1. Presentation On KMP, Investments And Related Party Transactions Section 185 to 188 By CA SANJEEV VERMA LUCKNOW Email: taxverma@gmail.com

3. Some basic Observations over Act:  Was it necessary to bring new Act altogether?  If bought to make Act concise ?  If Act going to serve purpose for which it is bought?  Role of ICAI & Auditors  Other Corporate laws –if inconsonance with new Act?  CSR & Public interest  Severity of penal provisions, if deterrent for formation of private limited companies  If penal provisions will really work, in wake of current situation of legal disobedience.

4. Some Relevant definitions:- SlSub Section & definition Act,2013Act,1956 1 2(51) Key Managerial Person i)CEO, MD or Manager ii)Company Secretary iii)Whole Time Director iv)CFO and v)Such officer as may be prescribed Not defined 2 2(18)CEO – An officer of a company designated as such Not defined

5. Some Relevant definitions:- Sl Sub Section & definition Act,2013 Act,1956 3 2(19) CFO- a person appointed as Chief Financial Officer Not defined 4 2(24) Company Secretary or Secretary – as defined in CS Act,1980-2(1)(c)- appointed by company to perform function of a CS 2(45)-Secretary means CS appointed to perform duties which may be performed by a secretary 2(46) Secretary in whole time practice-who is not in full time employment

6. Some Relevant definitions:- SlSub Section & definition Act,2013Act,1956 5 2(53) Manager-means an individual who subject to superintendence, control and direction of the BOD, has the management of whole/ substantially whole of the affairs of a Co. and includes director / any other person occupying position of a manager by whatever name called whether under contract of service or not. 2(24) An individual who, subject to superintendence, control and direction of BOD, has management of affairs of Co. And includes director or any other person by whatever name called- whether under contract of service or not.

7. Some Relevant definitions:- SlSub Section & definition Act,2013Act,1956 6 2(54) MD- a director who, by virtue of articles, or an agreement with Co or a resolution passed at GM or by its BOD, is entrusted with substantial powers of management and includes a director occupying position of MD, by whatever name called. Explanation: For this clause power to do administrative acts of routine nature when so authorised by Board, shall not be deemed to be included within substantial powers 2(26) MD -almost similar

8. Some Relevant definitions:- SlSub Section & definition Act,2013Act,1956 7 2(59) Officer –includes director, manager, or KMP or any person in accordance with whose directions/instructions the BOD or any one/more directors as/are accustomed to act. KMP not included. 8 2(94) Whole time director- includes a director in whole time employment of the Co. Not defined in sec 2

9. Some Relevant definitions:- SlSub Section & definition Act,2013Act,1956 9 2(77) Relative- with reference to any person, means any one who is related to another, if – i)They are members of a HUF ii)They are husband and wife or iii)One person is related to the other-as may be prescribed- lineally ascendants (maternal & paternal) and lineally descendants and to include step relationships for certain people 2(41)-anyone related to such person as specified in sec 6 and no others. Sec 6-member of HUF, husband/wife or related in manner of Sch. I-A

10. Some Relevant definitions:- SlSub Section & definition Act,2013Act,1956 10 2(6) Associate Company- a company in which that other Co has significant influence, but not a subsidiary Co of a co having such influence and includes joint venture Co Explanation Significant influence means control of atleast 20% of total share capital or of business decisions under an agreement. Not defined

11. Some Relevant definitions:- SlSub Section & definition Act,2013Act,1956 11 2(27) Control –include right to appoint majority of directors or to control the management or policy decisions exercisable by a person/s acting individually or in concert, directly/indirectly, including by virtue of their share holding/management rights or shareholders agreements or voting agreements or in any other manner. Not defined in sec 2

12. Some Relevant definitions:- SlSub Section & definition Act,2013Act,1956 12 2(76) Related Party- i)A director or his relative ii)a KMP or his relative iii)a firm in which director, manager or his relative is partner iv)a private company in which director/manager is a member/ director v)a public co in which director/ manager is a director or holds along with his relatives, more than 2% of its paid up share capital vi)a body corporate whose BOD/MD/Manager is accustomed to act in accordance with advice, direction or instructions of a director/ Manager( EXCEPT PROFESSIONAL CAPACITY) Not defined in sec 2

13. Some Relevant definitions:- SlSub Section & definition Act,2013Act,1956 12 vii) Any person under whose advice/directions/ instructions a director/ Manager is accustomed to act (EXCEPT PROFESSIONAL CAPACITY) viii) Any co which is holding, subsidiary or associate co of such co or subsidiary of a holding co to which it is also a subsidiary. ix) Such other person as may be prescribed Relate party- read with Rule 3 The rule provides a list of relationships which shall be treated as relative of another. As compared to 1956, 14 kinds of relationships excluded, like Dada, Dadi, Nana & Nani. Damad included.

