Background
 
The Companies Act, 2013 (the 2013 Act) became largely effective from 1 April 2014. On  2 December 2014, the Union Cabinet introduced the Companies (Amendment) Bill, 2014 in the Parliament to make certain amendments to the 2013 Act. The amendment received the President’s assent on 25 May 2015 and was subsequently notified in the Official Gazette on 26 May 2015, is called the Companies (Amendment) Act, 2015 (Amendment Act, 2015). Further, the Ministry of Corporate Affairs (MCA) on 29 May 2015 notified
Section 1 to 12 and 15 to 23 of the Amendment Act, 2015.
 
New development

The MCA on 14 December 2015, notified Section 13 (reporting of an offence involving a fraud to the central government) and Section 14 (an omnibus approval for related party transactions) of the Amendment Act, 2015.  The notification will be effective from the date of its publication in the Official Gazette i.e. 15 December 2015.Further, the MCA through its notification
dated 14 December 2015 also amended/inserted certain rules which are as
follows:

Amendments	Brief description of the changes
Amended Rule 13 relating to reporting of frauds by auditors and other matters (the Companies (Audit and Auditors) Amendment Rules 2015).	The amendment specifies that an auditor would report a fraud of an amount of INR1 crore or above to the central government after following a specified process.
Inserted Rule 6A relating to omnibus approval for related party transactions on an annual basis (the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015).	An audit committee may provide an omnibus approval for related party transactions after following certain specified conditions.
Omitted Rule 10 relating to loan to directors, etc. under Section 185 of the 2013 Act (the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015).	Aligned rules with the Amendment Act, 2015.
Amended Rule 15 relating to contract or arrangement with a related party (the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015).	Aligned rules with the Amendment Act, 2015.

This issue of First Notes aims to provide an overview of the key amendments in the above mentioned rules.

Amendment in reporting of frauds by auditors and other matters (Rule 13)
 
Currently, the 2013 Act or the aforesaid rules do not provide any threshold for reporting of frauds by auditors.

Now, the amended Rule 13 provides that if an auditor of a company in the course of the performance of his duties as a
statutory auditor, has a reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of INR1 crore or above, is being or has been committed against the company by its officers or employees, the auditor should report the matter to the central government after ensuring the following process:

• The auditor should report the matter to the board or the audit committee (as the case may be) immediately but not later than two days of his/her knowledge of the fraud seeking their reply or observations within 45 days
• On receipt of such a reply or observations from the board or the audit committee, the auditor should forward his/her report and the reply or observations of the board or the audit committee along with his/her comments (on such a reply or observations of the board or the audit committee) to the central government within 15 days from the date of receipt of such a reply or observations
• In case the auditor fails to get any reply or observations from the board or the audit committee within the stipulated period of 45 days, he/she should forward his/her report to the central government along with a note containing the details of his/her report that was earlier forwarded to the board or the audit committee for which he/she has not received any reply or observations.

The report to the central government would be in the form of a statement as specified in Form ADT-4.

In the case of a fraud of less than INR1 crore, the auditor would report the matter to an audit committee or board (as the case may be) not later than two days of his knowledge of the fraud. Additionally, the details of such a fraud reported to the audit committee or the board during the year, would be disclosed in the board’s report along with the following information:

• Nature of fraud with description 
• Approximate amount involved
• Parties involved, if remedial action not taken
• Remedial action taken.

The provision of this rule would also apply to a Cost Auditor and a Secretarial Auditor during the performance of his duties under Section 148 and Section 204 respectively of the 2013 Act.
 
Amendments to the above Rule 13 would come into force from the date of publication in the Official Gazette i.e. 15 December 2015.
 
Amendments introduce Rule 6A relating to omnibus approval for related party transactions
 
Currently, Regulation 23 of the newly effective SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) provide that an audit committee may grant an omnibus approval for a related party transaction proposed to be entered into subject to certain conditions. Such an omnibus approval would be valid for a period not exceeding one year and would require fresh approvals after the expiry of one year. MCA with an intent to align with the Listing Regulations has amended the rules so that an audit committee would be empowered to provide omnibus approvals for related party transactions subject to certain conditions. The conditions specified by MCA are largely similar to the Listing Regulations.
 
Following are the conditions specified for an omnibus approval from an audit committee:

1. The audit committee after obtaining approval of the Board of Directors specify the criteria which should include:
   • Maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year
   • The maximum value per transaction which can be allowed
   • Extent and manner of disclosures to be made to the audit committee at the time of seeking an omnibus approval
   • Review, at such intervals as the audit committee may deem fit, related party transaction entered into by the company pursuant to each of omnibus approval made
   • Transactions which cannot be subject to the omnibus approval by the audit committee.
2. The criteria which audit committee should consider while specifying the criteria for making an omnibus approval as follows:
   • Repetitiveness of the transactions (in the past or the future)
   • Justification for the need of an omnibus approval.
3. The audit committee would 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 should contain or indicate information:
   • 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
   • any other information relevant or important for the audit committee to take a decision on the proposed transaction.
      
     In the situations where need for a related party transaction cannot be foreseen and aforesaid details are not available, an audit committee may make omnibus approval for such transactions subject to their value not exceeding INR1 crore per transaction.
5. Omnibus approval would not be valid for a period exceeding one financial year and would require a fresh
   approval after the expiry of such financial year.
6. Omnibus approval would not be made for transactions in respect of selling or disposing of an undertaking of a company.
7. Any other conditions as the audit committee may deem fit.

The amendments to the above rules will come into force from the date of their publication in the Official Gazette.

Omitted Rule 10 relating to loan to directors, etc. under Section 185 of the 2013 Act

The Amendment Act, 2015 had incorporated the exemptions from requirements of Section 185 from the Rules to the 2013 Act. The exemptions relate to:

• Loan,or guarantee/security (for a loan) by a holding company to its wholly-owned subsidiary
• Guarantee/security by holding company for loan by a bank or a financial institution to its subsidiary

The above transactions should be subject to relevant loans being utilised only for principal business activities of a subsidiary.

The MCA has now omitted Rule 10.  

The amendments to the above rules would come into force from the date of their publication in the Official Gazette.
 
Amended Rule 15 relating to a contract or arrangement with a related party
 
The Amendment Act, 2015 had amended Section 188, Related party transactions to allow a company to approve certain related party transactions through a resolution instead of special resolution.  However, similar amendments were not made to the rules.  Now Rule 15(3) has been amended by substituting ‘resolution’ instead of ‘special resolution’ for the above mentioned transactions.

The amendments to the above rules would come into force from the date of their publication in the Official Gazette.
  
Our comments
 
The above amendments signify MCA’s continuing effort to relook at the 2013 Act as well as the aforesaid rules. The
amended rules for reporting of fraud by auditors increases responsibility of auditors and prescribes timelines indicating the effort MCA is putting to increase the efficiency and timelines of such reporting.  Also, immaterial frauds would now form part of the annual report, and the requirement to report immaterial frauds to the central government has been done away with.
 
The amended rules for omnibus approval of related party transactions are welcome and is a step to make the provisions
consistent with the new Listing Regulations issued by SEBI.

The bottom line
 
MCA continues to consider the practical challenges faced by corporates in India while implementing the 2013 Act and aligning it with the SEBI Listing Regulations requirements.

To access the text of the MCA circular notifying Section 13 and 14 of the 2013 Act, please click here.

Given are the links to the amendment made in the Rules:   

• Companies (Audit and Auditors) Amendment Rules, 2015, please click here.
• Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015), please click here.