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COMPLIANCE WITH
DISCLOSURES
RELATING TO RELATED
PARTY TRANSACTIONS

BY ISHIKA S JAIN
340692594/02/2019
DECEMBER 27, 2022

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ACKNOWLEDGEMENT:

I wish to extend my sincere gratitude and heartfelt regards to Ms. Rekha

Surendhiran, Company Secretary- M/s. Carborundum Universal Limited for
giving me the opportunity to gain practical knowledge through undergoing
Management Training.

I am grateful to Mr. Arjun Raj P, Sr. Manager-Secretarial and Ms. Jully H Jivani,
Manager- Secretarial - M/s. Carborundum Universal Limited for their guidance
and valuable help in framing this project report.

I do take this opportunity to convey my gratefulness to the Secretarial Department

for their support.

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$
murugappa

CERTIFICATE

TO WHOMSOEVER IT MAY CONCERN

This is to certify that this project report on "Compliance with disclosures relating to
Related Party Transactions" is the bonafide work of Ms. Ishika S Jain - student
registration No. 340692594/02/2019 who carried out the project work under my
supervision.

For Carborundum Universal Limited

Arjun Raj P
Sr. Manager-Secretarial

Carborundum Universal limited E: cumigeneral@[Link]

T: +91-44-3000 6161
Registered office : ' Parry House', No 43, W : [Link]
F: +91-44-3000 6149
Moore Street, Chennai- 600 001, Ind ia Downloaded by Rachit Mishra (rachit774@[Link]) CIN No. : L29224TN1954PL000318
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DECLARATION:
The project report on the Long-term Training undergone at Carborundum
Universal Limited in partial fulfillment of the requirement for the award of the
Company Secretary membership submitted by me, Ishika S Jain –
340692594/02/2019 is a record of the original work done me.

Ishika Jain
340692594/02/2019

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CONTENTS

S. No. CHAPTER Pg. No.

1 Chapter I – Introduction 4-12
2 Chapter II – Methodology 13-14
3 Chapter III – Organisational Study 15-24
4 Chapter IV – Analysis and Interpretation 25-31
5 Chapter V – Findings 32-35
6 Chapter VI - Conclusion 36-38
7 Appendices 39-42
8 Bibliography 43

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Chapter I.
INTRODUCTION

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DEFINITIONS:

Related Party:

Section 2(76) of Companies Act, 2013

“Related party”, with reference to a company, means—

(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager [or his relative] is a member
or director;
(v) a public company in which a director or manager [and holds] is a director or
holds along with his relatives, more than two per cent. of its paid-up share capital;
(vi)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;
(vii) any person on whose advice, directions or instructions a director or manager
is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice,
directions or instructions given in a professional capacity;
(viii) any company which is—
(A) a holding, subsidiary or an associate company of such company; or
(B) a subsidiary of a holding company to which it is also a subsidiary;
(C) an investing company or the venturer of the company;";
Explanation.—For the purpose of this clause, “the investing company or the
venturer of a company” means a body corporate whose investment in
the company would result in the company becoming an associate company of
the body corporate.]
(ix) such other person as may be prescribed; [a director (other than an independent
director) or key managerial personnel of the holding company or his relative with
reference to a company, shall be deemed to be a related party.]
Regulation 2 (1) (zb) of SEBI (Listing Obligations and Disclosures
Requirements), 2015

“Related party” means a related party as defined under sub-section (76) of section
2 of the Companies Act, 2013 or under the applicable accounting standards.

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Provided that:
(a) any person or entity forming a part of the promoter or promoter group of the
listed entity; or
(b) any person or any entity, holding equity shares:
(i) of twenty per cent or more; or
(ii) of ten per cent or more, with effect from April 1, 2023;
in the listed entity either directly or on a beneficial interest basis as provided under
section 89 of the Companies Act, 2013, at any time, during the immediate
preceding financial year; shall be deemed to be a related party.
Accounting Standards 18

Related party transactions as those transacted between two parties related in a

particular way as defined:
(a) enterprises that directly, or indirectly through one or more intermediaries,
control, or are controlled by, or are under common control with, the reporting
enterprise (this includes holding companies, subsidiaries and fellow subsidiaries);
(b) associates and joint ventures of the reporting enterprise and the investing party
or venturer in respect of which the reporting enterprise is an associate or a joint
venture;
(c) individuals owning, directly or indirectly, an interest in the voting power of the
reporting enterprise that gives them control or significant influence over the
enterprise, and relatives of any such individual;
(d) key management personnel and relatives of such personnel; and
(e) enterprises over which any person described in (c) or (d) is able to exercise
significant influence. This includes enterprises owned by directors or major
shareholders of the reporting enterprise and enterprises that have a member of key
management in common with the reporting enterprise.
Indian Accounting Standards 24

A related party is a person or entity that is related to the entity that is preparing its
financial statements (in this Standard referred to as 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 over 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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(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).
(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.
(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.
Related Party Transactions

Section 188 of the Companies Act, 2013:

A related party is any contract or arrangement 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) 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.

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Regulation 2 (1) (zb) of SEBI (Listing Obligations and Disclosures

Requirements), 2015

“Related Party Transaction” means a transaction involving a transfer of resources,

services or obligations between:
(i) listed entity or any of its subsidiaries on one hand and a related party of the listed
entity or any of its subsidiaries on the other hand; or

(ii) listed entity or any of its subsidiaries on one hand, and any other person or entity
on the other hand, the purpose and effect of which is to benefit a related party
of the listed entity or any of its subsidiaries, with effect from April 1, 2023;
regardless of whether a price is charged and a “transaction” with a related party
shall be construed to include a single transaction or a group of transactions in a
contract.
Provided that the following shall not be a related party transaction:
(a) the issue of specified securities on a preferential basis, subject to compliance
of the requirements under the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations, 2018;

(b) the following corporate actions by the listed entity which are uniformly
applicable/ offered to all shareholders in proportion to their shareholding:
i. payment of dividend;
ii. subdivision or consolidation of securities;
iii. issuance of securities by way of a rights issue or a bonus issue; and
iv. buyback of securities.

