section 186 of Companies Act 2013 governs loans, investments and guarantees by a company. Section 186 provides that a company may give loans or provide security/guarantee up to 60% of its (paid up capital + free reserves + securities premium) or 100% of (free reserves + securities premium), whichever is higher. For transactions exceeding these limits, approval of members is required to be sought by way of a special resolution. on 10th March 2015, Ministry of Corporate Affairs clarified that loans and/or advances made by the companies to their employees, other than the Managing or Whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013, if it is in accordance with the condition of services to all employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated. Due to this clarification now a Company is not required to maintain a register of loans given to its employees in the format MBP2 and does not disclose the details of loans given to its employees in the Directors report as specified u/s 186(9)
Companies Act 1956 The new provisions of section 372A (1956) is applicable only to Public Limited Companies and provide for a combined limit of sixty percent of the paid up share capital and free reserves (which term includes reserves free for distribution as dividend including the amount in the securities premium account) or one hundred percent of free reserves whichever is higher, for grant of loan (which term includes debentures) to any other body corporate, giving of any guarantee or provision of security in respect of a loan to or by any body corporate and acquisition of securities (which term includes shares, debentures, bonds and other marketable securities, etc.) of any other body corporate by way of subscription, purchase or otherwise. These powers are given to the board of a company by the statute .The scope of section 372A is much larger than the erstwhile section 372. Needless to say that there must a basic provision in the memorandum/articles of a company authorizing the board to make inter-corporate loans and investments.However, in exceptional circumstances, the board may provide guarantee without the previous authorization of shareholders. The Board needs to take approval of shareholders in the immediately succeeding meeting of members.
Conditions
No loan, provision of guarantee or security or investment can be made unless the resolution sanctioning the same is passed at a meeting of the board with the consent of all the directors present at the meeting and with the prior approval of the public financial institution where any term loan is subsisting. However, prior approval of the financial institution is not required, if the aggregate of the investments made, loan granted, guarantees given or security provided together with the proposals in this regard does not exceed 60% of the limit referred to above, provided there is no default in repayment of loan or interest thereon.
No loan can be given to any body corporate at a rate of interest lower than the prevailing bank rate.
If a company has defaulted in the matter of public deposits under section 58A of the Act, such a company is prohibited from availing of the provision in section 372A of the Act. This is a temporary restriction, as the prohibition does not apply when the default under section 58A is made good.
EXCEPTIONS
The regulatory provisions of section 372A are not applicable in the following cases : -
to any loan made, any guarantee given or any security provided or any investment made by a banking or insurance company or a housing finance company in the ordinary course of their business or to a company established with the object of financing industrial enterprises or of providing infrastructural facilities;
to a company whose principal business is the acquisition of shares, stock, debentures or other securities;
to a private company unless it is a subsidiary of a public company;
to any investment made in rights issue;
to any loan made, any guarantee given or security provided to or acquisition of shares by a holding company in its wholly owned subsidiary.
Every Public company having a paid up share capital of Rs. 5.00 crores or more must appoint a Whole time director or Managing Director.
A managing Director must essentially be a Director of the Company. In case the proposed MD is not a Director he must be appointed as Additional Director.
Being an Additional director he will assume the office of Director till the next AGM, wherein he has to be reappointed.
Managing director can be appointed for the period of 5 years. [Sec. 317]
A copy of Board resolution appointing MD should be filed with the ROC within 30 days. [Sec. 192 (1)]
Section 269 applies to every Public Company and Pvt. Co. which is a subsidiary of Pub. Co.
After appointment of MD form 25-C should be to be filed as specified u/s 269(2) within 90 days of appointment.
In case of omission of filing such form the appointment does not become void.
Schedule XIII specifically provides that appointment of MD should be approved by shareholders in General meeting.
Approval of Central Govt. is necessary in case the appointment is not according to Sch. XIII. An application in form 25A has to be submitted within 90 days of such appointment. U/s 269(6), even in case Central Govt. rejects the appointment, the individual can continue occupying the position by payment of Fine / Penalty.
The above-mentioned provisions do not apply to Pvt. Company.
There is no restriction on Remuneration payable to MD of a Pvt. Company.
Restrictions on Appointment: An individual cannot be managing director or manager of more than two companies, public or private, where out of two companies at least one is a public company or private company, which is a subsidiary of a public company. An individual may hold the office of managing director or manager in any number of private companies, which are not subsidiaries of public company. But if the office is held in a public company or a private company which is subsidiary of a public company, the same individual can not, in addition thereto, hold the office of managing director in more than one company whether such company is a public company or private company which is subsidiary of public company or any private company. (Section 316)
Terms of Office: The term of office of a managing director must not exceed 5 years at a time. The term, however, may be extended for further period not exceeding 5 years at a time. (Section 317)
It is important to note that the person ceases to be managing director with a censure of directorship on account of his retirement by rotation at the Annual General Meeting. But if such a person is re-elected as director at the AGM and thereby he continues as the director of the company, he shall continue as a managing director also for the period for which he is so elected by the AGM and for the unexpired period of present term of appointment as managing director.
