MEETINGS OF BOARD AND ITS POWERS (Section 184to 195) CONCEPT NOTE s EduTapContents 1 Introduction. 2 Section 184 - Disclosure of interest by director. 2.1 General Disclosure... 2.2 — Specific Disclosure... 3. Section 185 - Loan to directors, ete. .. 3.1 Prohibited Cases... 3.2 Conditional Cases... 3.3. Exempted Cases.. 3.4 — Punishment in case of violation of this provision 4 Section 186 - Loan and investment by company. 4.1 Section 186(1) en 4.2. Section 186(2).. 4.3. Other provisions of Section 186. 4.4 Rate at which Loans or Investments are transacted .. 4.5 Maintaining Register for Loans and Investment by Companies. 4,6 Certain Exceptions for Loans and Investment by Companies .. 4.7 Punishment for violation of Section 186 .. 5 Section 187 - investments of company to be held in its own name.. 5.1 Punishment for violation of the above Section .. 6 _ Section 188 - Related party transactions 6.1 Whatis the legal requirement for entering Related party Transactions (RPT) 6.2 Other provisions of Section 188 : a 7 cry 6.3 Punishment for violation of Section 188 7 cry 7 Section 189 - Register of contracts or arrangements in which directors are interested... cry 8 Section 190 - Contract of employment with managing or whole-time directors, 7 2 9 Section 191 - Payment to director for loss of office, etc., in connection with transfer of undertaking, property or shares. ... 12 10 Section 192 - Restriction on non-cash transactions involving directors, 13 11 Section 193 - Contract by One Person Company. 14 12 Section 194 Prohibition on forward dealings in securities of company by director or key managerial personnel... 13. Section 195 - Prohibition on insider trading of securities. WWW.EDUTAP.CO.IN QUERV? HELLO@EDUTAP.CO.IN / 81462072411 Introduction In the Companies Act, 2013 as per the Syllabus mentioned, Specific reference to Chapter Ill, Chapter IV, Chapter Vill, Chapter X, Chapter XI, Chapter Xil and Chapter XXVII is mentioned. «In this lesson, we will cover Chapter XI - Appointment and Qualifications of Directors, which comprises of section 184 to section 195. 2 Section 184 - Disclosure of interest by director. Who is an interested director? In the image it is shown that Ram who is a director in company A and at the same time hes also a shareholder in company B or has such relation that he can benefit from company 8. [May be Ram's wife is working in company 8 or Son is senior executive in Company B etc.) ‘* Now if the company A wants to enter into @ contract or agreement with Company 8, then Ramis an interested director. 2.1 General Disclosure Director should disclose his interest in any company or association at the following times by giving a notice in FORM MBP1. Every Director at 1. In the first meeting of Board of directors after his appointment as director 2. In first meeting of board of directors ‘Whenever : First Board First Board 7 each financial year ammuagee rang iat there is any ‘ oo change like 3. Whenever there isa change in disclosure eaetas samemibiaad shareholding. already made like increase in shareholding from 3 %to 5%. cca Haver Feerem any Corgan / Body Comerate/ Fem ee Note: All Such notices given by directors disclosing his interest shall kept for 4 period of eight years from the end of the financial year. 2.2 Specific Disclosure Any director if directly/ indirectly interested in a contract or arrangement shall 1. Disclose his interest at the Board Meeting. I 2. Not participate in such [tosis | meeting. Example: As seen in the above image, in a meeting in which such contract is being discussed by directors of company A, such a director or directors shall disclose their interest and should not participate in that meeting.3. Ifa director is not interested in company at the time when contract was entered into but became Interested later, then he should disclose his interest in the immediate next meeting of Board of Directors. (As discussed in general disclosure). What is the criteria of interested director in specific disclosure? The criterion of interested director is any director (Ram in the above image) alone or together with other director holds > 2% shareholding in Company B or is partner, owner, promoter, or CEO in Firm B. What is the penalty for violation of this provision? Ifa contract is entered by violating these conditions like interested director not disclosing his interest or participating in a meeting in which the contract was discussed, then + Contract can become vold if company wants to cancel the contract and ‘+ Director shall be punishable with fine of one lakh rupees. 3 Section 185 - Loan to directors, etc. Imagine a situation where there is no regulation on Loa Guarantee / scurry what amount of loan on ~ Secretar what terms and conditions shall be given to directors _— me by company. vese * ons * + + if there is no | otc ‘rene ine on rah mascnmner eee then Jo {/Gurcruweve eee) ‘Gere directors will be fC hcadne concent EE atepusasgeud | wonongunin racy getting the loans by | sheconeny ‘staon rosigemgany ay cheating the company. * Jemima bounce tipmepal OTHER! cbt Hence to prevent such situations from arising section 185 has spelt out the criteria. The entire section is summarised in the image. 3.1 Prohibited Cases Company cannot give loan, guarantee or security for any loan taken in such instances as shown in a the image. cane 3.2 Conditional Cases The company can give loan, guarantee or security to any party with whom ferested, subject to conditions mentioned in ctor the image. corer alpace WWW.EDUTAP.CON QUERY? HELLO@EDUTAP.CO.IN / 8146207241What 1g of Any party 2 The cases of interested parties are mentioned as follows 1. Ifa director of @ company is a director or member of any private company (OR) 2. Any company where not less than twenty-five percent, of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together. 3.3. Exempted Cases Three Exceptions in case Loans to Directors are discussed as follows. 1. Loan can be given to a managing or whole-time director (whole-time director” includes a director in ‘the whole-time employment of the company) when a. That is being given as part of scheme introduced for the employees of the company. b. Asoart of any scheme passed by special resolution. 2, Acompany which usually is in the business of giving loans or security towards any loans can give loans without any restrictions mentioned in this section provided they charge rate not less than the rate of prevailing rate of government securities of the same duration. © Exampler Banks are in the business of providing loans, they can continue providing loans without ‘* Example: if loan is being provided for 5 years and rate of interest on 5 years of Government bonds is 5% then rate of interest on the loan shall not be less than 5%. 3. Loan given by the Holding company to its subsidiary company or security, or guarantee given by the holding company for a loan taken by the subsidiary company shall be exempted from all such restrictions provided these loans are used by the subsidiary company for principal act 3.4 Punishment in case of violation of this provision Punishment is different in case of different stakeholders as mentioned below. 1, To the Company - Fine which shall not be less than five lakh rupees, but which may extend to twenty: five lakh rupees. 2. To the Officer of the company who is in default - a. Imprisonment for a term which may extend to six months or b. with fine which shall not be less than five lakh rupees, but which may extend to twenty-five lakh rupees 3, To the Director or the other person to whom any loan is advanced or guarantee or security is given a. Imprisonment which may extend to six months or b. With fine which shall not be less than five lakh rupees, but which may extend to twenty-five lakh rupees, or With both alpave y EDUTAP.CO.IN QUERY? HELLO@EDUTAP.CO.IN / 814620724| 4 Section 186 - Loan and investment by company. This section differs from section 185 wherein it dealt specifically with loan to directors/ any person in whom the director is interested whereas this section is open ended (where the company can give loan to anyone.) What are Layers of Companies? It means subsidiaries of Companies. What are subsidiaries of Companies? It is mentioned in the image. What is the meaning of Investment Company? It is mentioned in the image. 4.1 Section 186(1) ‘A company shall not make investment through more than ‘two layers of investment companies ‘+ So, if any investment is done through subsidiary which is 3rd layer investment company, then that shall not be valid as shown in the image. slPeve EDUTAP.CO.IN QUERY? HELLO@EDUTAP.CO.IN / 8146207241\ 4.2. Section 186(2) The limits of loans that can be provided by the company is being dealt in this provision as shown in the image. Company shall not 1, Give any loan to any person except employees Loon! Guvonce/scurt/ vest any pron Tort oe a or other body corporate or | | sowett pais up rare capt rea reserves and securtespromium aceount i 2. 100% oft ree reserves anc secures premium accourt 2. Provide security in ‘whichever is morels te nt u/s 186 connection with a loan to | ca.ritepopomd\/6r/alene wth arene feng VCP any other Give any guarantee to. body Winther ws 185. exert it 146 corporate or person and feviemere See 3. Acquire or purchase the J nerspuaneon anon nino securities of any other J conan riswos Miovappouloten ‘erent body corporate. x SpedstReaaon Exceeding ‘A. sixty percent. of its paid-up share capital, free reserves, and securities premium account or B. one hundred percent. of its free reserves and securities premium account, whichever is more. Example: The company disclosure is mentioned below. 