(c) acceptance of fixed deposits by banks/Non- Banking Finance Companies at

the terms uniformly applicable/offered to all shareholders/public, subject to
disclosure of the same along with the disclosure of related party transactions
every six months to the stock exchange(s), in the format as specified by the
Board:

Provided further that this definition shall not be applicable for the units
issued by mutual funds which are listed on a recognised stock exchange(s).

Accounting Standards 18 and Indian Accounting Standards 24:

A related party transaction is a transfer of resources, services or obligations

between a reporting entity and a related party, regardless of whether a price is
charged.

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INTRODUCTION:
With the growing participation of investors and other stakeholders in companies,
the question of transparency in arrangements with related parties often becomes a
topic of debate and discussion.
A Related Party transaction (RPT) refers to a transaction between two parties who
are joined by a special relationship prior to the transaction; the transaction could
be a business deal, a single or a series of financial contracts, or an arrangement.
The parties involved on the two sides of the deal could be a parent company and
its subsidiaries or affiliates, the employees, the principal owners, the directors or
the management of the company and the subsidiaries, or members of their
immediate families.
In the Indian context, the statute which deals with the Related Party Transactions
(RPTs) is the Companies Act, 2013, SEBI (Listing Obligations and disclosures
requirements), 2015 and Indian Accounting standards, which does not bar the
Related Party Transaction but lays down certain safety measures that are required
to be followed while dealing with RPTs. As per Section 188 of the Companies Act
which lays down certain conditions for the regulation of Related Party
Transactions, the making of disclosure of the transaction to the Board and
shareholders forms the primary pre-requisite. Lately, SEBI has made
amendments to the RPT regime based on the Working Group Report on Related
Party Transactions (which came into force from April 1st, 2022).

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Need for the Study:

Based on the above recommendations and inputs, the current framework of RPTs
has evolved. However, as the corporate eco-system evolves, the area of corporate
governance including that of Related Party Transactions requires periodic review.
While taking note of some of the recent issues in relation to RPTs, it is observed
that one commonality in major corporate wrongdoings was that they were
allegedly carried out by persons with the ability to influence the decisions of the
company. Shell or apparently unrelated companies, controlled directly or
indirectly, by such persons were purportedly used to siphon off large sums of
money through the use of certain innovative structures, thereby circumventing the
regulatory framework of RPT.
Apart from use of circular transactions, companies appear to have diluted or
circumvented the requirements under their policy on RPTs by procuring approvals
for continuous lending to group companies. The SEBI Working Group reviewed
the approval mechanisms for RPTs and revisited disclosure requirements relating
to information relevant for the persons (including shareholders, where required)
involved in the approval mechanism. The regulatory changes aims to strengthen
the approval and disclosure processes to assist the audit committee and
shareholders in informed decision making with respect to RPTs.
Definition of Related Party Transactions ('RPTs') in the Companies Act covers a
wide range of transactions. Thus, it is absolutely necessary to understand the
concept of identification, approval and disclosure of RPTs. Many Companies also
formulate and implement a Policy which shall unambiguously define the roles and
responsibilities of Board, communication, disclosure and monitoring
requirements.
RPTs are widespread and are part of every business group activity. RPTs have
come under close scrutiny in recent years as they have been misused by companies
as revealed in various corporate scandals. Several scandals in the U.S. and other
parts of the world have cited RPTs as a means to manage earnings as well as divert
resources from their companies. Accounting frauds in Enron, Tyco, Parmalat, and
Satyam are glaring examples of the same. Companies with high RPTs related to
sales and income were found to report lower performance compared to companies
with low RPTs. While ownership structure failed to offer any explanation for the
magnitude of RPTs, RPTs were found to be lower in companies where big audit
firms were statutory auditors.
The potential to abuse RPTs is a cause for concern all over the world to both
regulators as well as investors. If RPT is widespread and misused, it may lead to
serious consequences. RPTs not only reduce the returns to outside shareholder but
also raise doubts on the effectiveness of corporate governance, which in turn
hinders growth in the equity market and the overall economic progress of a
country.
RPTs have always been prevalent and have also contributed to the growth of
business for entities around the world. Hence, inspite of the possibility of misuse,

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most jurisdictions have permitted RPTs, albeit with certain safeguards. Therefore,
it is also recognised that there is no need to prohibit RPTs, although the regulatory
framework should be fortified to mitigate the possibility of abuse.
However, not all RPTs are beneficial to investors. Transactions involving related
parties are not considered to be at an arms-length basis. Though they are not illegal,
the intricacies underlying them are difficult to identify. Companies often indulge
in RPTs to manage their earnings or to siphon off the assets of listed companies to
other affiliated firms. Other RPTs include granting loans, writing off loans and
dues, selling assets to a related entity for a price significantly below the market
price, and so on. Such RPTs are usually indulged in by dominant shareholders,
who have significant control rights compared to their cash flow rights, creating a
strong incentive to expropriate the minority (absentee) shareholders. In a situation
where control rights are higher than cash flow rights and the enforcement systems
are weak, one can presume a high level of RPTs.
Aim and Objective:
The aforesaid practices necessitate the study of the extent of use of RPTs by a
company in India. A review of these transactions provides indications of the
following:
1. Dependence of the company on related parties for sales, purchases, and
financing.
2. Support of the parent company to its subsidiaries through various
loans/advances.
3. Diversion of funds through these transactions to the associate and related
companies.
This study evaluates the increasing trend of the related party transactions
especially in the listed companies. The paper examines the average value of RPTs
as reported from 2014 to 2018 and compares it with the total revenue, EBITDA
and net worth. This comparison gives an indication of the rise in the related party
transactions over the years and the impact of the such transactions on the
stakeholders of the company.
The study contributes to the existing literature on RPTs by examining the
transparency of disclosure as well as its impact on the operational performance of
Indian companies. The remaining part of the paper is organised as follows. In
Section 2, we discuss the regulatory framework. Section 3 discusses the
methodology and data. Section 4 reports and discusses the results; in the last
section, we conclude and give our recommendations and suggestions.

