meetings of board and its powers (chapter-xii) › media › filer_public › 72 › 5f ›...

Meetings of Board and its Powers

(Chapter-XII)

A Refresher course on Companies Act, 2013

16th February 2019

By CS Swetha Subramanian

Highlights of latest Amendments in Chapter- XII

Participation through Video Conference [Sec 173]

Directors can participate through video conference even on matters which cannot be

dealt through video conferencing – if there is quorum through physical presence of

directors

w.e.f: 07/05/2018

Matters which cannot be dealt with through video conference

▪ the approval of the annual financial statements

▪ The approval of the Board’s report

▪ the approval of the prospectus

▪ the Audit Committee Meetings for consideration of financial statement including

consolidated financial statement if any, to be approved by the board under sub-

section (1) of section 134 of the Act; and

▪ the approval of the matter relating to amalgamation, merger, demerger,

acquisition and takeover.

http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17517

Query?

Can notice calling Board meeting be sent through

WhatsApp ?

Mode of service of notice u/s 173

S.173(3): A meeting of the Board shall be called by

giving not less than seven days’ notice in writing to every

director at his address registered with the company

and such notice shall be sent by hand delivery or by

post or by electronic means

Highlights of latest Amendments in Chapter-XII

Committee Constitution for listed company [Sec 177 & 178]

Requirement for Audit committee and NRC will apply only to Listed public companies*

and other prescribed classes of companies which are as follows:

(i) the Public Companies having PUC of Rs 10 Crores or more; or

(ii) the Public Companies having turnover of Rs 100 crores or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and

deposits, exceeding Rs 50 crore:

The following classes of unlisted public company shall not be covered:-

(a) a joint venture;

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act.

*w.e.f: 07/05/2018

http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=28130

What is the

effect on

constitution of

committees

after the

introduction of

exemptions to

JV/ WOS /

Dormant

companies for

appointing IDs

● ABC Pvt Ltd is a WOS of RST

Limited (which is an unlisted

public company)

● ABC Pvt Ltd appointed 2 IDs on

its board from 10 Sep 2014 for a

term of 5 years

● ABC Pvt Ltd has constituted audit

committee and a NRC

● After the amendment to

Companies Appointment of

Director Rules, 2014 w.e.f

05/07/2017, ABC Pvt is exempt

from appointing IDs

● Can ABC Pvt Ltd dissolve the

Audit committee and NRC after

05/07/2017 ?

Facts

The company may dissolve the

committee since the applicability for

constitution of AC and NRC is

● Every Listed Company; and

● Company covered under Rule 4

of Companies (Appointment of

Director) Rules, 2014

The Rule 4 refers to applicability of

appointment of IDs, where sub-rule 2

talks about exemption to an unlisted

public company which is a JV/WOS or a

dormant company.

Thus, the company is not required to

constitute AC/NRC since the exemption

available for appointment of ID is

available for constitution of committees

as well.

Solution


• RPTs entered into by the company outside the scope of Sec.188 need not be approved

by Audit Committee, but the committee shall make its recommendations on it to the

Board.

• RPTs upto Rs 1 crore entered into by a director or officer must EITHER be approved by

the audit committee or be ratified by it within 3 months, failing which it shall be voidable

by the committee.

• In such cases, if the party is related to the director or the transaction is authorized by a

director, the concerned director shall indemnify the company of any losses.

• Transactions between holding and WOS will not require approval of audit committee,

unless they fall under Sec. 188.

RPT approvals by Audit committee [Sec 177]

w.e.f: 07/05/2018


Nomination Remuneration & Stakeholder relationship Committee [Sec 178]

▪ NRC should now lay down manner of performance evaluation of the Board, its

committees and Individual Directors, which carried out by:

1. The board,

2. The NRC itself (OR)

3. An independent agency.

▪ Remuneration Policy formulated by NRC should be made available on the website of

the company, and the web address can be given on the board’s report.

▪ Inability to resolve or consider any grievance by the Stakeholders Relationship

Committee in good faith shall not constitute a contravention of section 178

w.e.f: 07/05/2018


Borrowing Power Restriction on Board [Sec 180]

Powers of the Board to Borrow money has been relaxed and threshold for special

resolution required to borrow money has been increased to:

100% of [Paid-up Share Capital + Free Reserves + Securities premium]

w.ef. 09/02/2018


Prohibition & Restrictions on Political contribution [Sec 182]

▪ A company can now contribute any amount to a political party and is not limited upto

7.5% of its average net profits during three preceding financial year

▪ Payment can be done through account payee cheque or specified instrument

prescribed under any law.

▪ Total Contributions should be disclosed in the annual accounts. Not necessary to

disclose the name of the political party.

