For listed companies and specified unlisted companies, related party transactions must be approved by the audit committee. Section 177 of the Companies Act, 2013 governs the audit committee. A defective approval can invalidate the transaction.
The audit committee's role
The audit committee reviews the RPT and approves it. The committee must be satisfied that the transaction is in the ordinary course of business and at arm's length. The committee can approve the transaction, modify the terms or reject it.
The composition
The audit committee must have at least three directors, with a majority of independent directors. The chairperson must be an independent director. The committee must meet at least four times a year.
The pitfalls
A defective approval can arise from:
- The committee not having the required composition
- The committee not meeting the quorum
- The related party being present at the meeting
- The committee not reviewing the transaction properly
- The committee approving the transaction after it was entered into
The practical points
The company should ensure that the audit committee is properly constituted. The committee should review the transaction before it is entered into. The related party should not be present at the meeting. The minutes should record the approval and the reasons.
Call to Action: We advise companies on audit committee approval, RPT compliance and Section 177. For an audit committee review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.