Chapter XII Meetings of Board and its Powers (Sections 173 195) read with The Companies (Meetings of Board and its Powers) Rules, 2014 Sections applicable from September 12, 2013: Sections 176, 180 to 183, 185, 192, 194 and 195 Sections applicable from April 1, 2014: Sections 173-175, 177 to 179, 184, 186 to 191 and 193 1
Meetings of Board (Section 173; Rule 3 and 4) 2
Meeting of the Boards of the Company First Board Meeting of the company should be held within 30 days from the date of incorporation. Number of Board Meeting in a Financial year: Minimum 4 meetings of the Board should be held every year. A maximum gap of 120 days can be between two consecutive Board meetings. Modes of participation in the Board Meeting: The directors in the meeting can participate either through person or video conferencing or audio visual means which are capable of recognizing the directors and recording and storing the proceedings of the meeting. Notice for calling the meeting: A minimum 7 days notice should be given in writing to every director at the address registered with the company. Exception: A meeting can be held by giving a shorter notice to transact an urgent business, provided atleast one independent director, if any, is present at the meeting. Means of sending the notice: Either through hand delivery or by post or by electronic means. Penalty in case of failure to send notice: Every officer of the company whose duty is to send the notice shall be liable to a penalty of Rs. 25,000/- 3
Number of Board Meetings in case of One Person Company, Small Company and Dormant Company Number of Board Meeting in a Financial year: Other provisions of the section shall be deemed to have been complied with if minimum 1 meeting of the Board is held every halfyearly. A maximum gap of 90 days can be between two consecutive Board meetings. Exception: Nothing can affect the above stated provision and Section 174 of the Act, in case, one person company has only one director in the Board. Matter not to be dealt in a meeting through video conferencing or other audio visual means Approval of annual financial statements Approval of Board report Approval of prospectus Audit committee meeting for consideration of accounts Approval of matters relating to amalgamation, merger, demerger, acquisition and takeover. 4
Quorum for meetings of Board (Section 174) 5
Quorum for the Board Meeting Quorum of the Board Meeting: Higher of the following- 1/3 rd of the total strength of the Board Or 2 Directors Non- presence of quorum: If articles are silent, then, the meeting shall stand adjourned to the same day, time and place in the next week and in case, it s a national holiday then the next succeeding day at the same time and place. Important Points to be considered If the directors of the company participate through video conferencing or by other audio visual mean it shall be counted for quorum. In case of any vacancy in the Board, the continuing directors may act till the quorum fixed by the Act is not reduced below the limit and in case, the quorum is reduced below limit fixed, they can act for the purpose of increasing the number of directors to the limit fixed for the quorum or for summoning a general meeting and not for any other purpose. In case of Interested Directors present in the meeting: if the number of directors present in the meeting exceeds or equals 2/3 rd of the total strength of the Board, then, the noninterested director not less than 2, shall form the quorum for the meeting. Any fraction of number shall be rounded off as one and total strength shall not include directors whose places are vacant. 6
Passing of resolution by circulation (Section 175; Rule 5) 7
Resolution by circulation The Board can pass resolution by circulation if the following conditions are satisfied: resolution should be circulated in draft with necessary papers; it should be sent to all the directors, or members of the committee, as the case may be at their address registered with the company in India; the draft can be sent either through hand delivery or by post or by courier or E- mail or fax; the resolution should be approved by a majority of directors who are entitled to vote on the resolution. Exception: If not less than 1/3 rd of the total number of directors of the company require the resolution under circulation should be decided at a meeting, the chairperson should put the resolution to be decided at a meeting. The resolution passed through circulation shall be noted at a subsequent Meeting of the Board or the committee and be made part of the minutes of such meeting. 8
Defects in appointment of directors not to invalidate actions taken (Section 176) 9
Defects in appointment of Director but Acts valid.. Any act done by a person in the capacity of a director shall not be deemed invalid if the company subsequent to his appointment notice that there was a defect in the appointment of the director due to the following reasons: disqualification due to the virtue of any provision contained in this Act or in the articles of the company, or; termination due to the virtue of any provision contained in this Act or in the articles of the company. Exception: If the company had noticed that any appointment of a director as invalid or terminated, any act done after that by such a director can not be held valid. 10
