TOPICS FOR DISCUSSIONCompanies Act, 2013 vis‐à‐vis Companies Act, 1956 TOPICS FOR DISCUSSION 9Sec 184: Disclosure of Interest by Director 9Sec 185: Loan to Directors etc. 9Sec

Companies Act, 2013 vis‐à‐vis Companies Act, 1956

TOPICS FOR DISCUSSION Sec 184: Disclosure of Interest by Director

Sec 185: Loan to Directors etc.Sec 85: oan to irectors etc.

Sec 186: Loans and Investment by company

Sec 188 Related Part TransactionsSec 188: Related Party Transactions

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SEC 184: DISCLOSURE OF INTEREST BY DIRECTORBY DIRECTOR

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WHAT SECTION 184 SAYS?

Every Director to disclose his concern or interest in any company/companies/bodies corporate/firms:company/companies/bodies corporate/firms:

‐ at the First Board Meeting in which he participates as a Director; and

‐ thereafter at the First Board Meeting of every FY.

Later at the time of change, disclosure of concern or interest to be made at the first Board Meeting held after such change.

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Every Director who is in any way, whether directly or indirectly, concerned/ interested in a contract/arrangement or proposed contract/arrangement entered into or to be entered into: with (i) acontract/arrangement entered into or to be entered into: with (i) a body corporate in which such director or such director in association with other director, holds > 2% of shareholding of that body corporate; or (ii) with a firm or other entity in which, such director is a partner, owner or y , p ,member, as the case may be:

(a) shall disclose the nature of his concern/interest

(b) shall not participate in such meeting(b) shall not participate in such meeting.

Where any Director is not concerned/interested at the time of enteringinto a contract/arrangement , but becomes concerned/interested later,such concern or interest to be disclosed at the first Board meeting held

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such concern or interest to be disclosed at the first Board meeting heldafter he becomes interested.



A contract/arrangement entered into by the company:

‐ without such disclosure or

‐ with participation of interested director

shall be voidable at the option of the company.

Penal Provisions:

Di t h t th i i t b i h bl‐ a Director who contravenes the provisions to be punishablewith imprisonment for max 1 year term or with fine ofminimum 50,000 and maximum 1 lac or both.

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Nothing in this section shall be taken to preclude theoperation of any rule of law restricting a director of a

/ /company from having any concern/interest in any contract /arrangement with the company.

Nothing in this section shall apply to any contract /arrangement entered into or to be entered into between twocompanies where any of the directors of the one company ortwo or more of them together holds or hold not more than2% of the paid‐up share capital in the other company.

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p p p p y


WHAT RULES SAY ?

Form No. 12.1 prescribed for giving notice.

Director to be duty bound to cause his notice of interest disclosed at theDirector to be duty bound to cause his notice of interest disclosed at the Board meeting held immediately after the date of his notice.

All such notices shall be kept at the registered officeAll such notices shall be kept at the registered office.

All such notices to be preserved for 8 years from the end of the FY to hi h it l twhich it relates .

All such notices to be kept in the custody of the Company Secretary or any

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other person authorized by the Board for the purpose.


WHAT OLD LAW HAD?

Section 299 contained somewhat similar provisions.

Contained a provision for a GENERAL NOTICE to be given by a director to the Boardh ff h h i di b f ifi d b d ito the effect that he is a director or a member of a specified body corporate or is a

member of a specified firm and is to be regarded as concerned or interested in anycontract or arrangement which may, after the date of the notice, be entered intowith that body corporate or firm, be deemed to be a sufficient disclosure ofy p ,concern or interest in relation to any contract or arrangement so made.

Any such general notice to expire at the end of the FY in which it is given, but maybe renewed for further periods of one FY at a time, by a fresh notice given in thelast month of the FY in which it would otherwise expire.

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Further, Section 300 restricted directors from discussing or voting on an itemwhere they were interested. However, the section did not apply to privatecompanies.


WHAT IS THE IMPACT?

Burden of dual disclosure on director.

Director to be duty bound to cause his notice of interest disclosed at the Boardmeeting held immediately after the date of his notice.

Draconian punishment as violation of any one of the two disclosures is a groundfor imprisonment. Thus, a simple omission of a company’s name in annualdisclosure, even where no actual transaction takes place, may land a director injailjail.

