests are covered
  22. 22. Disclosure of Nature of interests in Contracts and Arrangements to Board is required
  23. 23. Penalty – Fine upto Rs 50 Thousand or Imprisonment upto 6 months + Vacation of Office by the interested Director</li></ul>Section 300: Interested Directors not to participate in discussion & Vote<br />Section 301: Company to Maintenance of Register of Contracts, Companies & Firms<br />
  24. 24. Related Party Disclosures Companies Act, 1956<br />Section 314: Directors & relatives not to hold Place of Profits<br /><ul><li>In case of Director – any place of profit other than his office as Director
  25. 25. In case of any related party of Director – any office or place of profit with monthly remuneration exceeding
  26. 26. Rs. 10,000 : Special Resolution by General Meeting
  27. 27. Rs. 20,000 : Prior Approval by Special Resolution
  28. 28. Rs. 50,000: Prior Approval by Special Resolution + Prior approval of Central Government </li></li></ul><li>Related Party DisclosuresAccounting Standard -18<br />Similar to International Accounting Standard 24 (IAS -24)<br />Disclosures Required:<br />Name of the related party and nature of the related party relationship where control exists should be disclosed irrespective of whether or not there have been transactions between the related parties.<br />If there have been transactions between related parties, during the existence of a related party relationship, the reporting enterprise should disclose the following:<br />(i) the name of the transacting related party;<br />(ii) a description of the relationship between the parties;<br />(iii) a description of the nature of transactions;<br />
  29. 29. Related Party DisclosuresListing Agreement- Cl. 49<br />Mandatory review of Related Party Transactions by the Audit Committee<br />Disclosures on materially significant Related Party transactions that may have potential conflict with the interest of Company at large <br />
  30. 30. Related Party DisclosuresSEBI DIP Guidelines <br />Due Diligence Report by Merchant Banker to SEBI<br />Disclosure in Prospectus of all related entities, promoters, companies under the same management, Other group companies, their financial performance, pending litigations and risk factors<br />
  31. 31. INSIDER TRADING <br />
  32. 32. Disclosures & Transparency in Corporate Affairs<br />Insider Trading: Meaning <br />“Act of subscribing, buying and selling or agreeing to subscribe, buy, sell or deal in securities by an Insider, who is connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of (a) Company or who has received or has excess to such unpublished price sensitive information “<br />- Reg. (d) & (e) of SEBI (Prohibition of Insider Trading ) Regulations<br />
  33. 33. Disclosures & Transparency in Corporate Affairs<br />Insider Trading <br />It is BAD because:<br /><ul><li>Used to make profit at the expense of other investors
  34. 34. Leads to loss of confidence of investor in stock market
  35. 35. The process corrupts the ‘Level Playing Field’
  36. 36. It is easier to identify the beneficiaries of insider dealing. But the extent of losses occurred is impossible to calculate.</li></li></ul><li>SEBI Prohibition of Insider Trading Regulations <br />SEBI Prohibition of Insider Trading Regulations Prohibits Dealing, Communicating or Counseling in securities by any person having Unpublished Price Sensitive Information<br />
  37. 37. SEBI Prohibition of Insider Trading Regulations <br />Disclosures to be made:<br /><ul><li>Initial disclosure by person who holds more than 5% shares/ voting rights
  38. 38. Within 4 working days of receipt of information of allotment or the acquisition of shares/voting right
  39. 39. Continual disclosure by person who holds more than 5% shares/ voting rights
  40. 40. Disclosure of the number of shares held & any Changeexceeding 2%
  41. 41. The number of shares held & any Changeexceeding Rs. 5 Lakh OR 25000 Shares OR 1% whichever is Lower</li></li></ul><li>SEBI Prohibition of Insider Trading Regulations <br />Other Obligations of Corporate:<br /><ul><li>Creation of Model Code of Conduct
  42. 42. Pre-clearance of Certain Trades
  43. 43. Restricted /Grey List of Securities
  44. 44. Adaptation of “Chinese Wall “ & Need to Know Concept </li></li></ul><li>Listing Agreement – Cl. 36<br />Disclosure of Price Sensitive Information<br /><ul><li>Change in the general character or nature of</li></ul> business<br /><ul><li>Disruption of operations due to natural calamity.
  45. 45. Commencement of Commercial Production/</li></ul> Commercial Operations<br /><ul><li>Litigations/ dispute with a material Impact.
  46. 46. Revisions in Ratings</li></li></ul><li>Indian Scenario<br />
  47. 47. Related Party Transactions<br />Indian Case Studies<br />Majority Companies are following the letter part of Transparency but the Spirit is missing<br />They are complying unavoidable provisions of Laws only & taking advantages of loop-holes<br />Impractical Legal Provisions such as prior approval of Central Government even in case of Closely help Companies <br />Long approval process & undue delay <br />
  48. 48. Insider Trading<br />Indian Case Studies<br />Majority Listed Companies (especially Regional Listed) are complying on piece-meal basis or not at all complying<br />There is no proper surveillance system & System of ascertaining the loss to investors<br />Poor Implementation of Insider Code of Conduct in the Companies <br />Improper protection of Whistle Blowers <br />Implementation of Legal Provisions Vs. Sensitivity & Pre-mature disclosure <br />
  49. 49. Suggestions for Better Disclosure & Transparency<br />
  50. 50. Related Party Transactions<br />Suggestions for Better Disclosure & Transparency<br />Clear & Written policy & Transparent Ownership Structure with respect of Related Party Transactions;<br />Sufficient System of Internal Control <br />Disclosure of cost-benefits, urgency & need of all related party transactions;<br />Role of Independent Directors with pre-defined format for actual benefit/loss to the Company <br />Legal Provisions should be practical oriented & Time bound approvals should be granted<br />
  51. 51. Insider Trading<br />Suggestions for Better Disclosure & Transparency<br />Company’s Insider Policy should be practical and not just the Rule Book;<br />Effective protection of Whistle blowers <br />Legal Provisions should be practical oriented (e.g. giving Public Announcement with in 4 days)<br />Disclosures of Price Sensitive Information as given on Stock Exchanges web-sites should be prominent <br />
  52. 52. Satyam VadaDharmamChara<br />- Taittariya Upanishad <br />
  53. 53. “Forever speak the truth and follow the dharma”<br />
  54. 54. Truth: Disclosure of Actual State of Affairs (Transparency in operations and transactions)<br />
  55. 55. Dharma: “Dharma is for the stability of society, the maintenance of social order and the general well-being and progress of humankind.”<br />- KarnaParva of the Mahabharata. Verse-58 in Chapter 69<br />
  56. 56. Corporates are also expected to use their<br />Capacity, Knowledge and Resources<br />TOWARDS<br />Dharma<br />Maximization of stakeholders’ value and well-being and progress of humankind <br />THROUGH<br />Truth<br />Transparency, accountability and truthful disclosure of state of affairs<br />
  57. 57. Thanking You……<br />

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