[FAQs] Accounting and Audit Related Issues, RPTs & Vigil Mechanism

As per section 138 of the Companies Act, 2013 read with Rule 13(1)(c) of The Companies (Accounts) Rules, 2014 every private company having the following shall be required to appoint an internal auditor:-

a. Turnover of two hundred crore rupees or more during the preceding financial year.

or

b. Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year.

As per Section 138 of the Companies Act, 2013 an internal auditor, shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board.

Explanation to Rule 13 of The Companies (Accounts) Rules, 2014 states that the internal auditor may or may not be an employee of the company.

Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies (Accounts) Rules, 2014 provides for the mandatory appointment of an internal auditor who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities for classes of company given below-

1. Every listed company

2. Every unlisted public company having –

• • • Paid up share capital of 50 crore rupees or more during the preceding financial year; or
    • Turnover of 200 crore rupees or more during the preceding financial year; or
    • Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year; or
    • Outstanding deposits of 25 crore rupees or more at any point of time during the preceding financial year.

3. Every private company having –

• • • Turnover of 200 crore rupees or more during the preceding financial year; or
    • Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year.

Section 188(1) of Companies Act, 2013 provides that except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to

1. 1. Sale, purchase or supply of any goods or materials
   2. Selling or otherwise disposing of, or buying, property of any kind
   3. Leasing of property of any kind
   4. Availing or rendering of any services
   5. Appointment of any agent for purchase or sale of goods, materials, services or property
   6. Related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company
   7. Underwriting the subscription of any securities or derivatives thereof, of the company

Hence Due Diligence Report of such transactions has its own importance.

Due diligence report is system of curbing related party transactions from occurring. Audit committee should seek a due diligence report with regard to all proposed material transactions which should highlight potential conflict of interest. Therefore, the companies should have well articulated policies specifying that transactions beyond a certain threshold limits and transactions of certain nature would require a pre-clearance from the audit committee.

Following are the legal provisions of Related party transactions:-

• • All related party transactions require the approval of the Audit Committee as per section 177 of the Companies Act, 2013 except to a transaction, referred to in section 188 of the Companies Act, 2013, between a holding company and its wholly owned subsidiary company, as stated under fourth proviso to section 177(4) of the Companies Act, 2013. Up to certain limits, the approval of the Board is required and above the limits, approval of the members must be taken.
  • As per proviso two of section 188(1) of the Companies Act, 2013 member of the company shall not vote where he is related party. However as per proviso three of section 188(1) of the Companies Act, 2013, if 90% or more members are related party, members can vote.
    As per proviso four of section 188(1) of the Companies Act, 2013, the approval of the Board is not required where the transactions are on arms length basis in ordinary course of business.
  • Further, as per proviso five of section188(1) of the Companies Act, 2013, the approval of members is not required in case of transaction between holding and wholly owned subsidiary.
  • As per the exemption notification dated 5th June, 2015 issued by Ministry of Corporate Affairs, the first and second proviso to sub-section(1) to section 188 of the Companies Act, 2013 shall not apply to:

a. A Government Company where the contracts/arrangements to be entered into by it with any other Government Company.

b. A Government company (other than a listed company), in respect of contracts/arrangements other than those mentioned in (a) above, if it has obtained approval of the administrative ministry of the concerned Central/State Government.

Regulation 2(1)(zc) of SEBI (LODR) Regulations, 2015, defines related party transaction a transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions.

Regulation 23 of SEBI (LODR) Regulations, 2015 provides for monitoring of related party transactions:-

1. The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions.

2. Approval of Audit Committee: All related party transactions shall require prior approval of the audit committee.

3. Omnibus approval: Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions-

a. The audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature.

b. The audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity.

c. The omnibus approval shall specify:

i. The name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into.

ii. The indicative base price/current contracted price and the formula for variation in the price if any.

iii.  Such other conditions as the audit committee may deem fit

provided where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may grant omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

d. The audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given.

e. Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year.

4. Approval of the shareholders: All material related party transactions shall require approval of the shareholders through resolution and the related parties shall abstain from voting on such resolutions whether the entity is a related party to the particular transaction or not.

5. Exemptions: The provisions of sub-regulations (2), (3) and (4) shall not be applicable in the following cases:

a. Transactions entered into between two government companies.

b. Transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

As per section 204(1) of Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the following companies are required to obtain Secretarial Audit Report:

• • Every listed company
  • Every public company having a paid-up share capital of fifty crore rupees or more
  • Every public company having a turnover of two hundred fifty crore rupees or more.
  • Every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.

Circular dated February 8, 2019 specifies that while the annual secretarial audit shall cover a broad check on compliance with all laws applicable to the entity, listed entities shall additionally, on an annual basis, require a check by the PCS on compliance of all applicable SEBI Regulations and circulars/guidelines issued thereunder, consequent to which, the PCS shall submit a report to the listed entity in the manner specified in this circular.

The NFRA is an independent regulator established under Section 132 of the Companies Act, 2013 to oversee the auditing profession. The NFRA has been established as an independent regulators for enforcement of auditing standards and ensuring the quality of audits to strengthen the independence of audit firms and therefore enhance investor and public confidence in financial disclosures of companies. The powers and functions of NFRA are majorly pertaining to oversee the auditing profession that may be studied under the following points-

1. 1. To investigate either suo-motu or on a reference made by the Central Government in matters of professional misconduct committed by any member or Chartered Accountants firm.
   2. To make recommendations to the Central Government on formulation and laying down of accounting standards and auditing policies for adoption by companies or their auditors.
   3. To monitor and implement compliance relating to accounting standards and auditing policies as prescribed.
   4. To oversee the quality of service of professions associated with compliance of accounting standards and auditing policies and suggest measures for improvement.
   5. NFRA shall have equivalent powers as a civil court under the Code of Civil Procedure, 1908. It can exercise the powers related to:-
      (i) discovery and production of books or other documents as specified by NFRA;
      (ii) summoning and enforcing the attendance of persons and examining them on oath;
      (iii) inspection of books, registers and other documents of any person; (iv) issuing commissions for examination of witness or other documents.
   6. NFRA may impose penalties:
      (i) not less than one lakh rupees which may extend up to five times of the fees received in case of individuals and
      (ii) not less than ten lakh rupees which may extend up to ten times of the fees received in case of firms.
   7. NFRA may consider an investigation based on monitoring and compliance review of auditor or audit firm upon recommendations by Member- Accounting and Member- Auditing.

(Note: This list is inclusive and not exhaustive)

Every listed company and the companies belonging to the following class or classes shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances:—

a. The Companies which accept deposits from the public.

b. The Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees.

Vigil Mechanism under Companies Act, 2013

• • Section 177(9) of the Companies Act, 2013 provides that every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.
  • Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that every listed company and the companies belonging to the following class or classes shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances:

a. The Companies which accept deposits from the public.

b. The Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees.