BOARD MEETINGS & ITS POWER

BOARD For Private or Public Company

MEETING
(Section 173) 1st Board Meeting: The 1st Board meeting should be held within 30 days from the
date of incorporation.

2nd & Subsequent Board Meeting: There must be at least 4 Board Meetings in a
year. The gap between two consecutive Board Meetings shall not be more than
120 days. The Board shall meet at least once in every calendar quarter.

For OPC, Dormant Company & Small Company

There must be at least one board meeting in each half of the calendar year and
the gap between two meetings should not be less than 90 days.

An adjourned Meeting being a continuation of the original Meeting, the interval

period in such a case, shall be counted from the date of the original Meeting.

Where a company is required to appoint Independent Directors under the Act,

such Independent Directors shall meet at least once in a Calendar Year.

PRACTICAL QUESTION:
The Board of directors of ABC Ltd. met thrice in the year 2014 and the 4th
Meeting, though called, could not be held for want of quorum.
Examine with reference to the relevant provisions of the Companies Act, 2013,
Whether any provisions of the Companies Act, 2013 have been contravened?

A Director shall not be reckoned for Quorum in respect of an item in which he is

interested and he shall not be present, whether physically or through
Electronic Mode, during discussions and voting on such item.

For this purpose, a Director shall be treated as interested in a contract or

arrangement entered into or proposed to be entered into by the company:
(a) with the Director himself or his relative; or
(b) with anybody corporate, if such Director, along with other Directors holds
more than two percent of the paid-up share capital of that body corporate, or he
is a promoter, or manager or chief executive officer of that body corporate; or
(c) with a firm or other entity, if such Director or his relative is a partner, owner
or Member, as the case may be, of that firm or other entity.

NOTICE FOR Issued by: Notice shall be issued by the Company Secretary or where there is no
BOARD Company Secretary, any Director or any other person authorised by the Board
MEETINGS for the purpose.

Time Limit: Notice should be given to every directors of the Company not less than
7 days before the date of Board Meeting. The notice should be sent to the registered
address of every director as available with the company or in case of absence of
details of address, any of such addresses appearing in the Director Identification
Number (DIN) registration of the Director.

Mode of Sending Notice: Notice in writing of every Meeting shall be given to

every Director by hand or by speed post or by registered post or by facsimile or
by e-mail or by any other electronic means.
 Shorter Notice: A Board Meeting can be called at a shorter notice provided at
least one independent director shall be present at the meeting in which it was
decided for shorter notice. If the Independent Director is not present, then
decision of the meeting shall be circulated to all directors and it shall be final
only after ratification of decision by at least one Independent Director.

Video Conferencing Option:

The Notice shall inform the Directors about the option available to them to
participate through Electronic Mode and provide them all the necessary
information.

Agenda:
The Agenda, setting out the business to be transacted at the Meeting, and Notes
on Agenda shall be given to the Directors at least seven days before the date of
the Meeting, unless the Articles prescribe a longer period.

Any item not included in the Agenda may be taken up for consideration with the
permission of the Chairman and with the consent of a majority of the Directors
present in the Meeting.

Board Note:
Each item of business requiring approval at the Meeting shall be supported by a
note setting out the details of the proposal, relevant material facts that enable
the Directors to understand the meaning, scope and implications of the proposal
and the nature of concern or interest, if any, of any Director in the proposal,
which the Director had earlier disclosed.

PRACTICAL QUESTION:
Examine with reference to the provisions of the Companies Act, 2013 whether
notice of a Board Meeting is required to be sent to the following persons:
(i) An interested Director;
(ii) A Director who has expressed his inability to attend a particular Board
Meeting;
(iii) A Director who has gone abroad (for less than 3 months).

QUORUM FOR Quorum means the minimum number of directors which is required to validate
BOARD meeting of the Board. Quorum should be present throughout the meeting of
MEETINGS Board, it means at beginning of the meeting and also at conclusion of the
(Section 174) Meeting. If any decision (resolution) is taken without the presence of quorum,
then such decision (resolution) shall be treated as null and void.

(a) General Quorum: 1/3rd of total strength of Board or 2 directors, whichever is higher,
shall be treated the quorum for a Board Meeting of a Company.

If due to resignations or removal of director(s), the number of directors of the

company is reduced below the quorum as fixed by the Articles of Association of
the company, then, the continuing Directors may act for the purpose of
increasing the number of Directors to that required for the quorum or for
summoning a general meeting of the Company. It shall not act for any other
purpose.

(b) Quorum in case of Interested Director: If at any time the number of interested
directors exceeds or is equal to 2/3 of the total strength of Board, the remaining
directors shall be counted for quorum provided the number should not be less
 than 2.

