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Related Party Transactions

Fri, 30 May 2025 06:46:27 +0000

RELATED PARTY TRANSACTIONS: CORPORATE GOVERNANCE AT THE CROSSROADS

INTRODUCTION:

A company often engages in transactions with its related parties, including subsidiary and associate companies. These related party relationships are a common feature of business. However, due to the nature of these relationships, transactions between related parties may not be conducted on the same terms as those with unrelated parties. For instance, a company might sell goods to a related party at cost, a practice it wouldn’t extend to other customers. Such preferential treatment, whether in pricing, credit terms, or other conditions, can impact the company’s financial position and performance. To ensure fairness and transparency, the law mandates detailed compliance and disclosure requirements for transactions with related parties.

Effective corporate governance plays a critical role in ensuring these transactions are conducted transparently, fairly, and without bias, thereby preserving the trust of shareholders and stakeholders alike. However, when mismanaged or misused, RPTs can undermine the integrity of a company, erode shareholder value, and lead to serious ethical dilemmas. In this article, we explore the key provisions that private companies and unlisted public companies must follow to ensure proper handling of related party transactions.

LET’S UNDERSTAND WHAT IS RELATED PARTY WITH EXAMPLES:

As per Section 2(76) of the Companies Act, 2013, related party, with reference to a KPC Builders Private Limited (Company), means -

SR.NO.	RELATED PARTIES	EXAMPLE
1.	A director or his relative	Mr. Amar and Mr. Dinesh are directors and the relatives of these Directors are considered as related parties.
2.	A key managerial personnel or his relative	Mr.Rohit is a Company secretary, his relatives will be considered related parties
3.	A firm, in which a director, manager or his relative is a partner	Mr. Amar is a partner at Legal Advisors LLP, another firm. This firm will also be considered as a related party.
4.	A private company in which a director or manager [or his relative] is a member or director	Mr. Dinesh is a director in Shreeom Pvt. Ltd. – In this case Shreeom Pvt. Ltd. becomes a related party. Even when Mr. Dinesh’s relative is a member or director in Shreeom Pvt. Ltd., this company will be considered as a related party.
5.	A public company in which a director or manager [and holds] is a director or holds along with his relatives, more than two per cent. of its paid-up share capital	Mr. Amar along with his relatives holds more than 2% of the paid-up capital of Finserv ltd. In this case, Finserv Ltd will be considered as a related party.
6.	Any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager	When Finserv Ltd acts on the directions of Mr. Dinesh, Finserv Ltd will be a related party.
7.	any person on whose advice, directions or instructions a director or manager is accustomed to act	Mr.Omkar holding 51% in KPC Builders Private Limited on whose advice Mr. Amar has to act will be considered as a related party.
8.	(A) holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary; (C) an investing company or the venturer of the company

Not every transaction with a related party qualifies as a "related party transaction," although every "related party transaction" involves a related party. Such transactions are not inherently harmful. The concern arises when there is abuse due to conflicts of interest or non-arm's length dealings, which benefit the related party at the expense of other stakeholders. Issues like siphoning of funds and diversion of company resources also raise alarms. Therefore, transparency in related party transactions is crucial to ensure fairness and protect the interests of all stakeholders.

KEY LEGISLATIONS GOVERNING RELATED PARTY TRANSACTIONS:

WHAT IS THE MEANING OF RELATED PARTY TRANSACTIONS?

As per Section 188 of the Companies Act, 2013, the consent of the Board of Directors is required through a resolution passed at a Board meeting to enter into any contract or arrangement with a related party concerning the following Related Party Transactions –

Sale, purchase or supply or any goods or materials

Selling, buying property of any kind

Leasing of property of any kind

Availing or rendering of any services

Appointment of agent for purchase or sale of goods, materials, services or property

Appointment to any office or place of profit in the Company/Associate/Subsidiary Company

Underwriting of securities

Provided also that nothing in this section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.

WHETHER SHAREHOLDERS APPROVAL REQUIRED OR NOT?

Whenever a material Related Party Transaction (RPT) is to be entered into by the company, it must be approved by the shareholders through an ordinary resolution. Therefore, understanding what constitutes materiality is essential.

SR	TYPE OF TRANSACTION	MATERIAL LIMIT
1.	sale, purchase or supply of any goods or materials directly or through appointment of agents	10% or more of the annual turnover
2.	selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents	10% or more of net worth
3.	leasing of property of any kind	10% or more of the turnover
4.	availing or rendering of any services directly or through appointment of agents	10% or more of the turnover
5.	appointment to any place of profit in the company, its subsidiary or associate company at a monthly remuneration	Monthly remuneration Exceeding Rs. 2.5 lakhs
6.	remuneration for underwriting the subscription of any securities or derivatives thereof of the company	Remuneration exceeding 1% of the net worth

The limits specified in clause (1) to (4) shall apply for transaction or transactions to be entered into either individually or taken together with the previous transactions during a financial year.

What if transaction is between holding company and its wholly owned subsidiary?

In case of wholly owned subsidiary, the resolution is passed by the holding company shall be sufficient for the purpose of entering into the transaction between the wholly owned subsidiary and the holding company.

APPROVAL PROCEDURE UNDER COMPANIES ACT:

*Audit Committee is applicable as per Section 177 under Companies Act, 2013.

Key Governance Practices That Require Attention:

Related Party not entitled to vote on Members’ Resolution
If 90% of members are either related parties or relatives of Promoters, RPs can vote on Resolution.
Audit Committee approval not necessary for Section 188 transactions between a Holding Company and its WOS.
Shareholders resolution not necessary for 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.

