What is a related-party transaction?
Organisations often leverage available resources and transact within the group or affiliated entities. This arrangement between the two parties is termed as related-party transaction (RPT). Some common examples of related parties include holding companies, subsidiaries, branch offices, shareholder groups, associate group entities, key management personnel etc.
While the concept of RPT is legitimate and is regulated under various laws, typically these transactions are alleged of being conflicting to the interests of minority shareholders and external stakeholders of an organisation. For example: A subsidiary company paying a management/royalty fee to its holding company not commensurate with the benefit received.
Understanding the provisions
Provisions pertaining to the RPT are governed by Section 188 of the Companies Act, 2013, which came into force from 1 April 2014 and the SEBI (LODR) Regulations, 2015. These provisions lay down the approval process and mandate the disclosure of RPTs that can provide stakeholders with necessary information to substantiate the impact of RPTs.
The regulatory environment requires extensive disclosures of RPT, approval mechanisms to be adhered to and above all, the stipulation that the RPTs be conducted at arm’s length price. Notwithstanding the regulatory framework around RPTs, there may be many reasons challenging the governance and ensuring transparency around them. It could be either the uniqueness of the transaction or lack of substantial policy and/or maintenance of robust supporting documentation. Therefore, making it inevitable for the companies to rethink on how they view RPT governance, regulatory oversight and creation of robust transparent documentation.
What does RPT include
Key legislations governing RPT
- The Companies Act, 2013 (the Act) and SEBI (Listing Obligations and Disclosure requirements) regulations, primarily outline the policies and compliance requirement for RPT.
- The Income-tax Act covers RPT between two domestic related parties to the extent that either of the entities is availing tax. GST and special valuation law lay down requirements for related party supply.
- Regulations require RPTs to be undertaken in the ordinary course of business on an arm’s length basis.
- Robust RPT policies and compliance requirements instill more responsibility and accountability for the key management personnel, board members, independent directors, audit committee members.
- Penal provisions in case of RPT-related non-compliance.
Four guiding principles of good governance
An expert speaks
“Each day a new corporate financial fraud comes to light and the reason frequently ends up being direct / indirect transactions of the listed entity with its related parties. Good governance of these related party transactions (RPT) has become non-negotiable for companies that aspire to thrive and grow in India and globally. SEBI’s new LODR norms for RPT effective 1 April 2022 signal a further tightening of the approval process by lowering of thresholds and enhanced 3 tier disclosures to the audit committee, shareholders and the stock exchange. The time is ripe for companies and boards to step back and review their entire lifecycle of RPTs right from identification of related parties, transactions, arm’s length benchmarking, approvals, documentation and execution, including use of technology. The right culture and tone at the top are the key factor that drives fairness and transparency in RPTs in substance and not just form. The RPTs that meet the increasingly tighter approval and disclosure norms will likely survive in the long run.”Fatema Hunaid Chartered Accountant, Bengaluru
Grant Thornton Bharat advantage
A comprehensive approach to a holistic governance framework
Grant Thornton Bharat has a team of seasoned professionals who assist leading companies across verticals including financial services, real estate, manufacturing and consumer, in undertaking RPT review and benchmarking from Corporate Governance perspective.
Our bespoke solution aims at a comprehensive review of the RPTs along with the underlying documentation and related approval processes. As a value add, we share best practices to improve the RPT governance systems and processes from a corporate governance standpoint. Our findings can be relied upon for presentation before the audit committee/the board of directors.
- RPT compliance review under various statutes
- Risk identification and grading
- Risk mitigation
- Robust testing and review of policies and processes
- Identification of areas of improvement
- Corrective measures
- Review internal and external comparable data for benchmarking
- Undertaking arm’s length analysis commensurate with function, asset and risk profile of the related parties
- Develop SOPs for covering the RPT lifecycle
- Provide inputs for strengthening RPT policy framework
- Cross-functional experts from tax and regulatory, forensic, transfer pricing, governance, risk and operations etc.
- Inputs from technology domain experts
Our bespoke solution
Grant Thornton Bharat has a team of seasoned professionals who assist leading companies across verticals including financial services, real estate, manufacturing and consumer.Click here to know more
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