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LITERATURE REVIEW:

In most parts of the world, ownership is concentrated in the hands of the controlling
shareholders. In such cases, the agency problem arises from conflicts between the
controlling and the minority shareholders. Controlling shareholders are
incentivised to expropriate firm resources to pursue their own interests at the cost
of those of the minority shareholders mainly through RPTs. Controlling
shareholders derive private benefits at the cost of the other shareholders through
transactions such as the sale or transfer of assets (at lower value), the purchase of
assets (at higher value), and the sale of goods or services to other entities under
their control at prices that are not at arm’s length.

The effect of RPTs on the performance of companies is mixed. These

transactions—also termed as “tunnelling” - the potential to siphon off wealth and
are routed through related parties where the dominant shareholder has high cash
flow rights. It is also noticed that the use of RPTs for a variety of other purposes -
high levels of related-party sales are made to their controlling shareholders and
other member firms in the group where an attempt is made to inflate earnings.
RPTs have been used for “propping” the operational performance of the firm.

These discussions lead to the following hypothesis:

1. RPTs will negatively affect the company’s operating performance measured by

return on assets.

2. Related-party transactions are more frequent in companies with higher

concentrated ownership.

3. Higher Foreign Institutional Investors (FIIs) involvement will deter RPTs.

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Chapter II.
METHODOLOGY

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SCOPE OF STUDY:
 The data used in this report is secondary and is qualitative data and the
researcher has studied and analysed reports of the various companies and
presented her views in analysis chapter.
 Nifty Companies are often a representative of what is happening in other Listed
companies. Related Party Transactions which have started happening in Nifty
Companies are expected to be more prevalent in other listed companies, since
they are exposed to lesser scrutiny.
 Analysis is based on the Consolidated reporting reported by companies in their
respective annual reports.
 Analysis includes Nifty companies, however, it excludes the Non-Bank
Financing Institutions, Public Sector companies and Banks. List of companies
analysed is mentioned separately in Annexure III.
 All numbers are converted to crores and total may not match due to rounding
off.
 Dividend Paid is not considered for reporting, because dividend by nature is
given to all shareholders in proportion to their interest in the firm and is
technically not a related party transaction that merits attention.
 Related party transactions were broadly classified into following types:

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Chapter III.
ORGANISATIONAL STUDY

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REGULATORY FRAMEWORK:

Legislative History
The legal regime in India relating to RPTs has evolved over the years after taking
into consideration recommendations made by a number of committees such as the
Narayana Murthy Committee on Corporate Governance (2003), J.J. Irani
Committee on Company Law (2005), the Company Law Committee (2016) and
the Kotak Committee on Corporate Governance (2017).
Requirements in relation to RPTs under the erstwhile listing agreement:
Several disclosure requirements with respect to RPTs were mandated under Clause
49 of the erstwhile listing agreement. This listing agreement referred to
Accounting Standard 18 for the definition of the term ‘related party transactions’.
Under the erstwhile listing agreement, the audit committee of a listed entity was
required to review the disclosure of related party transactions in the annual
financial statements with the management of the entity before submission to the
Board of directors for their approval. The audit committee was also required to
review a statement of significant RPTs submitted to it by the management. The
erstwhile listing agreement required a disclosure of materially significant RPTs
that may have potential conflict with the interest of the company in the annual
report. Pursuant to the recommendations of the Narayana Murthy Committee on
Corporate Governance, the following disclosures in the quarterly compliance
reports on corporate governance in relation to RPTs were mandated in clause 49
of the erstwhile listing agreement:

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“(A) Basis of related party transactions

(i) A statement in summary form of transactions with related parties in the
ordinary course of business shall be placed periodically before the audit
committee.
(ii) Details of material individual transactions with related parties which are not
in the normal course of business shall be placed before the audit committee.
(iii) Details of material individual transactions with related parties or others,
which are not on an arm’s length basis should be placed before the audit
committee, together with Management’s justification for the same.”
Regulation of RPTs under the Companies Act, 1956:
The concept of related party transactions was not explicitly defined in the
Companies Act, 1956 (‘1956 Act’). However, restrictions were imposed on certain
kinds of transactions with certain related parties by way of Sections 294, 294A,
294AA, 297 and 314 of the 1956 Act.
(i) Under the 1956 Act, directors of companies and certain other persons were
prohibited, without the consent of the board of directors, from entering into
a contract or arrangement for:
 sale, purchase or supply of any goods, materials or services; or
 underwriting the subscription of any shares in, or debentures of, the
company.
(ii) The prohibition in (i) above applied to a contract entered by the director, his
relatives, a firm in which such director or the director’s relative is a partner,
any partner of such firm, or a private company of which the director is a
member or a director.

(iii) If the paid-up share capital of the company exceeded Rs.1 crore, the prior
approval of the Central Government was also required in addition to board
approval, prior to entering into such transactions.

