Proposed Role of Audit Committee In Related Party Transaction

EFFECT OF ROLE OF AUDIT COMMITTEE IN RELATED PARTY TRANSACTION (RPTs) UNDER COMPANIES AMENDMENT BILL 2016

1. INTRODUCTION:

Audit Committees has to play significant role in determining, regulating the RPTs and designing the internal control procedure of the Company that is to be followed so that related non-compliances can be avoided and interest of the Company can be protected.

The SEBI (LODR) Regulation 2015 and The Companies (Meeting of Boards and Powers) Second Amendment  Rules 2015 mandates to refer all the related party transaction to the Audit Committee and to design the RPT policies.

2. WHAT IS RELATED PARTY TRANSACTIONS?

A related Party Transaction is a transactions between a Company with its related party/parties.  However, each and every transactions with related parties are not Related Party Transitions. Only the following types of  Transactions with related parties are to be treated as Related Party Transactions and should be entered into after all the required compliances under Companies Act, 2013 are met:

(a) sale, purchase or supply of any goods or materials;

(b) The Companies Amendment Bill 2016 has proposed to further enlarge the scope of Audit Committees in regulating RPTs by bringing the concept of recommendatory rules and also by enlarging the definition of Related Party.

selling or otherwise disposing of, or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company:

3. ROLE OF AUDIT COMMITTEE IN RPT COMPLIANCES:

As per Companies Act, 2013 read with the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015, as notified by the MCA dated on 14^th December 2015 each and every RPTs shall be placed to the audit Committee and require prior approval of Audit Committee.

4. OMNIBUS APPROVAL OF RPTs BY AUDIT COMMITTEE:

The Companies (Meetings of Board and Power) Second Amendment Rules, 2015 mandates that 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.

5. CHANGES IN ROLES OF AUDIT COMMITTEES BY PROPOSED AMENDMENT OF COMPANIES AMENDMENT BILL 2016

The proposed Amendment of the Act, through The Companies Amendment Bill 2016, will make the role of Audit Committee more clear as the amendment, if implemented, will clear the Recommendatory Role of Audit Committee. The proposed amendment mandates the Audit Committee to scrutinize all related party transitions whether or not it covers under Section 188. However, if a transactions with Related Parties which are not coming under Section 188(as defined in para 2), and the Audit Committee does not approve it, then it shall make its recommendations to the Board.

This amendment will make Role of Audit Committee in terms of Approval & Recommendation clear.

6. EFFECT OF CHANGES IN THE DEFINITION OF RELATED PARTIES:

The Companies Amendment Bill 2016 has also proposed  to change the definition of Related Parties by  substitution of the word ‘Company’ with ‘body corporate’   in clause 2(76) , for sub-clause (viii), .

This amendment, if implemented, will surely enlarge the scope of related parties and henceforth related party transactions with holding, subsidiary and associate company incorporated in India and also in  abroad will be included in the definition of Related Party;

Further, the Amendment Bill, has also proposed to include an investing company or venturer company as ‘related party’. However,  confusion arises in terms of meaning and scope of investing company or venturer company . Because the Companies Act, 2013 has not defined the term  investing company or venturer company .

(Author is Associated with ‘RRR Compliance Services (A division of PJ LAW SOLUTION) and can be reached at pj_law_solution@yahoo.in)