Commercial

ANALYSIS OF POWER OF AUDIT COMMITTEE ON OMNIBUS APPROVALS

Dear Friends,

The Ministry of Corporate Affairs  through Companies (Amendment) Act, 2015 and  Companies ( Meetings of Board and its Powers) Amendment Rules, 2015 has inserted proviso in Section 177(4)(iv) and Rule 6A with effect from 14th December, 2015, as follows;

PROVISO u/s. 177(4)(iv)“Provided that the 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;”.  

RULE 6A. OMNIBUS APPROVAL FOR RELATED PARTY TRANSACTIONS ON ANNUAL BASIS.- 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 subject to the following conditions, namely:-   (1) The Audit Committee shall, after obtaining approval of the Board of Directors, specify 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 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.  

(2) The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely: –
(a) repetitiveness of the transactions (in past or in future);
(b) justification for the need of omnibus approval.  

(3) The Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature and that such approval is in the interest of the company.  

(4) 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) any other information relevant or important for the Audit Committee to take a decision on the proposed transaction:  

Provided that 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.  

(5) 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.  
(6) Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.  
(7) Any other conditions as the Audit Committee may deem fit.”

Let’s analyse- the proviso under above Clause allow Audit Committee to grant omnibus approvals for RPTs which are generally repitative in nature as per amended Rule 6A referred above.

Omnibus approval can be given by committee after it has taken approval of the Board of Directors for making such approvals after deciding and analysing below mentioned parameters.

  1. The maximum value of transactions in aggregate, which can be allowed under Omnibus Approval route in a year;
  2. The maximum value that can be allowed per transaction;
  3. Extent and manner of disclosures to be made to the committee at the time of seeking Omnibus Approval;
  4. The committee shall review from time to time as considered fit, RPTs entered into by the company based on earlier Omnibus Approvals;
  5. Transactions which cannot be subject to Omnibus Approval;
  6. The committee shall also consider the following factors while considering the criteria for making Omnibus Approval;
  7. Repetitiveness of the transaction both in the past and the present
  8. The justification for the need for such Omnibus Approvals.
  9. The committee has to satisfy itself as regards the need for Omnibus Approval for transactions which are of a repetitive nature and that such approval is invariably in the interest of the company;
  10. The Omnibus Approval granted by the committee shall indicate the following;
  1. Name of the related parties(s);
  2. Nature and duration of transaction(s);
  3. The maximum amount of transaction that can be entered into;
  4. The indicative base price or current contracted price and formula for variation of price if any;
  5. Any other information that may be considered to be relevant or important for the committee to take a decision in this matter.
  • In cases where the need for an RPT cannot be forseen and the details as stated are not available, the committee may make an Omnibus Approval for such transactions subject to their value not exceeding Rs. 1.00 Crore for every such transactions;
  • The Omnibus Approval granted by the committee shall be valid for only one year and fresh approval will have to be obtained after expiry of one year;
  • No Omnibus Approval shall be granted  in respect of transactions involving the sale or transfer of the undertaking of the company;
  • While granting Omnibus Approval , committee may impose further terms and conditions as it may deem fit.

PLEASE NOTE THAT

Where the Committee does not approve transactions other than those covered under Section 188 , it will make its recommendations to the Board of Directors of the Company. Below mentioned Provisos have been inserted through the Companies ( Amendment) Act, 2017 dated 7th May, 2018;

In Section 177(4)(iv) , after the proviso, the following provisos shall be inserted, namely:—  

Provided further that in case of transaction, other than transactions referred to in section 188, and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board:  

Provided also that in case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it:    

Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.”

This amendment has given scope to the Audit Committee not to grant approval to RPTs which are considered by it not to be appropriate in which case the clould make suitable recommendations to the Board.

The Audit Committee will grant approvals only those RPTs which are beneficial to the company.

Newly inserted proviso empowers the Committee not to approve transactions which are not of types specified in clauses (a) to (g) as specified in Section 188(1) of the Companies Act, 2023( as mended from time to time). In such cases Committee make recommendations to the Board not to carry out such transaction(s) or suggest modification in terms and conditions of transactions(s) ,so that transactions(s) should be in the interest of the company.

The third provision postulates that where any transaction(s) involving a value not exceeding Rs. 1 Crore has been entered into by director or officer of the company with a related party without taking approval of Audit Committee , and such transaction(s) are not ratified by the Audit Committee within a period of three months from the date of such transaction(s) , the transaction(s) shall be voidable at the option of the Audit Committee or if transaction(s) is with related party(s) of the director or authorised by any director , the director concerned who has authorised the transaction(s) will indemnify the company against any loss incurred if any.

PLEASE NOTE THAT-  the above newly inserted provision empowers Audit Committee to approve or disapprove any transaction(s) entered by director(s) with related parties within a period of three months from the date of inceptuion of such transactions(s). if audit committee does not ratified it , then concerned director(s) authorising such transaction(s) will compensate the company for any loss incurred due to such transaction(s) with related party(s).

The last newly proviso inserted in Section 177(4)(iv) through Companies ( Amendment) Act, 2017 – provides that this clause i.e. Clause (iv) of Section 177(4) does not apply in respect of transaction other than those referred to in Section 188 if transaction(s) is between the Holding Company and its Wholly Owned Subsidiary(WOS).

As transaction between Holding and WOS is not subject to approval of Audit Committee if transaction does not below to genre stated under provision of Section 188 of the Companies Act, 2013.

DISCLAIMER: the article presented here is only for sharing information and knowledge with the readers. The views are personal, shall not be considered as professional advice. In case of necessity do consult with professionals for more understanding and clarity on subject matter.

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