Here is a recent case of governance threat related to a Related Party Transaction that occurred in India:

Blusmart Mobility Private Limited and Gensol Engineering Limited

Case in Brief:

Anmol Singh Jaggi, co-founder of Blusmart Mobility, also leads Gensol Engineering Ltd., a listed company. Gensol, a 12-year-old company, is closely linked to Blusmart, raising concerns about potential conflicts of interest and financial risks due to their intertwined operations. Blusmart’s fleet of 6,000 vehicles is largely leased from Gensol, accounting for over half of Gensol's assets under management in leasing. The preferential leasing terms give Blusmart a cost advantage over other customers, potentially disadvantaging Gensol’s minority shareholders. Despite claiming that the transactions were at "arm's length," Gensol did not seek shareholder approval or disclose the terms of these deals, raising concerns about transparency and fairness. This dual involvement could become costly for both companies as SEBI could soon launch a probe into alleged improprieties in related-party transactions of Gensol Engineering.

Possible Threat To Governance As Following Practices Are Observed:

i.Preferential Pricing: Undermines fair competition, benefiting insiders at the expense of the company’s financial health and shareholder interests.

ii.Undisclosed or Under-Disclosed Terms: Lack of transparency prevents informed decision-making, raising concerns about hidden conflicts of interest and potential financial manipulation.

iii.Profit Shifting: Distorts financial performance and undermines accurate reporting, creating risks related to tax avoidance and regulatory scrutiny.

iv.Asset Stripping: Depletes company resources, weakening financial stability and long-term value, while putting shareholders and employees at risk.

v.Over-Inflated Compensation: Mis-allocates company resources, reduces shareholder value, and damages trust by rewarding insiders without merit.

CONCLUSION:

Related party transactions, though essential in business, present significant governance challenges when not properly managed. The potential for conflicts of interest, lack of transparency, and unethical practices can compromise a company's financial integrity and harm shareholder interests. Ultimately, fostering a culture of accountability and transparency is key to maintaining trust and ensuring long-term sustainability in business practices. The risks highlighted by these issues call for stricter adherence to regulatory frameworks and ethical standards to safeguard all stakeholders.

Hemangi Mazire | Team Compliance

RBKRS & Associates LLP

Connect to Hemangi on Linked in - https://www.linkedin.com/in/hemangi-mazire-888762285/

Trumps Tariffs – How It May Affect India And The Global Economy

Sat, 19 Apr 2025 09:04:15 +0000

Trumps Tariffs – How It May Affect India And The Global Economy

US President Donald Trump has announced a “Reciprocal Tariff Policy” on goods imported from other countries. Over 180 countries, including key trade partners of US like India, China, Vietnam and EU are now going to face these new tariffs. This move of Trumps has sparked the fear of a global recession, Trade war, supply chain disruption and economic slowdown. India may faces Challenges in various sectors due to these tariffs but may also gain certain competitive advantages due to higher tariffs on the major competitors.

Tariff – What is it?

Tariffs are the taxes levied on goods imported into a country. In simple words, it’s a tax imposed by the government on imported goods.

Example: India is one of the largest exporters of jewelry. Let’s say there is a piece of jewelry that costs $1,000 when made in India. Now, if the US government imposes a 26% tariff on this piece of jewelry, the final cost for consumers in the US would be $1,260. Tariffs are used by most governments as an economic tool to increase the prices of imported products, thereby encouraging people to buy locally made goods instead.

US President Donald Trump Announces Reciprocal Tariffs

On April 2nd, Trump announced reciprocal tariffs on other countries. This policy includes a 10% baseline tariff that will be imposed on all goods imported into the US. In addition, a discounted reciprocal tariff will be imposed, which is set at half the rate other countries charge on US products. The rate of the tariff imposed by the US will be based on the tariffs those nations impose on American goods. India faces a 26% tariff, which is higher than the tariffs on the EU (20%), Japan (24%), and South Korea (25%).Tariffs on China have increased to 145% in total, Vietnam to 46%, Cambodia to 49%, and Taiwan to 32%.More than 180 countries are affected by these reciprocal tariff.

Recently Donald Trump has announced a 90-day pause on these tariffs except for China whose tariffs are raised to 245% and all the Countries who didn’t retaliated against US tariffs will only face blanket tariff of 10% until July.

How It May Affect the World?

Risk of Global Recession
According to an American Multinational Investment Bank and Financial service provider, Goldman Sachsa recession is more likely due to the US government's tariff policy. They estimate a 45% chance of a recession in the next 12 months. One more leading American Multinational Financial Services firm, J.P. Morgan raised its forecast for a global recession by the end of the year from 40% to 60%. According to various Economists this policy would have a direct impact on households and businesses and could disrupt global supply chains. Imposing tariffs on all imports will increase costs for US businesses, leading to higher prices for US consumers. This could push the US into a recession, which may also impact other countries. “It will be difficult for the US to avoid a recession if the tariffs stay at the level that’s been announced,” said Claudia Sahm, chief economist at New Century Advisors, in a recent statement to TIME.

Tariff War/ Trade War

This move by Trump’s administration may trigger a trade or tariff war, which already appears to be unfolding between the US and China. In retaliation to US tariffs, China initially imposed a 34% tariff, which has now been increased to 84%. Canada has retaliated by imposing a 25% tariff on some US-made vehicles. EU member states have also voted to approve retaliatory tariffs on US goods.

