PRESENTATION BY CA. (DR.) DEBASHIS MITRA M.COM, LL.B, F.C.A., A.C.M.A., A.C.S., DISA(ICA), PhD.
LOANS TO DIRECTORS ETC. According to section 185 of the Act save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person: Provided that nothing contained in this subsection shall apply to- Debashis Mitra & Associates
LOANS TO DIRECTORS ETC. (Contd.) a) The giving of any loan to a Managing or Whole-time director- (i) as a part of the conditions of service extended by the company to all its employees; or (ii) Pursuant to any scheme approved by the members by a special resolution; or b) A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India. Debashis Mitra & Associates
EXPLANATION For the purposes of this section, the expression to any other person in whom director is interested means a) Individual entity: i. any director of the lending company; or ii. any director of its holding company; or iii.any partner of any such director; or iv. relative of any such director; b) Firm: i. any firm in which any such director is a partner; or ii. any firm in which the relative of any such director is a partner; Debashis Mitra & Associates
EXPLANATION (Contd.) For the purposes of this section, the expression to any other person in whom director is interested means c) Company: i. any private company of which any such director is a director; or ii. any private company of which any such director is a member; Debashis Mitra & Associates
EXPLANATION (Contd.) d) any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by: i. Any such director; or ii. By 2 or more such directors, together; or e) any body corporate, the board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the: i. Board; or of ii. Any director or directors of the lending company Debashis Mitra & Associates
PENAL CONSEQUENCES If contravention of section 185(1): i. The giver and ii. The receiver both are punishable; The company shall be punishable with: a. fine (not less than Rs.5 lakhs but may extend to Rs.25 lakhs) The director or the other person (receiver) shall be punishable with: a. imprisonment which may extend to 6 months; or b. with fine (not less than Rs.5 lakhs but may extend to Rs.25 lakhs) or with both Debashis Mitra & Associates
CLARIFICATION DATED 14.02.2014 o General Circular no.03/2014 This Ministry has received number of representations on the applicability of section 185 of the Companies Act, 2013 with reference to loans made, guarantee given or securities provided under section 372A of the Companies Act, 1956. The issue has been examined with reference to applicability of section 372A of the Companies Act, 1956 vis-à-vis section 185 of the Companies Act, 2013. Debashis Mitra & Associates
CLARIFICATION DATED 14.02.2014 (Contd.) Section 372A of the Companies Act, 1956 specifically exempts any loans made, any guarantee given or security provided or any investment made by a holding company to its wholly owned subsidiary. Whereas, section 185 of the Companies Act, 2013 prohibits guarantee given or any security provided by a holding company in respect of any loan taken by its subsidiary company except in the ordinary course of business. Debashis Mitra & Associates
CLARIFICATION DATED 14.02.2014 (Contd.) In order to maintain harmony with regard to applicability of section 372A of the Companies Act, 1956 till the same is repealed and section 185 of the Companies Act, 2013 is notified, it is clarified that any guarantee given or security provided by a holding company in respect of loans made by a bank or financial institution to its subsidiary company, exemption as provided in clause (d) of sub-section (8) of section 372A of the Companies Act, 1956 shall be applicable till section 186 of the Companies Act, 2013 is notified. Debashis Mitra & Associates
CLARIFICATION DATED 14.02.2014 (Contd.) This clarification will, however, be applicable to cases where loans so obtained are exclusively utilised by the subsidiary for its principal business activities. ----- end of circular ----- Debashis Mitra & Associates
Companies (Meetings of Board and its Powers) Rules, 2014 According to Rule 10 of the Companies ( Meetings of Board and its Powers) Rules, 2014 any loan made by a holding Company to its wholly owned subsidiary or any guarantee given or security provided by the holding Company in respect of any loan made to its wholly owned subsidiary is exempted. Further any guarantee provided by the holding Company to banks/f.is in respect of loan to its subsidiary is also exempted. But in both the cases the loans should be used by the subsidiary for its principal business activities. Debashis Mitra & Associates
SOME IMPORTANT ISSUES RELATING TO SECTION 185 Whether Deposits are covered Whether Providing Advances in also Barred Whether there is total embargo on Book Debts What constitutes ordinary course of business Debashis Mitra & Associates
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Presentation by CA. (DR.) DEBASHIS MITRA M.Com, LL.B,F.C.A., A.C.M.A., A.C.S., DISA (ICAI) PhD.
LOAN & INVESTMENT BY COMPANIES u/s 186 A Company shall make investment through : Not more than 2 layers of investment companies unless otherwise prescribed The provisions of this sub-section shall not be applicable to (i) a company acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country ;
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) (ii) a subsidiary company having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force - section to 186 (1)
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) No company shall directly or indirectly (a) give any loan to any person or other body corporate : (b) give any guarantee or provide security in connection with a loan to any other body corporate or person ; and (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate exceeding : i. 60% of its paid-up share capital, free reserves and securities premium account ; or ii. 100% of its free reserves and securities premium account ; whichever is more section 186 (2)
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) If the limits as specified, above are exceeded prior approval by means of a : i. special resolution ( to specify the total amount upto which the Directors are authorised) ii. Passed at a general meeting shall be necessarysection 186 (3) Requirement shall not apply where loan / guarantee /security provided to its wholly owned subsidiary or a Joint Venture Company or acquisition made by a holding Company by way of subscription, purchase or otherwise of securities of its wholly owned subsidiary. Full details to be disclosed u/s 186 (4) Rule 11
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) Discloure requirements : The Company to disclose to the members : i. in the financial statement ii. the full particulars of the loans/investments/guarantee/security and iii. the purpose for which the same is proposed to be utilized by the recipient section 186(4)
LOAN & INVESTMENT BY COMPANIES U/S 186 (Contd.) No investment or loan etc. to be made : i. unless the resolution sanctioning it is passed at a meeting of the Board. ii. with the consent of all the directors present at the meeting and iii. the prior approval of the public financial institution concerned where any term loan is subsisting section 186 (5)
LOAN & INVESTMENT BY COMPANIES U/S 186 (Contd.) Prior approval of a PFI shall not be required : i. whre the aggregate of the loans and investments made along with the proposed ones does not exceed the limit as specified in sub-section (2) : and ii. If there is no default in repayment of loan installments or payment of interest thereonsection 186(5)
LOAN & INVESTMENT BY COMPANIES U/S 186 (Contd.) No company, which is registered under section 12 of the Securities and Exchange Board of India Act, 1992 and covered under such class or classes or companies as may as prescribed, shall take inter-corporate loan or deposits exceeding the prescribed limit and such company shall furnish in its financial statement the details of the loan or deposits. - Section 186 (6) According to Rule 11(3) the limit is pursuant to which it obtained certificate of registration from SEBI
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) No loan shall be given under this section at a rate of interest : i. lower than the prevailing yield of 1 year, 3 year, 5 year or 10 year Government Security close to the tenor of the loan- Section 186 (7)
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) No loan/investment etc. can be made if : i. a company is in default in repayment of any deposits accepted before or after the commencement of this Act; or ii. Has defaulted in payment of interest thereon; Till the defaults are subsisting section 186 (8)
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) Maintenance of Register : Every Company giving loan giving a guarantee providing security making an acquisition required to keep a register which shall contain particulars of loans and guarantees given, securities provided and acquisitions made section 186 (9)
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) As per Companies ( Meetings of Board and its Powers) Rules, 2014 Register to be maintained in Form MBP 2 Entries in the register to be made chronologically in respect of each such transaction within 7 days of the event date The register shall be kept at the registered office of the company The register can be maintained manually or in electronic mode The register shall be kept in the custody of the company secretary of the company or any other person authorised by the Board for the purpose.
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) As per Companies ( Meetings of Board and its Powers) Rules, 2014 (Contd.) Entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorised by the Board for the purpose Extract of the Register can be furnished to any member of the Company on payment of a fee which shall not exceed Rs. 10/- per page.
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) Nothing contained in this section, except sub-section (1), shall apply To a loan/guarantee/security made by : i. a banking company ; or ii. an insurance company; or iii. a housing finance company in the ordinary course of its business ; or a company engaged in the business of financing of companies or of providing infrastructural facilities ( for a NBFC registered with RBI this will include business of giving of any loan to a person or providing guarantee or security for due repayment of any loan availed by any person in the ordinary course of its business Rule 11 (2) )
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) Nothing shall apply to any acquisition : (i) made by NBFC registered under Chapter IIIB of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities : Provided that exemption to non-banking financial company shall be in respect of its investment and lending activities ; (ii) made by a company whose principal business is the acquisition of securities ; (iii) of shares allotted in pursuance of clause (a) of section 62 (1) section 186(11)
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) Contravention : If company contravenes : Company shall be punishable with fine (not less than Rs. 25,000/- but which may extend to Rs. 5 lakhs) Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 2 years and with fine not less than Rs. 25,000/- but which may extend to Rs. 1 lakh section186 (13)
LOAN & INVESTMENT BY COMPANIES u/s 186 (Contd.) Explanation-For the purposes of this section : (a) the expression investment company means a company whose principal business is the acquisition of shares, debentures or other securities; (b) the expression infrastructure facilities means the facilities specified in Schedule VI.
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RELATED PARTY TRANSACTIONS U/S 188 OF THE COMPANIES ACT, 2013 Presentation by CA. (DR.) DEBASHIS MITRA M.Com, LL.B, F.C.A, A.C.M.A, A.C.S., DISA (ICAI) PhD
Related Party - Definitions According to Rule 2 (e) of the Companies (Meetings of Board & its Powers) Rules, 2014. Related Party means a director or a KMP of the holding Company or his relative with reference to a Company According to Section 2 (76) of the Act related party with reference to a Company means. i. a director or his relative; ii. a key managerial personnel or his relative; iii. a firm, in which a director, manager or his relative is a partner;
Related Party Definitions (Contd.) iv) a private company in which a director or manager is member or director; v) a public company in which a director or manager is a director or holds along with his relatives, more than two per cent 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; vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:
Related Party Definitions (Contd.) Provided that nothing in sub-clauses (vi) and (Vii) shall apply to the advice, directions or instructions 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 ; ix) such other person as may be prescribed;
Related Party Definitions (Contd.) According to Section 2(77) of the Act relative with reference to any person means any one who is related to another if i) they are members of a H.U.F. ii) they are husband or wife, or iii) one person is related to the other in such manner as may be prescribed. A person shall be deemed to be the relative of another, If he or she is related to another in the following manner, namely:- a) Father including step-father b) Mother including step-mother c) Son including step-son d) Son s wife: e) Daughter: f) Daughter s husband: g) Brother including step-brother h) Sister including step- sister
Related party transactions u/s of the Companies Act,2013 SEC 188 Related party transactions Except with the consent of BOD given by a resolution and subject to such conditions as may be prescribed, no Co shall enter into any contract/ arrangement with a related party with respect to:- (a) sale, purchase or supply of any goods/materials; (b) Selling/otherwise disposing of, or buying, property of any kind; (c) Leasing of property of any kind; (d) Availing/ rendering of any services; (e) Appointment of any agent
Related party transactions u/s 188 of the Companies Act, 2013 (Contd.) (f) Such related party s appointment to any office or place of profit in the Co/ its subsidiary Co/ associate Co and (g) Underwriting the subscription of any securities/ derivatives thereof, of the Co. Provided no contract/ agreement in case of a Co having paid up share capital of not less than such amount ( Rs. 10 crores or more) or transactions not exceeding such sums, as may be prescribed, shall be entered into except with prior approval by a special resolution: Provided further that no member of such Co shall vote on such special resolution, if such member is related party;
Related party transactions u/s 188 of the Companies Act, 2013 (Contd.) Provided also that nothing in this sub sec shall apply to any transactions entered into in its ordinary course of business other than transactions which are not on an arm s length basis. Expl.- a) office or place of profit means i) where it is held by a director, if he receives anything by way of remuneration over & above remuneration to which he is entitled as director, by way of salary, fee, commission, perqs, rent free accommodation or otherwise; ii) by any individual, other than director, or by any firm/ Pvt. co / body corporate holding it receives from the co anything by way of remuneration, salary, commission, perqs, any rent free accommodation or otherwise
Related party transactions u/s 188 of the Companies Act, 2013 (contd.) b) expression arm s length transaction means transaction between 2 related parties that is conducted as if they were unrelated, so that there is no conflict of interest. (2) Every contract/ arrangement of sub sec (1) shall be referred to in Board s Report along with justification for entering into such contract/arrangement. (3) Where entered without obtaining consent of Board/ approval by special resolution in GM and if not ratified by Board/GM within 3 months, such contract voidable at the option of Board and director concerned (sanctioning) shall indemnify against any loss incurred by it.