As an interested director is not entitled to participate in the proceedings of Boardmeeting

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g


SEC 185: LOAN TO DIRECTORSSEC 185: LOAN TO DIRECTORS

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Company cannot give directly/ indirectly any loan to Directors or to any other person in whom the director is interested or provide any guarantee / security in connection with any loan taken by such Director/Person/ security in connection with any loan taken by such Director/Person.

3 Exceptions:

‐ Loan to MD/WTD as part of the conditions of service extended by the company to all its Employeescompany to all its Employees

‐ Loan to MD/WTD pursuant to any scheme approved by shareholders by Special Resolution.

L b i O di C f i B i f idi l‐ Loan by a company in Ordinary Course of its Business of providing loans /guarantees / securities for due repayment of any loan provided that loan carries interest at not less than the Bank Rate declared by RBI.

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‘Any Other Person in whom the Director is Interested’ means:

(a) any Director of the lending company/ holding company/any partner or( ) y g p y/ g p y/ y prelative of any such director;

(b)any Firm in which any such director/ relative is a partner;

(c)any Private Company of which any such director is a director/member;(c)any Private Company of which any such director is a director/member;

(d)any Body Corporate at a general meeting of which not less than 25% ofthe total voting power may be exercised /controlled by any such director/by 2 or more such directors together;by 2 or more such directors, together;

(e)any Body Corporate, BOD/MD/ Manager, whereof is accustomed to actin accordance with the directions/ instructions of the Board/ofDirector(s)of the lending company.

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Director(s)of the lending company.



Penal Provisions:

‐ Company to be punishable with fine of minimum 5 Lac andmaximum 25 Lacmaximum 25 Lac

‐ Director/ Any other Person to whom loan advanced orguarantee/security is given/provided to be punishable withimprisonment up to 6 months or fine of minimum 5 Lac andmaximum 25 Lac or with both.

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WHAT OLD LAW HAD?

Section 295 contained somewhat similar provisions.

P i & B ki i dPrivate & Banking companies were exempted.

However it allowed 2 Exceptions:However, it allowed 2 Exceptions:

‐ Loan to Director/Any Person in whom the Director isinterested could be given with CG

approval

‐ Loan/Guarantee/Security by Holding Co. to its Subsidiary Co.t

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was exempt.


WHAT IS THE IMPACT?

Restrictions also applicable to PRIVATE COMPANIES now.

Loans to Directors or Connected Persons barred in most cases.

No provision for CG approval.

Generally, the Board Members of Subsidiaries can be said to work underthe administrative control of Board of Holding company As such thethe administrative control of Board of Holding company. As such, theBoards of these subsidiaries can be said to be ACCUSTOMED TO ACT inaccordance with the directions/instructions of the Board of HoldingCompany. As a result, the Holding Company cannot give any loan to suchp y , g p y g ysubsidiary company not even with Shareholders’ approval.

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SEC 186: LOANS AND INVESTMENT BY COMPANYCOMPANY

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Company cannot make loans and investments or give guarantees or provide security to any person or body corporate exceeding:

(i) 60% of its Paid up Capital and Free Reserves; or(i) 60% of its Paid‐up Capital and Free Reserves; or

(ii) 100% of its Free Reserves and Securities Premium Account,

whichever is MORE.

Loans/Investments/Guarantees beyond the above limit can be made with prior special resolution of shareholders.

Loan cannot be given at a rate of interest lower than yield of 1/3/5/10 yr Govt. Security closest to the tenor of the loan.

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Company registered under Sec 12 of SEBI Act, 1992 and covered under such class /classes of companies as may be prescribed shall not take inter corporate loan/deposits exceeding the prescribed limit and shall furnish incorporate loan/deposits exceeding the prescribed limit and shall furnish in its financial statement details of loan/deposits.

No company which is in default in the repayment of any deposits or inNo company which is in default in the repayment of any deposits or in payment of interest shall give any loan or guarantee or provide security or make an acquisition till such default is subsisting

Investment restricted to maximum two layers of investment companies

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WHAT DRAFT RULES SAY ?

For the purpose of Sec 186(9), every company giving loan/guarantee or idi it ki i iti f th d t f itproviding security or making an acquisition, from the date of its

registration, shall maintain a Register in Form 12.2. and enter separately particulars of each such loan/guarantee/security etc.

S h t i t b d h l i ll ithi 7 d f ki h lSuch entries to be made chronologically within 7 days of making such loan etc.

Such register to be kept at the Registered Office.