Economic Slowdown in Export-Driven Countries
Countries like Canada, Mexico, Vietnam, South Korea, and others whose major export incomes come from the US may suffer economic slowdowns. For countries like Vietnam, Bangladesh, and Cambodia, losing even a small share of the market could be painful and may severely impact their economies. Vietnam, for example, manufactures almost 50% of Nike footwear. Due to tariffs, it may lose 40% of its total goods exports.

Increase in Global Inflation
Inflation is very likely to rise because of the tariffs. The policy increases the cost of imported consumer goods and raw materials used by businesses, leading to price hikes for the end consumer. Higher import costs will lead to increased inflation and reduced purchasing power. Federal Reserve Chair Jerome Powell said: “We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation. While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.”

Financial Market Volatility
Due to global uncertainty, volatility has surged in financial markets. The S&P 500 has plunged 20% from its recent peak, wiping out trillions in market value. The Dow Jones and NASDAQ have declined significantly. On April 7, Indian indices such as Sensex and Nifty experienced a steep fall. The Trump’s Tariff policy has introduced a wave of uncertainty, leading to increased market volatility, reduced investor appetite and a high risk across the global and Indian financial Market.

Impact of Trump’s Tariffs on India

Almost 18% of India’s exports go to the United States, where India currently enjoys a trade surplus of $36 billion (in FY 2023–24) and so India is likely to feel the heat of the Trump’s policy. Higher Tariff on the Indian exports could reduce the trade volume and impact the revenues in few sectors. While some sectors may see a short term set back, India could also find opportunities as competing nation faces steeper tariff.

Sectors Likely to Be Affected in India

Electronics Exports
The US imports nearly $14 billion worth of electronics from India. This sector is expected to be hit hard, as it previously paid only 0.41% in tariffs. The new tariff hikes could reduce exports to the US by 12% if the situation does not improve. More than 50% of India’s electronic exports consist of mobile phones, particularly Apple and Samsung devices assembled in India. This sector may see a decline in exports to the US. States like Tamil Nadu and Karnataka, which are major hubs for electronics manufacturing, are likely to be affected.

Gems and Jewelry
The US imports nearly $9 billion worth of gems and jewelry from India, accounting for 40% of India's total exports in this category. Previously, this sector faced a 2.12% tariff. Now, it may experience a 15% decline in exports to the US. India’s diamond sector, which exports over one-third of its production to the US, is likely to be severely affected. States like Gujarat and Maharashtra may see layoffs in the diamond sector. Officials indicate that consultations are ongoing with ministries and export associations to evaluate the consequences.

Agriculture and Seafood
The agricultural sector may remain resilient despite Trump’s reciprocal tariffs. Products like basmati rice, spices, tea, and coffee may see a temporary slowdown in exports, but long-term challenges are unlikely.According to the Global Trade Research Initiative (GTRI), the hardest-hit segments in agriculture would be fish, meat, and processed seafood.

Textiles
Nearly 28% of India’s textile exports go to the US. Despite the tariffs, the textile industry is expected to experience modest growth. According to Shiraz Askari, President of Apollo Fashion International Limited, “It will impact pricing and demand in the short term, but the fundamentals of the industry remain strong. India has built a robust supply chain, a skilled workforce, and strong manufacturing capabilities. Compared to countries like Vietnam and Bangladesh, which now face even higher tariffs, India still has a relative cost advantage.

Pharmaceuticals and Semiconductors
Previously, the Trump administration had exempted pharmaceuticals and semiconductors from the reciprocal tariff policy. However, Trump has now stated that a “major” tariff on pharmaceutical imports will soon be announced to encourage drug manufacturing in the US.The US is India’s largest export market for pharmaceutical goods, with Indian exports totaling $8.7 billion in FY 2024–25. Pharma companies like Dr. Reddy’s, Sun Pharma, and Aurobindo Pharma earn over 30% of their revenue from the US.If tariffs are imposed on this sector, both India and the US will be impacted. The US relies on India for affordable generic medicines, and such tariffs could lead to inflation and higher prices in the pharmaceutical sector.

Semiconductors

This sector remains exempt from Trump’s reciprocal tariffs, at least for now. However, products that use semiconductors—like mobile phones, computer systems, and GPUs—are not exempt. This may raise the cost of end products in which semiconductors are used.

Automotive Sector
The US is the largest importer of automobiles. In 2024, India exported automobile components worth approximately $21.2 billion, with 30% going to the US. Despite the 26% tariff in this sector, India has the potential to perform strongly, as major automotive exporting countries now face even higher tariffs. India can position itself as a competitive alternative by focusing on cost-effective production. Strategic government policies and export incentives can enhance India’s role in the global automotive supply chain.

IT Sector
The US is the largest importer of Indian IT services, making it a key market for Indian tech Companies. The Trump’s Reciprocal Tariff Policy mainly targets on physical goods rather than services. Since the IT sector is primarily service-based, these services are not subject to import tariffs.The Indian IT sector May not Face direct Tariffs but it could still be affected by the global economic slowdown

Will Trump’s Tariffs Create Opportunities for India?

According to a report published by Motilal Oswal, the US reciprocal tariffs will have a minimal impact on India’s GDP. The report estimates that the impact will be only 1.1% of India’s GDP. India’s exports to the US in six key sectors—electrical machinery, gems and jewelry, pharmaceutical products, machinery for nuclear reactors, iron and steel, and seafood—amount to approximately $42.2 billion. This figure represents about 1.1% of India's GDP.

