Related Party Transactions as per Presentation on Related Party Transactions as per Listing Agreement BY ILAM C. KAMBOJ Asso. V.P. Legal & Company Secretary Hero MotoCorp Ltd. March 13, 2015

Table of Contents 10 S. No. Topics 1 Clause 49- applicability 2 Related party as per Listing Agreement 3 Related party as per CA 2013 4 Related party as per AS 18 5 Related Party Transactions 6 Directors vis-à-vis RPT 7 Audit Committee, Board and Shareholders vis-à-vis RPT 8 Disclosures 9 Penal consequences for non compliance 10 Practical challenges

Clause 49 All Listed Companies Non Mandatory : Applicability All Listed Companies Non Mandatory : Paid up capital not exceeding Rs. 10 crores and Net worth not exceeding Rs. 25 crores Comply within 6 months from the date of applicability Listed exclusively on SME and SME – ITP Platforms

Related Party as per Listing Agreement

Related Party – Clause 49(VII)(B) An entity shall be considered as related to the company if it is a Related Party: under Section 2(76) of the Companies Act, 2013; or under the applicable accounting standards. 

Related Party as per Companies Act, 2013

Related Parties 2(76) Company I. Director Manager III. Firm IX Director /KMP of Holding Company & their relatives Related Parties 2(76) VIII. Holding Co/ Subsidiary Co/Associate Co. $/Sister Subsidiary VI Body Corporate whose Board/MD/Manager accustomed to act in accordance with advise, directions or instructions of a Director/Manger * VII. Any person , on whose advice, directions or instructions Director/Manager is accustomed to act* II. KMP or relative IX. Any other prescribed person Company I. Relative of Director # Director+2% V. Public Co. Member/Director IV. Private Co. I. Director Partner # Director+2% Member/Director Partner II. Relative of Manager Manager Partner III. Firm Partner *Except if advice given in professional capacity, # Director+ Holds more than 2% of PSC along with relatives. $ 2(6) “Associate Company” means a Company in which other Company has a significant influence, but which is not a subsidiary of the Company having such influence and includes a joint venture company.

Relatives 2(77) & Rules 1 H.U.F (all the members) 2 Spouse Husband/Wife 3 Father/Step Father 4 Mother/ Step Mother 5 Son /Step Son Wife 6 Daughter Husband 7 Brother/Step Brother 8 Sister/Step Sister

Related Party as per Accounting Standard

Related Party – AS-18… “Related Party” means if one has ability to control the other party or exercise significant influence over the other in making financial and/or operating decisions.  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);

Related Party – AS-18… 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;

Related Party – AS-18… c. Individuals owning directly or indirectly, an interest in the voting power of the enterprise that gives them control or significant influence over the enterprise. Relatives of such individual are also related parties.

Related Party – AS-18… d. Key Management Personnel (KMP) and relatives of KMP; and e. Enterprises over which any person described in (c) and (d) above is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the enterprise or enterprises that have common KMP.

Related Party – AS-18… Control under AS – 18 means: Ownership directly or indirectly, more than ½ of the voting power, or Control of the Composition of the Board of Directors, or

Related Party – AS-18… Substantial Interest in voting power and the power to direct, by statute or agreement, the financial and/or operating policies of the company. “Substantial Interest” means owning, directly or indirectly, 20% or more interest in the voting power of the other enterprise.

Related Party – AS-18… Significant Influence under AS-18 means: Participation in the financial and/or operating policy decisions of an enterprise, but not control of those policies; or Example: Representation on the Board Participation in the policy making process Material inter Company transactions

Related Party – AS-18 Interchange of managerial personnel Dependence on technical information Shareholding directly or indirectly, through subsidiaries, 20% or more voting power; or Influence by Statute or Agreements.

Related Party Transactions (RPT)… RPT as per Clause 49 Transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged. Transaction to include single transaction or a group of transactions in a contract.

Related Party Transactions (RPT)… Exception transactions entered into between two government companies; transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

Related Party Transactions (RPT)… Exception u/s 188 Transaction entered into in Ordinary course of business and on arm’s length basis Arm’s Length basis A transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

Related Party Transactions (RPT) RPT as per AS-18 Transfer of resources or obligations between a company and a related party, regardless of whether a price is charged.

Directors vis-a-vis RPT

Directors vis-à-vis RPT… Members of the Board and key executives to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the company.

Directors vis-à-vis RPT… Monitor and manage potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

Directors vis-à-vis RPT… Duties of Independent Director - Code for ID’s Pay sufficient attention; Ensure that adequate deliberations are held before approving related party transactions; and Assure themselves that the same are in the interest of the company.

