OMNIBUS APPROVAL FOR RELATED PARTY TRANSACTIONS

Ministry of corporate Affairs issued a notification dated 14^th December 2015 and published here in the Gazette of India dated 15^th December 2015 regarding amendment in the Companies (Meetings of Board and its Power) Rules 2014.

The Companies (Meetings of Board and its Power) Second Amendment Rules, 2015 notified after notification of Section 14 of the Companies (Amendment) Act, 2015. Section 14 of the Companies (Amendment) Act, 2015 inserts a proviso to Clause (iv) of sub- section (4) of Section 177 as discussed earlier here. Text of amended clause 177(4(iv) is reproduced here:

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include — (iv) approval or any subsequent modification of transactions of the company with related parties;

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.

The Companies (Meetings of Board and its Power) Second Amendment Rules, 2015 (i) inserts a new Rule 6A, (ii) omit present Rule 10 and (iii) amend present Rule 15(3).

According to newly inserted Rule 6A, 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 certain conditions enumerated in the Rule.

CONDITIONS

These conditions mentioned in Rule 6A are:

• The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include criteria mentioned in Clause 6A(1);
• The Audit Committee shall consider the certain factors while specifying the criteria for making omnibus approval;
• 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;
• The omnibus approval shall contain or indicate certain details related to transaction;
• 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;
• Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company; and
• Any other conditions as the Audit Committee may deem fit.”

Criteria

According to Clause (1) of Rule 6A, 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.

 The Audit committee may fix these criteria as a policy for omnibus approvals of related party transactions on annual basis. This policy shall have approval of the Board of Directors. Related Party Transactions which fulfill these criteria may get omnibus approval otherwise case to case approval shall be required. Policy among other criteria shall have maximum aggregate value of transactions for a financial year (contest here is financial year), maximum value per transaction, and disclosure requirement. The policy shall also have provision for timely review of these omnibus approvals. The policy may exclude certain transaction from omnibus approval in addition to the other exclusions given in the law.

Factors

According to Clause (2) of Rule 6A, 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.

A related party transaction which is not of repetitive nature may not get omnibus approval, even if such transaction may take place more than one time. This is duty of audit committee to consider justification for need of omnibus approval.

Repetitive Nature

According Clause (3) of Rule 6A, 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.

Repetitive nature is one prominent condition under this Rule for omnibus approval of related party transaction by the audit committee. Not only clause (3) put it as condition but clause (2) put it a factor to be considered by audit committee while granting omnibus approval to a related party transaction. The audit committee has to satisfy that related party transaction under consideration for omnibus approval has repetitive nature to satisfy condition under clause (3) and factor of repetitiveness shall be considered to satisfy the condition under clause (2).

Such omnibus approval of related party transaction by the audit committee should be in the interest of the company. Any related party transaction disparaging the interest of company bound to be rejected by audit committee and may subject to judicial or regulatory review.

Certain Details

According to Clause (4) of Rule 6A, the omnibus approval shall contain or indicate following details related to related party transaction

• name of the related parties;
• nature and duration of the transaction;
• maximum amount of transaction that can be entered into;
• the indicative base price or current contracted price and the formula for variation in the price, if any; and
• any other information relevant or important for the Audit Committee to take a decision on the proposed transaction.

Non – availability of certain details

According to proviso to clause (4) of Rule 6A, 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.

In other words, audit committee may grant omnibus approval to a foreseen transaction for which these details required under clause (4) of Rule 6A are not available at the time of granting omnibus approval. Such approval, as per clause (5) of Rule 6A, shall have validity for one financial year. The value of such omnibus approval for such foreseen related party transaction shall not exceed rupees one crore par transaction. This limit shall not be calculated for a standalone transaction but for a related party transaction with repetitive nature which satisfy condition of clause (3) of Rule 6A.

Period for approval

According to Clause (5) of Rule 6A, 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.

All omnibus approval granted by audit committee during a financial year shall expire at the end of financial year of the company. The financial year shall end according to the definition under Section 2(41) of the Companies Act, 2013. 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. This is advisable to have meeting of audit committee to grant fresh omnibus approval in earliest possible time of the financial year for smooth transactions.

“Financial Year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up. [Section 2(41)]

Selling or disposing of Undertaking

According to Clause (6) of rule 6A, omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

All transaction in respect of selling or disposing of the undertaking of the company shall not be granted omnibus approval.

Other Conditions

According to Clause (7) of Rule 6A, the audit committee may impose any other conditions as the Audit Committee may deem fit to grant the omnibus approval.

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