If a Board meeting has been adjourned due to want of quorum, unless the
articles provide otherwise, the Board Meeting shall be held on the same day at
the same time and same place in the next week or if the day is National Holiday,
the next working day at the same time and place.

If there is no Quorum at the adjourned Meeting also, the Meeting shall

stand cancelled.

PRACTICAL QUESTION:
There are 15 directors in a company and during discussion of a particular item, 13
of the directors are said to be ‘interested’ within the meaning of section 184(2) of
the Companies Act, 2013. What shall be quorum of the meeting?

PLACE OF Board meeting can be held anywhere in the world as there is no such provision
BOARD regarding the place of holding board meeting.
MEETING
Board meeting can be done by the way of video conferencing provided that the Notice of
the meeting shall inform the directors regarding the option available to them to
participate through video conferencing mode and director intending to
participate through video conferencing shall give prior intimation to that effect
in advance so that company is able to make suitable arrangements in this
behalf.

Any director who intends to participate in the meeting through electronic mode
may intimate about such participation at the beginning of the calendar year and
such declaration shall be valid for one year;

PRACTICAL QUESTION:
1. Board of directors of Ash Ltd. having its registered office at New Delhi decides
to hold its next meeting at New York, USA since all the directors of the
company are going to attend a sales exhibition to be held at New York.
Examining the provisions of the Companies Act, 2013, advise the Board about
the validity of its decision to hold the Board meeting at New York. (June 2016)

2. The Board of Directors of Infotech Consultants Limited, registered in Calcutta,

proposes to hold the next board meeting in the month of May, 2014.They seek,
your advice in respect of the following matters:
(i) Can the board meeting be held in Chennai, when all the directors of the
company reside at Calcutta?
(ii) Is it necessary that the notice of the board meeting should specify the
nature of business to be transacted?
Advise with reference to the relevant provisions of the Companies Act, 2013

PREPARATION (a) Circulation of draft minutes: Within fifteen days from the date of the
OF MINUTES conclusion of the Meeting of the Board or the Committee, the draft Minutes
thereof shall be circulated by hand or by speed post or by registered post or by
courier or by e-mail or by any other recognised electronic means to all the
members of the Board or the Committee, as on the date of the Meeting, for their
comments.

(b) Confirmation from Directors:

The Directors, whether present at the Meeting or not, shall communicate their
 comments, if any, in writing on the draft Minutes within seven days from the
date of circulation thereof, so that the Minutes are finalised and entered in the
Minutes Book within the specified time limit of thirty days.

If any Director communicates his comments after the expiry of the said period of
seven days, the Chairman, if so authorised by the Board, shall have the
discretion to consider such comments.

In the event a Director does not comment on the draft Minutes, the draft
Minutes shall be deemed to have been approved by such Director.

A Director, who ceases to be a Director after a Meeting of the Board is entitled to

receive the draft Minutes of that particular Meeting and to offer comments
thereon, irrespective of whether he attended such Meeting or not.

(c) Recording in the Minute Books: After completion of above confirmation

procedure of the meeting, the minutes shall be entered in the minute book and
signed by the Chairperson within 30 days from the date of conclusion of
meeting.

(d) No Alteration: Minutes, once entered in the Minutes Book, shall not be
altered. Any alteration in the Minutes as entered shall be made only
by way of express approval of the Board at its subsequent Meeting at which the
Minutes are noted by the Board and the fact of such alteration shall be recorded
in the Minutes of such subsequent Meeting.

(e) Signing & Dating: Minutes of the Meeting of the Board shall be signed and
dated by the Chairman of the Meeting or by the Chairman of the next Meeting.
Minutes of the previous Meeting may be signed either by the Chairman of such
Meeting at any time before the next Meeting is held or by the Chairman of the
next Meeting at the next Meeting.

(f) Preservation: Minutes of all Meetings shall be preserved permanently in

physical or in electronic form with Timestamp.

Office copies of Notices, Agenda, Notes on Agenda and other related papers shall
be preserved in good order in physical or in electronic form for as long as they
remain current or for eight financial years, whichever is later and may be
destroyed thereafter with the approval of the Board.

(g) Custody: Minutes Books shall be in the custody of the Company Secretary.
Where there is no Company Secretary, Minutes Books shall be in the custody of
any Director duly authorised for the purpose by the Board.

CHAIRMAN OF The Chairman of the company shall be the Chairman of the Board. If the
BOARD company does not have a Chairman, the Directors may elect one of themselves
MEETINGS to be the Chairman of the Board.

The Chairman of the Board shall conduct the Meetings of the Board. If no
Chairman is elected or if the Chairman is unable to attend the Meeting, the
Directors present at the Meeting shall elect one of themselves to chair and
conduct the Meeting, unless otherwise provided in the Articles.