14.  Section 185 Loan to Directors etc. (Corresponding to sec 295, 296 0f Act,1956) 1) No company shall directly or indirectly advance any loan (including book debt) to any of its directors or to whom directors are interested, or give guarantee or provide any security in connection with any loan taken by him/any such other person.

15.  Section 185 Loan to Directors etc. (Corresponding to sec 295, 296 0f Act,1956) Provided nothing contained in this sub-section shall apply to a) The giving of loan to Mg/ Whole- time director- i) as part of condition 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 in ordinary course of business provides loan/ give guarantee or securities for due repayment of any loan and interest is charged at a rate not less than bank rate declared by RBI

16.  Section 185 Loan to Directors etc. Explanation: expression “to any other person in whom director is interested” means- a) Any director of lending company, or of a company which is holding company or any partner or relative of any such director; b) Any firm in which any such director or relative is partner; c) Any such private company of which any such director is a director or member; d) Any body corporate at GM of which not less than 25% of total voting power may be exercised/ controlled by any such director or by 2 or more such directors together; or e) Any body corporate, BOD, MD or Manager, whereof is accustomed to act in accordance with directions or instructions of the Board, or of any director/s of the lending company.

17. Section 185 Loan to Directors etc. 2. If any loan is advanced, guarantee or security is given or provided in contravention of sub sec (1), company shall be punishable with fine –not less than Rs 5 lacs extendable to Rs. 25 lacs and person to whom loan so advanced/guarantee or security so given- shall be punishable with imprisonment which may extend to 6 months or with fine not less than Rs 5 lacs extending to Rs 25 lacs or with both,

18. Section 185 Loan to Directors etc. Relevant Rule 10, 11, 13 of the Companies (Meetings of Board and its Powers)Rules, 2014 Rule-10- i) loans/ guarantee given/ security provided- by a holding co to wholly owned subsidiary co – exempted and ii) Any guarantee given/ security provided by a holding Co in respect of loan made by any bank or financial institution to its subsidiary Co –exempted Provided such loans are utilised for its principal business activities.

19. Section 185 Loan to Directors etc. Caution: Sec 184- Private Co – covered and applied on interested director –who cannot vote in contrast to Act,1956 As new act prohibits granting of loans, giving of guarantee / providing security to directors/ persons interested (excepted exempted) SEEKING APPROVAL OF CENTRAL GOVT. (As available in Act,1956) DELETED Refer Gen circular no 3/2014 dated 14-2-2014 Regarding transitional arrangements till notification of sec 186. As sec got notified w.e.f 1-4-14, there is no relief even for existing loans.

20. SEC 186 – Loan & Investment by company (corresponding to sec 372A of Act,1956) (1) Without prejudice to the provisions contained in this Act, a co shall unless otherwise prescribed, make investment through not more than two layers of investment co’s : Provided that the provisions of this sub-section shall not affect, - (i) a co from acquiring any other co incorporated in a country outside India if such other co has investment subsidiaries beyond two layers as per the laws of such country ; (ii) a subsidiary co from having any investment subsidiary for the purpose of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

21. SEC 186 – Loan & Investment by company (2) No co shall directly or indirectly – (a) give any loan to any person or other body corporate ; (b) give any guarantee or provide security in connection with a loan to any other body corporate or person ; and (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding 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.

22. SEC 186 – Loan & Investment by company (3) Where the giving of any loan or guarantee or providing any security or the acquisition under sub-section (2) exceeds the limit specified in that sub-section, prior approval by means of a special resolution passed at a general meeting shall be necessary. (4) The co shall disclose to the members 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.