Audit Committee (Section 177; Rule 6 and 7) 11
Audit Committee Listed Company Unlisted Public Company Paid-up capital Rs. 10 crores or more or Turnover Rs. 100 crores or more or Aggregate outstanding loans or borrowings or debentures or deposits Note exceeding Rs. 50 crores The paid up share capital or turnover or aggregate outstanding loans, or borrowings or debentures or deposits shall be as on the date of last audited financial statements. 12
Composition of the Committee The committee shall consist of minimum 3 directors, majority of whom shall be independent directors. The majority members of the committee including the chairperson should be with an ability to read and understand the financial statement. Note: The Audit Committee of the company existing immediately before the commencement of this Act shall, within 1 year of such commencement be reconstituted in accordance with the above stated provisions. 13
Duties and Responsibilities of the Committee To act in accordance with the terms of reference specified by the Board which shall include the following and to investigate in the matter or referred it to the Board. Further, have the power to seek professional advice from external sources and to have full access to information contained in the records of the company: recommending the appointment, remuneration and terms of appointment of auditors of the company; reviewing and monitoring the auditor s independence and performance, and effectiveness of audit process; examining the financial statement and the auditors report thereon; approval or any subsequent modification of transactions of the company with related parties; scrutinizing the inter-corporate loans and investments; valuation of undertakings or assets of the company, wherever it isnecessary; evaluating internal financial controls and risk management systems; monitoring the end use of funds raised through public offers and related matters. To call for the comments of the auditors about internal control systems, scope of the audit including the observations of the auditors and review of financial statement before their submission to the Board and discuss the related issues with the internal and statutory auditors and management of the company. 14
Important points to be kept in mind At the time of consideration of auditor s report, the auditors and KMP has the right to be heard in the meetings but cannot vote. The composition of the Audit committee should be disclosed in the Board s Report. If the Board does not consider the recommendations given by the Audit committee, same shall be disclosed in the Board s Report along with the reasons thereof. 15
Establishment of Vigil Mechanism for Directors & Employees Listed Company Other Company Accept deposits from the public Borrow money from Banks and PFI exceeding Rs. 50 crores Constitution of Vigil Mechanism The companies which are required to constitute audit committee then, that audit committee and in other companies, the Board should nominate a director to play the role of the audit committee for the purpose of vigil mechanism. Note The details of establishment of Vigil Mechanism should be disclosed on the website of the company, if it has one, and in the Board s Report. 16
Duties and Responsibilities of the Vigil Mechanism To provide adequate safeguards against victimisation of employees and directors who avail of the vigil mechanism. Direct access to the chairperson of the Audit committee or the director nominated to play the role of Audit Committee in appropriate or exceptional circumstances. To take suitable action against the concerned director or employee including reprimand, in case of repeated frivolous complaints filed by the directors or employee. Note In case the member of the committee have conflict of interest in a given case, then they should rescue themselves and the other members in the committee should deal with the matter. Punishment for Contravention of the Section 178 Company Officer of the Company in default Fine Rs. 1,00,000/- Rs. 5,00,000/- Max. 1 year Or/ both Min: Rs. 25000/- Max: Rs. 100000/- 17
Nomination and Remuneration Committee and Stakeholders Relationship Committee (Section 178; Rule 6) 18
Nomination and Remuneration Committee Listed Company Unlisted Public Company Paid-up capital Rs. 10 crores or more or Turnover Rs. 100 crores or more or Aggregate outstanding loans or borrowings or debentures or deposits Note exceeding Rs. 50 crores The paid up share capital or turnover or aggregate outstanding loans, or borrowings or debentures or deposits shall be as on the date of last audited financial statements. 19
Composition of the Committee Three or more nonexecutive directors One-half shall be independent directors Note The Chairperson of the company, whether executive or non-executive can be the member of the committee but cannot chair the committee. 20
