The Companies Act, 2013 mostly aims for:

1. Better and Effective Corporate Governance Practices and Compliance’s
2. Enhanced Transparency and Disclosures
3. Enhanced Accountability of Corporate, its Directors, Professionals and Legal Advisors
4. Effective Protection of Stakeholders
5. More Shareholder’s Democracy
6. Corporate Social Responsibility
7. Stricter Regulations and Implementation of Laws
8. Effective Insolvency Norms
9. Self Regulation
10. Gender Diversity

In today’s scenario, Related Party Transactions (RPT’s) is one of the most crucial area under Companies Act, 2013 which is monitored and regulated by Ministry of Corporate Affairs (MCA) and SEBI more closely and minutely. Sections and rules are amended from time to time by the regulators to bring enhanced transparency and disclosures by companies in related party transactions carried out by them.

Recently, MCA vide its Notification dated 14^th December, 2015 amended the Companies (Meetings of Board and its Powers) Rules, 2014 by notifying Companies ( Meetings of Board and its Powers) Second Amendment Rules,2015.  In the Companies (Meetings of Board and its Powers) Rules, 2O14- after Rule 6, Rule 6A shall be inserted specifying the procedures and outline for giving omnibus approvals by Audit Committees. Further, MCA vide its Notification no. S.O 3388(E) dated 14.12.2015 had made effective the provisions of section 14 of Companies (Amendment) Act, 2015, Section 14 of Companies (Amendment)Act, 2015 deals with amendment of section 177 of Companies Act,2013 relating to Audit Committee i.e 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.

SEBI has also introduced process for granting omnibus approval by audit committees for listed company vide Regulation 23 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 which came into force from 1^st December, 2015.

So, what proposed actions are to be taken as per Rule 6A of Companies (Meetings of Board and its Powers) Rules, 2014 by the companies who have constituted Audit Committees?

1. In next board meeting of the company, there can be 2 agenda items: (i) To grant  approval and authority to Audit Committee for specifying the criteria for granting  omnibus approval of the transactions that are of repetitive nature and such approvals shall be in the interest of the company (ii) Related Party Transactions Policy as framed by the listed and other companies(as applicable) shall be reviewed and revised as per rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014 and Regulation 23 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for listed companies.
2. Thereafter, Audit Committee shall hold its meeting, filter out the transactions that are of repetitive nature and which may be considered for granting omnibus approval and then finalize 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 the time of seeking omnibus approval; (d) review, at such intervals as the Audit Committee may deem fit , transaction entered into by the company pursuant to each of the omnibus approval made;(e) transactions which cannot be subject to the omnibus approval Audit Committee by the  Audit Committee i.e . transactions related to disposing of the undertaking of the company and transactions which are not in Ordinary Course of Business and Arm’s Length Basis.
3. Further, Audit Committee shall give omnibus approval to the repetitive transactions and pass resolution including following details: (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) any other information relevant or important for the Audit Committee to take a decision on the proposed transaction. Further, 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.
4. Omnibus approval shall be valid for a period not exceeding one financial year and fresh approval shall be required after the expiry of such financial year. Omnibus Approvals are to be renewed every financial year. So audit committee is required to review their transactions which are approved in F.Y 2015-2016 and specify the criteria for omnibus approval before the end of financial year preferably i.e 31.03.2016 and grant fresh approval as per criteria’s fixed for the F.Y 2016-2017.

The Board shall be informed about all the decisions taken in above referred matters by audit committees by placing their minutes in next board meetings as prescribed and also by placing Register of contracts and arrangements entering details of transactions which are granted omnibus approval.

Further, as per Regulation 23(8) of SEBI (LODR) Regulations, 2015, all the listed companies shall place for approval of its shareholders in the first General Meeting subsequent to notification of SEBI(LODR) Regulations, 2015 (w.e.f 1.12.2015) details of all existing material related party contracts or arrangements entered into prior to the date of notifications of these regulations.

For this purpose, 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.

Food for Thought:

The Companies Act,2013 along with SEBI (LODR) Regulations, 2015 have prescribed enormous rules and regulations to monitor Related Party Transactions and audit committees are given huge and crucial responsibility to monitor it in their company. Along with this, audit committees are required to monitor Auditor’s Independence/Performance, Inter-corporate loans and Investments, Valuations, etc.

Important questions to ponder about:

1. Do companies have such efficient, well informed audit committee members to monitor and perform their roles diligently?
2. Do most of audit committee members really understand what is their role, how crucial their role is and to what extent they are responsible and accountable to stakeholders?
3. Audit Committees members have so much on their plate , how they will be able to devote time to perform their duties diligently and take quality decisions if they are not remunerated accordingly by the companies?

As per recent survey by KPMG, only 40 % of audit committee members have expertise to overseas major risks. There is a severe need to train audit committee members from time to time, experts should be inducted as members of the audit committee having wide experience and knowledge to understand the role of audit committee, perform their roles diligently and monitor it from time to time. In absence of efficient audit committee, all rules and regulations framed by various regulators will not fetch desired results in terms of transparency, disclosures, monitoring and effective protection of stakeholders.

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