23. SEC 186 – Loan & Investment by company (5) No investment shall be made or loan or guarantee or security given by the co unless the resolution sanctioning it is passed at a meeting of the board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained ; Provided the prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in sub-section (2), and there is no default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

24. SEC 186 – Loan & Investment by company (6) No company, which is registered under section 12 of the SEBI Act 1992 and covered under such class or classes of companies as may be prescribed, shall take inter-corporate loan or deposits exceeding the prescribed limit and such company shall furnish in its financial statements the details of the loan or deposits. (7) No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year government security closet to the tenure of the loan..

25. SEC 186 – Loan & Investment by company (8) No company which is in default in the repayment of deposits excepted before or after the commencement of this Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting. (9) Every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register which shall contain such particulars and shall be maintained in such manner as may be prescribed.

26. SEC 186 – Loan & Investment by company (10) The register referred to in sub-section (9) shall be kept at the registered office of the company and – (a) shall be open for inspection at such office ; and (b) extracts may be taken therefrom by any member, and copies thereof may be furnished to any member of the company on payment of such fees as may be prescribed.

27. SEC 186 – Loan & Investment by company (11) Nothing contained in this section, except sub-section (1), shall apply – (a) to a loan made, guarantee given or security provided by a banking company or insurance company or a housing finance company in the ordinary course of its business or a company engaged in the business of financing of companies or of providing infrastructural facilities ; (b) to any acquisition – (i) made by a non-banking financial company registered under chapter III-B of the RBI Act 1934 and whose principal business is acquisition of securities ; Provided that exemption to non-banking financial company shall be in respect of its investment and lending activities ; (ii) made by a company whose principal business is the acquisition of securities ; (iii) of shares allotted in pursuance of clause (a) of sub-section (1) of section 62.

28. SEC 186 – Loan & Investment by company (12) Central government may make rules for the purposes of this section. (13) If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty five thousand rupees but which may extend to five lac rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 2 years and with fine which shall not be less than twenty five thousand rupees but which may extend to twelve lacs rupees Explanation : For the purpose of this section – (a) the expression “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities ; (b) the expression “infrastructure facilities” means the facilities specified in schedule VI. Relevant Rule 11, 12 of Co (Meetings of Board and its power) Rules, 2014

29. SEC 187 – Investment of companies to be held in its own name. (1) 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 : Provided that the company may hold any shares in its subsidiary company in the name of any nominee or nominees of the company, if it is necessary to do so, to ensure that the number of members of the subsidiary company is not reduced below the statutory limit.

30. SEC 187 – Investment of companies to be held in its own name (corresponding to sec …………. (2) Nothing in this section shall be deemed to prevent a company – (a) from depositing with a bank, being the bankers of the company, any shares or securities for the collection of any dividend or interest payable thereon ; or (b) from depositing with, or transferring to, or holding in the name of, the State Bank of India or a Scheduled Bank, being the bankers of the company, shares or securities, in order to facilitate the transfer thereof : Provided that if within a period of six months from the date on which the shares or securities are transferred by the company to, or are first held by the company in the name of, the State Bank of India or a Scheduled Bank as aforesaid, no transfer of such shares or securities take place, the company shall, as soon as practicable after the expiry of that period, have the shares or securities re-transferred to it from the State Bank of India or the Scheduled Bank or, as the case may be, again hold the shares or securities in its own name ; or

31. SEC 187 – Investment of companies to be held in its own name (c) from depositing with, or transferring to, any person any shares or securities, by way of security for the repayment of any loan advanced to the company or the performance of any obligation undertaken by it ; (d) from holding investments in the name of a depository when such investments are in the form of securities held by the company as a beneficial owner. (3) Where in pursuance of clause (d) of sub-section (2), any shares or securities in which investments have been made by a company are not held by it in its own name, the company shall maintain a register which shall contain such particulars as may be prescribed and such register shall be open to inspection by any member or debenture-holder of the company without any charge during business hours subject to such reasonable restrictions as the company may by its articles or in general meeting impose.

