4 minute read 20 Aug 2021
Related Party Transaction

How technology can strengthen an organization’s related party transactions

Ashwin Vishwanathan
By Ashwin Vishwanathan

EY India International Tax & Transaction Services- Transfer Pricing, Partner

Experienced transfer pricing professional advising companies on intercompany pricing and working with tax administration on tax policy issues.

4 minute read 20 Aug 2021
Related topics Tax Tax compliance
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Regulations on related party transactions have placed a lot of responsibility on the board.

Despite its elevated importance, organizations’ risk monitoring and mitigation efforts currently fall short of boards’ expectations. This is the stark finding emerging from EY’s new survey of more than 500 board of directors from organizations with greater than US$1b revenue across several industries around the world.[1]

Corporate governance and risk management is an important focus area in related party transactions (RPTs). RPTs of public listed companies in many countries are strictly regulated to address abuse or potential exploitation of non-controlling stakeholders.

In India, Section 188 of Companies Act, 2013, Section 92 of Income Tax Act,1961 and SEBI (LODR) regulation, 2015 have prescribed RPT reporting, review and approval frameworks and a stringent penalty and enforcement regime. Further, SEBI, earlier in the year 2020, had issued the ‘Report of the Working Group on Related Party Transactions’ which were approved recently. Applicable from April 2022, these amendments have significantly expanded the definition of RPTs, modified the approval requirements, enhanced materiality thresholds and disclosure requirements. Objective is to further strengthen and enforce the regulatory norms relating to RPTs. This has consequently placed a lot of responsibility on the board and audit committees.

Many organizations often find events of RPT slip through without board/ audit committee or shareholder approval as mandated by the law. They:

  • are unaware of the various categories of RPTs under different laws
  • lack a mechanism to identify RPTs
  • have disparate data sources that are siloed and unconnected
  • do not have documentation substantiating the transactions
  • may be unaware of the risks
  • have insufficient information on how the data and risks are correlated

Regulatory scrutiny reveals gaps and attract unwanted media attention, thereby resulting in reputational risks.

EY’s article, “Why technology is the tipping point in transfer pricing”, observes that, ‘with increasing regulatory focus, corporate boards are also securitizing related party transactions carefully and want credible data and controls underlying the transfer pricing design of a company’.

This article explores how technology can play an important role in implementing and strengthening the related party framework from a governance standpoint, including related party transactions under companies Act 2013.

Considering the enhanced compliance and transparency required under Companies Act, 2013 and SEBI (LODR) Regulations, there is an increased onus on the Board/audit committee to review and approve related party arrangements. Where there are high value/volume of transactional flows within group companies, adoption of digital and technology driven approach with minimum people dependency, helps enhancing enterprise risk management, appropriate documentation, transparency, and timely compliance of requisite regulatory requirement and avoiding business disruption/delay.
Paresh Parekh
Partner and National Tax Leader, Consumer and Retail Sector, EY India

Starting point 

For a start, updating and/or adopting a defined and properly structured RPT framework and guidelines is critical. Streamlining all touch points and internal stakeholders around their duties and responsibilities in a collective RPT reporting function can help. Driving awareness by constant communication to all key stakeholders on the risks associated with RPT will sustain the momentum.

Role of technology

RPT data collection and monitoring can be automated so that it occurs in near to real time, flagging potential issues to finance and business teams much sooner than a purely manual approach. Companies can consider digitizing low-value and time-consuming manual tasks, such as promoter, board and key management personnel’s periodic declarations for mapping and identifying related parties and other simple data processing activities. This way, key stakeholders would spend more time assessing governance related threats or missed/erroneous reporting.

Next is automated analytics to ensure consistency in the risk indicators that need monitoring, without which outliers might go unnoticed or be acted upon too late. These insights can be presented in easy to comprehend formats via dashboards to senior management and boards. Importantly, an improved understanding of the intricacies of RPT related risks help to develop more effective mitigation measures.

A successful integration of data, technology and analytics can prove to be a big asset to organizations. Also important is a combination of internal personnel and external advisors to blend company knowledge and information about best practices to craft a robust reporting and monitoring design.

Case study

An Indian headquartered diversified business conglomerate with multiple legal entities and business divisions was increasingly finding itself in related party situations. It did not have any documented mechanism to identify those RPTs entered during the ordinary course of business as per criteria defined in section 188 of Companies Act, 2013 vis-à-vis those that required specific approvals. The organization lacked an early warning system to flag these unapproved transactions or pricing mismatches, despite having delineated finance, tax and corporate secretarial teams inhouse. The organization was heavily dependent on manual processes resulting in human errors and gaps in communication.

EY was brought in to examine the RPT function within the organization and suggest remedial measures. The team analyzed the RPT function lifecycle covering RPT policy, RPT process and controls, data availability and structure, technology and systems, people and performance, and scored them from “Basic” to “Leading”.

A deep dive into the results helped understanding the maturity of the organization’s RPT function and benchmarking against industry best practices. It also surfaced quick fixes and potential automation hotspots. Improvement measures included digitalization of key management declarations, rule based and automated related party identification and transaction identification, system based transaction level approval tracking and maintaining a repository of relevant documentation by integration of various data sources, providing near to real time reporting and monitoring of RPT.

(Arpit Lodha, Senior Manager-Tax, EY India has also contributed to this article.)

How EY can help

Digital tax strategy

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Revenue authorities are focusing more widely and intensely on transfer pricing issues. From documentation to helping your practices match your policies, our teams of experienced professionals can help interpret the intent of tax authorities wherever you operate or intend to operate.

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Summary

Related party transactions may continue to be on the radar of regulators thus necessitating sharper focus by corporate boards. It is vital to place key stakeholders at the center of the RPT function and let a combination of data, systems, and processes enable timely identification, reporting, insights and risk management. Technology is the common thread that can truly transform this compliance function into a well-informed strategic input for the business.

About this article

Ashwin Vishwanathan
By Ashwin Vishwanathan

EY India International Tax & Transaction Services- Transfer Pricing, Partner

Experienced transfer pricing professional advising companies on intercompany pricing and working with tax administration on tax policy issues.

Related topics Tax Tax compliance
Upvote