All Entries to be authenticated by Company Secretary or any other person authorised by the Board for this purpose.

Extracts from such register may be furnished to any member on payment of fees prescribed in the AOA provided it shall not exceed 10 rupees per page.

Resolution may specify total amount upto which Board of Directors may

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give guarantee.

Company to disclose to members in financial statement full particulars of the guarantee given and the purpose for which it shall be utilized by the


WHAT OLD LAW HAD?

Section 372A imposed restriction only for OTHER BODY CORPORATES.

Restriction to ANY PERSON was not there earlier.

Loans/Investments/Guarantees to /on behalf of WHOLLY OWNEDSUBSIDIARIES were exemptedSUBSIDIARIES were exempted.

Also, PRIVATE COMPANIES which were not subsidiaries of publiccompanies were exemptedcompanies were exempted.

Loans could not be made at a RATE OF INTEREST lower than the prevailingb k t tifi d b RBI

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bank rate, notified by RBI.


WHAT IS THE IMPACT?

Loans etc. even to non‐incorporated entities/ individuals viz. Trusts/ p / /Mutual Funds / employees will have to be within the prescribed limits.

Will result in needless paper work and hassles. Just imagine the steps involved in granting Rs. 1000 loan to an employee…. passing a unanimous g g p y p gboard resolution, ensuring that the loan carries interest at not less than prescribed rates, making necessary entry in the register which would be open to inspection by members, disclosure of full particulars in the financial statements.

Loans etc. to WOS will also be included within the prescribed limits.

Interest free loans to subsidiaries/employees will not be possible. / p y p

Rate of interest cannot be lower than yield on Govt. Security of relevantperiod.

Due to Layer restriction many large scale companies that have more than

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Due to Layer restriction many large scale companies that have more than2 layers already, would not be able to make any future investments.


SEC 188: RELATED PARTY TRANSACTIONSTRANSACTIONS

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WHAT IS MEANT BY RELATED PARTY?“Related Party”, with reference to a company, means—

A Di t hi l ti‐ A Director or his relative;

‐ A KMP or his relative;

‐ A firm, in which a director, manager or his relative is a partner;

‐ A private company in which a director or manager is a member or director;

‐ A public company in which a director or manager is a director or holds along with his relatives, > 2% of its paid‐up share capital;

(vi) Any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;, g ;

(vii) Any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub‐clauses (vi) and (vii) shall apply to the advice, directions or instructions

given in a professional capacity;given in a professional capacity;

(viii) Any company which is—

(A) a holding, subsidiary or an associate company of such company; or

(B) a subsidiary of a holding company to which it is also a subsidiary;

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(ix) such other person as may be prescribed;



B d’ / Sh h ld ’ ti i d f CERTAIN CONTRACTSBoard’s/ Shareholders’ sanction required for CERTAIN CONTRACTS /ARRANGEMENTS with RELATED PARTIES.

Related Party defined under Section 2(70).

Following contracts/arrangements covered:‐ Sale/Purchase / Supply of goods/materials‐ Sale/Purchase/Lease/otherwise Disposing of any property of any kindA ili / R d i f i‐ Availing/ Rendering of any services

‐ Appointment of agents for above purposes‐ RP’s appointment to any Office/Place of Profit in the company or itssubsidiarysubsidiary

or associate company‐ Underwriting the subscription of any securities or derivatives of thecompany.

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company.

Exclusion:

Contracts entered into in the ORDINARY COURSE OF BUSINESS and at ARM’S LENGTH



‘Arms’ Length Transaction’ means a transaction between two parties that is conducted as if they were unrelated, so that there is no conflict of interest.

Procedure for entering into contracts/arrangements covered:Board appro al (in a meetin )‐ Board approval (in a meeting)

‐ if transaction amount or company’s Paid‐up capital exceeds the threshold limit(to be notified), prior approval of Shareholders (Special Resolution) also

required.‐ RP can’t vote on such Special Resolution.‐ Contract along with justification to be referred in Directors’ Report.

Consequences if any such contract/arrangement by a director or any other lemployee

without obtaining Board’s consent/ Shareholders’ approval, as the case may be, and not being ratified by the Board/Shareholders at a meeting within 3 months from the date of such contract / arrangement:

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from the date of such contract / arrangement:

‐ such contract/arrangement to be VOIDABLE at the option of Board

‐ if such a contract/arrangement is with a RP to any Director, or is authorised by any other director, the Directors concerned shall INDEMNIFY the company



Company may proceed against a director or any other employee who had entered into such a contract/arrangement in contravention of theentered into such a contract/arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract/arrangement.