(iv) An exemption from the requirement of such prior approvals was granted for
cash transactions at prevailing market prices, transactions undertaken
regularly by the company and in case of a banking or insurance company
for any transaction in the ordinary course of business with any director,
relative, firm, partner or private company as described above.

(v) Further, Section 314 of the 1956 Act prohibited the director of a company
from holding any office or place of profit under the company or any
subsidiary of the company (unless the remuneration received from such
subsidiary in respect of such office or place of profit was paid over to the
company or its holding company), without the consent of the shareholders
of the company by way of a special resolution.

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(vi) Additionally, no partner or relative of such director, no firm in which such

director, or a relative of such director, is a partner, no private company of
which such director is a director or member, and no director or manager of
such a private company was allowed to hold any office or place of profit
carrying a total monthly remuneration above a prescribed limit.

(vii) A monetary threshold was prescribed for the monthly remuneration of the
office or place of profit in the company, above which, prior approval of the
Central Government was also required.

(viii) Sections 294, 294A, 294AA of 1956 dealt with appointment of sole selling
agents and prohibition of payment of compensation to sole selling agents
for loss of office in certain cases.

Suggestions of the J.J. Irani Committee:

In 2005, the report of the J.J. Irani Committee on Company Law stated that it
would be appropriate to have a ‘shareholder approval and disclosure-based regime’
in India for regulating transactions in which directors or their relatives are
interested as opposed to the ‘government approval based regime’ as existing in
1956 Act. The J.J. Irani Committee further suggested that transactions between a
company and director or persons connected with the director with regard to the
sale or purchase of goods, materials or services above a certain materiality
threshold should require mandatory shareholders’ approval by way of a special
resolution. These recommendations were later reflected in the Companies Act,
2013 (‘Companies Act’).
Suggestions of the Kotak committee on corporate governance:
More recently, the committee on corporate governance chaired by Mr. Uday Kotak
also dealt with the approval mechanisms and disclosure requirements in relation to
RPTs. Some of the suggestions of the committee that were accepted and
incorporated into the LODR are mentioned below:
(i) Expanding the scope of the definition of ‘related party’ to include any
person or entity belonging to the promoter or promoter group of listed entity
and holding 20% or more of the shareholding in the listed entity.

(ii) Requiring the policy on RPTs of the listed entity to include clear threshold
limits, as approved by the board of directors and for such policy to be
reviewed and updated every three years.

(iii) Introduction of a lower materiality threshold for transactions involving

payments made to related parties with respect to brand usage or royalty.

(iv) Permitting related parties of the listed entity to cast a negative vote on
resolutions seeking approval for RPTs.

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(v) Requiring the listed entity to disclose its RPTs on a consolidated basis, for
each half-year, in accordance with the formats prescribed under the relevant
accounting standards for annual results.

(vi) Requiring disclosure of transactions of the listed entity with any person or
entity belonging to its promoter/promoter group and holding 10% or more
shareholding in the listed entity.

Majority of these recommendations were later reflected in the SEBI LODR, 2015.

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Approval of Related Party Transactions under Companies 2013

Act (All Companies)

WHOSE APPROVAL
Whose approval IS
is REQUIRED?
required

Related Party Transaction Related Party Transaction is

is at arm’s Length and in not at arm’s Length or not in
the ordinary course of the ordinary course of business
business or both.

Audit
Audit Committee Shareholders’
Committee Board’s approval
approval approval
approval

If the transaction with a Prior approval of

related party is covered shareholders in
under Section 188(1) all cases where
of the Act but does not the transaction
exceed the thresholds exceeds the
under Companies thresholds.
(Meetings of the Board (Annexure II)
and its Powers) Rules,
2014 (Annexure I)

Note:
1. Except transactions between a listed company and its wholly owned subsidiary.

2. Schedule IV of the Act specifically provides that Independent Director shall pay
sufficient attention and ensure that adequate deliberations are held before approving
related party transactions and assure themselves that the same are in the interest of the
company

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OMNIBUS APPROVAL:
Section 177 of the Act permits the Audit Committee to grant omnibus approval for
related party transactions on an annual basis subject to the fulfilment of certain
conditions prescribed in Companies (Meetings of Board and its Powers) Rules,
2014, namely:
1. The Audit Committee shall, after obtaining approval of the Board of Directors,
specify the criteria for making the omnibus approval which shall include the
following, namely: -
(a) maximum value of the transactions, in aggregate, which can be allowed
under the omnibus route in a year;
(b) the maximum value per transaction which can be allowed;
(c) extent and manner of disclosures to be made to the Audit Committee at the
time of seeking omnibus approval;
(d) review, at such intervals as the Audit committee may deem fit, related party
transactions entered into by the company pursuant to each of the omnibus
approvals made;
(e) transactions which cannot be subject to the omnibus approval by the Audit
Committee.

2. The Audit Committee shall consider the following factors while specifying the
criteria for making omnibus approval, namely: -
(a) repetitiveness of the transactions (in the past or in the future);
(b) justification for the need of omnibus approval.

3. The omnibus approval shall contain or indicate the following: -

(a) name of the related parties;
(b) nature and duration of the transaction;
(c) maximum amount of transaction that can be entered into;
(d) the indicative base price or current contracted price and the formula for
variation in the price, if any; and
(e) any other information relevant or important for the Audit Committee to
take a decision on the proposed transaction.

4. Where the need for related party transaction cannot be foreseen and aforesaid
details are not available, the Audit Committee may make omnibus approval for
such transactions subject to their value not exceeding Rs. 1 crore per
transaction.

5. Omnibus approval shall be valid for a period not exceeding one financial year
and shall require fresh approval after the expiry of such financial year.