Duties and Responsibilities of the Committee Identifying the person who can become the directors and can be appointed in senior management of the Company Recommending the appointment and removal of the directors Evaluating the performance of every director Formulating the criteria for determining qualifications, positive attributes and independence of a director Recommending remuneration policy to the Board for the directors, key managerial personnel and other employees. Such policy should be disclosed in the Board Report Evaluating the performance of every director Ensuring that the level and composition of remuneration is reasonable and fair Maintaining a balance between remuneration and performance Maintaining a balance between fixed and incentive pay to reflect the short and long term performance objectives appropriate with the working of the company and its objectives and goals 21
Stakeholders Relationship Committee If Company has more than 1000 Shareholders or Debenture -holders or Deposit Holders or Any other Security holder At any time during a financial year Composition of the Committee Chairperson Non- executive Director Other members As may be decided by the Board 22
Duty of the Stakeholders Relationship Committee To consider and resolve the grievances of security holders of the Company. Duty of the Chairperson of all the Committees under Section 178 To attend the General meetings of the Company and in his absence by such member of the Committee as authorized by him. Punishment for Contravention of the Section 178 Company Officer of the Company in defaul Fine Rs. 1,00,000/- Rs. 5,00,000/- Max. 1 year Or/ both Min: Rs. 25000/- Max: Rs. 100000/- 23
Powers of Board (Section 179; Rule 8) 24
Powers of Board The Board can exercise the following powers by means of board resolution: To make calls on shareholders in respect of money unpaid on their shares. To authorize buy-back of securities under Section 68. To issue securities, including debentures, whether in or outside India. To borrow monies. To invest the funds of the company. To grant loans or give guarantee or provide security in respect of loans. To approve financial statement and the Board s Report. To diversify the business of the company. To approve amalgamation, merger or reconstruction. To take over a company or acquire a controlling or substantial stake in another company. 25
Powers of Board To make political contribution. To appoint or remove key managerial personnel (KMP). To take note of appointment(s) or removal(s) of one level below the KMP. To appoint internal auditors and secretarial auditor. To take note of the disclosure of director s interest and shareholding. To buy, sell investments held by the company (other than trade investments), constituting 5% or more of the paid up share capital and free reserves of the investee company. To invite or accept or renew public deposits and related matters. To review or change the terms and conditions of public deposit. To approve quarterly, half yearly and annual financial statements or financial results as the case may be. Rights of the Company The company in the General Meeting can impose restrictions and conditions on the powers of the Board that it exercise. 26
The board vide resolution can delegate its power to borrow monies, invest the funds of the company and grant loans or give guarantee or provide security in respect of loans to any of the following: Committee of Directors Managing Directors Manager Other principal officer of the company In Case of Branch Office Principal officer of Branch Office 27
Banking Company Acceptance of deposits of money from public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise Placing of monies on deposit with another banking company In normal course of business Not to be considered as borrowing of monies or making of loans 28
Restrictions on powers of Board (Section 180) 29
The Board of Directors of a Company shall exercise the following powers only with the consent of the company by a special resolution: Sell, lease or otherwise dispose of the whole or substantially whole of the undertaking/(s) of the Company Exceptions: the title of the buyer or other person shall not affect, if he has purchased or taken on lease from the company any property, investment or undertaking in good faith. if the company sale or lease property in its normal course of business. Invest the amount of compensation received by the company as a result of merger or amalgamation otherwise in trust securities. Borrow money, if the amount to be borrowed along with the amount already borrowed exceed the aggregate of paid-up capital and free reserves apart from temporary loans obtained from the company s bankers in the ordinary course of business. In case, the company borrow monies in excess of the limit specified, it shall be neither be valid nor effective, until the lender proves that the loan was given in good faith and without knowledge that the limit had been exceeded Special Resolution passed shall specify the total amount up to which the monies may be borrowed by the Board of Directors Remit or give time for repayment of any debt due from a director 30
