How to determine meaning of Ordinary Course of Business under Related party Transactions?
Who determines that the transaction with related party is in the ordinary course of business? Is it the Board or the Audit Committee?
♦ The Act does not clearly lay down tests for determining whether a transaction is in the ordinary course of business.
♦ Therefore, as per the clarification in the guidance note issued by ICSI, following steps can be taken to be sure of it-
1. Memorandum of Association of the Company should be referred to for ascertaining whether the activity is covered in the objects clause therein. This is not a decisive test but will assist in determining whether a transaction is in the ordinary course of business or not.
2. The Audit Committee may decide whether a particular transaction is in the ordinary course of business and such decision will be based on the policy on transactions with related parties (if any). The company’s policy on transactions with related parties should specify the parameters to guide the Audit Committee on whether a transaction is in the ordinary course of business or not.
3. Apart from such a policy, a company may formulate guidelines approved by the Audit Committee and the Board of Directors on transactions with related parties. In such cases, the Company can enter into transactions based on the approved guidelines and every transaction need not be placed before the Audit Committee for determining whether the same is in the ordinary course of business or not.
Note/ In case the company does not have an Audit Committee, the decision as to whether a transaction is in the ordinary course of business or not will be taken by the Board.
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