If the Chairman is interested in any item of business, he shall, with the consent
 of the members present, entrust the conduct of the proceedings in respect of
such item to any Dis-interested Director and resume the Chair after that item of
business has been transacted. The Chairman shall also not be present at the
Meeting during discussions on such items.

Unless otherwise provided in the Articles, in case of an equality of votes, the

Chairman shall have a second or casting vote.

PROCEDURES RULE 3 OF THE COMPANIES (MEETINGS OF BOARD AND ITS POWERS) RULES,
& 2014
REQUIREMENT
OF A BOARD 1. Convening of Board Meetings: A Board Meeting may be conducted physically
MEETING or also through video conferencing or other audio visual mode.

Provided that the Central Government may, by notification, specify such matters
which shall not be dealt with in a meeting through video conferencing or other
audio visual means.

Safeguards during Board Meetings: The Chairperson and the company secretary
shall take due and reasonable care:
(a) To safeguard the integrity of the meeting by ensuring sufficient security and
identification procedures;
(b) To ensure the availability of proper video conferencing or other audio visual
equipment or facilities for transmission of the communications for effective
participation in the Board Meeting;
(c) To record the proceedings of the Board Meeting and prepare the minutes of
the meeting;
(d) To store for safekeeping and marking the tape recordings(s) or other
electronic recording mechanism as part of the records of the company at least
before the time of completion of audit of that particular year;
(e) To ensure that no person other than the concerned director are attending or
have access to the proceedings of the meeting through video conferencing mode
or other audio visual means.

2. Notice to the Directors: The notices of the meeting shall be sent to all the
directors.

(a) The notice of the meeting shall inform about the other option available to
participate in the Meeting through video conferencing mode or other electronic
mode.

(b) A director intending to participate through video conferencing mode or audio

visual means shall communicate his intention to the Chairman or the company
secretary.

(c) The director, who desires, to participate may intimate his intention of
participation through the electronic mode at the beginning of the calendar year
and such declaration shall be valid for 1 calendar year.

Provided that such declaration shall not debar him from participation in the
meeting in person in which case he shall intimate the company sufficiently in
advance of his intention to participate in person.

(d) In the absence of any such intimation from the director, it shall be assumed
 that the director will attend the meeting in person.

3. Roll call by Chairperson: At the commencement of the meeting, the

Chairperson shall check and ensure the participation of every director through
video conferencing or other audio visual for the record and verify the following
details:
(a) The name of the directors;
(b) The location from where a director is participating;
(c) Ensure that the directors can completely and clearly see, hear and
communicate with the other participants;
(d) Ensure that the directors have received the agenda and all the relevant
material for the meeting; and
(e) Ensure that no one other than the concerned director is attending.

However, the roll call shall also be made at the conclusion of the board meeting
and at the re-commencement of the board meeting after every break to confirm
the presence of a quorum throughout the meeting.

Note:After the roll call, the Chairperson or the Secretary shall inform the Board
about the names of persons other than the directors who are present for the
said meeting at the request or with the permission of the Chairman.

Special Note:
A director participating in a meeting through video conferencing or other audio
visual mode shall be counted for the purpose of quorum.

4. Place of Board Meetings: In case of Board Meeting convened by video

conferencing or other electronic mode, the place of recording of proceedings of
the board meetings shall be deemed as place of Board Meeting.

5. No accessibility of the place of Board Meeting: No person other than the

Chairperson, directors, Secretary and any authorized person shall be allowed
access to the place where the Board Meeting is going on without the permission
of the Board.

6. The following matters shall not be dealt with in any meeting held through
video conferencing or other audio visual mode:
(a) The approval of the annual financial statements;
(b) The approval of the Board’s report,
(c) The approval of the prospectus;
(d) The Audit Committee Meetings for consideration of accounts; and
(e) The approval of the matter relating to amalgamation, merger, demerger,
acquisition and takeover.

COMPLIANCE Section 118(10): ―Every company shall observe secretarial standards with
WITH respect to general and Board meetings specified by the Institute of Company
SECRETARIAL Secretaries of India (ICSI) constituted under section 3 of the Company
STANDARDS Secretaries Act, 1980, and approved as such by the Central Government‖.

Revised SS 1 deals with ―Meetings of Board of Directors‖ which has become

effective from 1st October 2017.

RESOLUTION  The Act requires certain business to be approved only at Meetings of the
PASSED BY Board. However, other business that requires urgent decisions can be
CIRCULATION approved by means of Resolutions passed by circulation. Resolutions passed
(Section 175 Of by circulation are deemed to be passed at a duly convened Meeting of the
The Companies Board and have equal authority.
Act, 2013)
 Where not less than one-third of the total number of Directors for the time
being require the Resolution under circulation to be decided at a Meeting,
the Chairman shall put the Resolution for consideration at a Meeting of the
Board. Interested Directors shall not be excluded for the purpose of
determining the above one-third of the total number of Directors.

