Related Party Transactions & Loans - Nilesh Patel

8/11/2019 Related Party Transactions & Loans - Nilesh Patel

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CS Nilesh Patel


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Loans & Advances [Section 185 & 186] Loans to Directors Section 185

No company shall give loan, provide guarantee/ security to Director/ personsconnected with DirectorPersons connected with Director:

a) any director of the lending company, or of a company which is its holdingcompany or any partner or relative of any such director;

b) any firm in which any such director or relative is a partner;c) any private company of which any such director is a director or member;d) any body corporate at a general meeting of which not less than twenty-five

per cent of the total voting power may be exercised or controlled by anysuch director, or by two or more such directors, together; or

e) any body corporate, the Board of directors, managing director or manager,whereof is accustomed to act in accordance with the directions orinstructions of the Board, or of any director or directors, of the lendingcompany.

Private Companies are also covered


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Two possible interpretation of Save a s o the rwise p rov ided in the Act Section 185 not applicable to transactions permitted under Section 186(2) Will render

Section 185 redundantSection 185 is prohibitory in nature and a code in itself. Permission u/s 186 availableonly for loans/ guarantee not otherwise prohibited u/s 185

Accustomed to act in accordance with the directions or instructionsRegular or usual practice of issuing directions or instructions by the Board or Directorof lending company

Directions or instructions are followed by the Board of receiving entity

ExemptionsLoans may be provided to MD/WTD as a policy for employees; or pursuant toscheme approved by special resolution

Loans by company in its ordinary course of its business at a rate not lessthan the Bank Rate declared by RBILoans/ guarantee/ security by holding company to its Wholly Owned SubsidiaryGuarantee/ Security by holding company to its subsidiary is exemptedProvided Loans are utilized by subsidiary for its principle business

activities


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Ordinary course of its business Complex test for determinationMemorandum of Association may be decisiveTransaction is in furtherance of the business objectives and has closeproximity with the normal business of the companyRecurring in nature - Previous instances to demonstrate that such activity iscustomary

Negative TestTransaction should not be of extraordinary or unusual nature


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Loans, investments, guarantee - Section 186(2)Company can:

a) Give loan to any person or body corporateb) Give guarantee or security in connection with Loan to any body corporate or

personc) Acquire securities of any other body corporate

up to 60% of share capital, free reserves and securities premium or 100% o f

reserves and secur i t ies prem ium with approval of the BoardUnanimous resolution at the Board meeting for loan, investment, guaranteeor securityPrivate companies are also coveredInterest on loan not lower than G-sec

Prior Special Resolution required for loans, investment etc. exceeding the limitSpecial Resolution not required

In respect of loans, investment, guarantee etc. to Wholly Owned Subsidiary/ JointVenture companyIn respect of acquisition by holding company of securities of Wholly Owned Subsidiary

However, such loans guarantee/ secur i t ies w i l l be coun ted for ca lcula t ing thel im it , unlike earl ier Section 372A


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Special resolution to specify cap on loans, guarantee, security etc.Special resolution by existing companies To be passed within one year fromnotification i.e. by 31/03/2015Particulars of loans, investment etc including the purpose of utilization byrecipient to be disclosed in financial statementCompany which has defaulted in repayment of Deposits or interest thereon arenot eligible to give loan or provide guarantee/ security till default is subsisting

Register to be maintained in Form MBP 2 (For entries after 1 st April, 2014)

Exemption from Section 186 :Infrastructure companies/ Financing Companies/ Banks/ NBFC/ HFC/Insurance companies


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* Exemption to infrastructure companies/ Financing Companies/ Banks/ NBFC/HFC/ Insurance companies

Transaction Whether Section 185 or 186attracted?

185 186*

Loans to employees as a part of companypolicy (except MD/WTD)

No

Loans, guarantee, security by holding towholly owned subsidiary

No Yes ButSpecialResolution notrequired

Loans by holding to subsidiary (If notconnected to Director in anyway)

No SpecialResolution, if itexceeds limit

Corporate Guarantee by holding company forterm loan by subsidiary No (Rule 10) SpecialResolution, if itexceeds limit

Corporate Guarantee by holding company forBank/ Performance Guarantee by subsidiary

No No


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Related Party Transactions [Section 188] Approval of Board at a meeting required for following Related Party

Transactions:Sale/ buy of goods or supply of servicesSale / bu y any p rop er ty

Leasing of any property Appointment of any agent for purchase/ sale of goods etc.

