Corporate Governance
Contents
Who is a Related party What is a Related party transaction Related Party Transaction policy in India Related party transaction in India The Satyam case and case of the CEO of listed company The unethical practices The good practices Related Party Transaction with Samsung Example Disclosure Consequences Implications
A firm in which a director or manager or his relative is a partner A private company in which a director or manager is a member or director A public company in which a director or manager is a director or holds along with his relatives, > 2% of its paidup share capital;
Any corporate whose BoD, MD or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
Any company which is a holding, subsidiary or an associate company of such company; or a subsidiary of a holding company to which it is also a subsidiary
Under the Companies Act, 2013, except with the consent of the Board of Directors, no company shall enter into any contract or arrangement with a related party with respect to(a) sale, purchase or supply of any goods or materials; (b) selling or otherwise disposing of, or buying, property of any kind; (c) leasing of property of any kind; (d) availing or rendering of any services; (e) appointment of any agent for purchase or sale of goods, materials, services or property;
(f) such related party's appointment to any office or place of profit in the company, its
subsidiary company or associate company; and (g) underwriting the subscription of any securities or derivatives thereof, of the company.
Member who is related party to the any contract or arrangement shall not vote on the special resolution for approval of such contract or arrangement. Where any contract or arrangement is entered into by a director or any other employee, without complying with the provisions and if it is not ratified by the approving authority, such contract or arrangement shall be voidable at the option of the Board. The section also provides penalty for director or other employee of a company who had entered into or authorized the contract or agreement in violation of the provisions in case of listed company or unlisted company.
Indirect RPT
RPT have been routed through entities indirectly controlled by the promoter group/management in the form of businesses with group entities, reimbursement of expenses, etc. Example: RPT in the form of businesses with group entities MNCs sometimes: - source a significant portion of their raw material requirements from companies under the control of the same parent - sell their finished products to their parent or other group companies.
In 2001-02, Gillette India sourced 44% (Rs 97 crore) of its input requirements (both
raw materials and traded products) from its US parent and its fellow subsidiaries. P&G Hygiene, Novartis also sourced a key portion of their input requirements either from their parents or sibling subsidiaries.
Nestle India, Gillette India and P&G, derive a significant portion of their revenues from sales of finished products to their parent or other group companies.
Dependence on group companies has both positive & negative implications Positive
If sourcing is through centralized procurement of inputs by a parent, it could result in input cost savings for its Indian co. Sales arrangement with a parent or other group companies could provide
Negative
Considerable influence over the revenues and profitability of a listed co. by the parent/group companies Difficult to judge whether the terms are unduly favorable to the group companies in the absence of
Required to get RPTs approved by their shareholders through a special resolution but the
related parties should abstain from the voting
Listed entities should have a policy for determining "material RPTs Observing that mandatory real time disclosures of RPTs might be onerous and could pose practical difficulties for companies to comply with - It is proposed that the companies may be mandated to disclose details of all RPTs on a quarterly basis along with the compliance report on corporate governance
Asia Roundtable on Corporate Governance : Fighting Abusive Related Party Transactions in Asia and Workshop on Implementation
Each agenda approved by board committees is instantly notified to all Directors. The Board of Directors may put the resolutions approved by the committees for voting at the Board meeting. Purpose The RPT Committee is a committee under the BoD to enhance corporate transparency and promote fair transactions. Composition The Related Party Transactions Committee shall comprise of three Independent Directors.
Operation The Related Party Transactions Committee shall hold regular meetings at least once a quarter. Authority and Duties Authority a) Authority to Receive Reports on Related Party Transactions b) Authority to Order Investigations on Related Party Transactions c) Authority to Recommend Corrective Measures for Unfair Related Party Transactions
Duties a) Duty of good faith b) Duty to investigate and report to the Board c) If the committee finds any related party transaction that is in violation of laws or regulations, it shall promptly report to the Board. d) Duty to prepare minutes
Disclosure
Relationships between parents and subsidiaries [IAS 24.16] Entity must disclose the name of its parent/ ultimate controlling party/ the name of the next most senior parent Management compensation [IAS 24.17] Disclose key management personnel compensation in total Short-term/long term employee benefits Termination/post-employment benefits Related party transactions [IAS 24.18-19] The amount of the transactions, outstanding balances Provisions for doubtful debts Expense in respect of bad or doubtful debts due from related parties
Consequences
In case, where any contract or arrangement is entered in to by a director or any other employee, without obtaining the consent of the board or approval in the general meeting under sub section (1) and, 1) 2) if it is not ratified by the board or 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 and,
If the contractor arrangement is with are 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.
Recovery of loss Company can proceed against a director or any other employee for recovery of any loss sustained by it. Penal provisions In case of a listed company any director or other employee of the listed company be punishable with - Imprisonment for a term extending upto 1 year or - Fine of not less than Rs. 25,000 but may extend to Rs. 5,00,000. - With both In case of other than listed company either of the two penalties listed above