PROCEDURE: (SS 1)
1. A Resolution proposed to be passed by circulation shall be sent in draft,
together with the necessary papers, individually to all the Directors including
Interested Directors on the same day.

2. The draft of the Resolution to be passed and the necessary papers shall be
circulated amongst the Directors by hand, or by speed post or by registered
post or by courier, or by e-mail or by any other recognised electronic means.

3. Each business proposed to be passed by way of Resolution by circulation

shall be explained by a note setting out the details of the proposal, relevant
material facts that enable the Directors to understand the meaning, scope
and implications of the proposal, the nature of concern or interest, if any, of
any Director in the proposal, which the Director had earlier disclosed and
the draft of the Resolution proposed. The note shall also indicate how a
Director shall signify assent or dissent to the Resolution proposed and the
date by which the Director shall respond.

4. The Resolution is passed when it is approved by a majority of the Directors

entitled to vote on the Resolution, unless not less than one-third of the total
number of Directors for the time being require the Resolution under
circulation to be decided at a Meeting.

5. The Resolution, if passed, shall be deemed to have been passed on the last
date specified for signifying assent or dissent by the Directors or the date on
which assent from more than two-third of the Directors has been received,
whichever is earlier, and shall be effective from that date, if no other effective
date is specified in such Resolution.

6. Resolutions passed by circulation shall be noted at the next Meeting of the

Board and the text thereof with dissent or abstention, if any, shall be
recorded in the Minutes of such Meeting.

7. Passing of Resolution by circulation shall be considered valid as if it had

been passed at a duly convened Meeting of the Board.

BOARD  The Companies Act, 2013 also recognizes the formation of Board Committees
COMMITTEES Including Audit Committees. The Committees may be formed by the Board of
Directors for following reasons:
(a) Audit
(b) Compensation
(c) Executive
(d) Governance and nomination
(e) Other types of committees
  Committees are usually formed as a means of improving board effectiveness and
efficiency in areas where more focused, specialized and technical discussions
are required.

 These committees prepare the groundwork for decision – making and report at
the subsequent board meeting.

 Any board should regularly review its own structure and performance and
whether it has the right committee structure and an appropriate scheme of
delegation from the board.

CLASSIFICATION OF BOARD COMMITTEES

AUDIT Constitution of Audit Committee: As per the provisions of the Companies Act,
COMMITTEE 2013, the following companies are required to constitute an Audit Committee:
(Section 177) 1. Every Listed Public Companies; or
2. Unlisted public companies having:
Every: L (a) Paid up share capital of ` 10 Crores or more;
(b) Turnover of ` 100 Crores or more;
U
(c) Aggregate, outstanding loans or borrowings or debentures or deposits
S: 10
exceeding ` 50 Crores or more.
L: 50
T: 100 Members: The Audit Committee shall comprise of minimum 3 directors with
majority of the directors being Independent Directors. The majority of
members of audit committee should be financial literate.

Role of Audit Committee:

(a) The recommendation for appointment, remuneration and terms of
appointment of auditors;

(b) Review and monitor the auditors’ independence and performance, and
effectiveness of audit process;

(c) Examination of the financial statement and the auditors’ report thereon;

(d) Approval or any subsequent modification of transactions of the company

with related parties;

(e) Scrutiny of inter – corporate loans and investments;

(f) Valuation of undertakings or assets of the company, wherever it is necessary;

(g) Evaluation of internal financial controls and risk management systems;

(h) Monitoring the end use of funds raised through public offers and related
matters.

Establishments of vigil Mechanism: Every listed company and the companies

belonging to the following class or classes shall establish a vigil mechanism
for their directors and employees to report genuine concerns or grievances:
(1) The companies which accept deposits from the public;
(2) The companies which have borrowed money from banks and public
financial institutions in excess of ` 50 crore.
 PRACTICAL QUESTION:
An Audit Committee of a Public Limited Company constituted under section 177
of the Companies Act, 2013 submitted its report of its recommendation to the
Board. The Board, however, did not accept the recommendations. In the light of
the situation, analyze whether:
(a) The Board is empowered not to accept the recommendations of the Audit
Committee.
(b) If so, what alternative course of action, would be Board resort to?

NOMINATION Constitution of nomination Committee: The following companies are required

AND to constitute a nomination Committee:
REMUNERATION 1. Every listed Public Companies, or
COMMITTEE 2. Unlisted public companies having;
(Section 178) (a) Paid up capital of ` 10 Crores or more;
(b) Turnover of ` 100 Crores or more;
(c) Aggregate, outstanding loans or borrowings or debentures or deposits
exceeding ` 50 Crores or more.