According to Goldman Sachs that India’s economy is likely to remain strong in an uncertain global environment. They expect India’s GDP to grow at an average of 6.5% between 2025 and 2030. Global economists believe that India will still be the fastest-growing economy in the world despite Trump’s tariffs. The 26% tariff on India is relatively low compared to the tariffs imposed on other countries, such as China (increased to 145% in total), Vietnam (46%), and Taiwan (32%). Higher reciprocal tariffs on several Asian economies create an opportunity for India to expand its presence in global trade and manufacturing. Moreover, during a visit by Prime Minister Narendra Modi to the US, India and the US launched “Mission 500” for bilateral trade. Under this ambitious initiative, both nations aim to more than double their total bilateral trade to $500 billion by 2030, according to a release from the Prime Minister's Office.

India’s Plan to Counter the Tariffs

To deal with the impact of the Us Tariff policy India is actively working on strengthening its global trade ties. Union Commerce and Industry Minister Piyush Goyal announced that India expects to conclude the first phase of its bilateral trade agreement (BTA) with the US under Mission 500 by the autumn of 2025. As part of the agreement, both sides will designate senior representatives to negotiate terms, strengthen trade in goods, reduce tariffs and non-tariff barriers, and enhance supply chains. He also mentioned India’s ongoing trade and economic partnership with EFTA countries—Switzerland, Norway, Iceland, and Liechtenstein—and similar negotiations with other countries that could benefit India. Additionally, the Ministry of Commerce and Industry is in continuous talks to enhance trade, investments, and technology transfer between India and its global partners.

Conclusion

In short, while Trumps policy presents risks for India’s exports and global trade stability, it also opens the door for strategic gains by actively engaging in trade negotiations and strengthening its global presence.

-Athoured by Mr. Bhavya Belani, Article Trainee at RBKRS & Associates LLP

Connect to Bhavya on LinkedIn - https://www.linkedin.com/in/bhavya-belani-5b2432258/

SBO and Its Declaration under Companies Act, 2013

Tue, 18 Mar 2025 05:47:03 +0000

Significant Beneficial Ownership and Its Declaration under Companies Act, 2013

A.Introduction

Since its inception, Indian corporate law has undergone various transformations to ensure transparency and accountability. Historically, many entities and individuals have masked their identities to exercise control over Indian companies, often for tax evasion, illicit financial activities and regulatory avoidance. To address these concerns, the concept of Significant Beneficial Ownership (SBO) was introduced under the Companies Act, 2013 (“the Act”). This framework aims to bring corporate transparency and identify individuals who ultimately wield significant influence over a company’s operations.

The SBO rules represent a significant upgrade from India’s earlier corporate regulations, such as the Companies Act, 1956. Previously, determining who truly controlled a company’s shares or influenced its decisions was difficult, creating opportunities for entities to conceal illicit financial activities. As part of global efforts to combat money laundering and tax evasion, the updated rules aim to enhance transparency.

B.What is Significant Beneficial Ownership (SBO) and how to identify?

A significant beneficial owner (SBO) is a person who has a substantial interest or control in a company. This could be through shareholding, voting rights, or other means. Section 90 of the Companies Act read with the Companies (Significant Beneficial Owners) Rules, 2018 (SBO Rules) prescribe twin tests to find an individual who would qualify as Significant Beneficial Owner (SBO) of the reporting company:

·Objective test: 10% shareholding at the reporting company with a mandatory indirect shareholding alongwith possible direct shareholding of the said SBO and majority holding through the ownership chain.

·Subjective test: SBO having the right to exercise or actually exercising “significant influence” or “control” in any manner other than through direct holding alone.

Companies are required to identify such individuals by applying above principle and shall seek declaration from SBO in Form BEN-4.

C.Compliance Requirements for SBO and Companies

Once an SBO is identified, both the individual and the Indian company (“Company”) must comply with the following legal requirements:

D.Impact on Corporate Governance

The introduction of the SBO framework strengthens corporate governance by ensuring that companies disclose their true owners. This measure curtails tax evasion, prevents financial misconduct, and enhances investor confidence by providing greater transparency in business ownership structures.

By enforcing SBO regulations, India aims to align with global best practices in corporate compliance and accountability, fostering a more robust and transparent corporate environment.

DISCLAIMER

This document is not for public circulation and is meant only for intended recipient. It is not exhaustive and does not purport any opinions or suggestions. Any action taken on the basis of this compilation is strictly at your own risk and we shall not be held liable for the same. All right reserved.

Authored by CS. Sanat Chavan of RBKRS & ASSOCIATES LLP

Understanding Basics of POSH

Thu, 23 Jan 2025 13:22:37 +0000

UNDERSTANDING BASICS OF POSH

A. What is POSH?

POSH is an abbreviation used for ‘The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. This Act was promulgated in 2013 and it extends to the whole of India including Jammu and Kashmir.

The Act has been framed with an intent to prevent, prohibit and redress cases of sexual harassment of women at workplaces.

B. Applicability

This Act is applicable to all types of organizations that have 10 or more employees. It is pertinent to note that the definition of organization includes private companies, public companies, LLPs, partnership firms, proprietary firm etc.

Further employees shall include all of the following categories:

· Full Time

· Part time

· Contractual

· Cleaning Staff

· Interns

Thus, if the organization has 10 or more employees from all or any of the above categories, provisions of POSH shall be applicable. Additionally, it is to be observed that the term “employee” defined under the Act, is gender neutral that means that even in case the company has all 10 male employees the provisions of this Act shall be applicable to this organization.

