ACS Gautam  Singh

[Pursuant to Section 188 and Section 177 of Companies Act, 2013 with reference to Regulation 23 of the SEBI (LODR), 2015]

The Companies (Meetings of Board and its Power) Second Amendment Rules, 2015 notified after notification of Section 14 of the Companies (Amendment) Act, 2015. Section 14 of the Companies (Amendment) Act, 2015 inserts a proviso to Clause (iv) of sub- section (4) of Section 177:

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include — (iv) approval or any subsequent modification of transactions of the company with related parties;

Provided that the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed.

The Companies (Meetings of Board and its Power) Second Amendment Rules, 2015 (i) inserts a new Rule 6A, (ii) omit present Rule 10 and (iii) amend present Rule 15(3).

According to newly inserted Rule 6A, all related party transactions shall require approval of the Audit Committee and the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to the certain conditions enumerated in the Rule.

CONDITIONS:

These conditions mentioned in Rule 6A are:

The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include criteria mentioned in Clause 6A(1);

  • The Audit Committee shall consider the certain factors while specifying the criteria for making omnibus approval;
  • The Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature and that such approval is in the interest of the company;
  • The omnibus approval shall contain or indicate certain details related to transaction;
  • Omnibus approval shall be valid for a period not exceeding one financial year and shall require fresh approval after the expiry of such financial year;
  • Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company; and
  • Any other conditions as the Audit Committee may deem fit.”

CRITERIA:

According to Clause (1) of Rule 6A, the Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include the following, namely:-

(a) maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year;

(b) the maximum value per transaction which can be allowed;

(c) extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;

(d) review, at such intervals as the Audit Committee may deem fit, related party transaction entered into by the company pursuant to each of the omnibus approval made;

 (e) transactions which cannot be subject to the omnibus approval by the Audit Committee.

 The Audit committee may fix these criteria as a policy for omnibus approvals of related party transactions on annual basis. This policy shall have approval of the Board of Directors. Related Party Transactions which fulfill these criteria may get omnibus approval otherwise case to case approval shall be required. Policy among other criteria shall have maximum aggregate value of transactions for a financial year (contest here is financial year), maximum value per transaction, and disclosure requirement. The policy shall also have provision for timely review of these omnibus approvals. The policy may exclude certain transaction from omnibus approval in addition to the other exclusions given in the law.

FACTORS:

According to Clause (2) of Rule 6A, the Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely: –

(a) repetitiveness of the transactions (in past or in future);

(b) justification for the need of omnibus approval.

A related party transaction which is not of repetitive nature may not get omnibus approval, even if such transaction may take place more than one time. This is duty of audit committee to consider justification for need of omnibus approval.

REPETITIVE NATURE:

According Clause (3) of Rule 6A, the Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature and that such approval is in the interest of the company.

Repetitive nature is one prominent condition under this Rule for omnibus approval of related party transaction by the audit committee. Not only clause (3) put it as condition but clause (2) put it a factor to be considered by audit committee while granting omnibus approval to a related party transaction. The audit committee has to satisfy that related party transaction under consideration for omnibus approval has repetitive nature to satisfy condition under clause (3) and factor of repetitiveness shall be considered to satisfy the condition under clause (2).

Such omnibus approval of related party transaction by the audit committee should be in the interest of the company. Any related party transaction disparaging the interest of company bound to be rejected by audit committee and may subject to judicial or regulatory review.

CERTAIN DETAILS:

According to Clause (4) of Rule 6A, the omnibus approval shall contain or indicate following details related to related party transaction

  • name of the related parties;
  • nature and duration of the transaction;
  • maximum amount of transaction that can be entered into;
  • the indicative base price or current contracted price and the formula for variation in the price, if any; and
  • any other information relevant or important for the Audit Committee to take a decision on the proposed transaction.

NON – AVAILABILITY OF CERTAIN DETAILS:

According to proviso to clause (4) of Rule 6A, where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may make omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

In other words, audit committee may grant omnibus approval to a foreseen transaction for which these details required under clause (4) of Rule 6A are not available at the time of granting omnibus approval. Such approval, as per clause (5) of Rule 6A, shall have validity for one financial year. The value of such omnibus approval for such foreseen related party transaction shall not exceed rupees one crore par transaction. This limit shall not be calculated for a standalone transaction but for a related party transaction with repetitive nature which satisfy condition of clause (3) of Rule 6A.

PERIOD FOR APPROVAL:

According to Clause (5) of Rule 6A, omnibus approval shall be valid for a period not exceeding one financial year and shall require fresh approval after the expiry of such financial year.

All omnibus approval granted by audit committee during a financial year shall expire at the end of financial year of the company. The financial year shall end according to the definition under Section 2(41) of the Companies Act, 2013. At the start of new financial year a company may not enter into such related party transaction without approval or omnibus approval by the audit committee. Such fresh approval shall be granted only after the expiry of earlier financial year not before that period. This is advisable to have meeting of audit committee to grant fresh omnibus approval in earliest possible time of the financial year for smooth transactions.

“Financial Year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up. [Section 2(41)]

SELLING OR DISPOSING OF UNDERTAKING:

According to Clause (6) of rule 6A, omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

All transaction in respect of selling or disposing of the undertaking of the company shall not be granted omnibus approval.

OTHER CONDITIONS:

According to Clause (7) of Rule 6A, the audit committee may impose any other conditions as the Audit Committee may deem fit to grant the omnibus approval.

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F RELATED PARTY TRANSACTIONS

[ Extract of Regulation 23 of SEBI (LODR), 2015]

23. (1) The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions:

Explanation:- A transaction with a related party shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds ten percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

(2) All related party transactions shall require prior approval of the audit committee.

(3) Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions, namely-

(a) 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;

(b) the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity;

(c) the omnibus approval shall specify:

(i) the name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall 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:

Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may grant omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

(d) the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given.

(e) Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year:

(4) All material related party transactions shall require approval of the shareholders through resolution and the related parties shall abstain from voting on such resolutions whether the entity is a related party to the particular transaction or not.

(5) The provisions of sub-regulations (2), (3) and (4) shall not be applicable in the following cases:

(a) transactions entered into between two government companies;

(b) 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.

Explanation: For the purpose of clause (a), “Government Company (ies)” means Government Company as defined in sub-section (45) of section 2 of the Companies Act, 2013.

(6) The provisions of this regulation shall be applicable to all prospective transactions.

(7) For the purpose of this regulation, 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.

(8) All existing material related party contracts or arrangements entered into prior to the date of notification of these regulations and which may continue beyond such date shall be placed for approval of the shareholders in the first General Meeting subsequent to notification of these regulations.

(Author can be reached at csgautamsingh@gmail.com)

Posted Under

Category : Company Law (2996)
Type : Articles (10773)
Tags : Companies Act (1523) Companies Act 2013 (1277) SEBI (447)
  • HSC

    If a company wants to execute a contract for sale of goods agreeing the principle terms and conditions including the pricing formula and settlement terms and the period of contract is let us assume to be 5 years. After execution of the contract, the buyer will place orders on the company as per its requirement from time to time and the company will accordingly manufacture the goods and invoice it to the customer based on the pricing formula and the quantity of goods sold. So under the single contract, number of individual transactions of different value will take place in the period of 5 years. Suppose the contracting parties are related parties, what will be the legal formalities they will have to complete with regard to the above situation?

    • gautam singh

      Referring to the provisions under Section 188 and the concept of Omnibus Approval. In your case the party is a related party and the transaction is a continuous transaction. Hence, the omnibus approval will be required for every year for the period of 5 years.