Note: The calculation of above paid – up share capital or turnover or

outstanding loans etc. shall be based on the last audited Financial
Statements.

Members: This committee shall consist of 3 or more non – executive directors

out of which not less than ½ shall be independent directors.

Formulation of Policy: The Nomination and Remuneration Committee shall

consider the following while formulating the policy:

(a) The level and composition of remuneration is reasonable and sufficient to

attract, retain and motivate directors of the quality required to run the
company successfully.

(b) Relationship of remuneration to performance is clear and meets

appropriate performance benchmarks; and

(c) Remuneration to directors, key managerial personnel and senior

management involves a balance between fixed and incentive pay reflecting
short and long – term performance objectives appropriate to the working of
the company and its goals.

ROLE & RESPONSIBILITIES OF NOMINATION AND REMUNERATION

COMMITTEE(June 2016)
(a) Identifying the persons who are qualified to become Directors and who may
be appointed in senior management;

(b) Recommend to the Board the appointment and removal of any director;

(c) Formulation of the parameters for determining qualifications, positive

attributes and independence of a Director; and

(d) Recommend a policy relating to the remuneration for the Directors, KMP
and other employees.
STAKEHOLDERS’  A company has to constitute a ―Stakeholders Relationship Committee‖
RELATIONSHIP where such company has more than 1000 shareholders, debenture – holders,
COMMITTEE deposit – holders and any other security holders at any time during a
[Section 178(5)] financial year.

 The Chairperson of a Stakeholders Relationship Committee shall be a non

– executive director or other member of the Board. This Committee
considers and resolves the grievances of security holders of the company.

 The chairperson of each of the committees or in his absence, any other

member of the committee duly authorized by him, shall attend the general
meetings of the company.

Penalty for Contravention:

For Company: Minimum Fine – ` 1,00,000/- Maximum Fine – `5,00,000/-.

For Every officer who is in default: Imprisonment – upto one year or Minimum
Fine – ` 25,000/-, Maximum Fine – ` 1,00,000/- or both.

POWER OF The Board may take the decisions including on the following matters:
BOARD (a) To make calls on shareholders in respect of money unpaid on their shares;
(Section 179) (b) To authorize buy – back of securities under section 68;
(c) To issue securities, including debentures, whether in or outside India;
(d) To borrow monies;
(e) To invest the funds of the company;
(f) To grant loans or give guarantee or provide security in respect of loans;
(g) To approve financial statement and the Board’s report.

The Board may delegate its power to any committee of directors, the managing
director, the manager or any other principal officer of the company, by a
resolution passed at a meeting.

RESTRICTION ON The Board can exercise the following powers only with the approval via special
POWERS OF resolution passed by the shareholders:
BOARD (a) To sell, lease or otherwise dispose of the whole or substantially the whole
(SECTION 180) of the undertaking of the company or where the company owns more than one
undertaking, of the whole or substantially the whole of any of such
undertakings;

(b) To Invest Otherwise In Trust Securities The Amount Of Compensation

Received By It As A Result Of any merger or amalgamation;

(c) To borrow money, where the money to be borrowed, together with the money already
borrowed by the company will exceed aggregate of its paid – up share capital, free reserves
and Securities Premium, apart from temporary loans obtained from the company’s bankers
in the ordinary course of business;

Provided that the acceptance by a banking company, in the ordinary course of

its business, of deposits of money from the public, repayable on demand or
otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be
deemed to be a borrowing of monies by the banking company within the
meaning of this clause.

Explanation.—For the purposes of this clause, the expression ―temporary

 loans‖ means loans repayable on demand or within six months from the date
of the loan such as short-term, cash credit arrangements, the discounting of
bills and the issue of other short-term loans of a seasonal character, but does
not include loans raised for the purpose of financial expenditure of a capital
nature;

(d) To remit, or give time for the repayment of, any debt due from a director.

The special resolution relating to borrowing money exceeding paid – up capital

and free reserves specify the total amount up to which the money may be
borrowed by Board.

CONTRIBUTIONS Section 181: The contribution must be authorized by board in its meeting by
TO CHARITABLE resolution. The permission of company in general meeting is required if such
FUNDS AND contribution exceeds 5% of its average net profits for the 3 immediately
POLITICAL preceding previous years.
PARTIES (Section
PROHIBITIONS AND RESTRICTIONS REGARDING POLITICAL CONTRIBUTIONS:
181 of Companies SECTION 182:
Act) Who Cannot Give Political Contributions: Government Company and Company
who has a Existence of Less than 3 years.

Quantum of Contribution:
The non – government company or the company which has been in existence
less than 3 financial years may contribute any amount directly or indirectly to
any political party. Further, the limit of contribution to political parties is 7.5%
of the average net profits during the 3 immediately preceding financial years. (Deleted by
Annual Finance Act 2017) (now, no limit on contributions)

Mode of Payment:
Notwithstanding anything contained in sub-section (1), the contribution
under this section shall not be made except by an account payee cheque
drawn on a bank or an account payee bank draft or use of electronic clearing
system through a bank account:

Provided that a company may make contribution through any instrument,

issued pursuant to any scheme notified under any law for the time being in
force, for contribution to the political parties.

Disclosure: The company is required to disclose in its profit and loss account
any amount or amounts contributed by it to any political party during the
financial year and the particular of total amount contributed and the name of
the political party to whom the contribution so made.

Penalty for Contravention:

The company shall be punishable for an amount of which may extend to 5
times of the amount so contributed and every officer who is in default shall be
punishable with imprisonment for a term which may extend to 6 months and
with fine which may extend to 5 times of the amount so contributed.

PRACTICAL QUESTION:
1) Net profits of PQR Ltd. during the following years as disclosed in the
statement of profit and loss are as under:
Financial year ended Net Profits (`in crore)
 31st March, 2013 10
31 March, 2014
st 12
31st March, 2015 08
The Board of Directors of the company at its meeting decides to contribute to a
charitable organization, for charitable purposes, a sum of `3 crore out of the net
profits of the financial year ended 31st March, 2015. This contribution has been
made by the Board without seeking approval of shareholders in general
meeting.
In the light of the provisions of the Companies Act, 2013, examine the validity of
the contribution made by the company. What shall be your answer in case the
Board decides to contribute `1 crore only? (Dec. 2015)

RELATED PARTY RELATED PARTIES (Section 188)

TRANSACTIONS A related party means and includes:
(a) A director or his relative,
(b) Key Managerial Personnel or their relative,
(c) A firm in which a director, manager or his relative is a partner,
(d) A private company in which a director or manager is a director or
members,
(e) A public company in which a director or Manager is a director or holds
along with his relatives more than 2% of its paid – up share capital,
(f) A person on whose advice, directions or instruction (except given in
professional capacity) a director or manager is accustomed to act,
(g) A holding/subsidiary or associate company, subsidiary’s subsidiary, and
such person as would be prescribed.

RELATED PARTIES TRANSACTIONS

The following contracts or arrangements come under the category related
party transactions:
(a) Sale, purchase or supply of any goods or materials;
(b) Selling or otherwise disposing of, or buying, property of any kind;
(c) Leasing of property of any kind;
(d) Availing or rendering of any services;
(e) Appointment of any agent for purchase or sale of goods, materials, services
or property;
(f) Such related party’s appointment to any office or place of profit in the
company, its subsidiary company or associate company; and
(g) Underwriting the subscription of any securities or derivatives thereof, of
the company.

Provided that no contract or arrangement, in the case of a company having a

paid-up share capital of not less than such amount, or transactions not
exceeding such sums, as may be prescribed, shall be entered into except with
the prior approval of the company by a resolution
Provided further that no member of the company shall vote on
such 1[resolution], to approve any contract or arrangement which may be
entered into by the company, if such member is a related party
Provided also that nothing contained in the second proviso shall apply to a
company in which ninety per cent or more members, in number, are relatives
of promoters or are related parties.
Provided also that nothing in this sub-section shall apply to any transactions
entered into by the company in its ordinary course of business other than
transactions which are not on an arm’s length basis.
Provided also that the requirement of passing the resolution under first
proviso shall not be applicable for transactions entered into between a holding
company and its wholly owned subsidiary whose accounts are consolidated
with such holding company and placed before the shareholders at the general
meeting for approval.
OFFICE OR PLACE OF PROFIT means any office or place:
(i) For Director: Where such office or place is held by a director, if the director
holding it receives from the company anything by way of remuneration over
and above the remuneration to which he is entitled as director, by way of
salary, fee, commission, perquisites, any rent – free accommodation, or
otherwise;

(ii) For Individual: Where such office or place is held by an individual other
than a director or by any firm, private company or other body corporate, if the
individual, firm, private company or body corporate holding it receives from
the company anything by way of remuneration, salary, fee, commission,
perquisites, any rent – free accommodation, or otherwise.

ARM’S LENGTH TRANSACTION:

Arm’s length transaction means a transaction between two related parties
that is conducted as if they were unrelated, so that there is no conflict of
interest.

In simple words, it means a transaction which is made at the market price

(without giving any special discount or concession) that is Arm’s length
transaction between a company or related parties.