Related party transactions u/s 188 of the Companies Act, 2013(contd.) (4) Open to the Company to proceed against director / any other employee for recovery of any loss sustained (5) Any director/ any other employee of Company who entered into / authorized such contract/ arrangement in violation, shall i) in the case of listed co be punishable with imprisonment upto 1 year or with fine not less than Rs.25,000/- may extend to Rs. 5 lacs or with both and ii) in any other Company- fine Rs. 25000/- to Rs 5 lacs.
According to Rule 15 of the Companies (Meetings of Board & its Powers) Rules, 2014 A company shall enter into any contract or arrangement with related party subject to the following conditions, namely:- (1) The agenda of the board meeting at which the resolution is proposed to be moved shall disclose- (a) the name of the related party and nature of relationship; (b) the nature, duration of the contract and particulars of the contract or arrangement; (c) the material terms of the contract or arrangement including the value, if any; (d) any advance paid or received for the contract or arrangement, if any;
According to Rule 15 of the Companies (Meetings of Board & its Powers) Rules, 2014 (Contd.) (e) the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract; (f) whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and (g) any other information relevant or important for the Board to take a decision on the proposed transaction.
According to Rule 15 of the Companies (Meetings of Board & its Powers) Rules, 2014 (Contd.) (2) Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement. (3) For the purpose of first proviso to the subsection (1) of section 188, except with the prior approval of the company by a special resolution- (i) a company having a paid-up share capital of ten crores rupees or more shall not enter into a contract or arrangement with any related party; or
According to Rule 15 of the Companies (Meetings of Board & its Powers) Rules, 2014 (Contd.) (ii) a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into- as contracts or arrangements with respect to clauses (a) to (e) of sub-section 188 with criteria, as mentioned below- sale, purchase or supply of any goods or materials directly or through appointment of agents exceeding twenty-five per cent of the annual turnover as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188; selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents exceeding ten per cent of net worth as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;
According to Rule 15 of the Companies (Meetings of Board & its Powers) Rules, 2014 (Contd.) leasing of property of any kind exceeding ten per cent of the net worth or exceeding ten per cent of turnover as mentioned in clause (c) of sub-section (1) of section 188; availing or rendering of any service directly or through appointment of agents exceeding ten per cent of the net worth as mentioned in clause (d) and clause (e) of sub section (1) of section 188; appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and half lakh rupees as mentioned in clause (f) of subsection 188; or
According to Rule 15 of the Companies (Meetings of Board & its Powers) Rules, 2014 (Contd.) remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding one per cent of the net worth as mentioned in clause (g) of sub-section (1) of section 188. Explanation.-(1) The turnover or net worth referred in the above sub-rules shall be on the basis of the audited financial statement of the preceding financial year. (2) In case of wholly owned subsidiary, the special resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between wholly owned subsidiary and holding company.
According to Rule 15 of the Companies (Meetings of Board & its Powers) Rules, 2014 (Contd.) (3) The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section 101 shall contain the following particulars namely:- (a) name of the related party (b) name of the director or key managerial personnel who is related, if any; (c) nature of relationship; (d) nature, material terms, monetary value and particulars of the contract or arrangement; (e) any other information relevant or important for the members to take a decision on the proposed resolution.
According to Rule 15 of the Companies (Meetings of Board & its Powers) Rules, 2014 (Contd.) According to Rule 16 the Register of Contracts or Arrangements in which Directors are interested shall be maintained in MBP4 According to Rule 17 no director of a Company shall receive any payment by way of compensation in connection with any event mentioned in sub-section 1 unless prescribed particulars are disclosed to the members of the Company while passing the Resolutions.