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Approval of Related Party Transactions under SEBI LODR,

2015 (Listed Companies)

WHOSE APPROVAL
Whose approval IS
is REQUIRED?
required

Transactions of the Listed Transactions of the Subsidiary

Entity of the Listed entity*

All Related Material Unlisted Listed

Party Related Party
Subsidiary Subsidiary
Transactions Transactions

Require Prior Require prior All the transactions Prior approval of

approval of Audit approval of of the subsidiary listed entity not
Committee (AC) Shareholders of require prior required if LODR
of Listed Entity. Listed Entity. approval of listed provisions are
entity’s AC and applicable to such
Shareholder, if it listed subsidiary.
exceeds the
threshold**.

Note:
* This is applicable when the subsidiary of the listed entity is the party but the listed entity
is not a party to the transaction.
** ten percent of the annual consolidated turnover, as per the last audited financial
statements of the listed entity. (w.e.f. 01.04.2022)
Ten percent of the annual standalone turnover, as per the last audited financial
statements of the subsidiary. (w.e.f. 01.04.2023)

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What is Related Party Transactions under SEBI LODR:

Listed Entity (LE)

Transaction with

Any other Related Related

w.e.f. Subsidiary Party of
person or 01.04.2023 Party of
entity LE Subsidiary

Transaction with

Benefit to

01.04.2023
w.e.f.
Related Related Any other
Benefit to
Party of w.e.f.
01.04.2022 Party of Benefit to person or
w.e.f. Subsidiary LE entity
01.04.2023

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DISCLOSURES
DISCLOSURES UNDER COMPANIES ACT,2013:

1. Every company shall maintain one or more registers in Form MBP 4 and shall
enter therein the particulars of such contracts or arrangements with a related
party with respect to transactions to which section 188 applies.

2. As per Section 134 of the Act, the Report of the Board shall contain the
particulars of contracts or arrangements with related parties referred to in
section 188(1) in the Form AOC-2.

DISCLOSURES UNDER ACCOUNTING STANDARDS:

Indian Accounting Standard (Ind AS)-24 requires disclosure of related party

relationships, transactions and outstanding balances, including commitments, in
the financial statements.

DISCLOSURES UNDER LODR, 2015:

1. Disclosures of the details of related party transactions in the corporate

governance section of the annual report.
2. In terms of Schedule V of the regulation, details of all material transactions
with related parties shall be disclosed along with the quarterly compliance
report on corporate governance submitted by the listed Company.
3. The listed entity shall submit to the stock exchanges disclosures of related party
transactions in the format as specified by the Board from time to time every six
months within fifteen days from the date of publication of its standalone and
consolidated financial results.(w.e.f. April 1, 2022).
4. The listed entity shall make such disclosures every six months on the date of
publication of its standalone and consolidated financial results (w.e.f. April 1,
2023).

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Chapter IV.
ANALYSIS AND
INTERPRETATION

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STATEMENT OF PURPOSE:
The purpose of this Research Report is to study and understand the increasing trend
of the Related Party Transactions along with the impact of increased regulatory
requirements introduced in India for disclosure of RPTs by Companies and the
usage pattern of RPTs by such companies.

Sales as a % of Total Revenue:

1. Sales as a % of total revenue has been compared to judge how much of revenue
has been generated by sale to outside parties.
2. Unrealistic business commitments and high valuation expectations have often
induced promoters to sell to related parties to meet targets.
3. Over a period of 5 years from FY14 to FY18, approx 1.4% of the revenue
generated has been through sales done to related parties.
4. The value of such transactions have increased at a CAGR of almost 16.5% from
~20,800 Crores (1.1%) in FY14, to ~44,700 Crores (2%) by FY18.

Purchases as a % of Total EBITDA

1. Purchase as % of total EBITDA has been compared to judge how much of
EBITDA attributable to stakeholders (profits, interest and taxes) may have been
abstracted to related parties.
2. The risk here is that stakeholders may be denied their rightful share if purchases
are not done at arms’ length price.
3. A high % of such transactions also raises questions of principal-agency conflict,
especially in today’s world where organisations always have multiple options to
purchase products/services from non-related entities at equally competitive
prices.
4. Over a period of 5 years from FY14 to FY18, the sample companies have done
purchases from related parties of a value of approx 14.7% of the EBITDA.
5. The value of such transactions have increased at a CAGR of almost 14% from
~41,400 Crores (12.6%) in FY14, to 79,700 Crores (17.6%) by FY18.

Interest Income as a % of Total EBITDA

1. Interest Income as % of total EBITDA has been compared to judge how much
of EBITDA may have arisen by generating interest income by giving loans to
unconsolidated entities.
2. Companies Act 2013 had mandated that no interest free loans can be given, but
Risk here is of Capital Misallocation.
3. A high % of such transactions raises questions on Capital Allocation of the
company, since shareholders’ wealth is being used for providing loans to related
parties.

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4. Over a period of 5 years from FY14 to FY18, the sample companies have done
interest income from related parties of a value of approx 0.2% of the EBITDA.
5. The value of such transactions have marginally reduced at a CAGR of 2.3%
from ~790 Crores (0.2%) in FY14 to ~700 Crores (0.2%) by FY18.

Others (including Royalty) as a % of Total EBITDA:

1. Other payments (including Royalty) as % of total EBITDA has been compared
to judge how much of EBITDA attributable to stakeholders (profits, interest and
taxes) may have been abstracted to related parties.
2. The risk here is that stakeholders may be denied their rightful share if other
payments are not done at arms’ length price.
3. A high % of such transactions also raises questions of principal-agency conflict.
4. There has been an increasing trend to pay Management Fees/Royalty to
Holding/Promoter Entities.
5. Over a period of 5 years from FY14 to FY 18, the sample companies have done
purchases from related parties of a value of approx 2.6% of the EBITDA.
6. The value of such transactions have increased at a CAGR of almost 14% from
~6,500 Crores (2%) in FY14, to ~12,700 Crores (2.8%) by FY18.