Amended through Finance Act, 2017


Disclosure of interest of director [Sec 184]

▪ The section shall not apply to any contract or arrangement entered between two

companies or between one or more companies and one or more bodies corporate

where any of the directors of the one company or body corporate or two or more of

them together holds or hold not more than two per cent of the paid-up share capital in

the other company or the body corporate.

▪ Minimum penalty is removed in respect of contravention.

w.e.f 09/02/2018

QueryIn Section 184(2), what is the sanctity of the words “in any way, whether directly or indirectly”

(2) Every director of a company who is in any way, whether

directly or indirectly, concerned or interested in a contract

or arrangement or proposed contract or arrangement

entered into or to be entered into—

(a) with a body corporate in which such director or such

director in association with any other director, holds more

than two per cent. shareholding of that body corporate, or

is a promoter, manager, Chief Executive Officer of that

body corporate; or

(a) with a firm or other entity in which, such director is a

partner, owner or member, as the case may be, shall

disclose the nature of his concern or interest at the

meeting of the Board in which the contract or arrangement

is discussed and shall not participate in such meeting:

Section 184

Regarding the interpretation of the word “interest” in

sub-section (1) of section 299 of the 1956 Act.

[Corresponding to section 184(1) of the 2013 Act], the

principle is that the contract or arrangement hit by the

section is the one in which the director has personal

interest conflicting his duties towards the company as

its director. Even where the director himself has no

personal interest in any contract or arrangement but

any of his relatives has, the director would be deemed

to be indirectly interested within the meaning of section

299 of the 1956 Act [Corresponding to section 184 of

the 2013 ,Act ]

Clarification by Department

of company affairs

As per Guidance Note on SS-1: A Director shall neither be reckoned for Quorum nor shall be entitled to participate in

respect of an item of business in which he is interested, except for a private company in which the director declares his

interest at the meeting.

This also seems to be spirit of the Law makers, as the Report of the expert committee on company law states that,

interested director should abstain from participating in the Board meeting during consideration of relevant agenda item in

which he is interested.

Hence, it can be concluded that, if he does not participate in the agenda where the contract in which the director is

interested in considered, it would be sufficient compliance of section 184(2).

Section 184(2) says the director’s “shall not participate in such meeting” in respect of the contracts in which director is concerned or

interested.

What does “shall not participate in such meeting” mean?

Does it mean that he shall not attend the meeting itself or he shall not be present during discussions or does it mean he may be

present there but shall not speak during the discussions?

Solution

Query


Loan to director & persons in which directors are interested [Sec 185]

▪ Blanket Prohibition to extend loan (directly or indirectly or represented by book debt) is

only on:

▪ Loans to the directors of the company and

▪ Directors of its holding company and

▪ Their Partners, relatives and the firms in which they are partners.

▪ A company can now give loans, or extend security or provide guarantee to any person

in whom a director is interested if a special resolution is passed.

▪ Such loans, can be given only for principal business activity of the recipient

▪ The explanatory statement to the notice of the general meeting, shall also disclose the

purpose for which the loan/ guarantee/ security is proposed to be utilized by the

recipient

U/S 185 A COMPANY CAN GIVE GUARANTEE/ SECURITY/ LOAN

:

As per old

provision

As per new

provision

1 To any of its directors x x

2 To relative of directors x x

3 To the directors of the holding company x x

4 To the partner of director x x

5 To the partnership firm in which its director or directors of its holding

company is partnerx x

6 To any other private company having common directors or members x ✔

7 Any body 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

x ✔

8 Any body corporate, the Board of directors, managing director or manager,

whereof is accustomed to act in accordance with the directions or

instructions of the Board, or of any director or directors, of the lending

company

x ✔

Source- Taxguru


Loan to director & persons in which directors are interested [Sec 185]

▪ Loans extended in the ordinary course of its business is exempt from applicability of

section 185 interest is charged at a rate not less than the rate of prevailing yield of one

year, three years, five years or ten years Government security closest to the tenor of

the loan. (Before amendment, the minimum rate was RBI’s bank rate).

▪ Penalty provisions under this section will now also apply to every officer of the

Company

w.e.f 07/05/2018

Query

If XYZ Ltd extends Loan for a term say, 10 years to PQR Ltd, and a rate of interest is fixed at the

prevailing yield on a 10-year Government Security. Now, after 5 years have passed, should the rate be

revised to 5 year prevailing yield on Government Security?

Section 186(7) clearly says “No loan shall be given at a rate of interest lower than the prevailing yield of

one year, three year, five year or ten year Government Security closest to the tenor of the loan.”

In the above sub section the word “Given” is crucial and it points to the date on which interest has to be

determined.

For example, if XYZ Ltd extends Loan for a term say, 10 years to PQR Ltd, and a rate of interest is fixed at

the prevailing yield on a 10-year Government Security. Now, after 5 years have passed, should the rate

be revised to 5 year prevailing yield on Government Security?