Penal Provisions in case of listed companies:Penal Provisions in case of listed companies:

‐ any director or any other employee, who had either entered into or authorised the contract/arrangement in violation of the provisions this section, to be punishable with imprisonment for max 1 year term or withsection, to be punishable with imprisonment for max 1 year term or with fine of minimum Rs. 25,000 and maximum Rs. 5 lacs or with both.

Penal Provisions in case of any other companies:

any director or any other employee who had either entered into or

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‐ any director or any other employee, who had either entered into or authorised the contract/arrangement in violation of the provisions of this section, to be punishable with fine of minimum Rs. 25,000 and maximum Rs. 5 lacs.


WHAT THE RULES SAY?

Notice of the Board Meeting at which the resolution to be moved to disclose names of related parties, particulars of contracts, advance paid or received etcreceived etc.

Interested director not to participate in the discussion and voting on the resolutionresolution.

In case of transaction with wholly owned subsidiary, the special resolution d b h h ldi h ll b ffi ipassed by the holding company shall be sufficient.

Explanatory Statement annexed to the Notice to contain specified

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particulars like names of related parties, name of interested Director or KMP, nature of relationship, particulars of contracts etc.


WHAT THE RULES SAY?

Cases where prior approval of shareholders will be required:

(i) a company having a paid‐up share capital of rupees one crore/ more; 0r

(ii) where the transaction(s) to be entered into:

(a) individually or taken together with previous transactions during a FY,( ) y g p g ,exceeds 5% of the annual turnover or 20% of the net worth of thecompany as per the last audited financial statements of the company,whichever is higher, for contracts or arrangements mentioned in section188(1)(a‐e); or

(b) relates to appointment to any office or place of profit in the company,its subsidiary company/associate company at a monthly remuneration

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exceeding Rs.1 lakh mentioned in section 188(1)(f); or

(c) is for a remuneration for underwriting the subscription of anysecurities/derivatives thereof of the company exceeding Rs. 10 lakh


WHAT OLD LAW HAD?

Section 297 dealt with Board’s sanction to be required for certain contracts in which particular directors are interested.

Contracts by Company with following were covered:

‐ DIRECTOR

‐ his RELATIVE,

‐ a FIRM in which such director or relative is a partner,

‐ any other PARTNER in such a firm, y ,

‐ a PRIVATE COMPANY of which the director is a member or director

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WHAT OLD LAW HAD?

Nature of Contracts which were covered: ‐ Sale or Purchase of Goods/Services‐ Underwriting the subscription of shares or DebenturesUnderwriting the subscription of shares or Debentures‐ Purchase/sale of goods is for cash at prevailing market prices‐ Contracts in respect of goods/services in which the Company or the

contracting partyg p yregularly deals and its value does not exceed Rs. 5,000/‐ in a year.

Procedure for entering into such contracts:Procedure for entering into such contracts:‐ Board approval‐ If Paid‐up Capital exceeded Rs. 1 cr, prior approval of Govt. was also

required.

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q


WHAT IS THE IMPACT?

Related Party is now defined to include a subsidiary company also.

Contracts with any of the related parties entered in the ordinary course of business which are at arm’s length, irrespective of value, are exempt.

No Govt. approval required for any related party transactions, only Special Resolution of shareholders required in certain cases.

No related party can vote on the Special Resolution.

In case of WOS, Special Resolution passed by the Holding Company shall be

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sufficient for the purpose of entering into the transactions between Holding company and its WOS.


WHAT IS THE IMPACT?

Lease/Sale/purchase of immovable properties no more exempted.

Disclosure with justification to be given in Directors’ Report.

Imagine a case where there is a transaction between S1 and S2, both being WOS of H, who will vote? H‐ the holding company is not a party to transaction and hence not required to pass special resolution. S1 and S2

d i l l i b i b h h H b i h lneed to pass special resolutions, but in both the cases, H being the sole shareholder‐ cannot vote being a related party to both.

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Documents

TOPICS FOR DISCUSSIONCompanies Act, 2013 vis‐à‐vis Companies Act, 1956 TOPICS FOR DISCUSSION 9Sec 184: Disclosure of Interest by Director 9Sec 185: Loan to Directors etc. 9Sec