Appointment to any office or place of profit in company, its subsidiary orassociateUnderwriting of share or debentures

Approval of Audit Committee for all transaction with Related Party {Section 177(4)}

Conditions to enter into RPTs:Board Agenda shall disclose, names of related parties, material terms including

value, nature/ duration of contract etcDirector shall not be present at the meeting during discussions

All RPTs to be reported in Board Report with justificationContracts entered without approval of Board or shareholders and ratified within 3

months Voidable at option of Board


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Prior approval of shareholders by Special Resolution :Company with share capital of Rs. 10 Cr or more

Sale, purchase of goods & material exceeding 25% of turnoverSelling, buying of any property exceeding 10% of net worth or 10% of turnoverLease contracts above 10% of networth or 10% of turnover

Availing or rendering of Services exceeding 10% of networth Appointment to place of profit in company, subsidiary or associate at

remuneration above Rs. 2.5 Lac p.m.Turnover or networth calculated as per last audited financial statementRelated Par ty shal l not v ote on the t ransact ion

Special Resolution by Holding Company will be sufficient for entering intotransaction with its Wholly Owned Subsidiary

ExemptionTransactions entered in the ord inary course o f b us iness and a t arms l eng thOrdinary course of business - Refer discussion u/s 185

Arms length transaction between related parties conducted as if they wereunrelated so that there is no conflict of interestTransfer pricing methods may be adopted


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Three stage compliances

Transaction in ordinary course and at arms length Audit Committee Board Shareholders

Below orabove threshold

X X

Transactions not in the ordinary course or n ot at arms length

Below threshold X

Above threshold


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Posers

Illustrative list of transactions Whether Section 188 attracted?

Providing loans, guarantee etc. to subsidiary NoEquity contribution by holding in subsidiary No

Leasing of premises/ Using joint premises Yes. Exempted if in the ordinarycourse of business

Existing contract for 5 years No. Can continue till full tenure.Material contracts by listedcompany - Till first general meetingafter 1 st October, 2014 if transactionis likely to continue beyond 31 st March, 2015

Purchase of shares by KMP through StockExchanges

No

Appointment of Managing Director No


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A related party transaction is a transfer of resources, services or obligationsbetween a company and a related party, regardless of whether a price is charged

Parties are related if one party;Controls the otherExercises significant influence over the otherIs a related party under Section 2(76)Is a key management personnel of the Company or of a parent company

An entity is related to a company if any of the following conditions applies:a) The entity and the company are members of the same groupb) One entity is an associate or joint venture of the other entityc) Both entities are joint ventures of the same third party.d) Two entities are JV and associate, respectively of a third entitye) 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

Clause 49 of Listing Agreement [w.e.f. 1/10/2014]


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Listing Agreement Companies Act 2013

Wider definition of Related Party coveringclose family members, fellow groupcompanies etc.

Close relatives, companies in whichDirectors are interested, holding &subsidiary company etc.

All RPTs to require prior approval of AuditCommittee

Approval or subsequent modification toall RPTs

All material RPTs to be approved byshareholders through special resolution andrelated parties to abstain from voting

Approval of RPTs exceeding prescr ibedthreshold by special resolution andrelated parties to abstain from voting

Company to formulate policy on materialrelated party transactions and dealing withRPTs(Transaction(s) individually or collectivelyentered during FY exceeds 5% or turnoveror 20% of net worth of company)

-

Policy on dealing with RPTs to be disclosedon website and also in Annual Report

-

Material RPTs to be disclosed to StockExchanges on quarterly basis alongwith CGReport

All RPT to be reported in Board Reportwith justification


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Thank you


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Notification not

made public

Section 2(76) Related party with reference to company means:Director, KMP or their relative Firm in which a director, manager or his relative is a partnerPrivate company in which a director or manager is a member or directorPublic company in which a director or manager is a director and holds alongwithhis relatives, more than 2% of its paid-up share capitalBody corporate whose BOD, MD or manager is accustomed to act inaccordance with advice, directions or instructions of a director or manager(except services provided in professional capacity)

Any person under whose advice, directions or instructions (except servicesprovided in professional capacity) of director or manager is accustomed to actCompany which is;

Holding, subsidiary or an associate company of such companyFellow subsidiary

Director, KMP of holding company or his relative


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Section 2(77) Relative includes members of HUF and followingrelationship:

Self & Spouse

Father &Mother

Children (Son/Daughter) & their

spouse

Brother & sister

Documents

Related Party Transactions & Loans - Nilesh Patel