The Answer is No, as no loan is Given at the end of 5 years, the loan already given just continues.

Therefore, the interest rate should be determined on the date of giving of the Loan, as the act of giving of

the loan is sought to be covered under section 186.

Is a Private

Company still

exempted from

Section 185 post

Amendment Act,

2017?

The spirit of the amendment is evident from the report of

the Expert Committee on Company Law, and the relevant

section is quoted below from the report:

“Limited relaxation has already been provided to

private companies not having other body corporates

invested in them and therefore any further relaxation

should be subject to greater safeguards. The Committee,

therefore, recommended, that it may be considered to

allow companies to advance a loan to any other person

in whom director is interested subject to prior approval of

the company by a special resolution …

Conclusion is that, relaxation already available to private

companies as per MCA Notification dated 05 June 2015

continues subject to satisfaction of conditions.

“

Loans to directors & other u/s 185 by a Private

Companies is allowed if following conditions are met:

No Body Corporate

Shareholder

No borrowings from

Banks/ FI/ Body

Corporate(s) > 2 times

the PUC or Rs 50 Crs

whichever is lower

No repayment default

subsisting of such

borrowings at the time of

giving loan

As per MCA Notification dated 05 June 2015


Loan and investments by companies [Sec 186]

• Employees will not be included in the term “persons” for the purpose of computing

the threshold limits for loans, guarantees and investments.

• The provisions in the Rules with respect to need for special resolution to extend

loans, to give guarantee or security or to invest beyond the threshold prescribed in

section 186 has been introduced in the Act

• Similarly provisions of the Rules for excluding from the threshold loans, guarantees,

securities provided to WOS companies, JV, or investment in the securities of WOS

companies has been introduced in the Act.

w.e.f 07/05/2018


Loan and investments by companies [Sec 186]

• Exemptions to the section 186 has been widened to include Loans, or guarantee or

security extended or investments made in the ordinary course of business by:

a) Banking company, or an insurance company, or a housing finance company

a) company established with the object of and engaged in the business of

financing industrial enterprises, or of providing infrastructural facilities

(this provision is yet to be notified)

• Further, in the explanation to s.186(13), meaning of investment company has be

altered in lines with RBI’s stipulations. Now “investment company” means a

company whose principal business is the acquisition of shares, debentures or other

securities and if its assets in the form of investment in shares, debentures or other

securities constitute not less than 50% of its total assets, or if its income derived from

investment business constitutes not less than 50% of its gross income.

Query

First Proviso to Section 186(3) only exempts a company

from passing a Special Resolution for extending loans/

giving guarantee/ providing security to WOS in excess of

the prescribed threshold.

The above exemption does not extend to sub-section (7)

as the proviso to sub-section (3) specifically states that,

“the requirement of this sub-section shall not apply.”

01

02

This view is also confirmed from the Report of the Expert

Committee of Company Law, which debated this issue

and concluded as under:

03

“The Committee also deliberated on the suggestion to exempt

the application of Section 186, except sub-Section (1), to

wholly owned subsidiaries. However, the Committee did not

agree to the suggestions that interest free loans may be

specifically allowed to wholly owned subsidiaries.

Can a company advance interest-free loans to its wholly-owned subsidiaries

under section 186?


Related Party Transactions [Sec 188]

1. The definition has been widened to include body corporate:

(a) which is holding, subsidiary or associate company of such company.

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

(a) an investing company or the venturer of the company.

Explanation - ‘’the investing company or the venturer of company‘’ i.e a body corporate

whose investment in the company would result in the company becoming an associate

company of the body corporate [i.e at least 20% voting power]

2. Here in the context of an associate company, now the investor will be a related party

to the associate company.

3. Now all Foreign Subsidiary/ holding/ associate/ investing companies will be

related parties

w.e.f 09/02/2018


Related Party Transactions [Sec 188]

• Section 188 restricts the related party from voting in the general meeting in which the

RPT is considered. This requirement was relaxed for Pvt Companies, it is now

relaxed further for companies in which 90% or more members in number are relatives

of promoters or are related parties

• The RPT which requires approval by the Board or shareholders, if not duly approved

or ratified within 3 months thereafter by the Board or the shareholders respectively,

the contract becomes voidable at the option of the board/ shareholders

w.e.f 09/02/2018

Office or Place of ProfitU/s 188 office of place of profit

means - 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 a director.

Then if a promoter director is

appointed in the company and

receives monthly Salary, what would

tantamount to over and above the

remuneration to which he is entitled

to?

Office or place of profit means any office

or place—

(i) 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) 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;

Meaning

Over and above remuneration means

anything paid in excess of which he is

entitled to for providing his service as a

director.

Consequently, if he is drawing

remuneration in any other capacity, other

than as director, then Section 188 is

attracted and the limit shall be Rs. 2.5

Lakhs per month.

Query

Solution

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