In other words, Arm’s length transaction would mean transaction between two
related or affiliated parties that is conducted as if they were unrelated. The
concept of an arm’s length transaction is to ensure that both parties in the
deal are acting in their own self – interest and are not subject to any pressure
from either party.

Non – presence of Interested Director: An interested director shall not be

present at the meeting during discussions on the subject matter of the
resolution relating to such contract or arrangement in which he is interested.

Approval form shareholders: The prior approval from shareholders via

Ordinary resolution(as per the Companies (Amendment) Act, 2015) is required
in the following circumstances:

1. A company having a paid – up share capital of ` 10 crore or more; or

2. A company shall not enter into a transaction or transactions except the
prior approval in special resolution, where the transaction or transactions to
be entered into:
(a) Sale, purchase or supply of any goods or materials directly or through
appointment of agents exceeding 25% of the annual turnover;
(b) Selling or otherwise disposing of, or buying, property of any king directly or
through appointment of agents exceeding 10% of net worth;
(c) Leasing of property of any kind exceeding 10% of the net worth or
exceeding 10% of turnover;
(d) Availing or rendering of any services directly or through appointment of
agents exceeding 10% of the net worth; or
3. Appointment of any related parties or their relatives to the office or place of
profit in the company or its subsidiary company or its associate company at a
monthly remuneration exceeding `2.50 lacs; or
4. Remuneration for underwriting the subscription of any securities, if
exceeding 1% of the net worth.

Companies (Amendment) Act, 2015

1. The Audit Committee may make omnibus (all power) approval for related party
transaction proposed to be entered into by the company.

2. There is no requirement of Special Resolution whereas the ordinary resolution

is sufficient.

3. Related Party Transactions (RPT) between holding company and its wholly
owned subsidiary does not require any approval from the members, even of
the holding company. It means RPT transactions are exempted from the
purview of Related Party Transactions.

Special Note:In case of any ordinary course of business and on the arm’s
length transaction basis, then there is no requirement of obtaining approval
from the audit committee.

Disclosure of Interest by Director (Section 184) (June 2016)

Every director shall disclose his interest or concern in any company or firms
or other association of individuals in writing in Form MBP – 1 at the 1st Board
Meeting after his appointment as director ad also at 1st Board Meeting of every
financial year.

In addition to the above disclosure, the director shall also disclose any change
after previous disclosure in next board meeting.

(a) No participation: Every director is required to disclose his interest at the

Board Meeting in which such contract or arrangement is discussed. The
participation of the interest of director is not allowed in such meeting.

(b) Time of disclosure: Every interested director shall disclose his interest at
the meeting held immediately after the date of the board notice.

(c) Preservation of record: All notices shall be kept at the registered office and
preserved for a period of 8 years from the end of the financial year.

Note: If a contract entered into by the company without disclosure of interest

by director or with participation by a director who a interested whether
directly or indirectly, in the contract or arrangement, shall be voidable at the
option of the company.

Exemption from this Section:

Nothing in this section—
(a) shall be taken to prejudice the operation of any rule of law restricting a
director of a company from having any concern or interest in any contract or
arrangement with the company;
Penalty for Non – Disclosure: Punishment – upto 1 year or with fine which
 may extend to ` 1,00,000/- or both.

PRACTICAL QUESTION:
Barkha Ltd. has four directors on its Board. A Board meeting was convened
which was attended by only two directors, where Rekha was appointed as an
additional director. Rekha is related to both the directors. Referring to the
provisions of the Companies Act, 2013, examine the validity of the appointment.
(Dec. 2016)

LOANS TO (1) No company shall, directly or indirectly, advance any loan, including any
DIRECTORS loan represented by a book debt to, or give any guarantee or provide any
(Section 185) security in connection with any loan taken by,—
(a) any director of company, or of a company which is its holding
company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.

(2) A company may advance any loan including any loan represented by a
book debt, or give any guarantee or provide any security in connection with
any loan taken by any person in whom any of the director of the company is
interested, subject to the condition that—
(a) a special resolution is passed by the company in general meeting:
Provided that the explanatory statement to the notice for the relevant
general meeting shall disclose the full particulars of the loans given, 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 and any other relevant fact; and

(b) the loans are utilized by the borrowing company for its principal
business activities.

Explanation.—For the purposes of this sub-section, the expression "any person

in whom any of the director of the company is interested" means—
(a) any private company of which any such director is a director or member;

(b) anybody corporate at a general meeting of which not less than twenty-five
per cent. of the total voting power may be exercised or controlled by any such
director, or by two or more such directors, together; or

(c) anybody corporate, the Board of directors, managing director or manager,

whereof is accustomed to act in accordance with the directions or instructions of
the Board, or of any director or directors, of the lending company.