Funds Deployed (New + Outstanding) as a % of Net worth

1. To check how much of net worth has been blocked in supporting finance needs
of related parties instead of earning return for shareholder.
2. In some cases, the funds are being deployed during the year and taken before
end of financial year so that the amount doesn’t show up on Balance Sheet.
3. Over a period of 5 years from FY14 to FY18, the sample companies have on an
average deployed almost 4% of their net worth into related parties.
4. In none of the year, the net funds deployed for related party investments have
reduced and the net outstanding investments have increased at a CAGR of 8.6 %
from ~8700 Crores in FY14 to 13,200 Crores in FY18.

Funds Received (New + Outstanding) as a % of Net worth

This route has not been used much except by few companies and this might be due
to sampling, since most Nifty companies being bigger are more likely to give loans
and deposits than take funds.

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Analysis of the value of Related-Party Transactions

(in INR crores)
Transactions 2014 2018
Loans & Deposits Given 1160 1496
Income 1005 1057
Expenses 769 1117
Investment in Shares and others 653 516
Bank Guarantee Given 691 453
Loans & Liability 115 438
Bank Guarantee Received 234 252
Dividend Payment 55 87
Fixed Assets Purchase/Sale 66 56
Share Capital 24 52

Share Capital

Fixed Assets Purchase/Sale

Dividend Payment

Bank Guarantee Received

Loans & Liability

Bank Guarantee Given

Investment in Shares and others

Expenses

Income

Loans & Deposits Given

0 200 400 600 800 1000 1200 1400 1600

2018 2014

Figure:1-Analysis of the value of Related-Party Transactions

Interpretation: Although the sample companies had a number of RPTs of a different

nature, the three major transactions were income, expenses, and loans and deposits.
The purchase of goods and material and the payment for services were the major
component of expenses.

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Analysis of Value of Transactions with Each Related Party

(in INR Crores)
Party 2014 2018
Subsidiary 3307 3885
Holding 195 587
Associate 414 503
Joint Venture 169 229
Others 692 931
(in % average)
Party 2014-18
Subsidiary 69.2
Holding 4
Associate 8.6
Joint Venture 3.5
Others* 14.4

Others, 14.4

Joint Venture, 3.5

Associate, 8.6

Holding, 4

Subsidiary, 69.2

Subsidiary Holding Associate Joint Venture Others

Figure:2-Analysis of Value of Transactions with Each Related Party

Interpretation:

 Transactions with subsidiaries primarily consisted of loans given and income

transactions.
 Expenses—payment for goods, royalty, and other expenses—formed the major
transaction with associates and holding companies as well as with JVs. Sales to
associates, holdings, and JVs formed the next highest transaction.
 Dividend payment was made to holding companies.

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Analysis of Frequency of RPTs

Party 2014 2018

Subsidiary 143 137
Holding 47 85
Associate 72 80
Joint Venture 59 62
Others* 162 160

Others

Joint Venture

Associate

Holding

Subsidiary

0 20 40 60 80 100 120 140 160 180

2018 2014

Interpretation:
Nearly 80% of the reporting companies had transactions with subsidiary companies and
associates and almost all the companies had transactions with key management personnel
(KMP), mainly due to remuneration paid which is categorised under ‘others’.

* “Others” include fellow subsidiaries, key shareholder control, relatives of key management
personnel, partnership firms, AOP, and any other related parties indicated as others.

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Specific Case Studies and instances of Transactions challenged by

shareholders in non-sample set companies

 Jubilant Foodworks – In FY 19, the holding company of Jubilant Food Works

Ltd.—the operator of Domino’s Pizza chain in India— backtracked on charging
a royalty from subsidiaries for using its brand name within hours as it sparked
concerns about rewarding promoters at the expense of shareholders. The
company lost market cap in excess of 1000 Crores, when the holding company
made a proposal to charge corporate brand royalty of 0.25 percent of
consolidated revenues of the company.

 Eveready – In FY 2020, the statutory auditor of Eveready Industries, Price

Waterhouse & Co., resigned for the reason of “Basis of Disclaimer of Opinion”.
The auditor disclosed that the company had provided inter-corporate deposits
worth 230.8 crore INR and corporate guarantees estimated at 283.1 crore INR,
along with a credit of 62 crore INR to another company of which neither were
the details of the deed extended for disclosure nor were any claims made for
the refund of the advanced amount.

Not enough evidence to account for was given to the audit committee; thus,
they were also unable to estimate the real financial standing of the company
and its future impact. Evidence of RPTs was also discovered when the “notes
to accounts” of the audited reports showed that the default in repayment of
several loans had been guaranteed by the promoter directors. The shares of the
company had already fallen by more than 50% in a year due to issues relating
to Guarantees and Loans advanced to Debt ridden promoter group companies.

 Tata Motors – In FY15, though Motors was making losses, it sought to pay
high salaries to KMP beyond the permissible limit. Shareholders voted against
the resolution and company, marking the first instance when shareholders
successfully stalled payment of excessive compensation to top executives in a
company as large as the Tata group firm. Eventually the company had to come
back to shareholders with greater disclosures and explanations of why the
salary was justified.

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Chapter VI.
FINDINGS

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MAIN ISSUES OBSERVED:

1. Increasing trend in Related Party Transactions

The average value of RPTs per year has shown an increasing trend most cases that
were studied as below:
a) Related Party Sales has increased at a CAGR of almost 16.5% from ~20,800
Crores (1.1% of total revenue) in FY 14, to ~44,700 Crores (2% of total
revenue) by FY18.
b) Related Party Purchases have increased at a CAGR of almost 14% from
~41,400 Crores (12.6%) in FY14, to 79,700 Crores (17.6%) by FY18.
c) Net outstanding investments in Related Party Companies have increased at a
CAGR of 8.6 % from ~8700 Crores in FY14 to 13,200 Crores in FY18.