1. Paid-up share capital is Rs. 20 Crore, 2. Free reserves are Rs. 50 Crore and 3. Security premium account is Rs. 30 Crore then Then as per section 186(2), the limit applicable is illustrated below. A. 60% of Rs. 100 Crore = Rs. 60 Crore B. 100% of Rs. 80 Crore = Rs. 80 Crore So maximum limit shall bé 80 for giving a loan to these parties as per this example. IF company wants to exceed this limit, then special resolution needs to be passed. Exception to the above section ‘+ Ifaloan or guarantee is given or wherea security has been provided by a company to its wholly owned subsidiary company or a joint venture company, then the requirements of this section does not apply. ‘* Company shall give such details in the financial statement of the company Other provisions of Section 186 ‘+ The company shall disclose in the financial statement the full particulars of the loans given, investment made, or guarantee given, or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security. ‘+ No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting. OlPexe W.EDUTAP,CO.IN QUERY? HELLO@EDUTAP.COVIN / 81462072414.4 Rate at which Loans or Investments are transacted No loan shall be given under this section at a rate of interest lower than the prevailing yield of Government Securities of similar number of years as the duration of the loan. Example: if loan is being provided for 5 years and yield of 5 years of Government bonds is 5% then rate of interest on loan shall not be less than 5%. 4.5. Maintaining Register for Loans and Investment by Companies All the loans/guarantee/securities provided by the company is to be maintained in the register. 1. Every company giving loan or giving a guarantee or providing security or making an investment under this section shall keep a register. 2. The company shall maintain a register using FORM MBP2 and enter in that the details of particulars of loans and guarantees given, securities provided, and acquisitions made. 3. The entries in the register shall be made chronologically and within seven days of doing such transactions, 4. The register can be maintained manually or electronically and shall be authenticated by the company secretary of the company 5. The extracts of the register shall be available to any member of the company on making such 4 request. 6. The register shall be kept at the registered office of the company. 4.6 Certain Exceptions for Loans and Investment by Companies Except the condition discussed in [Sos subsection 186 (1) (As shown in image), | Sercwlyuecimennecomeany no other provision as discussed above ffs. any incre i soe Wont ubnitey (Section 186) shall be applicable in the | Sumnnwswamnstemegs cases 2s mentioned below: List | Loan or guarantee or security provided, or investment made by following entities shall be exempted 1. Housing Finance Companies 2. Banking Company 3. Insurance Company 4 Any other company with these activities as its principal activities List I Any investment done by following entities shall be exempted 1. Investment made by investment company. 2. Investment made by investing rights issues of shares made by some other company. 3. Investment done by NBFC whose principal business is acquisition of securities. [race WWW.EDUTAP.CO.IN QUERY? HELLO@EDUTAP.CO.IN / 814624.7 Punishment for violation of Section 186 What is the punishment for the company and officer? 1. To the Company - Fine which shall not be less than twenty-five thousand rupees, but which may ‘extend to five lakh rupees. 2. To the officer who is in default a. Imprisonment for @ term which may extend to two years and b. With fine which shall not be less than twenty-five thousand rupees, but which may extend to one lakh rupees. 5 Section 187 - Investments of company to be held in its own name. All investments made or held by a company in any property, security or other asset shall be made and held by it in its own name. Exceptions are discussed in the image. ‘+ For some Operational SaaS reason company can |MMEREEMIE > [Sameera ere have Investments not In its name as » ame, mentioned gga” tha ister taarane stevayurbe image. repayreer of ary loan sevanced + In the last point where Seem Conger ervrttonee shares are held with company as beneficial owner, company needs to maintain a register using FORM MBP 3 with detail of all such shares. > The register shall be authenticated by the company secretary of the company or by any other person authorized by the Board for the purpose. 5.1 Punishment for violation of the above Section What is the punishment for the company and the officer of the company in default? 1. To Company - The company shall be liable to a penalty of five lakh rupees. 2. To Officer of Company - Every officer of the company who is in default shall be liable to @ penalty of fifty thousand rupees. Blrace W.EDUTAP,CO.IN QUERY? HELLO@EDUTAP.CO.IN / 81462072416 Section 188 - Related party transactions Who is related part Related party with respect to company is mentioned in the image. * As discussed in the image, a director, or his relative, Key ‘managerial personnel or his relative etc. The question arises who is ‘relative? (Which is discussed as reference to Company? follows) Who is relative as seen in the related party definition? They are members of a Hindu Undivided Fa They are husband and wife Father including step father Mother including step Mother Son including stepson and Son’s wife Daughter and daughter's husband Brother including step brother Sister including stepsister exon ee ee What is the Difference between Related Party Contracts and Interested Contracts? The difference is illustrated in the image. Oleace WWW.EDUTAP.CO.IN QUERY? HELLO@EDUTAP.CO.IN / 81462072416.1 What is the legal requirement for entering Related party Transactions (RPT)? What_is_arm’s_le transaction? | A transaction between two Io rnatunert mee related parties that is J ™™repne’” = coon Forspeted aration conducted as if they were] "artonews unrelated, so that there is J ‘ote térmstngn ear res) no conflict of interest. + So, in general all the J Bistngs: aerate nash transactions between | laartnnarrercengetany cries ; ee a ee eae eee ee related parties shall (8) such fee eer OF place of profit in the company, its suosikary company occur at arm’s length | (unieraning ne strc of ay scares orderhaves thro the compoy tana 1 section 188 Is volated, the transaction becomes voidable atthe option of the company. What are specified transactions? Asseeninthe aboveimage, [Bipilipnena eerie the specified transactions ss puchssecrsuplyof ary sends o1 materials amounting 10%oF the ermorer_srountng o> 10% of the . ir sraoee Fae Seruasineay are same transaction 25 discussed above for Board [oes ctoyiadmanwtiveahann — afescanny "tout tis cepamy resolution but when they. |csrecrscnervctanremsancztnsto| ameuringto= 10% ofthe é : ay esas rae ‘the ordinary rescltiticnn tsi seeasee sim igs a a aS the general meeting needs | pssst retin necemsanytesubidary ta to be passed. Luterwriing the Sutscpton a ny Secures cr remuneration for underwrmting <= 1% remuneration for orvstastheretot ne cmosny Cofthenetwerthofthecompany_unteraiorg> % ofthe net worth att company What Is the procedure for obtaining Board approval! When Boards consent is required, Boards Consent must be obtained by passing a resolution in meeting of board of directors. In the meeting following details shall be presented 1. Name of the related party and nature of relationship 2. Nature, duration of the contract and particulars of the contract or arrangement 3. Terms of the contract or arrangement including the value, if any. 4. The manner of determining the pricing and other commercial terms. What is the procedure for obtaining Shareholders approval or Ordinary resolution? ‘+ Where shareholder approval is required, Resolution needs to be passed by members of company in general meeting of company. ‘+ while passing a resolution for a particular contract then the member which is a related party wi ‘respect to that contract shalll not participate in that voting with the exception that if 90% or more of members are rel: ives of promoters or are related parties then even related members can participate in the meeting or in case of private company related parties can vote. + Exceptions Liuoleage WWW EDUTAP COIN QUERY? HELLOM@EDUTAP COIN / sise207241 |> No Resolution shall be required to be passed by the company if the transaction is between holding and wholly owned subsidiary of that company irrespective of their value. Resolution by 80D shall suffice. > Transactions between government companies shall not require resolution to be passed by shareholders. 6.2 Other provisions of Section 188 1. Every contract or arrangement entered under this section 188 shall be referred to in the Board’s report to the shareholders along with the justification for entering such contract or arrangement. 2. if any related party contract Is entered into by a director or any employee without obtaining the consent of the Board or approval by a resolution in the general meeting as per requirement under section 188 then it can be ratified by the board or, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered. + Ifitismot ratified by the Board or by the shareholders at a meeting within three months, the board or the shareholders has the option to cancel. 3. In case of any loss to the company due to the contract being cancelled the director concerned shall indemnify the company against any loss incurred by it 6.3 Punishment for violation of Section 188 A director or employee who had entered or authorised the contract or arrangement in violation of the Provisions of this section 1. Incase of listed company, be liable to a penalty of twenty-five lakh rupees. 