CORPORATE GOVERNANCE

Disclosure & Transparency

Related Party Transactions &

Insider Trading

Virender Jain & Pavan Kumar Vijay

Disclosures & Transparency in Corporate Affairs

Concept & Need

It is the responsibility of corporate houses to keep the stake holders aware of all major

corporate events to help them to take informed decisions

It is the duty of directors to not to place themselves in a position when their fiduciary

duties towards the company conflict with their personal interests

“Timely and Accurate Disclosure should be made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.”

Disclosure And Transparency

OECD Principles

Increased access to external capital Lower cost of capital Improved operational performance Reduced risk of corporate crises, scandals Enhanced trust

Disclosure And Transparency

Advantages

Related Party Transactions Under Companies Act, 1956Under Accounting Standard – AS 18 Listing Agreement – Clause 49 – Audit CommitteeSEBI DIP Guidelines

Insider Trading Prohibition of Insider Trading RegulationsListing Agreement with Stock Exchanges – Cl. 36

Transparency & Disclosures

Indian Legal Context

Related Party Transactions & Disclosures

“A business deal or arrangement between two parties who are joined by a special relationship prior to the deal.”

Disclosures & Transparency in Corporate Affairs

Meaning of Related Party Transaction

Section 297: Approval of Contracts by Board of Directors

Applicable to all Companies, Public & Private

Both direct & Indirect interests contracts for goods or services or

underwriting are covered

Disclosure at Board & Approval of contracts

Prior approval of Central Government in case of Paid-up capital of

more than Rs 1 cr.

Penalty – Fine upto Rs 5000 + Rs. 500 per day

Related Party Disclosures

Companies Act, 1956

Section 295: Loans to Director applicable only on public companies Both direct & Indirect Loans & Guarantees are covered Prior approval of Central Government is required; Penalty – Fine up to Rs 50 Thousand or Imprisonment

up to 6 months + Vacation of Office by the interested Director

Special Disclosure of outstanding amount & Maximum amount in Balance Sheet

Related Party Disclosures

Companies Act, 1956

Section 299: Disclosure of Interest by Directors Applicable to all Companies, Public & Private Both direct & Indirect interests are covered Disclosure of Nature of interests in Contracts and Arrangements to

Board is required Penalty – Fine upto Rs 50 Thousand or Imprisonment upto 6 months

+ Vacation of Office by the interested Director

Section 300: Interested Directors not to participate in discussion & Vote

Section 301: Company to Maintenance of Register of Contracts, Companies & Firms

Related Party Disclosures

Companies Act, 1956

Section 314: Directors & relatives not to hold Place of Profits In case of Director – any place of profit other than his

office as Director In case of any related party of Director – any office or

place of profit with monthly remuneration exceeding Rs. 10,000 : Special Resolution by General Meeting Rs. 20,000 : Prior Approval by Special Resolution Rs. 50,000: Prior Approval by Special Resolution + Prior approval of

Central Government

Related Party Disclosures

Companies Act, 1956

Similar to International Accounting Standard 24 (IAS -24)

Disclosures Required:◦ Name of the related party and nature of the related party

relationship where control exists should be disclosed irrespective of whether or not there have been transactions between the related parties.

◦ If there have been transactions between related parties, during the existence of a related party relationship, the reporting enterprise should disclose the following: (i) the name of the transacting related party; (ii) a description of the relationship between the parties; (iii) a description of the nature of transactions;

Related Party Disclosures

Accounting Standard -18

Related Party Disclosures

Listing Agreement- Cl. 49

Mandatory review of Related Party Transactions

by the Audit Committee

Disclosures on materially significant Related Party

transactions that may have potential conflict with

the interest of Company at large

Related Party Disclosures

SEBI DIP Guidelines

Due Diligence Report by Merchant Banker to SEBI

Disclosure in Prospectus of all related entities, promoters, companies under the same management, Other group companies, their financial performance, pending litigations and risk factors

INSIDER TRADING

“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 of (a) Company or who has received or has excess to such unpublished price sensitive information “

- Reg. (d) & (e) of SEBI (Prohibition of Insider Trading ) Regulations

Disclosures & Transparency in Corporate Affairs

Insider Trading: Meaning

Disclosures & Transparency in Corporate Affairs

Insider Trading

It is BAD because:Used to make profit at the expense of other

investors

Leads to loss of confidence of investor in stock market

The process corrupts the ‘Level Playing Field’

It is easier to identify the beneficiaries of insider dealing. But the extent of losses occurred is impossible to calculate.