2. Family Controlled Entities have Higher Related Party Transaction

 The average value of RPTs per year, for each of the different transactions
impacting the Balance Sheet, P&L, and Guarantees, is higher for companies
which belong to a Family Group.
 MNC/Professionally controlled entities have lower value of Related Party
Transactions.

3. Newer Areas of RPT Transactions

 There has been an increasing trend to pay Management Fees/Royalty to
Holding or Promoter Entities. Companies are not only increasing the
existing Royalties/Brand Management Fees, but some companies have
suddenly after years of existence decided to enter into such agreements with

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Promoter Group. Other expenses (including Royalty) has increased at a

CAGR of 14% of FY14 to FY18.
 There have been cases where Related Parties are used for mandatory CSR
Expense.
 Guarantees and Investments in Related Party entities have emerged as new
RPT Transactions.
 Company assets are also being provided as Guarantee for loans taken by
Related Parties.

4. Spirit of Law not being followed

 Companies take use of technicality of law to evade spirit of the reporting.
 In a Pharma Major, a related entity to which 30% of sales were done in 2017-
18, was not disclosed as a related party in earlier years, merely because
promoter did not hold substantial shares, ignoring the fact that entity was still
virtually controlled by Key Management. It is only when Companies Rules
became stricter that this Company was disclosed as Related Party.
 Companies might be using technicality of law (minimum shareholding
threshold etc) to avoid reporting entities as Related Party.

 There appears to be little consistency regarding how companies interpret what

relationships and what transactions need to be disclosed and in what level of
detail. Only bare minimum information is provided.

5. Use of Shareholders’ funds to lend support to new ventures of Promoter Group

 Shareholders’ Funds are being used to fund new ventures of Promoter Group.
Companies are providing quasi debt to promoter Group Companies.

 An Infra and a FMCG Company have given Inter-company Deposits to

promoter group entities to pursue business opportunities, instead of company
directly pursuing those opportunities or taking an equity stake in those
entities.
 In an Auto Company- Almost 10% of Net worth of FY2014 was used to give
Inter Corporate Deposits to Hero Fincorp during the year, but repaid before
end of year so that it doesn’t remain outstanding at end of year.
 During the year FY18, related parties of an Infra company took loan of 6100
Crore which was repaid fully before end of year, thereby not getting shown
in Closing Balance Sheet.

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6. Identity of parties is often skipped

 Companies often do not disclose the specific value and name of the entity
with which they have entered into transactions. This is just clubbed under
broad heads such as Associates, JV’s, KMP Controlled Entities.
 There is a case of large conglomerate having many listed entities - In all the
entities the names of Related Party have not been disclosed in the Related
Party Schedule, and instead a blanket statement has been mentioned that “The
company’s Related Parties principally consist of XYZ Ltd, Subsidiaries and
Joint Arrangements of XYZ, the Company’s associates and their subsidiaries,
joint operations and joint ventures of the company.

7. No Explanation/Fairness Opinion
 The numbers are presented with virtually no context or explanation, leaving
doubts hanging as to whether a conflict of interest is lurking behind them.
 Shareholders do not receive enough information from Annual Report about
related party transactions to make informed investment and voting decisions.
There is no opinion on comparable options to make judgement on whether to
approve the transaction or not.

8. Risks not highlighted – ‘Framing’

 Framing a statement differently leads to different results.
 As of now, all shareholder voting resolutions provide the details of related
party and the transaction being entered into.
 However, the Audit Committee/Board should provide reasons what are the
risks in the related party transactions that are being proposed for voting.
 This will not only ensure that Risks are highlighted upfront to the shareholder
but will result in better participation and different voting results.

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Chapter VII.
CONCLUSION

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SUGGESTIONS:
 Development of Proxy Advisory Firms - Shareholders often lack the vigilance
to monitor and the determination to contest questionable deals. The interests of
the casual investors will be safeguarded with the development of proxy
advisory firms that would duly monitor transactions, keeping the shareholders
informed.

 Fairness Opinion: Merely providing value of Related party transactions in

Annual Report is of no use in judging the appropriateness of the same. Beyond
a threshold, it should be made mandatory for company to obtain a fairness
opinion on the valuation of the transaction from an independent financial
adviser and the opinion should be provided to the shareholders.

 Enforcement of Law: The implicit argument has been that the real problem
with corporate governance in India is a lack of observance and enforcement of
the laws, rather than flaws in the law itself. Wherever companies have
backtracked from Related Party transactions are those cases where there was
backlash from shareholders and loss of market capitalization, rather than from
fear of regulatory body.

 Payment of Royalty: It must be questioned whether there is a need to pay

royalty in the first place. More importantly, for recipients of the royalty or brand
fee must be able to justify what they are doing to create or develop the brand.
For instance, in case of Maruti/Nestle, the companies themselves are spending
substantial money on R&D and yet they are required to give Royalty on a
continued basis to Promoter Group for technology support.

 Following OECD Prinicple: Timely and adequate disclosure should be made

on all material matters regarding the corporation, including the financial
situation, ownership and governance of the Company.

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Conclusion:

Related party transactions (RPTs) which occur between related companies which
are commonly reported in published financial reports. Regulations have been
enforced by authorities globally, to control and prevent misuse of these types of
transactions through extensive disclosure requirements. Research on RPTs in a
country is important as it gives an indication of the usage of these transactions by
companies during their operations. These transactions need to be tracked as they
could be for legitimate reasons or for influencing the performance reports, thereby
misleading potential global investors.

