https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2022-01-18 00:26:082023-01-19 11:27:56FAQs on RPT regulatory framework as amended by the 6th LODR Amendment
An holding company( X Ltd.) has installed a computer software with the subsidiary company( Z Ltd.) for the purpose of ease in working. Z Ltd. is a non listed company. The cost of software will be borne by the holding company. The benefits of the software will be availed by subsidiary company. As no consideration is involved, this transaction will not be recorded in the books of accounts of subsidiary company.
Will such transaction fall under the RPT. If yes, then what should be the treatment?
As per Listing Regulations, related party transactions include the transfer of resources between the listed entity and its subsidiary, with or without consideration. Further, as per the Companies Act, 2013, availing or rendering of any services between related parties is also considered as related party transaction.
Therefore, in the present case, the transaction will be termed as a related party transaction.
Company A and Company B are related parties. They have entered into an agreement for supply of goods. i.e. Company A will sell the goods to company B. Due to some dispute Company A sues Company B before the regulatory body. The regulatory body directs them to resolve the dispute amicably. They reach to an amicable settlement and Company B agrees to pay a certain amount to Company A. Will this transaction falls within the ambit of section 188(1) of Companies Act 2013?. If yes, then what should be the arm’s length basis?
Do prior approval of Audit Committee in case of remuneration to Directors/KMPs is required to be taken? as Directors and KMPs are related party and remuneration payment would be considered as transaction with related party.
Further, materiality thresholds test (i.e. 10% of turnover) would also be applicable in case of remuneration to director/KMPs?
Yes, prior approval of the Audit Committee is required in case of payment of remuneration to RPs. The approval may either be taken at the time of appointment/ re-appointment valid for the tenure or as part of omnibus approval for a financial year.
Further, determination of material RPT taking into consideration all the transactions with that related party is required to be ascertained in all cases, except where excluded from the definition of RPTs in terms of Reg. 2 (1)(zc) of Listing Regulations.
In case a related party enters into a transaction with another related party, for e.g., sale of assets and as well as purchase of assets, whether the value of such transactions will be as taken net off or grossed up for the purpose of determining its materiality?
Referring to the definition of related party transaction u/r 2(zc), please note that all transactions entered into between any two related parties of a listed entity does not qualify as an RPT in terms of LODR Reg, for example a transaction between two directors of an entity does not require approval of the listed entity as a RPT. Having said that, assuming that in the instant case the transaction entered into between the two related parties for the purchase/ sale of assets, qualifies as an RPT in terms of Reg 2(zc) (considering one of the transacting parties is the subsidiary of the listed entity), please note that the full value of transaction will be taken into consideration without any netting-off for the purpose of determining materiality. However, the counter-transactions is not required to be considered twice for determining such materiality.
Respected Neha,
Thanks for the reply. However could not understand the last line of the reply. “However, the counter-transactions is not required to be considered twice for determining such materiality”. please clarify.
Please refer to this example for more clarity. Let’s say a transaction is being entered into between two subsidiaries (not wholly-owned) of a listed company. The transaction involves purchasing goods by one party and selling goods by another. In this case, the value of the transaction is not required to be included twice (one for the purchasing subsidiary, and another one for the selling subsidiary).
1) In case the unlisted subsidiary enters into different types of transactions with other unlisted subsidiary, for e.g., purchase of goods, giving of loans, etc., whether the value of such transactions will be clubbed for taking the approval of Audit Committee of Holding Company (presuming that the value of these transactions exceeds 10 % of subsidiary’s turnover).
As per the second proviso to reg 23(2), any RPT entered into by the subsidiary of which listed entity is not a party will require prior approval of the audit committee if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year exceeds the following limits-
1. exceeds 10% of the annual consolidated turnover of the listed entity;
2. W.e.f. April 1, 2023, exceeds 10% of the annual standalone turnover of the subsidiary.
Therefore, to conclude, approval of audit committee of the listed entity will be required for RPTs entered into by its unlisted subsidiary if the aggregate value of transactions exceed 10% of the consolidated turnover of the listed entity (w.e.f. April 1, 2023, exceeds 10% of the annual standalone turnover of the subsidiary).
Whether the transaction between “Director or any of its relatives” of the Company i.e. related party of the Company and “Director or any of its relatives” of the Holding Company i.e. related party of Holding Company will be considered as a Related Party Transaction for the Company of both Company and Holding Company are not being benefited through the transaction in question?
RPTs are transactions between
a. Listed entity with its related party;
b. Listed entity with the related party of its subsidiary;
c. Subsidiary of the listed entity with the related party of the listed entity;
d. Subsidiary with its own related party;
e. Subsidiary with the related party of other subsidiaries.
As such, where two individuals (even though they are related parties of the company/ holding company) transact with each other for their own benefit, it should not be considered an RPT.
Do you have a question? Is it an academic question, or do you think the question is such that it may be relevant to a lot others too? We encourage you to post your question here, and to the extent feasible, we will want to answer it here.