(3) Exemptions from this Section:

Nothing contained in sub-sections (1) and (2) shall apply to—
(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 rate of
prevailing yield of one year, three year, five year or ten year Government
 security closest to the tenor of the loan; or

(c) any loan made by a holding company to its wholly owned subsidiary
company or any guarantee given or security provided by a holding company in
respect of any loan made to its wholly owned subsidiary company; or

(d) any guarantee given or security provided by a holding company in respect

of loan made by any bank or financial institution to its subsidiary company:
Provided that the loans made under clauses (c) and (d) are utilised by the
subsidiary company for its principal business activities.

(4) Punishment for Contravention: If any loan is advanced or a guarantee or

security is given or provided or utilised in contravention of the provisions of
this section, the company shall be punishable with fine which shall not be
less than five lakh rupees but which may extend to twenty-five lakh rupees,
and the director or the other person to whom any loan is advanced or
guarantee or security is given or provided in connection with any loan taken
by him or the other person, shall be punishable with imprisonment which
may extend to six months or with fine which shall not be less than five lakh
rupees but which may extend to twenty-five lakh rupees, or with both.

Case Law: Dr. Fredie Ardesir Mehta v. Union of India

In this case, the Bombay High Court held that where company sells flat to one
of its directors on receipt of 50% cash and 50% agrees to receive by
installments does not amount to loan. It is like a sale credit and shall not be
treated loan to directors, therefore section 185 does not attract.

Penalty: Punishment – upto 6 months or Fine – Minimum ` 5 Lakhs to

Maximum ` 25 Lakhs or with both.

PRACTICAL QUESTION:
1. The managing director of a public limited company applied for purchasing a
company’s flat. The price of the flat is `40 lakh. The managing director
suggested that he may be allowed to pay `20 lakh and the balance of `20
lakh may be recovered from his salary in 40 installments. Accounts
department observed that it will tantamount to providing house building
advance to the managing director which is not covered by the rules of the
company. Being the Company Secretary of the company, you have been
asked by the Board of directors to examine and submit a note stating the
rules in this regard and action to be taken for considering the request. (Dec.
2011)

REGISTER OF Every company is required to keep one or more registers in Form MBP – 4 and
RELATED PARTY enter all particulars of all related party transactions (Contract or
TRANSACTIONS arrangement) particulars of Companies, firms or other association of
individuals, in which any director has any concern or interest.
(SECTION 189)
Important provisions
(a) The entries in the register shall be made at once, whenever there is a cause
to make entry, in chronological order and shall be authenticated by the
company secretary or by any authorized person.

(b) 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 or any authorized person.

(c) Such register or registers are required to be placed before the next meeting
of the Board and signed by all the directors present at the meeting.

(d) Every director within 30 days of his appointment or reappointment is

required to disclose his concern or interest in other association, which are
required to be included in the register.

(e) The register is to be kept at the registered office of the company and also
open for inspection during business hours.

Penalty: Every director who fails to comply is liable to a penalty of `25,000/-.

RESTRICTION ON NON – CASH TRANSACTIONS INVOLVING DIRECTORS(Section 192)

A company can’t enter into an agreement by which:
(a) A director of the company or its holding, subsidiary or associate company
or a person connected with him acquires or is to acquire assets for
consideration other than cash, from the company; or

(b) The company acquires or is to acquire assets for consideration other than
cash, from such director or person so connected.

Prior Approval from Shareholders: A company can enter into any contract or
arrangement with the prior approval by shareholders in general meeting either
for the director of the same company or its holding company.

Voidable Contract: Any arrangement entered into by a company or its holding

company in contravention of the provision shall be voidable at the option of
the company.

PRACTICAL QUESTION:
Board of Directors of Divine Ltd. decides to enter into a contract whereby
Manish, a director of the company shall acquire certain assets from the
company for consideration other than cash, without seeking approval of the
company in its general meeting. Certain shareholders of the company object to
the said decision of the Board. Referring to the provisions of the Companies Act,
2013, examine the validity of the Board’s decision and state whether the
contention of the shareholders shall be tenable. (Dec. 2015)

CONTRACT BY Contract must be in writing: Where One Person Company limited by shares or
ONE PERSON by guarantee enters into a contract except in its ordinary course of business
COMPANY with the sole member of the OPC who is also the director of the OPC, the OPC
shall ensure that the contract is in writing.
(Section 193)
Provisions in MOA: If the contract is not in writing, it ensures that the terms of
the contract or offer are contained in a memorandum or are recorded in the
minutes of the 1st Board Meeting of OPC held next after entering into contract.

The OPC is required to inform the ROC about every contract entered into by
the OPC and recorded in the minutes of the Board Meeting within 15 days
from the date of its approval.