Omnibus approval for related party transaction

In case of Companies Act, is the board required to approve all related party transactions from audit committee?

[1] The Companies Act 2013 prescribes that a company needs approval of the audit committee on all related party transactions and subsequent modifications thereto. Section 177(4) (iv).

[2] Provided that the Audit Committee may make [3] omnibus approval for related party transaction proposed to be entered into by the company subject to conditions given below.

OMNIBUS APPROVAL FOR RELATED PARTY TRANSACTIONS: In continuation of the Companies (Amendment) Act, 2015, MCA has on 14th Dec, 2015, issued the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015.

By this amendment, MCA has inserted Rule 6A under Chapter XII Rules to deal with the authority of Audit Committee to grant Omnibus Approval for related party transactions on an annual basis. The salient features of the newly inserted [4]Rule 6A Regulations 2015 (“LODR”) are as under:

NOTE:

The newly inserted rule specifically points out that ‘all related party transactions’ shall require the approval of audit Committee. There was confusion prevalent amongst advisors and companies that only those related party transactions which are covered u/s 188 and aren’t exempted from the compliance of the said section are the only ones which need to be approved by the audit committee u/s 177. With a clear language under newly inserted rule 6A, it is abundantly clear that ‘all’ related party transactions are required to be approved by the audit committee.

[5] OMBIOUS APPROVAL BY AUDIT COMMITTEE:[6]

The audit committee has the authority to specify the criteria for making an omnibus approval structure. However, a prior board approval is required in this regard-

Specified Criteria for omnibus approval: The Audit Committee shall consider the certain factors while specifying the criteria for making omnibus approval

a. Maximum value of transactions, in aggregate, which can be allowed under the omnibus route in a year;

b. 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. [7]Review of related party transactions entered into by the company pursuant to each of the omnibus approval. The intervals at which such review is to be done can be decided by the audit committee; 

e. Transactions which cannot be subject to omnibus approval by the audit committee.

Factors specifying the criteria for omnibus approval: 

- Such approval shall be applicable in respect of transactions which are [8]REPETITIVE in nature;

- Justification for the need of omnibus approval

f. The audit committee shall Satisfy Itself regarding the need for such omnibus approval and that such approval is in the interest of the Company;

g. the omnibus approval shall specify:

• The name(s) of the related party,
• Nature of transaction,
• Period of transaction,
• Maximum amount of transactions that shall be entered into,
• The indicative base price / current contracted price and
• The formula for variation in the price if any; and
• Such other conditions as the audit committee may deem fit: Clause-7

Approval of Omnibus transaction without fulfilling the above criteria:

Special Condition: 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 [9]One Crore per Transaction.

DUTY OF AUDIT COMMITTEE:

The audit committee shall review (at such interval as the Audit Committee may deem fit) the details of related party transactions entered into by the Company pursuant to Each of the omnibus approvals given.

TERM OF OMNIBUS APPROVAL:

Omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year.

NOTE:

i. Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the Company.Clause-6

ii. Any other conditions as the Audit Committee may fit.

REPETITIVE IN NATURE:

All omnibus approval granted by audit committee during a financial year shall expire at the end of [10]financial year of the company. 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.

Difference B/w LODR and Companies Rules:

Under LODR audit committee shall lay down the criteria for granting the omnibus approval [Re. Regulation 23(3)(a) of LODR] but the LODR specifies that such criteria shall be in line with the policy on related party transaction of the listed entity. No such requirement is been provided under Companies Act, 2013. Further, the amended rule requires the audit committee to obtain a prior board approval but no such requirement is been listed under LODR.

Review of related party transactions entered into by the company pursuant to each of the omnibus approval. The intervals at which such review is to be done can be decided by the audit committee; Under LODR the audit committee is required to review at least on a quarterly basis [Re. Regulation 23(3)(d) of LODR].

If anyone want complete article on “Related Party Transaction” under “SEBI LODR” drop mail to me on csdiveshgoyal@gmail.com

[1] This is irrespective of whether they are in the ordinary course of business and consummated at arm's length price or they are below prescribed thresholds