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An holding company( X Ltd.) has installed a computer software with the subsidiary company( Z Ltd.) for the purpose of ease in working. Z Ltd. is a non listed company. The cost of software will be borne by the holding company. The benefits of the software will be availed by subsidiary company. As no consideration is involved, this transaction will not be recorded in the books of accounts of subsidiary company.
Will such transaction fall under the RPT. If yes, then what should be the treatment?
As per Listing Regulations, related party transactions include the transfer of resources between the listed entity and its subsidiary, with or without consideration. Further, as per the Companies Act, 2013, availing or rendering of any services between related parties is also considered as related party transaction.
Therefore, in the present case, the transaction will be termed as a related party transaction.
Company A and Company B are related parties. They have entered into an agreement for supply of goods. i.e. Company A will sell the goods to company B. Due to some dispute Company A sues Company B before the regulatory body. The regulatory body directs them to resolve the dispute amicably. They reach to an amicable settlement and Company B agrees to pay a certain amount to Company A. Will this transaction falls within the ambit of section 188(1) of Companies Act 2013?. If yes, then what should be the arm’s length basis?
Do prior approval of Audit Committee in case of remuneration to Directors/KMPs is required to be taken? as Directors and KMPs are related party and remuneration payment would be considered as transaction with related party.
Further, materiality thresholds test (i.e. 10% of turnover) would also be applicable in case of remuneration to director/KMPs?
Yes, prior approval of the Audit Committee is required in case of payment of remuneration to RPs. The approval may either be taken at the time of appointment/ re-appointment valid for the tenure or as part of omnibus approval for a financial year.
Further, determination of material RPT taking into consideration all the transactions with that related party is required to be ascertained in all cases, except where excluded from the definition of RPTs in terms of Reg. 2 (1)(zc) of Listing Regulations.
In case a related party enters into a transaction with another related party, for e.g., sale of assets and as well as purchase of assets, whether the value of such transactions will be as taken net off or grossed up for the purpose of determining its materiality?
Referring to the definition of related party transaction u/r 2(zc), please note that all transactions entered into between any two related parties of a listed entity does not qualify as an RPT in terms of LODR Reg, for example a transaction between two directors of an entity does not require approval of the listed entity as a RPT. Having said that, assuming that in the instant case the transaction entered into between the two related parties for the purchase/ sale of assets, qualifies as an RPT in terms of Reg 2(zc) (considering one of the transacting parties is the subsidiary of the listed entity), please note that the full value of transaction will be taken into consideration without any netting-off for the purpose of determining materiality. However, the counter-transactions is not required to be considered twice for determining such materiality.
Respected Neha,
Thanks for the reply. However could not understand the last line of the reply. “However, the counter-transactions is not required to be considered twice for determining such materiality”. please clarify.
Please refer to this example for more clarity. Let’s say a transaction is being entered into between two subsidiaries (not wholly-owned) of a listed company. The transaction involves purchasing goods by one party and selling goods by another. In this case, the value of the transaction is not required to be included twice (one for the purchasing subsidiary, and another one for the selling subsidiary).
1) In case the unlisted subsidiary enters into different types of transactions with other unlisted subsidiary, for e.g., purchase of goods, giving of loans, etc., whether the value of such transactions will be clubbed for taking the approval of Audit Committee of Holding Company (presuming that the value of these transactions exceeds 10 % of subsidiary’s turnover).
As per the second proviso to reg 23(2), any RPT entered into by the subsidiary of which listed entity is not a party will require prior approval of the audit committee if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year exceeds the following limits-
1. exceeds 10% of the annual consolidated turnover of the listed entity;
2. W.e.f. April 1, 2023, exceeds 10% of the annual standalone turnover of the subsidiary.
Therefore, to conclude, approval of audit committee of the listed entity will be required for RPTs entered into by its unlisted subsidiary if the aggregate value of transactions exceed 10% of the consolidated turnover of the listed entity (w.e.f. April 1, 2023, exceeds 10% of the annual standalone turnover of the subsidiary).
Whether the transaction between “Director or any of its relatives” of the Company i.e. related party of the Company and “Director or any of its relatives” of the Holding Company i.e. related party of Holding Company will be considered as a Related Party Transaction for the Company of both Company and Holding Company are not being benefited through the transaction in question?
Hi Sir,
RPTs are transactions between
a. Listed entity with its related party;
b. Listed entity with the related party of its subsidiary;
c. Subsidiary of the listed entity with the related party of the listed entity;
d. Subsidiary with its own related party;
e. Subsidiary with the related party of other subsidiaries.
As such, where two individuals (even though they are related parties of the company/ holding company) transact with each other for their own benefit, it should not be considered an RPT.
Hope this helps.
Do you have a question? Is it an academic question, or do you think the question is such that it may be relevant to a lot others too? We encourage you to post your question here, and to the extent feasible, we will want to answer it here.