This report focuses on the impact of increased regulatory requirements introduced

in India for disclosure of RPTs by Companies and the usage pattern of RPTs by
companies. The study aims to analyse the related party transactions of the Nifty 50
Companies. The report includes the analysis of the various related party
transactions like sale, purchase, payment of royalty etc. in comparison to the total
revenue, EBITDA and net worth of such Company.

This trend is an indication that the regulatory requirements in India through the
Companies Act 2013 and the recently amended SEBI LODR, 2015, are proving to
be effective in achieving its objectives. Also, such regulations passed to improve
transparency in financial reporting in India will also act as a deterrent to
companies, who may be intending to misuse these transactions in the future.

Certain types of questionable transactions — such as contracts for below-market

goods or services, bill-and-hold arrangements, uncollateralized loans, and
subsequent repurchase of goods sold — also might signal that a company is
engaged in unusual or undisclosed related-party transactions. Regardless of
whether you are publicly traded or privately held, it is important to identify,
evaluate, and disclose all related parties. This will help to present related party
relationships and transactions, openly and completely.

On a concluding note, it is observed that India has made considerable efforts to

protect shareholders, however, there still exists a considerable gap between the
statutes and their implementation. Steps need to be taken to uplift the state of
corporate governance, especially, with regards to abusive RPTs. Since these
transactions are not only at the discretion of the Board but are also such entities
that are sometimes related to the top management, special efforts are taken to
conceal information and evade disclosures. Stringent measures must be taken to
create a balance between needed RPTs and safeguarding the interests of innocent
shareholders.

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APPENDICES:

Annexure I (Approval of Board*):

A related party is any contract or arrangement 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) 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.
* Where any director is interested in any contract or arrangement with a related party,
the concerned interested director shall not be present at the meeting during discussions
on the subject matter of the resolution relating to such contract or arrangement.

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Annexure II (Approval of Shareholders):

According to the provisions of the Act, the following items require shareholders’
approval:
Particulars Threshold
Sale, purchase or supply of any goods Transaction value ≥ 10% of annual
or materials, directly or through turnover or Rs. 100 crore, whichever is
appointment of agent lower.
Selling or otherwise disposing of, or Transaction value ≥ 10% of net worth
buying, property of any kind, directly or Rs. 100 crore, whichever is lower
or through appointment of agent
Leasing of property of any kind Transaction value ≥ 10% of net worth
or ≥ 10% of annual turnover or Rs. 100
crore, whichever is lower
Availing or rendering of any services, Transaction value ≥ 10% of annual
directly or through appointment of turnover or Rs. 50 crore, whichever is
agent lower
Appointment to any office or place of Monthly remuneration > Rs. 2.50 lakh
profit in the Company, its subsidiary
company or associate company
Remuneration for underwriting the Transaction value > 1% of net worth
subscription of any securities or
derivatives thereof.

* no member of the company shall vote on such resolution, to approve any contract or
arrangement which may be entered into by the company, if such member is a related
party (not applicable to private Company, government Company and unlisted public
company set up in special economic zones)

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ANNEXURE III:

LIST OF COMPANIES STUDIED

Adani Ports & Special Economic Zone Dr. Reddy's Laboratories Ltd.
Asian Paints Ltd. Eicher Motors Ltd.
Bajaj Auto Ltd. Grasim Industries Ltd.
Bharti Airtel Ltd HCL Technologies Ltd.
Bharti Infratel Ltd Hero MotoCorp Ltd.
Britannia Industries Ltd. Hindalco Industries Ltd.
Cipla Ltd Hindustan Unilever Ltd.
Infosys Ltd. Tata Steel Ltd.
JSW Steel Ltd. Larsen & Toubro Ltd.
Mahindra & Mahindra Ltd. Reliance Industries Ltd.
Maruti Suzuki India Ltd Sun Pharmaceutical Industries Ltd.
Tata Motors Ltd. Tata Consultancy Services Ltd.
Titan Company Ltd. UPL Ltd.
Tech Mahindra Ltd. UltraTech Cement Ltd.
Vedanta Ltd. Wipro Ltd.
ITC Ltd. Zee Entertainment Enterprises Ltd.

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Annexure IV.
List of Related Parties Reported by Companies
 Holding companies
 Subsidiaries/Sub-subsidiaries (Step-down subsidiaries)
 Fellow subsidiaries
 Enterprises under common control
 Associates
 Key management personnel
 Relatives of key management personnel
 Joint ventures/Joint ventures of subsidiary
 Entities where control or significant influence exists
 Entities having control or significant influence over reporting company
 Partnerships/Partnerships of subsidiaries
 Association of persons
 Unincorporated joint ventures
 Jointly controlled entities
 Integrated joint ventures
 Promoter group
 Entities where key management personnel or their relatives have control/significant
influence
 Parties having substantial interest
 Affiliates
 Trustee in board of trust
 Controlling shareholder and relatives of controlling shareholder

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BIBLIOGRAPHY

Article Reference:
 SEBI Working Group recommendations:
[Link]
of-the-working-group-on-related-party-transactions_45805.html

 ICSI Guidance note:

[Link]
[Link]

 Indian Institute of Management Report on RPT:

[Link]

 CFA Society India - Advocacy Committee’s report on RPT:

[Link]
[Link]

Websites:
 [Link]
analysis-of-the-recent-amendments-by-
sebi#:~:text=The%20term%20'related%2Dparty%20transaction,or%20shares%20som
e%20mutual%20interest.

 [Link]

 [Link]
tpapers/[Link]

 [Link]
transactions/

Case Studies:
 [Link]
[Link]

 [Link]
eveready

 [Link] backtracks-on-
royalty-issue

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