Important points to be kept in mind Meaning of Undertaking An undertaking in which the investment of a company is more than 25% of its net worth as per the audited balance sheet of the preceding financial year or which generates 25% of the total income during the previous financial year. Meaning of Substantially the whole of the undertaking It means 20% or more value of the undertaking in a financial year as per audited balance sheet of the preceding financial year. Temporary Loans Temporary loan taken by the company in ordinary course of its business from its bankers, repayable within 6 months, shall not be included. 31
Company to contribute to bona fide and charitable funds, etc. (Section 181) The Board of Directors of the company may contribute to a bona fide charitable and other funds but with the permission in general meeting if any amount in any financial year exceeds 5% of the average net profits for 3 immediately preceding financial years 32
Prohibitions and restrictions regarding political contributions (Section 182) The Company may contribute any amount directly or indirectly to a political party Provided If in any financial year the aggregate of amount shall not exceeds 7.5% of the average net profits for 3 immediately preceding financial years Resolution to be passed in the Board for authorizing such a payment 33
Deemed Contribution Following shall be treated as deemed contribution by the company: if any amount is given by the Company on its behalf or on its account to a person who is associated with a political party or was associated with the political party at the time of giving contribution, it shall be deemed to be a contribution to a political party. if a company incurred any expenditure, directly or indirectly by way of advertisement, souvenir, brochure, tract, pamphlet on behalf of the political party or for its advantage, it shall be deemed to be a contribution for a political purpose. 34
Disclosure of Contribution Every Company who contribute any amount to a political party, it shall disclose the same, in its profit and loss account along with the name of the party to whom the contribution is made. Circular No. 19 of 2013: Contribution to Electoral Trust If a company, give contribution to a Electoral Trust Company, then it shall disclose in its profit and loss account the amount contributed to the Electoral Trust only. 35
Punishment for Contravention of the Section 182 On Company On officer of the Company in default Fine Max: 5 times of the contribution Max: 6 month Or/ both Max: 5 times of the contribution 36
Power of Board and other persons to make contributions to national defence fund, etc. (Section 183) 37
Board of Directors Or Person or authority exercising the Power of Board of Directors Or Person or authority exercising the Power of company in General Meeting Contribute Amount To National Defence Fund or Fund approved by the Central Government for the purpose of national defence Amount should be disclosed in the profit and loss account Note This section has over ridding effect on the Act, Section 180, 181, 182as well as on the Memorandum of Association and Articles of Association of the company. 38
Disclosure of interest by director (Section 184; Rule 9) 39
When a director has to give disclosure of interest..? At the first Board meeting after he becomes the Director of the Company and thereafter, in the first Board meeting of each financial year. If any change is there in the disclosure already given. In case the director has any concern or interest directly or indirectly in a contract or arrangement to be entered between: the company and the body corporate in which the director himself or in association with any other director holds more than 2% of the shareholding in that body corporate or is the promoter, manager or CEO of that body corporate the company and a firm or other entity in which director is a partner or member. If after the contract or arrangement between two companies, he become interested. The disclosure shall be given by giving a notice in writing in Form MBP 1. 40
Important points to be considered It shall be the duty of the director to see, that the notice of disclosure is disclosed in the meeting held immediately after the date of the notice. The notice of disclosure shall be kept at the registered office of the company in the custody of the CS or any other person so authorized and shall be preserved for 8 years from the end of the financial year to which it relates. Exception to Section 184 The section does not restrict any director of the company from having any concern or interest in any contract or arrangement. If the director of one or more companies together hold less than 2% of the paidup capital in the other company with which the contract or arrangement is to be entered by the company alone or along with other companies. 41
Punishment for Contravention of the Section 184 (1) & (2) Director who contravene Max: 1 year Or/ both Min: Rs. 50,000/- Max: Rs. 100,000/- 42
Investments of company to be held in its own name (Section 185; Rule 10) 43
No Company Shall give any loan/ give guarantee/ provide security directly or indirectly to its Director To the Holding Company To any partner or relative of such director A body corporate whose board is controlled by the lending company To any firm in which director or its relative is a partner Private Company in which director is a director or member A body corporate at whose general meeting 25% or more of the total voting power is exercised or controlled by the director himself or with two or more directors of the lending company 44
Exception to Section 185 If loan is given to a managing or whole-time director in the following cases: As a part of the conditions of services extended by the company to its employee if such an scheme is approved by the members vide special resolution in the general meeting of the company. if loan/ security is provided or guarantee is given by the company in its normal course of its business for the due repayment of the loan and charges interest at a rate which is not less than the bank rate declared by RBI. any loan given by the holding company to its wholly owned subsidiary or guarantee given or security provided in respect of such a loan. any guarantee given or security provided by a holding company to its wholly owned subsidiary in respect of loan taken from any bank or financial institution. Note The subsidiary should use the loan for its principal business activities. 45
Punishment for Contravention of the Section 185 (1) On Company Director or the person Fine Min: Rs. 500,000/- Max: Rs. 25,00,000/- Max: 6 month Or/ both Min: Rs. 5,00,000/- Max: Rs. 25,00,000/- 46
Investments of company to be held in its own name (Section 186; Rule 11, 12 &13) 47
A Company can make investment through not more than two layers of investment companies only untill unless otherwise is prescribed EXCE PTION A company can acquire any other company incorporated outside India if such other company has investment subsidiaries beyond two layers as per the laws of that country A subsidiary company from having any investment subsidiary for the purpose of meeting the requirements under any rule or regulation framed under any the law for the time being in force 48
No Company shall directly or indirectly Give any loan to any person Or Other body corporate Give any guarantee Or Provide security in connection with the loan to Any person or body corporate Acquire by way of subscription, purchase or otherwise the securities of any other body corporate Exceeding 60% of its paid-up share capital, free reserves and securities premium account Or 100% of its free reserves and securities premium account Whichever is more 49
Important points to be considered If the limit of 60% or 100% is exceeded by the Company then prior approval is required by way of special resolution in the general meeting specifying the total amount upto which the Board is authorized to give loan or guarantee or provide security or make acquisition. Exception: In case the Company give loan or guarantee or provide security to its wholly owned subsidiary or a joint venture Company or if the holding acquire by way of subscription, purchase or otherwise securities of its wholly owned subsidiary. It shall be the duty of the company to disclose in the financial statement full particulars of the loan given, investment made or guarantee or security given, the purpose for which it is given and the proposed utility of the same by the recipient. 50
Important points to be considered The company shall pass a resolution in the Board meeting with the consent of all the directors for sanctioning of the investment, loan or guarantee or security to be provided. Also, if any loan is subsisting on part of the company then prior approval of the public financial institution (PFI) shall also be required. Exception: Approval of the PFI shall not be required if the aggregate of the amount doesnot exceed the limit specified in sub-section 2 of section 186 and there is no default in repayment of loan instalments or interest thereon by the company. The companies registered under Section 12 of the SEBI Act, 1992, cannot take any inter-corporate loan or deposit in excess of the limit specified on those companies and such companies are also required to make disclosure in their financial statement the details of the loan or deposits. The rate of interest shall not be lower than the prevailing yield of one, three, five or ten year government security closet to the tenor of the loan. 51
Maintenance of Register The register should be maintained by the Company in Form MBP 3 and particulars shall be entered in the register within 7 days of making the loan or giving guarantee or providing security or making acquisition. The content of the register shall be: Particulars of the loan; Particulars of guarantee given; Particulars of securities provided; Particulars of acquisitions made. The register shall be maintained either manually or electronic and preserved permanently at the registered office of the company under the custody of a CS or in the absence of CS by the Director or officer authorized by the Board. Entries of the register shall be authenticated by the CS or the person authorized to do so by the Board. The register shall be open for inspection and extracts from the register may be furnished to any member of the Company on the payment of fees as prescribed in the Articles of the Company but the same shall not exceed Rs. 10/- per page. 52
Exception to Section 186 Loan made or guarantee given or security provided by a banking company or an insurance company or a housing finance company in ordinary course of its business or if a company is engaged in the business of financing companies including NBFC or providing infrastructural facilities If any acquisition is made by a NBFC company whose business is acquisition of securities. If any acquisition is made by a company is principal business is acquisition of securities. If acquisition is made of shares allotted pursuant to clause (a) of sub-section 1 of section 62. 53
Punishment for Contravention of the Section 186 On Company On officer of the Company in default Fine Min: Rs. 25,000/- Max: Rs. 5,00,000/- Max. 2 years Both Min: Rs. 25,000/- Max: Rs. 1,00,000/- 54
Investments of company to be held in its own name (Section 187; Rule 14) 55
Investment made or held by company Property Other Assets Security Shall be made or held in its own name Note/ Exception The company can hold shares in its subsidiary in the name of the nominee /(s) of the company to ensure that the number of members of the subsidiary do not fall below the statutory limit 56
Cases where securities held in the name of the Company can be transferred Depositing of shares or securities with the bankers of the company for collection of interest or dividend. Depositing or transferring of shares or securities with the SBI or a scheduled bank, being the bankers of the company for transfer thereof. Provided if within 6 months the shares or securities are not transferred, the company should get the same retransferred in its name. Depositing or transferring of shares or securities to any person for the repayment of loan taken by the company or any other obligation. To hold investment in the name of the depository, where the securities are held b the company as beneficial owner 57
Maintenance of Register of Investment The register should be maintained by the Company in Form MBP3 in case investment in shares are securities are held as beneficial owner. The content of the register shall be: Particulars of the investment; Reasons for not holding investment in its own name; Name and the relationship or contract under which the investment is held in the name of any other person; If investment are held in the name of third part, details thereof. The register shall be open for inspection for the members and debenture holders of the company without any charges during the business hours subject to the restrictions if any. The register shall be maintained at the registered office of the company under the custody of a CS or in the absence of CS by the Director or officer authorized by the Board. Entries of the register shall be authenticated by the CS or the person authorized to do so by the Board. 58
Punishment for Contravention of the Section 187 On Company On officer of the Company in default Fine Max. 6 months Or/ both Min: Rs. 25000/- Max: Rs. 100000/- Twenty Five Thousand Rupees Twenty Five Lac Rupees 59
Related Party Transactions (Section 188; Rule 15) 60
Meaning of Related Party Section 2(76) of the Act defines the term Related party. Which transactions can be entered into between two related parties? a) sale, purchase or supply of any goods or material either directly or through appointment of agent; b) leasing of property of any kind either directly or through appointment of agent; c) availing or rendering of any services either directly or through appointment of agent; d) appointment of any related party to the office or place of profit in the company or its subsidiary or associate company; e) underwriting the subscription of securities or derivatives thereof, of the company; 61
Authorization to enter into related party transactions With the consent of the Board of Director in the Board Meeting a Company can enter into related party transaction with the related party. Points to be considered in the Board Meeting The agenda of the board meeting shall disclose the name and relation of related party along with the nature of the contract and its time duration. The terms of the contract including the value and if any advance is paid or received. Whether the factors relevant to the contract have been considered or not and if not reasons thereof. If any director is interested in the contract or arrangement, he should not participate in the meeting. 62