Directors vis-à-vis RPT… Duties of Interested Director Not to be present at the meeting during discussions; Abstain from voting in the General Meeting

Directors vis-à-vis RPT Disqualification of a Director – U/s 164(1)(g) Convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years. Vacation of Office

Audit Committee, Board and Shareholders vis-à-vis Related Party Transactions (RPT)

Audit Committee vis-à-vis RPT… Composition 2/3rd members Independent Directors Role include: To review with the management, the annual financial statements and auditor's report thereon before submission to the board for approval, with particular reference to disclosure of any related party transactions

Audit Committee vis-à-vis RPT… Mandatory Review: Statement of significant related party transactions (as defined by the Audit Committee), submitted by management;

Audit Committee vis-à-vis RPT… Approve Original or any subsequent modification of related party transactions. Prior approval of all RPTs;

Audit Committee vis-à-vis RPT… Omnibus approval for proposed RPTs subject to the following : Criteria laid down by AC; Criteria in line with the RPT Policy; Applicable in respect of Repetitive RPTs only.

Audit Committee vis-à-vis RPT… AC to satisfy itself that the omnibus approval is needed and in the interest of the company Omnibus approval shall specify the name/s of the related party, nature and period of transaction, maximum amount of transaction that can be entered into,

Audit Committee vis-à-vis RPT… the indicative base price/current contracted price and the formula for variation in the price, if any; and such other conditions as the Audit Committee may deem fit;

Audit Committee vis-à-vis RPT… Exception Omnibus approval for transactions where the need for RPT cannot be foreseen and aforesaid details are not available subject to the value not exceeding Rs.1 crore per transaction.

Audit Committee vis-à-vis RPT Review on RPTs – Details at least on a quarterly basis. Validity of Omnibus approvals - Not exceeding one year and fresh approvals after the expiry.

Board vis-à-vis RPT Companies Act, 2013: All transactions to be approved at meeting except exempted or requiring approval of shareholder Clause 49 silent Formulate policy on materiality of RPTs and dealing with RPTs

Shareholders vis-à-vis RPT… Section 188 and Rules Prior approval – In the form of Special Resolution All Companies - irrespective of its Paid up share capital

Shareholders vis-à-vis RPT… Value of Transactions : Goods and Materials - Exceeds 10% of the annual turnover or Rs. 100 crores (lower) Property – exceeds 10% of the Net worth or Rs. 100 crores (lower) Leasing of Property - exceeding 10% of the net worth or 10% of the Turnover or Rs. 100 crores (lower) Services - exceeding 10% of Turnover or Rs. 50 crores (lower)

Shareholders vis-à-vis RPT… Appointment to any office or place of profit in C/S/A Company – Monthly Remuneration exceeding Rs. 2.5 lac Remuneration for underwriting - exceeding 1% of the Net worth

Shareholders vis-à-vis RPT… Any member who is a related party for said transaction– Not to vote on Special Resolution Special Resolution passed by the holding company shall be sufficient for transactions with its wholly owned subsidiary

Shareholders vis-à-vis RPT… By Shareholders as per Clause 49 All Material RPT to be approved through Special Resolution. All Related Parties shall abstain from voting

Shareholders vis-à-vis RPT Material RPT: Transaction individually or together with previous transactions during a financial year exceeds 10% of the annual consolidated turnover of the company as per the last audited financial statements of the company.

Disclosures

Disclosure of RPT... Disclosure as per Clause 49 Stock Exchanges All material transactions on quarterly basis alongwith the Compliance Report on Corporate Governance

Disclosure of RPT Website Policy on dealing with RPT Annual Report Web link of the RPT Policy

Penal consequences for non-compliance For any Director or employee involved in contravention, penalty would be For Listed Company: Imprisonment, which may extend up to one year; or Fine, ranging between Rs 25,000 and Rs 500,000; or Both For others: Fine ranging between Rs 25,000 and Rs 500,000

Practical Challenges… Identification of Related parties – lack of timely information Transactions to be covered – Some typical transactions Transactions Working Capital Loan Lease Rent Recovery On Behalf of RPT Warranty Charges

Practical Challenges… Freight Charges Debit On account of Advertisement Exp. Die Maintenance charges Segregation Charges Component Sales Capital Assets sent on OSP basis

Practical Challenges… Services/obligations provided but not documented Common use of facilities Lack of knowledge at operating level Large number of departments/ individuals involved in transactions Inadequate monitoring systems

Practical Challenges… Business exigencies Very large number of transactions Arm’s length pricing/ Terms – Expertise to analyse Pressures Priorities of non secretarial departments

Practical Challenges Tough scrutiny by Audit Committee & Independent Directors Shareholder’s activism

Thank you