The Companies Act, 2013 (Act) read with the Companies (Meetings of Board and its Powers) Rules, 2014 (Rules) introduced specific provisions relating to related party transactions and defined the term related parties, (material) related party transactions, relatives and key management personnel. The Act and the Rules made there under have also laid down the financial limits and the approval process for such transactions.
Also, Regulation 23 of SEBI (LODR) Regulations 2015 requires a company to formulate a policy on materiality of related party transactions and dealing with related party transactions.
Although SEBI (LODR) Regulations 2015 not been applicable to our company being unlisted company yet for the sake better compliance the Board of Directors (Board) of Jet Knitwears Limited (Company) has adopted a policy and a standard operating procedure to regulate transactions between the Company and its Related Parties, in compliance with the applicable provisions of the Act its Rules and the provisions of SEBI (LODR) Regulations, 2015.
The objective of this Policy is to set out (a) the materiality thresholds for related party transactions and; (b) the manner of dealing with the transactions between the Company and its related parties based on the Act, SEBI (LODR) Regulations, 2015 and any other laws and regulations as may be applicable to the Company.
“Arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.
“Related Party”, with reference to the Company, shall have the same meaning as defined in Section 2(76) of the Companies Act, 2013 and SEBI (LODR) Regulations 2015.
“Related Party Transaction” (RPT) means –
• for the purpose of the Act, specified transaction mentioned in clause (a) to (g) of sub-section 1 of Section 188;
• for the purpose of SEBI(LODR) Regulations, 2015, related party transaction‖ means a transfer of resources, services or obligations between a listed entity and a related party, 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:
SEBI (LODR) Regulations 2015 requires a company to provide materiality thresholds for transactions beyond which the shareholders’ approval will be required by way of a special resolution. The Company has fixed its materiality threshold at 10% of the annual consolidated turnover of the Company as per last audited financial statements of the company for the purpose of SEBI (LODR) Regulations 2015
5.1 Identification of Potential Related Party Transactions
Each director and Key Managerial Personnel is responsible for providing notice to the Board or Audit Committee of any potential Related Party Transaction involving him or her or his or her Relative, including any additional information about the transaction that the Board/Audit Committee may reasonably require. Board/Audit Committee will determine whether the transaction does, in fact, constitute a Related Party Transaction requiring compliance with this policy.
The Company strongly prefers to receive such notice of any potential Related Party Transaction well in advance so that the Audit Committee/Board has adequate time to obtain and review information about the proposed transaction.
5.2 Procedure for approval of Related Party Transactions
a) Approval of the Audit Committee
All related party transactions require prior approval of the Audit Committee.
The Company may obtain omnibus approval from the Audit Committee for such transactions, subject to compliance with the following conditions :
The audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature;
• The Audit Committee shall satisfy itself the need for such omnibus approval and that such approval is in the interest of the company;
• The omnibus approval shall provide –
i. the name/s of the related party, nature of transaction, period of transaction, maximum amount of transaction that can be entered into,
ii. the indicative base price / current contracted price and the formula for variation in the price, if any and
iii. Such other conditions as the Audit Committee may deem fit.
However, in case of related party transactions which cannot be foreseen and where the above details are not available, Audit Committee may grant omnibus approval provided the value does not exceed Rs. 1 Crore per transaction;
1. The Audit Committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the company pursuant to each of the omnibus approval given;
2. Such omnibus approval shall be valid for a period of one year and shall require fresh approvals after the expiry of one year;
In determining whether to approve a Related Party Transaction, the Committee will consider the following factors, among others, to the extent relevant to the Related Party Transaction:
1. Whether the terms of the Related Party Transaction are fair and on arm’s length basis to the Company.
2. Whether there are any compelling business reasons for the Company to enter into the Related Party Transaction and the nature of alternative transactions, if any;
3. Whether the nature of the proposed transaction is something that the Company would have ordinarily done in the course of its business;
4. Whether the proposed transaction includes any potential reputational risk issues that may arise as a result of or in connection with the proposed transaction;
5. Where the ratification of the Related Party Transaction is allowed by law and is sought from the Committee, the reason for not obtaining the prior approval of the Committee and the relevance of business urgency and whether subsequent ratification would be detrimental to the Company or in contravention of any law; and
6. Any other factor the Committee deems relevant for reviewing and approving such Related Party Transaction.
b.) Approval of the Board of Directors of the Company
As per the provisions of Section 188 of the Act, all kinds of transactions specified under the said Section and which are not in the ordinary course of business and at arm’s length basis, are placed before the Board for its approval.
In addition to the above, the following kinds of transactions with related parties are also placed before the Board for its approval:
• Transactions which may be in the ordinary course of business and at arm’s length basis, but which are as per the policy determined by the Board from time to time (i.e. value threshold and/or other parameters) require Board approval in addition to Audit Committee approval;
• Transactions which are in the ordinary course of business and at arm’s length basis, but which in Audit Committee’s view requires Board approval.
• Transactions exceeding the materiality thresholds laid down Clause 4 of the Policy, which are intended to be placed before the shareholders for approval.
c.) Approval of the Shareholders of the Company
All the transactions with related parties exceeding the materiality thresholds, laid down in Clause 4 of the Policy, are placed before the shareholders for approval.
For this purpose, all entities falling under the definition of related parties shall abstain from voting irrespective of whether the entity is a party to the particular transaction or not.
In addition to the above, all kinds of transactions specified under Section 188 of the Act which (a) are not in the ordinary course of business and at arm’s length basis; and (b) exceed the thresholds laid down in Companies (Meetings of Board and its Powers) Rules, 2014 are placed before the shareholders for its approval.
In the event the Company becomes aware of a transaction with a related party that has not been approved in accordance with this Policy prior to its consummation, the matter shall be reviewed by the Audit Committee. The Audit Committee shall consider all of the relevant facts and circumstances regarding the related party transaction, and shall evaluate all options available to the Company, including ratification, revision or termination of the related party transaction. The Audit Committee shall also examine the facts and circumstances pertaining to the failure of reporting such related party transaction to the Audit Committee under this Policy and failure of the internal control systems, and shall take any such action it deems appropriate.
In any case, where the Audit Committee determines not to ratify a related party transaction that has been commenced without approval, the Audit Committee, as appropriate, may direct additional actions including, but not limited to, discontinuation of the transaction or seeking the approval of the shareholders, payment of compensation for the loss suffered by the related party etc. In connection with any review/approval of a related party transaction, the Audit Committee has authority to modify or waive any procedural requirements of this Policy.
The transactions or arrangements which are specifically dealt under the separate provisions of the laws and executed under separate approvals / procedures shall not be covered under this Policy. Examples of such transactions are as follows :
a. Appointment and payment of remuneration, including any variation, to key Managerial Personnel;
b. Payment of remuneration, fees, Commission etc. to any director in compliance with legal provisions;
c. Issues of shares/ securities to related party;
d. Any benefits, interests etc. arising to related party solely from the ownership of Company’s shares at par with other holders e.g. Dividend, Right Issues, Stock Split, Bonus shares, etc.
e. Shares based incentive plans for the benefits of Directors or KMPs approved by the Shareholders including ESOPs.
f. CSR Contribution;
The Company shall disclose, in the Board’s report, transactions prescribed in Section 188(1) of the Act with related parties, which are not in ordinary course of business or arm’s length basis along with the justification for entering into such transaction.
In addition to the above, the Company shall also provide details of all related party transactions exceeding the materiality threshold (laid down in Clause 4 of the Policy above) on a quarterly basis to the stock exchanges.