INTRODUCTION:
Regulation of RPTs being crucial part for good governance, the Companies Act, 2013 contain elaborate requirements for regulating RPTs. Every company has to follow the prescribe set of procedures in respect of RPTs. Audit Committees play significant role in determining the RPTs and designing the internal procedure of the Company to be followed so that RPTs can be regulated and related non-compliances can be avoided. It is advisable to refer each RPT to the Audit Committees for testing the transactions in terms of legal and internal compliances point of view.
The SEBI (LODR) Regulation 2015 mandates to refer all the related party transaction to the Audit Committee and to design the RPT policies.
CONSTITUTION OF AUDIT COMMITTEE:
As per Companies Act, 2013 and read with Rule 6 of the Companies (Meeting of Board and its Powers) Rules, 2014 the Board of Directors of the following types of public companies shall compulsorily constitute an audit committee:
i) every listed company
ii) every public company having paid-up capital of Rs. 10 crore or more;
iii) every public company having turnover of Rs.100 crore or more;
iv) every public company having in aggregate outstanding loans or borrowings or debentures or deposits exceeding Rs. 50 crore or more;
For details about the Audit Committee please read my previous article at the following link:
https://taxguru.in/sebi/impact-audit-committee-ca-2013-sebi-listing-regulations.html
Therefore, constitution of Audit Committee is mandatory to the above mentioned Public Companies & private Companies which is subsidiary of public companies as coming in the above mentioned categories only.
COMPLIANCE REQUIRED FOR RPTs
1.after Notification of the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015 issued by the MCA dated on 14th December 2015 each and every RPTs shall be placed to the audit Committee and require prior approval of Audit Committee. In case of a transactions with arm’s length price also require approval of Audit Committee .
However before the date of the above said notification it was not obligatory to place the exempted RPTs before the Audit Committees and only Boards approval was required.
- after the approval of the Audit Committee, it shall be placed before the Board of Directors for their approval. Each and every RPTs requires prior approval of Board of Directors.
- Audit Committee while extending their approval should judge the transaction with reasonableness, along with pre-decided fixed criteria.
OMNIBUS APPROVAL UNDER COMPANIES ACT, 2013, 2013 Vs SEBI REGULATIONS
Before the notification of the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015 the Companies Act, 2013 didn’t prescribed the Omnibus approval methodology of RPTs. Thereafter, in line with SEBI regulation, the Omnibus Approval methodology has been promulgated by the MCA to create synergy among SEBI Rules and Companies Act.
OMNIBUS APPROVAL OF RPTs BY AUDIT COMMITTEE:
The Companies (Meetings of Board and its Powers) 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.
Before making the O Omnibus approval by Audit Committee, the following benchmarks needs to be checked by SEBI:
- Identify the Related Parties
- Identify the transactions
- Justifications of the RPTs
- Approval
- Disclosures
PROS AND CONS OF ANALYSIS OF OMNIBUS APPROVAL OF AUDIT COMMITTEE:
Audit Committee shall pre-decide the CRITERIA for making Omnibus Approval. However, these set of criteria shall be previously approved by the Board of Directors of the Company:
The criteria shall include the following:
(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
Audit Committee can include other justifiable criteria with the approval of the Board of Director.
JUSTIFICATION OF OMNIBUS APPROVAL
While deciding the criteria the Audit Committee shall consider the following factors:-
(a) repetitiveness of the transactions (in past or in future);
(b) justification for the need of Omnibus approval.
CONTENTS OF APPROVAL
The Omnibus approval shall contain or indicate the following: –
(a) name of the related parties;
(b) nature and duration of the transaction;
(c) maximum amount of transaction that can be entered into;
(d) the indicative base price or current contracted price and the formula for variation in the price, if any; and
(e) other relevant information ;
(f) 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.
PERIOD OF OMNIBUS APPROVAL UNDER COMPANIES ACT, 2013:
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.
DISCLOSURES IN THE BOARD’S REPORT:
Every contract or arrangement entered into under Section 188(1) shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.
VARIANCE IN AUDIT COMMITTEE’S OMNIBUS APPROVAL UNDER THE COMPANIES ACT AND LISTING AGREEMENT
On comparison of the provisions of regulation 23 of the Listing Regulations with the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015 following are two variation in Omnibus approval:
As per the Listing Regulations the review of RPTs shall be at least on a quarterly basis regarding the details of related party transactions entered into by the listed entity pursuant to each of the Omnibus approvals given. However, the Companies (Meetings of Board and its Powers) (Second Amendment) Rules, 2015 the audit committee shall provide Omnibus approval for one financial year and require fresh approval after the close of the financial year. They can review this transactions for which approval has been given at any time as they think fit.
Audit committee of listed companies are required to review the transactions on quarterly basis and audit committees of unlisted public companies are required to review the transactions at such intervals, as it may deem fit.
Pursuant to the Companies (Meetings of Board and its Powers) Second Amendment, 2015, the Omnibus approval for related party transactions shall not be made for transactions in respect of selling or disposing of company’s undertaking. However, there is no such restriction in the Listing Regulations.