C. What are the Compliances?

Three major things are required to be ensured by an organization to which this Act is applicable:

1. Implementation of a POSH policy

2. Constitution of a POSH committee

3. Filing of Annual Return

1. Implementation of a POSH Policy

The organization must have a clearly defined policy that should be communicated to its employees. The policy shall encompass the instances that would be treated as ‘sexual harassment’, the modus operandi of filing a complaint, the manner of investigation to be carried out by the POSH committee and the decisions to be taken is cases of sexual harassment. Further, the organization has to ensure that each year it arranges for training session of its employees for sensitizing them towards this issue and also to train the members of the POSH committee. This training is generally conducted by an expert professional on POSH matters.

2. Constitution of POSH committee

The POSH committee shall have atleast 4 members as follows:

· A senior most female employee of the organization who has reasonable knowledge on these matters. She shall be appointed as the presiding officer of the Committee.

· Any 2 other employee members who have reasonable knowledge on this matter. (These could be male members)

· 1 external expert member. This could be an advocate, a CS, or any other professional who has sufficient legal knowledge and background. Also an NGO worker working in matters relating to women is eligible.

At least 50% of the members of POSH committee shall be WOMEN. Please note that where there are no Women working in the organization, this compliance is required to be dealt on case to case basis and expert opinion is required.

3. Filing of Annual Return

POSH law recognizes calendar year and not financial year. Thus after the year end every organization is required to submit a detailed annual return to the district officer. The due date for this is 31^st January, each year.

D. Consequences of non – compliance

Non compliance of any of the provisions of POSH law may attract a penalty upto INR 50,000/-

E. Conclusion

It is advisable to every organization to take due regards of compliances under POSH Act and to ensure its timely compliances because it deals with such a sensitive issue. More so, POSH has its genesis in the Indian Constitution and accordingly sexual harassment of a woman is considered as a violation of her fundamental rights of equality and right to life. Furthermore, vide amendment in the Companies Act, 2013 every Company is now mandatorily required to disclose in its Board Report whether it has complied with the provisions of POSH law or not. Failure to do so shall be constituted as a default under the Companies Act and shall be punishable.

Disclaimer: This article is only for knowledge purpose and do not pertain to soliciting the professional work. Reader’s discretion is sought to act upon the article. The author is not responsible for unauthorized use of the information contained herein.

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Understanding Nidhi as Business Model

Sat, 11 Mar 2023 16:16:25 +0000

Article - 1

It is the outcome of efforts taken by Sabanayagam Committee in the year 2000 under the Chairmanship of Shri. P. Sabanayagam, Former Union Secretary, Chief Secretary, State of Tamilnadu and the Expert Group in the year 2002 that established a need to induct a concept of structured Nidhi or Mutual Benefit Company as Limited Company under Companies Act. In fact, the concept of Mutual Benefit was well known in businessmen for a long time. We can look back history to witness that there existed large groups aggregating their individual contribution to be utilized for lending to needy member of the same group.

By definition, Nidhi means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit, and which complies with the rules made by the Central Government for regulation of such class of companies. Nidhi Companies are also known by the name of Mutual Benefit Companies, Mutual Nidhi Companies.

Coverage of Provisions

Sub-Section (1) of Section 406 of Companies Act 2013 (Erstwhile Section 620A (1) of Companies Act, 1956) covers the provisions for Nidhi Companies. The practical aspects of Nidhi company are covered by Nidhi Rules, 2014. During last few years, Ministry experienced stiff upward growth in the number of Nidhi companies. Hence, there was a need to observe possible reforms in existing rules. Recently, the rules are amended by Nidhi (Amendment) Rules, 2019 w.e.f. 15^th August 2019 and further by Nidhi (Amendment) Rules, 2022 w.e.f. 19^th April 2022. The new amendments introduced the new concepts like NDH-4, Fit & Proper Person, NDH-5, etc.

Nidhi Companies are registered with an intention to work exclusively for the members. Here member means Shareholder. The basic object of forming Nidhi company is to inculcate a sense of savings among its members. To achieve this, Nidhi Companies are allowed to provide various Deposit Account services to its members. The members can open Savings Deposit Accounts, Recurring Deposit Accounts, and Fixed Deposit accounts in Nidhi Company. Nidhi companies can utilise the collected funds for extending secured loans of small ticket size to its members only. In this way, the concept of “By the Members, For the Members” is achieved. This concept is, perhaps, a backbone of Mutual Benefit structure of Nidhi.

Legal Status of Nidhi Companies

Nidhi companies are registered as Public Limited Company. Although there is no need to obtain a Certificate of Registration from RBI, Nidhis are known to be Non-Banking Finance Company that does not require registration with RBI. The regulator of Nidhi Companies is the Ministry of Corporate Affairs.

However, the RBI may issue such directions for regulating Nidhi Companies as it deems fit. Nidhi companies can work like a banking institution by allowing members to open various deposit accounts and also extending loans. However, the basic structure of Nidhi does not require any licensing, it runs as unregulated Non-Banking Finance Company.

Five Basic Principles of Nidhi Company

The structure of Nidhi Company and its business concepts are covered in Nidhi Rules. There are almost 27 Rules framed for the operation of Nidhi Company. Among all, there are five basic principles of running a Nidhi Company. The operational aspect of Nidhi company can be understood with this basic principles.

