Approval of Related Party Transactions by Audit Committee – Can Non-Interested Directors Approve?

The answer is both Yes and No, depending on the type of company and applicable regulations.

Under Section 177 of the Companies Act, 2013 and Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR), all Related Party Transactions (RPTs) must be approved by the Audit Committee.

Further, Section 184(2) of the Companies Act, 2013 provides that a director who is directly or indirectly concerned or interested in any contract or arrangement must disclose his interest and shall not participate in the meeting where such transaction is discussed.

This raises an important question:

Can a non-interested director who is a member of the Audit Committee approve Related Party Transactions?

The answer varies based on the following scenarios:

Scenario 1: Public Unlisted Companies

In the case of public unlisted companies, Section 177 requires Audit Committee approval for Related Party Transactions. However, there is no restriction preventing non-interested directors who are members of the Audit Committee from approving such transactions, provided they are not interested in the transaction.

Therefore, non-interested Audit Committee members can approve Related Party Transactions in public unlisted companies.

Scenario 2: Listed Companies

In the case of listed companies, Regulation 23(2) of SEBI LODR provides that:

All Related Party Transactions and subsequent material modifications shall require prior approval of the Audit Committee.

Further, Regulation 23 clearly stipulates that:

Only those members of the Audit Committee who are Independent Directors shall approve Related Party Transactions.

Therefore, even if a director is not interested in the transaction, but is not an Independent Director, such director cannot approve Related Party Transactions in the Audit Committee of a listed entity (subject to Corporate Governance Applicablility).

Conclusion

• In public unlisted companies, non-interested directors who are members of the Audit Committee can approve Related Party Transactions.
• In listed companies, only Independent Directors who are members of the Audit Committee can approve Related Party Transactions, irrespective of whether other members are interested or not.

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From the desk of CS Sharath