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Omnibus Approval For Related Party Transactions
By Darshan Upadhyay Partner ELP

With a view to ease related party transactions, the Central Government has prescribed the mechanism for omnibus approval for related party transactions vide the Companies (Meeting of Board and its Powers) Second Amendment Rules, 2015 dated 14 December 2015 (Omnibus Approval Amendment).

The Omnibus Approval Amendment now aligns the availability of omnibus approvals route for listed companies under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations).

 

BACKDROP OF THE OMNIBUS APPROVAL AMENDMENT 

Section 188 of the Companies Act, 2013 (Act) deals with related party transactions and requires approval of members by means of an ordinary resolution in case such transactions are beyond particular thresholds as prescribed by Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, as amended from to time. Further, related party transactions which are in the ordinary course of business and are at arm’s length, are exempted from such approval requirements.

However, as per Section 177 (4)(iv) of the Act, in case of companies which mandatorily need to have audit committee, audit committee will approve all related party transactions or any subsequent modification of such transactions with related parties.

Listed companies already had the advantage of omnibus approval policy due to provisions of the Listing Regulations (and prior to that due to Clause 49), however, certain other public companies which are also required to have an audit committee (depending upon the criteria as provided by the rules), did not have the benefit of such omnibus approval policy until the Omnibus Approval Amendment, and related party transactions in such companies required approval of the Audit Committee on case to case basis.

To overcome this difficulty faced by companies requiring approval of Audit Committee for every related party transaction, the Central Government has amended the rules to provide for Omnibus Approval Amendment to enable companies to pursue their related party transactions on a pre-approved basis as per the policy framed therein for the purpose, unless such transactions are required to be approved otherwise. 

ANALYSIS OF THE OMNIBUS APPROVAL AMENDMENT


1. Applicability: 

The omnibus approval route is applicable for following companies which are required to mandatorily have an audit committee:

  1. Listed Companies;
  2. Public Companies with a paid-up capital of INR 10,00,00,000 (Indian Rupees Ten Crore) (approximately USD 1,511,000) or more;
  3. Public Companies having turnover of INR 100,00,00,000 (Indian Rupees One Hundred Crore) (approximately USD 15,110,000) or more; and
  4. Public Companies having in aggregate outstanding loans or borrowings or debentures or deposits exceeding INR 50,00,00,000 (Indian Rupees Fifty Crore) (approximately USD 7,555,000) or more.

Comment: In addition to compliances with requirements under the Act, listed companies will also need to ensure compliance with Regulation 23 of the Listing Regulations pertaining to omnibus approval therein for related party transactions.  
 
 
2. Criteria 

The Audit Committee may after obtaining approval of the Board of Directors, form omnibus approval policy for transactions that can be foreseen for a financial year. The Audit Committee is required to inter alia consider below-mentioned parameters for making the omnibus approval policy:
  1. maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year; 
  2. the maximum value per transaction which can be allowed;

  3. extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;

  4. 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; 

  5. transactions which cannot be subject to the omnibus approval by the Audit Committee; and

  6. any other conditions as the Audit Committee may deem fit.

Comment: Above-mentioned parameters are wide enough to enable Audit Committee to give free hand to the Board of Directors for entering into transactions which will not have an adverse impact on the Company and are usually in the ordinary course of business. Further, by allowing the Audit Committee to also list down transactions which cannot be subject to the omnibus approval is a welcome move to enable it to approve certain transactions on a case-to-case basis to ensure that they are in the interests of the Company. 


3. Factors to be taken into consideration for omnibus approval policy: 

The Audit Committee will need to consider (a) repetitiveness of the transactions (in past or in future); and (b) justification for the need of omnibus approval, before framing the policy on omnibus approval. The Audit Committee will be governed by the mandate of safeguarding the interests of the Company before framing omnibus approval policy.   

Comment: A key factor for determining if a transaction should be amenable to omnibus approval is that the transaction should be repetitive in nature. The intention is to ensure that the Audit Committee should frame the policy for transactions which are in the interests of the Company and are repetitive in nature


4. Contentsof the omnibus approval policy: 

The omnibus approval policy will need to provide/indicate details like 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 necessary relevant information. However, where the need for related party transaction cannot be foreseen and aforesaid details are not available, Audit Committee may provide for approval of such transactions in omnibus approval policy subject to their value not exceeding Rs. 1,00,00,000 (Indian Rupees One Crore) (approximately USD 151,100) per transaction.

Comment: As per the provisions of the Act, directors and key managerial personnel are required to disclose upfront their related parties and such disclosures will enable the Audit Committee to take them into account while framing the policy. However, there may be instances where mid-year, the Company end up having a new related party with whom it may need to have transactions, and to plug this, the Audit Committee has been empowered to incorporate such eventuality in the policy, but, value of any such transactions cannot exceed Rs. 1,00,00,000 (Indian Rupees One Crore) (approximately USD 151,100) per transaction. This will give the Company enough head room for managing its business in case of such unforeseen events.   


5. Exclusion

In addition to specific transactions for which omnibus approval policy may be framed by the Audit Committee, omnibus approval cannot be made for transactions in respect of selling or disposing of the undertaking of the Company. 

Comment: Thisexclusion is to avoid a potential conflicting situation with Section 180(1)(a) of the Act which requires the Board of Directors to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings, only with the consent of the company by a special resolution. 


6
Validity

The omnibus approval policy will have a validity of 1 financial year and will need to be renewed every financial year.

Comment: Unlike the case of listed companies where omnibus approvals are valid for a period of one (1) year, unlisted companies will have approval valid for one (1) financial year. 


Authors: 
Darshan Upadhyay, Bhavin Gada and Manendra Singh

Darshan Upadhyay is a Partner, Bhavin Gada is an Associate Partner and Manendra Singh is an associate at Economic Laws Practice.


This article is intended for informational purposes and does not constitute a legal opinion or advice.

 

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