1. Net Owned Funds – Nidhi company should bring a positive Net Owned Fund of Rs. 20,00,000 before filing NDH-4. Net Owned Funds is an aggregate of paid up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance sheet. The NOF is the dynamic amount to be always maintained by Nidhi Company since NOF has a direct co-relation with the amount of deposits the company can accept. As per recent amendment, the NOF requirement has been raised from previous limit of Rs. 10,00,000 to revised Rs. 20,00,000. Further, it is now required to bring the NOF within 120 days of incorporation and before filing NDH-4 Declaration.

2. Minimum number of Members – Nidhi Company is required to increase number of members to a minimum of 200 before filing Declaration in NDH-4 (Precisely within 120 days from the date of incorporation). Every deposit holder shall hold at least 10 equity shares or shares with nominal value of Rs. 100. The number of members shall not fall below 200 at any point of time.

3. Ratio of NOF to Deposit – How much deposits a Nidhi Company can accept depends upon the NOF. The total deposits of Nidhi Company shall not be more than 20 times of its NOF. In other words, the NOF should always be at least 5 percent of the total deposits. The Company is not allowed to accept further deposits if this ratio falls below 1 : 20. For this purpose, the NOF as per last audited financials should be considered.

4. Unencumbered Term Deposits – Every Nidhi company shall maintain a Deposit of at least 10 percent of its total deposits (outstanding as on the last working day of preceding 2 months) with a Nationalised Bank / Scheduled Commercial Bank / Post Office. The Unencumbered Term Deposits cannot be withdrawn without the permission of Regional Director. The amount of 10% shall be kept in the nature of Fixed Deposit.

Declaration of Nidhi in eForm NDH-4 – Every Nidhi Company (if incorporated on or after 15^th August 2019) shall declare itself as Nidhi in eForm NDH-4 within a period of 14 months (One year of incorporation + 60 days) from the date of its incorporation. For those Nidhi companies formed on or after 19^th April 2022 shall file declaration in eForm NDH-4 within a period of 120 days from the date of its formation and such Nidhi companies are not allowed to commence the business operations unless the eForm NDH-4 is approved. The Ministry of Corporate Affairs will notify the names of such Nidhi Companies whose eForm NDH-4 is approved. This is crucial compliance and currently, not a single company in India has received approval of NDH-4.

Restrictions for Nidhi Company

Nidhi Companies are established for the members only. They work in close environment for the financial betterment of their members. Hence, the Rules have provided for certain restrictions for operations of Nidhi Company –

i. Nidhi Company shall not commence its business operations unless the NDH-4 form is approved by MCA.

ii. Nidhi Company cannot open branches for the first 3 years of its formation subject to sustained profitability for all 3 years.

iii. Nidhi companies cannot give unsecured loans. Only secured loans against specific security types are provided in the Rules.

iv. Nidhi Company cannot issue partly paid shares. No preference shares are allowed for nidhi company.

v. The maximum rate that Nidhi can offer to its depositors is around 12.5% (the maximum rate NBFCs are allowed to offer as per RBI norms).

vi. The maximum loan that Nidhi can offer is Rs. 2,00,000 to any person at any time. It organically increases with increase in the Deposits.

vii. The loans can be given at the rate of interest which cannot exceed more than 7.5% of the maximum rate of interest paid to depositors.

viii. There are a few more general restrictions on the business operation side.

A Nidhi company is the finest business model for a small group of people coming together to achieve mutual financial growth. It is, indeed, only financial company that does not need RBI licensing and can be operated with minimum investment. The only format where company is allowed to operate savings and deposit accounts.

….. to be continued

Regards,

Raghvendra Kulkarni | 9850432434

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Basics of Management Dispute Resolution

Thu, 16 Feb 2023 10:35:56 +0000

If you were to Google ‘what is management dispute?’ the search result verbatim would be:

“Management Dispute means any matter which, after having been duly presented for approval of the Partners, is not approved by a Required Interest, but which receives the affirmative vote of a Majority Interest.”

To some extent, I defer to the above explanation. It would be incorrect to treat mere difference in opinions or arguments as management dispute. That in fact is the part and parcel of decision making process. I believe that ‘management dispute’ could be best explained as a cold war situation. It could also synonymously be referred to as a ‘management deadlock’ situation which is inflated to an extent beyond mutual resolution. It could either be backed by a series of events that have resulted in interrupting the operations of the organization, or could be a single event jolting the operations.

In a couple of months I would be completing half a decade in this profession and in my modest experience so far, I could say that these disputes could be put in the following two broad categories:

I) Issues driven by personal vengeance /ego clashes

II) Fraudulent practices/malpractices resulting in breach of trust

The manner of tackling each of these categories would be different. Further, it is not that the disputes arise only when the management team has outsiders (not relatives). I have handled disputes between close knit teams and trust me when I say this, that they are the tough ones to crack because the personal differences have an impending bearing upon business matters and they become interdependent.

Now a natural instinct that may trigger here, is to ensure that the initial business arrangement should be drafted in a manner so as to secure any prospective deadlock. Though this cannot be ruled out completely, however certain measures, like the ones stated below can definitely be taken care of in order to keep deadlock situations at bay:

1) Control in terms of management and / or voting power should not be equally divided

2) There must be a clear definition of powers and responsibilities with minimum or zero overlap and a defined transparent process for its execution.

3) There should not be any concentration of powers w.r.t. business operations, although some leverage may be given to ensure smooth operations.