SEBI Prohibition of Insider Trading Regulations Prohibits Dealing,

Communicating or Counseling in securities by any person having Unpublished Price

Sensitive Information

SEBI Prohibition of Insider Trading Regulations

Disclosures to be made:

Initial disclosure by person who holds more than 5% shares/ voting rights

Within 4 working days of receipt of information of allotment or the acquisition of shares/voting right

Continual disclosure by person who holds more than 5% shares/ voting

rights

Disclosure of the number of shares held & any Change exceeding 2%

The number of shares held & any Change exceeding Rs. 5 Lakh OR 25000

Shares OR 1% whichever is Lower

SEBI Prohibition of Insider Trading Regulations

Other Obligations of Corporate:Creation of Model Code of Conduct

Pre-clearance of Certain Trades

Restricted /Grey List of Securities

Adaptation of “Chinese Wall “ & Need to Know Concept

SEBI Prohibition of Insider Trading Regulations

Listing Agreement – Cl. 36Disclosure of Price Sensitive Information

Change in the general character or nature of business Disruption of operations due to natural

calamity. Commencement of Commercial Production/ Commercial Operations Litigations/ dispute with a material Impact. Revisions in Ratings

Indian Scenario

Majority Companies are following the letter part of Transparency but the Spirit is missing

They are complying unavoidable provisions of Laws only & taking advantages of loop-holes

Impractical Legal Provisions such as prior approval of Central Government even in case of Closely help Companies

Long approval process & undue delay

Related Party Transactions

Indian Case Studies

Majority Listed Companies (especially Regional Listed) are complying on piece-meal basis or not at all complying

There is no proper surveillance system & System of ascertaining the loss to investors

Poor Implementation of Insider Code of Conduct in the Companies

Improper protection of Whistle Blowers Implementation of Legal Provisions Vs.

Sensitivity & Pre-mature disclosure

Insider Trading

Indian Case Studies

Suggestions for Better Disclosure & Transparency

A. Clear & Written policy & Transparent Ownership Structure with respect of Related Party Transactions;

B. Sufficient System of Internal Control

C. Disclosure of cost-benefits, urgency & need of all related party transactions;

D. Role of Independent Directors with pre-defined format for actual benefit/loss to the Company

E. Legal Provisions should be practical oriented & Time bound approvals should be granted

Related Party Transactions

Suggestions for Better Disclosure & Transparency

A. Company’s Insider Policy should be practical and not just the Rule Book;

B. Effective protection of Whistle blowers C. Legal Provisions should be practical

oriented (e.g. giving Public Announcement with in 4 days)

D. Disclosures of Price Sensitive Information as given on Stock Exchanges web-sites should be prominent

Insider TradingSuggestions for Better Disclosure &

Transparency

Satyam Vada Dharmam Chara

- Taittariya Upanishad

“Forever speak the truth and follow the dharma”

Truth : Disclosure of Actual State of Affairs (Transparency in operations and transactions)

Dharma : “Dharma is for the stability of society, the maintenance of social order and the general well-being and progress of humankind.”

- Karna Parva of the Mahabharata. Verse-58 in Chapter 69

Corporates are also expected to use their

Capacity, Knowledge and Resources

Maximization of stakeholders’ value and well-being and progress of humankind

TOWARDS

THROUGH

Transparency, accountability and truthful disclosure of state of affairs

Dharma

Truth

Thanking You……