32. SEC 187 – Investment of companies to be held in its own name (4) If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extent to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both. Relevant Rule 14 of Co (Meetings of Board and its power) Rules, 2014

33. SEC 188– Related party transactions ( corresponding to sec 297, 314 of Act, 1956) Except with consent of BOD given by a resolution and subject to such conditions As may be prescribed, no Co shall enter into any contract/ arrangement with a related party with respect to:- (a) sale, purchase or supply of any goods/materials; (b) Selling/otherwise disposing of, or buying, property of any kind; (c) Leasing of property of any kind; (d) Availing/ rendering of ant services; (e) Appointment of any agent

34. SEC 188– Related party transactions ( corresponding to sec 297, 314 of Act, 1956) (a) Such related party’s appointment to any office or place of profit in the Co/ its subsidiary Co/ associate Co and (b) Underwriting the subscription of any securities/ derivatives thereof, of the Co. Provided no contract/ agreement in case of a Co having paid up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with prior approval by a special resolution: Provided further that no member of such Co shall vote on such special resolution, if such member is related party;

35. SEC 188– Related party transactions Provided also that nothing in this sub sec shall apply to any transactions Entered into in its ordinary course of business other than transactions4 which are not on an arm’s length basis. Expl.- a) office or place of profit means i) where it is held by a director, if he receives anything by way of remuneration over & above remuneration to which he is entitled as director, by way of salary, fee, commission, perqs, rent free accommodation or otherwise; ii) by any individual, other than director, or by any firm/ pvt co / body corporate holding it receives from the co anything by way of remuneration, salary, commission, perqs, any rent free accommodation or otherwise

36. SEC 188– Related party transactions b) expression ‘arm’s length transaction’ means transaction between 2 related parties that is conducted as if they were unrelated, so that there is no conflict of interest. (2) Every contract/ arrangement of sub sec (1) shall be referred to in Board’s Report along with justification for entering into such contract/arrangement. (3) Where entered without obtaining consent of board/ approval by special resolution in GM and if not ratified by Board/GM within 3 months, such contract voidable at the option of board and director concern (sanctioning) shall indemnify against any loss incurred by it.

37. SEC 188– Related party transactions (4) Open to the co to proceed against director / any other employee for recovery of any loss (5) Any director/ any other employee of co who entered into / authorized such contract/ arrangement in violation, shall i) listed co –be punishable with imprisonment upto 1 year or with fine not less than Rs.25,000/- may extend to Rs. 5 lacs or with both and ii) in any other co- fine Rs 25000/- to Rs 5 lacs. Relevant Rule 15 of Co (Meetings of Board and its power) Rules, 2014

38. Sec 188- RELATED PARTY CONTRACTS-Issues /applicability  Most pinching part of new act as contracts require “Special-special resolution”-where related party do not participate.  Rules defines ‘related party’ completely at variance from Act.  Some mistake in language of Rule- “Related party means a director or KMP of the holding Co or his relative with reference to a Co, shall be deemed to be a related party.” One can not make out relative with reference to a Co. as there is nothing called ‘relative with reference to a Co”. RELATIVES ARE BLOOD RELATIVES  Definition in AS 18- likely to be amended  Definition of rules are narrower than that in the Act.  Since “related part” defined in Rules, it might mean that definition of Act does not apply.  The word ‘means’ in definition, surely be converted into ‘includes’

39. Sec 188- RELATED PARTY CONTRACTS-Issues /applicability  Provision of ‘special-special’ resolution makes more sense only where it is a large contract by a large company.  Individual limits in respect of different transactions- - limit of 25% of turnover for contracts of sales/goods purchase/ services - property transactions -10% of net worth. - leasing/ service contracts-10% of turnover -employment of officers- if monthly salary exceeds Rs.2.5 lacs or above - Underwriting remuneration exceeding 1%of net worth as mentioned in 188(1)(g) Turnover/ net worth of last audited balance sheets

40. Sec 188- RELATED PARTY CONTRACTS-Issues /applicability  Likely Procedure-Audit Committee is expected to approve all transactions/ modification of such contracts with related parties regardless of value involved. Under clause 49 of listing Agreements relating to corporate governance, the Audit Committee is, inter alia, mandatorily expected to review such transactions  In case of transaction with wholly owned subsidiaries, only holding co required to pass resolution  Compliance particularly by private companies will be rendered difficult

41. A presentation for you learned Chartered Accountants