The above in spite of being vanilla in nature, are the biggest game changers when the dispute arises. However these measures may not be definitive to grant immunity, as each business arrangement is unique. Thus the effectiveness and the extent to which these could be implemented as a shield, could vary. Once it has been identified that the management has been divided owing to a dispute, its resolution becomes apparent. The following is a basic guide in this regards:

1) Recap:

Understanding all the facts in a correct manner is the first step in handling such cases. Hit restart and with a fresh mindset, list down all the events in chronology. The chronology of events is as important as the events themselves. Make notes, gather necessary documents and steer clear of developing any prejudices or framing opinions at this stage.

2) Stay Neutral:

Any preset prejudices would only defeat the resolution process. Thus, before any actions are taken, it is always advised to stay neutral and revisit all the events at a macro level. This facilitates better understanding of the trigger points of any dispute and the effective measures for its resolution.

3) Forensic Audit:

The incidences narrated should be corroborated by relevant documents. Apart from this, it is equally important to study the entire case again, this time based on the documents - financial and otherwise. The understanding as derived in point 1 should somewhere be a close match to the findings of the forensic audit. Should this not be achieved, the genuineness of the case could become a concern. This groundwork should be indispensable.

4) Designing tactics:

Before setting out any strategy, it is crucial to identify the desired goal. Further, the legal provisions should also be studied meticulously. A comprehensive course of action is then advised to be chalked out, anticipating the reflexes of the opposite party. There should be a thorough analysis of all the possible outcomes of your action plan so as to check if the same is in line with the desired goals. A back up plan should also be prepared at this stage focusing the ‘worst case scenarios’.

5) Act

In case of dispute resolution cases, it can often be seen that the action plan so devised cannot be implemented in the exact manner. Certain deviations or improvisations become necessary due to the manner in which events unfold. However, there must be a conscious effort to regulate the actions so as to certify that the adopted course is not in contradiction to the desired goals.

Whether you are a party to the dispute or a consultant, the biggest challenge in dispute resolution is to avoid being biased and jumping to conclusions. Management Dispute resolution is more focused on driving the energy towards resolving the dispute rather than passing a judgement as to what is ‘right and wrong’.

Ravina Shah | Partner | RBKRS & Associates LLP

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CARBON CREDIT- AN ASSET, NOT A LIABILITY

Wed, 15 Feb 2023 07:14:52 +0000

CARBON CREDIT- AN ASSET, NOT A LIABILITY

The looming environmental impact of massive industrialization has been a concern worldwide and it’s amplified instances cannot be neglected. Countries across the world have been taking cognizance, including India, which has been actively inclined towards mitigating the environmental adversities. Recently, the Government of India has taken measures towards introduction of a domestic carbon market. The Bureau of Energy Efficiency (BEE), India, presented a draft blueprint for the phased introduction of a national Cap-and-Trade system in India, providing for the introduction of a voluntary market in the first phase. Further an Amendment Bill to the Energy Conservation Act, 2001 has been adopted by the Lower House of the Parliament (Lok Sabha) which provides the legal basis for the establishment of a voluntary carbon credit trading scheme. The Bill would soon be presented before the Rajya Sabha.

The concept of ‘carbon credit’ or ‘certified emissions reduction (CER) credits’ have emerged since the advent of Kyoto Protocol and the same has been gaining momentum. The proposal to introduce a domestic market is going to incentivize Indian companies to adopt eco-friendly industrial processes and would eventually help the country in limiting its Green House Gas (GHG) emissions.

UNDERSTANDING THE BASICS:

1) What is ‘carbon credit’ or ‘certified emissions reduction (CER) credit’?

‘Carbon credit’ or CER is a certificate awarded for reduction in emission of Green House Gases.

1 credit=" 1" ton of GHG

These are issued either by the government or any agency authorized by the government. Alternatively they can also be bought from the voluntary market.

2) What is the mechanism of carbon credit?

The emissions from industries have a ceiling limit assigned by the government, the companies are thus expected to adopt processes so as to limit the emissions within the cap and if not, they can purchase carbon credits in proportion to the excessive emissions. On the other hand, companies are also awarded carbon credits if they establish that they have adopted measures in their industrial process that have resulted in reduction of overall GHG emissions.

3) What is ‘cap - and – trade’ system?

It is a system in which the upper limit of emissions from an industry or group is set (cap). Thus the company must either abide by that ceiling limit, and if not , enhance its limit by additional purchase of carbon credits (trade). This system incentivizes the companies to reduce the emissions, thereby allowing them to monetize their unutilized credits if desired.

4) What is meant by carbon offset?

Carbon offset means the reduction of emission of carbon dioxide or other GHG as a compensation towards the emission made otherwise, thereby neutralizing the carbon footprint. The most generic and cost effective form of offsetting is reforestation, as trees are the biggest contributors in absorbing the atmospheric carbon dioxide.

5) What is meant by retiring carbon credit?

Retiring a carbon credit means when it is purchased it is taken off the market and would never be traded or swapped again. This way only the purchaser can claim ownership of reducing the emission and will then not be able to resell this in the voluntary market.

6) Does buying carbon credits or offsets constitute valid CSR expenditure u/s 135 of the Companies Act, 2013?

The law as on date, does not have explicit provisions in this regards, which makes it a matter of judgement. Carbon credits, as seen above can be purchased for various reasons i.e. in order to comply with emission guidelines or merely as an investment/ tradable commodity.

Activities conducted with an aim to improve and sustain the environment, unambiguously constitute eligible CSR activities as per Schedule VII of the Act, however the intent with which those activities are conducted should be the testifying parameter along with others, to qualify or disqualify it as CSR expenditure.