Requirement of prior approval vide Special Resolution: In the following cases, the company should pass a special resolution in the general meeting, if it desire to enter into a related party transactions: if the paid up capital of the company is Rs. 10 crore or more or where the transaction (s) entered into is exceeding the following: In case of (a): if transaction exceeds 25% of the annual turnover. In case of (b): if transaction exceeds 10% of the net worth. In case of (c): if transaction exceeds 10% of the net worth. In case of (d): if monthly remuneration exceeds Rs. 2.5 lacs. In case of (e): if remuneration exceeds 1% of the net worth. Note Turnover or net worth shall be on the basis of the Audited Financial statement of the preceding financial year. 63
Other important issues a) The Board report should disclose the contract or arrangement entered by the Company along with the justification. b) If any contract or arrangement is entered by the Company without the consent of the Board or passing of special resolution it shall be ratified by the company within 3 months from the date of such contract or it shall be voidable at the option of the company and the director concerned should indemnify the company against any loss incurred by it. c) The company can even proceed against the director for the recovery of losses sustained by it due to the contravention of the provision of section 188. d) In case of a transaction between holding and its wholly owned subsidiary, resolution passed by the holding shall be sufficient for the purpose of entering into a contract. Exception Section 188 shall not apply if the transaction entered is in ordinary course of business and on the basis of Arm s Length basis. 64
Punishment for Contravention of the Section 188 Director Or Any other employee of the Company Listed Company Other Company Fine Max. 1 year Or/ both Min: Rs. 25000/- Max: Rs. 500000/- Min: Rs. 25000/- Max: Rs. 500000/- 65
Contract of employment with managing or whole-time directors (Section 189; Rule 16) 66
General provisions of the section Every Company shall maintain a register in Form MBP 4 containing the relevant particulars of all contracts or arrangement as specified in subsection2 of section 184 and 188. The register shall be kept at the registered office of the Company and shall be preserve permanently. It shall be kept in the custody of a CS or any other person as authorized by the Board. It shall be kept open for inspection for the members during the business hours, and the company shall provide its extract within 7 days of the request made by any member upon the payment of fees as prescribed in the article provided it should not exceed Rs. 10/- per page. The register shall be placed in the every Annual General meeting of the Company and shall remain open and accessible during the continuance of the meeting to any person who have the right to attend the meeting. 67
Exception No entry is required to be made for the contract or arrangement entered for the sale, purchase or supply of any goods, materials or services if the value of the goods/material or services does not exceed Rs. 5 lacs. If the company is a banking company and it collects bills in the ordinary course of its business. Contravention of Section 189 and rules made thereunder The director liable under this section and rules made thereunder shall be liable with a penalty of Rs. 25,000/- 68
Contract of employment with managing or whole-time directors (Section 190) 69
Contract of Service Managing Director or Whole- time director If in writing If not in writing Copy of Contract A written memorandum containing terms of it To be kept at the registered office of the company The copies shall be open for inspection for the members without any fees 70
Punishment for Contravention of the Section 190 (1) & (2) On Company On officer of the Company in default Fine Fine Twenty Five Thousand Rupees Five Thousand Rupees for each default Note Provisions of Section 190 are not applicable on a private company. 71
Payment to director for loss of office, etc., in connection with transfer of undertaking, property or shares (Section 191; Rule 17) 72
No director of a company shall receive any payment by way of compensation with respect to the following, until the same is approved by way resolution in the general meeting by the members transfer of whole or any part of any undertaking or property of the company; transfer to any person all or any of the shares of the company due to any of the following circumstances: if an offer is made to the general body of the shareholders; if an offer made by or on behalf of some other body corporate with a view to make a company its subsidiary or a subsidiary company of its holding; if an offer is made by or on behalf of an individual with a view to exercise or control not less than 1/3 rd of the total voting power at any general meeting of the company; any other offer which is conditional on acceptance to a given extent. 73
