[Opinion] RoC Penalizes Company & its KMP for not placing RPTs before the Audit Committee Meeting

Prof R Balakrishnan – [2023] 149 taxmann.com 282 (Article)

1. Related-party transactions

Related-party transaction to a deal or arrangement made between two parties who are joined by a pre-existing business relationship or common interest. Companies often seek business deals with parties with whom they are familiar or have a common interest. Although related-party transactions are themselves legal, they may create a conflict of interest or lead to other illegal situations. In view of this, the related party transactions are being regulated by the Companies Act 2013 for all companies and in addition to the SEBI (Listing Obligation & Disclosure Requirements) Rules 2015 regulates listed companies.

2. Framework of the Companies Act on related party transactions

As per the provisions of the Companies Act 2013, the whole concept of related party transactions has been capsulated/covered in a single section i.e. section 188 which combined the different sections of the earlier Act of 1956 and also contains many new provisions within the scope of related party transactions. As per the provisions of the Companies Act 2013 read with Companies (Meetings of Board and its Powers) Rules 2014, there are certain mandatory compliance requirements for Audit Committee approval for those related party transactions and the Acts and Rules have detailed provisions for dealing with related parties and the transactions entered between them. Audit Committee has been provided with a lot of roles and responsibilities under the provisions of the Companies Act 2013 including approval of related party transactions amongst many other things.

3. Audit Committee and its Role in relation to related party transactions

Every listed company, every other public company having a paid-up capital of rupees ten crores or more or having a turnover of rupees hundred crores or more or having in aggregate outstanding loans or borrowings or debentures or deposits exceeding rupees fifty crores are required to constitute an Audit Committee. The paid-up share capital or turnover or outstanding loans or borrowings or debentures or deposits as the case may be, as existing on the date of the last audited financial statements shall have to be taken into account for the purpose of this rule.

As per the provisions under section 177 of the Companies Act 2013, the Audit Committee is required to approve the related party transactions, including subsequent modifications in the related party transactions. The Committee may also grant omnibus approval for the related party transactions on annual basis, subject to compliance with certain prescribed conditions. The shareholders’ approval by ordinary resolution is required if the value of the transaction(s) exceeds the prescribed monetary threshold. The Companies Act and the secretarial standard -1 on meetings of the board of directors prescribes the procedure in conducting the board/ committee meeting, and documents to be presented to these forums for the deliberations and discussions leading to its decision.

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