In my opinion, buying Carbon credits due to the exhausted emission limit may not qualify as a CSR expenditure. However, in case where a credit is purchased merely as an investment and is thereafter immediately retired, or a carbon offset purchased otherwise than to meet some legal obligation, could qualify, other requisite parameters being met. This being a subjective matter, framing a generic opinion would be critical.

Some critics and environmentalist negate the concept of carbon credits, addressing them as an illusion. The fraudulent practices in the past, of various corporates w.r.t. carbon trading leads to introspection. However, in this fast paced world, industrialization is inevitable, thus any actions to either compensate for its adverse impact or to curb, if not stop its adversities, would be welcomed, provided the spirit behind these actions is intact . With the increasing global warming, limiting the footprint is a challenge for each country. Environmentally sustainable practices are being adopted globally. Statistics witness how various Indian corporates have already profited considerably in the past by selling their carbon credits. The increasing environmental awareness amongst corporates in India would give them an edge in the market allowing them to monetize as required. Thus, ‘carbon credit’ though a scientific term, has much relevance in strategic decision making.

In the light of this, a domestic market would indeed provide a platform for competitive trading, but the social obligation of retaining the true spirit behind this initiative is conferred amongst each of its participants. The ultimate beneficiary should be the environment!

Ravina Shah | Partner | RBKRS & Associates LLP

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THE DYNAMICS OF CHANGING CSR LAWS

Tue, 14 Feb 2023 12:54:18 +0000

The Ministry of Corporate Affairs has been making constant endeavors to inculcate a sense of social responsibility amongst the corporates across the nation. There still is a long way to go as the report of FY 2021 shows that approximately 34% of the eligible companies either failed to meet their CSR obligation in full, or in part. The CSR provisions contained in the Companies Act, 2013 have been based on the principle of “comply or clarify” until recently, when non- compliance of CSR provisions have been notified as a civil wrong w.e.f. 22^nd January, 2021. There has been a paradigm shift in the CSR laws since its introduction, with an aim to improve accountability, reporting patterns and not to forget a self-instilled sense of social responsibility. The latest “Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022 have also been notified on same lines w.e.f. 20^th September, 2022. I am attempting to explain the amended provisions of the above mentioned Rules, its implication and opinion thereof:

1. Modified Exception w.r.t. constitution of CSR committee

The requirement for constituting CSR committee was relaxed for companies whose CSR obligation did not exceed INR 50,00,000/-. However, there has been an exception made vide the recent amendment which states that incase, if the company has any amount lying in the ‘Unspent Corporate Social Responsibility Account’ w.r.t. any ongoing CSR project, then it is required to have a CSR committee.

Eg: Company A’s CSR obligation for FY 2022-23 is INR 49,00,000/-. It has been decided to undertake a project that would be completed in a span of 2.5 years. The outlay of each FY has been planned to commensurate with the CSR obligation of each FY. In this case, if the company fails to spend INR 49,00,000/- till 31^st March, 2022 then in spite of its obligation being less than INR 50,00,000/- it will not be able to dissolve its CSR committee.

In my opinion this revised exception was necessary so as to ensure proper implementation and execution, in case of ongoing CSR projects. A separate committee would result in better full time attention and control over the same as compared to Board, which already has various other duties.

2. REVISED EXEMPTION CRITERIA FOR S.135

Sub Rule 2 of Rule 3 is:

Every company which ceases to be a company covered under subsection (1) of section 135 of the Act for three consecutive financial years shall not be required to —

(a) constitute a CSR Committee; and

(b) comply with the provisions contained in sub-section (2) to (6) of the said section,

till such time it meets the criteria specified in sub-section (1) of section 135.

This sub rule has been omitted.

This implies, that the only eligibility criteria that prevails as to whether the company falls u/s 135 is the one that is stated in S. 135(1) which is “Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year” shall comply with S. 135. The eligibility would thus be determined on a year to year basis.

This has been one of the significant amendments as it will provide a cushion for the companies, that eventually ran into losses or subsequently had eligible profit of less than INR 500 lacs due to various industrial factors. The vicious circle of 3 consecutive years, so as to claim exemption from the clutches of S. 135 has now been omitted and eligibility would be tested based on numbers of the immediately preceding FY only.

3. INCLUSION OF IMPLEMENTING AGENCIES

A company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 of the Income Tax Act, 1961 (apart from 12A and 80G registered organizations) are also eligible implementing agencies provided they have registered themselves with the Ministry vide e-form CSR-1.

Needless to mention, the options for spending in local areas through implementing agencies would be expanded with this amendment. Thereby the spending companies will get more local options as well.

4. CAPPING IMPACT ASSESSMENT EXPENDITURE

The amended provisions state that a company may book expenditure to higher of the following:

· 2% of total CSR expenditure OR

· INR 50,00,000/-

Although the percentage has been reduced from 5% to 2%, the overall cap has increased as higher of the two is now allowed.

5. DISCLORUE REQUIREMENTS

The disclosure parameters for Annual Report on CSR activities that is required to be included in the Board's Report has been made more comprehensive. In case of Board’s Report drawn up for the financial year 2021-22, the new annexure format is to be appended only in cases where the Board is adopting its Report any time after 20/09/2022.

6. CHANGES IN CSR-1 FORM

The changes in CSR-1 form have been notified so as to include the categories of new implementing agencies as explained above. The said changes have been integrated and the updated form is available on the MCA portal.

Ravina Shah | Partner | RBKRS & Associates LLP

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