CPT V24P7-Art1 (Content).pmd - Taxmann

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Company Law 301 of the Companies Act, 1956, disclosing whether the transaction under section 301 is based on arm’s length price or not, preferential allotment to interested party, etc. 2.2 Accounting Standard 18 (AS 18) - To make an investor aware of the related party transactions, the Institute of Chartered Accountants (ICAI) has introduced the AS 18 “Related Party Disclosures”. Every company must comply with AS 18 including small and medium sized companies as per Accounting Standard Rule, 2006. The objective of this standard is to establish requirements for disclosure of related party relationships and transactions between reporting enterprises and their related parties. As per Accounting Standard (AS 18), “Related party” means “Parties are considered to be related, if at any time during the reporting period one party has the ability to control the other party or exercises significant influence over the other party in making financial and/ or operating decisions”. Further “Related Party transaction” means transfer of resources or obligations between related parties, regardless of whether or not a price is charged. An enterprise or an individual is considered to have a substantial interest in another enterprise, if that enterprise owns, directly or indirectly, 20% or more interest in the voting power of the other enterprise. If there have been transactions between related parties, during the existence of a related party relationship, the reporting enterprise should disclose the following:- u Name of the transacting related party, u relationship and nature of transaction with related party, u volume of transaction, u amounts written off or written back in the period in respect of debts due from or to related party. Scope of AS 18 is wider than the Companies Act, 1956. Directors and their relatives, key 698 managerial personnel and their relatives who control or influence decision making of the company, holding companies and their subsidiary companies, associates and joint ventures are covered under related parties. In the Companies Act the approval is required only if the director or his relative is involved in transactions. The company makes disclosure of related party transactions in the given format in financial statement of the company. For example, purchase or sale of goods and fixed assets, agency arrangements, leasing or hire purchase arrangements, transfer of Research and Development, license agreement, finance guarantee, management contracts, rendering or receiving of services, etc. Such disclosures help in an understanding of the financial statement. 2.3 SEBI - Its rules, regulations - August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 78 2.3.1 Listing Agreement - Listing Agreement is an important document which is to be executed by the company with the Stock Exchange where its shares are proposed to be listed. The company must follow and implement the provisions relating to related party under Listing Agreement. For example, the audit committee of the company must review related party transactions in their meetings; the company should place periodically before the audit committee a statement in a summarized form of transactions with related parties in the ordinary course of its business and the company should make disclosures in compliance with the Accounting Standard on “Related Party Disclosures” in its Annual Report, etc. 2.3.2 SEBI (Insider Trading) Regulation, 2011 - Insider trading means act of subscribing, buying and selling or agreeing to subscribe, buy, sell or deal in securities by an insider who is connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities or who has received or has access to unpublished price sensitive information. The purpose of this dealing is to make personal profit at the expense of other investor who
invests in a fair manner. Generally, the director, key managerial personnel, employees, an officer, merchant banker, relatives of above personnel, banker of the company are covered under these regulations. SEBI prohibits dealing in or counselling in securities by the above mentioned persons having unpublished price sensitive information. An insider must disclose some information in the prescribed format like acquisition of a share of more than 5%, Disclosure of number of shares held and exceeding ` 5 lakhs or ` 25,000 worth of shares or 1% of the total shareholding, whichever is lower. Also, the company’s duty is to disclose Model Code of Conduct, pre-clearance of certain trade, adoption of concepts of “Chinese Wall” and “Need to know” in respect of price sensitive information. 2.4 New Companies Bill - The Central Government placed New Companies Bill, 2011 in the winter session of the Parliament and for the first time the Government clarified the related party term in a detailed manner. Clauses 184, 185, 188, 189, 192 and 195 deal with the transactions in which directors are interested in and disclosure according to those clauses. 3. PROVISIONS OF RELATED PARTY TRANSACTIONS 3.1 New Companies Bill, 2011 - In New Companies Bill, 2011, the Central Government has defined the terms “Relative”, “Interested Director”, and “Related Party” specifically. 3.2 When is Board’s approval essential? - The Board’s approval is essential if the company enters into any contract or an arrangement with a related party with respect to the following:— u sale, purchase or supply of any goods or materials; u selling or otherwise disposing of, or buying, property of any kind; u leasing of property of any kind; u availing or rendering of any services; u appointment of any agent for purchase or sale of goods, materials, services or property; u such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and u underwriting the subscription of any securities or derivatives thereof, of the company. 3.3 When is special resolution essential? - If the company’s paid-up capital is more than the prescribed amount, a special resolution in the member’s meeting is essential for above mentioned contracts. The member, who is covered under definition of related party, shall not vote on such special resolution or approve any contract or an arrangement. Such clause does not apply to transactions which are based on an arm’s length. 3.4 Justification for entering into such a contract - The duty of Board of Directors is to disclose every contract or an arrangement entered into under clause 188 which shall be referred to in the Board’s report to the shareholders along with the justification for entering into such a contract or an arrangement. 3.5 Personnel prohibited from dealings in securities - Directors and the key managerial personnel of a company are prohibited from forward dealings in securities of the company. CONCLUDING REMARKS 4. A company should consider above mentioned provisions at the time of preparation of its financial statements. SEBI provisions apply only to listed companies. Schedule 1A to Companies Act, 1956 has list of 22 persons as relatives, as per AS 18, the relatives include spouse, son, daughter, mother, brother, father and sister. The object of all of these provisions is to disclose the transactions and events between the related August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 79 699
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August 1 to 15, 2012 u TAXMANN’S
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Accounts & Audit 701 707 FOUNDER ED
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INTRODUCTION Vodafone story - 1. On
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for earning tax exempt income. Howe
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of the hearing before the Tribunal
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the ITAT Rules, 1946, vis-à-vis th
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say, twice the latter amount or mor
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Taxing the Expenditure on Litigatio
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