2. Incase of any other company, be liable to a penalty of five lakh rupees. a Section 189 - Register of contracts or arrangements in which directors are interested. The answer is mentioned ie eee + After entering in the register, it shall be Lacan placed before the next meeting of the Board and signed by all the directors present at the meeting. ‘* Every director or key managerial personnel shall, within a period of thirty days of his appointment, or relinquishment of his office must disclose to the company relating to his concern or interest in the other associations which are required to be included in the register. What is the penalty for violation of the above provision: Director who fails to comply with the provisions of this section and the rules made thereunder shall be liable to a penalty of twenty-five thousand rupees. [Page WWW.EDUTAP.CO.IN QUERY? HELLO@EDUTAP.CO.IN / 8146207241What is the Procedure for Maintaining Register of Contracts or Arrangements in Which Directors are Interested? 1. The register shall be kept at the registered office of the company and the register shall be preserved permanently and shall be kept in the custody of the company secretary of the company or any other person authorized by the Board for the purpose. 2. The company shall provide extracts from such register to a member of the company on his request, within seven days from the date on which such request is made. 3. Register shall be open for inspection at the registered office during business hours 4. The register to be kept under this section shall also be produced at the commencement of every annual general meeting of the company and shall remain open and accessible during the continuance of the meeting to any person having the right to attend the meeting. 8 ~— Section 190 - Contract of employment with managing or whole-time directors. A company except private company 1, Should have a with the MD and other — whole-time director OR eee) 2A written memorandum setting out terms of employment. (As shown in image] The copies of the contract or the memorandum shall be open to inspection by any member of the company without payment of fee. What is the penalty for violation of the above provision: Penalty for the company and officer is mentioned as follows. 1. To Company: penalty of twenty-five thousand rupees for each default, 2. To Officer in default: penalty of five thousand rupees for each default. 9 Section 191 - Payment to director for loss of office, ete,, in connection with transfer of undertaking, property or shares. ‘The example of a director who will suffer monetary loss is described in the image. orn Company 5 ~ + recom hereto eae] [Carpooling an onder recor wal afer cone Fis ofice ‘when sate in| | ofeompany or seling sak in twonetery Lossin this cave ni [company is sokd company s21Page W.EDUTAP.CO.IN QUERY? HELLO@EDUTAP In / 8What is the procedure for obtaining the payment by director in case of loss of office? Section 191 says that any payment made to director for loss of office shall be made only if following are disclosed to the members of the company (Details to be disclosed are mentioned below) and they pass a resolution at a general meeting approving the payment of such amount. a, Name of the director. Amount proposed to be paid Event due to which compensation become payable. Date of Board meeting recommending such payment. Basis for the amount determined. Reason or justification for the payment. Manner of payment - whether payable in cash or otherwise and how. Sources of payment yRmpaogs What is the maximum payment that can be made to director? The payment made to the director shall not exceed the remuneration that he would have earned if he had been in office for the remainder of his term or for three years, whichever Is shorter What is the penalty for violation of this provision? If a director of the company makes any default in complying with the provisions of this section, such director shall be punishable with a fine which shall not be less than twenty-five thousand rupees, but which may extend to one lakh rupees. 10 Section 192 - Restriction on non-cash transactions involving directors. Example: Suppose director takes a big car from company for the promise that he will work hard in coming years. Now this car is not bonus for good results given to director instead it is being given as arrangement that director will work hard in coming time. Here hard work is being exchanged for car and hence it is an ‘example of a non-cash transaction. ‘+ This Section has been implemented because many a times promoters who are directors engage in such non-cash transaction which have no basis but to evade tax lia! What does the section 192 mention regarding such transactions? In cases as mentioned in the image, the resolution needs to be passed by the company A in general meeting and if the director is a director of its holding company, then the resolution needs to be passed by holding company also. wiPace Www UTAP.CO.IN QUERY? HELLO@EDUTAP.CO.IN / 814620724111 Section 193 - Contract by One Person Company. The provisions of section 193 are discussed in the image. 12 Section 194 - Prohibition on forward dealings in secu director or key managerial personnel. This provision is scrapped now. 3 4 13 Section 195 - Prohibition on insider trading of securities. This provision is scrapped now.