Exception Nothing contained in sub-section 1 shall affect any payment made by the company by way of compensation for loss of office or as consideration for retirement from office or in connection with the same to its managing or whole-time director or manager pursuant to the limits specified in sub-section 3 of Section 202 of the Act. in the cases provided below, no payment shall be made to the managing or wholetime director or manager under sub-section 2 of section 191: the company is in default of repayment of public deposit or interest thereon; the company is in default of repayment of debentures or interest thereon; the company is in default of repayment of any liability, secured or unsecured payable to any bank, PFI or other financial institution; the company is in default of repayment of dues towards income tax, VAT, excise duty, service tax or any other tax or duty payable to the CG or SG or any statutory authority untill it has disputed the due and the case is pending; if there are outstanding statutory dues to the employees or workmen of the company untill the liability is under a dispute; the company has not paid dividend on preference shares or has not redeem them on due date. 74
Contravention of Section 189 The director liable under this section shall be liable with a penalty of Rs. 25,000/- and may extend to Rs. 100,000/- Important points to be considered If the payment to be made under sub-section 1 or sub-section 2of the act, is not approved in the general meeting or the adjourned meeting due to the want of quoram it shall not be deemed to have been approved. In case the director receives any payment in contravention of sub-section 1 or before it is approved in the general meeting, it shall be deemed to have been received by him in trust for the company. The section does not restrict on any disclosure to be made with respect to any payment received under section 191 or made to any director under any other law requiring such disclosure to be made. 75
Restriction on non-cash transactions involving directors (Section 192) 76
Director Or Person connected with the Director Should not enter into any arrangement for acquiring assets of the company for consideration other than cash Company Holding Subsidiary Associate Company 77
Note Neither the director or person connected with the director can enter into such an arrangement nor the company unless resolution is passed in the General Meeting. If the director of the company is even the director of the holding company, then resolution should be passed in both the Companies. The resolution should contain the particulars of the arrangement along with the value of the assets. The value of the asset should be calculated by a registered valuer. In case of contravention: The arrangement shall be voidable at the instance of the Company unless: The restitution of money involved in the arrangement is not possible and the Company is indemnified by any other person for the loss or damage. The rights acquired are bona fide and without the notice of contravention of the provision of Section 192. 78
Contract by One Person Company (Section 193) 79
One Person Company Limited by Shares Limited by Guarantee Enter into a Contract Sole member who is even the Director Terms of the contract or offer shall be as per the memorandum Or It should be recorded in the first meeting of the Board held after the contract If the contract is in writing 80
Note Sub-section1 of section 193 is not applicable if the contracts entered are in normal course of business. it is the duty of the Company to inform to the Registrar about the contract within 15 days of the approval of the contract in the Board Meeting. 81
Prohibition on forward dealings in securities of company by director or key managerial personnel (KMP) (Section 194) 82
Company Holding Subsidiary Associate Company Director or KMP Should not buy A right to call/make for delivery at a specified price and within specified time of specified number of shares or debenture Or A right, as he may elect to call/ make for delivery at a specified price and within specified time of specified number of shares or debenture 83
Contravention of Subsection 1 of section 194 Director or KMP who contravene Max. 2 year Or/ both Min: Rs. 100,000/- Max: Rs. 500000/- Director or KMP should surrender its securities so acquired. The Company should not register the securities in the name of the Director or KMP in the register. 84
Note Shares and debentures means shares and debentures of the company or its holding or subsidiary in which the person is a director or KMP. In case of contravention, the transfer should not be registered and the name of transferor should remain in the register of members. 85
Prohibition on insider trading of securities (Section 195) 86
Meaning of Insider Trading An act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities by any director or KMP or any other officer of a Company either as principal or agent, if they are expected to have any access to any non-public price sensitive information in respect of securities of the company. Meaning of Price Sensitive Information Any information which relates, directly or indirectly, to a company and which if published is likely to materially affect the price of securities of the company. 87
NO Person Or Director Or KMP Indulge in insider trading Contravention of Section 195 Or/ Max. 5 year both Min: Rs. 500,000/- Max: Rs. 25,00,00,000/- Or 3 times the amount of profit Which ever is higher 88