Disqualifications for appointment: A managing director must be a director and therefore, all the disqualifications rendering impossibilities for the appointment of a person as director (Section 274) will apply in the case of appointment of a managing director. Section 267 specifically provide that company must appoint or continue the appointment of a person as managing or whole time director who is:
An undischarged insolvent or has at any time been adjudged insolvent;
Suspends or has at any time suspended payment to his creditor or has made a composition with them or
Has at any time been convicted of an offence involving moral turpitude. Meaning of the term moral turpitude: According to American encyclopedia of Law, it comprises anything contrary to justice, honesty, and principle of good morals, an act of baseness, vileness or depravity in the private and social duties, which a man owes to his fellowmen or society in general. The term also comprises anything contrary to the accepted and customary rule of right and duty between humans.
u/s 117(3) of the Companies Act 2013 any resolution of the Board of Directors of a company or agreement executed by a company, relating to the appointment, re-appointment or renewal of the appointment, or variation of the terms of appointment, of a Managing Director needs to be re filed with ROC within 30 days of passing the same.
The foreign nationals or foreign citizen or Non-Resident Indians residing abroad can be appointed as a Director on the Board of Indian companies whether public listed or unlisted or private. A foreign body corporate having 100% subsidiary company in India may nominate all its Directors of the subsidiary Indian company who may be foreign nationals. A foreign director may be appointed as whole time director (executive director) or non whole time director (non – executive director). Procedures relating to appointment of foreign directors under Companies Act are given below.
Under Section 2(13) of the Companies Act, 1956, Director includes any person occupying the position of Director be whatever name called. In view of this, a foreign national can be appointed as Director in the companies registered in India as per Companies Act 1956.
1. To become a Foreign Director he is required to obtain Director Identification Number (DIN) . For applying DIN, Permanent Account Number (PAN) from the Indian Income Tax department is compulsory. Before appointment of director, the Director has to apply for DIN.
2. In the case of foreign nationals, the recent color photograph of the director, Pass-port and proof of residence and the affidavit ( format of affidavit is available in MCA web site under DIN 1 ) have to be notarized from the respective country and by applying in Form DIN 1, the Director Identification Number can be obtained on-line. In case of
Foreign Director, the supporting documents can also be attested by Company secretary in full time employment / CEO / Managing director of the Indian company in which he / she proposed to be a director.
3. Affidavit by the applicant to be executed on non judicial stamp paper and duly notarised. It is a mandatory attachment.
4. In case of foreign applicant, address proof should not be older than 1 year from the date of filing of the E form.
5. Passport number is mandatory for foreign nationals. Foreign nationals shall select the nationality as declared in the passport.
6. Father’s name proof is not required in the case of foreign nationals / NRIs.
7. In case of proofs which are in languages other than Hindi / English, the proofs should be translated in Hindi / English from professional translator carrying his details (name, signature, address) and seal. In the case of foreign nationals, translation done by the notary of home country is also acceptable.
All the forms required to be filed under the Companies Act are filed through MCA website through the digital signature. In view of this the Foreign director is required to have one digital signature with his PAN number encrypted so as to enable him to file the returns with Income tax authorities on behalf of the company.
The Private Limited Companies are required to have a minimum of 2 Directors and Public Limited Companies are required to have a minimum of 3 Directors under the Companies Act. It is quite possible that all the Directors of the company may be foreign nationals and they run the business through the persons of Indian nationals appointed by them in India. The Companies Act does not prohibit holding Board meetings abroad. Similarly, it is also having the provision for conducting Board meetings through video –conference subject to adherence to the circulars issued by the Ministry of Corporate Affairs in this regard from time to time. In view of this, it is obvious that a company can have all the Directors consisting of foreign nationals or foreign citizens and there is no prohibition that only Indian Directors should be on the Board of Indian companies.
In the case of companies incorporated in Singapore, at least one Director should the resident of Singapore. But, no such nationality restriction is applicable for the companies incorporated in India.
Further, a Director belonging to China or Thaiwan who may not be expert in English and hence a person may also become the Director of Indian company without knowing any Indian languages. What is required is business acumen and also help from others to understand business language in India.
The person proposed to be entered into as Director shall give his consent to act as a Director of the Indian company in writing. This is mandatory in case of a public limited company but now-a-days as a good corporate governance practice, the consent of the proposed appointee director is obtained for private limited companies also. As a measure of caution, this consent may also be notarized in the respective country along with the other documents for obtaining Director Identification Number. This becomes absolutely necessary especially when the Form 32 is required to be certified by a professional and he may have a level of comfort if notarized documents are attached to vouch for the documents belonging to the appointee as he may not be knowing the foreign national personally.
Appointment of Directors is a power which is exercised by the members but once DIN has been obtained the board of directors can pass a resolution for appointing the foreign director by way of an additional director to meet urgent business needs. In addition Form 32 has to be filed with Registrar of Companies with in 30 days for the appointment of director. . And once Form 32 is approved the director’s name will appear in the ‘view signatory details’ in MCA website. At the next Annual general meeting however, the person appointed as Additional director by the Board has to be re-appointed as a Director by the members.
Foreign directors can be paid sitting fees for attending the board meetings even if they are attending the meetings by video conference. In addition to this directors in public limited companies may be also paid commission permitted under sec 309 of the Companies Act. If they are not in the whole time employment of the company they may be paid commission 1 % of the net profits of the company if the company has a managing director or a whole time director or a manager; 3 % of the net profits of the company in any other case. Sec 309 is not applicable to private limited companies and directors of the private limited companies may be paid commission on the net profits of the company without any restriction.
Under the Foreign Exchange Management Act, 1999, appointment of a foreign national as a director on the board of directors of an Indian company does not require the approval of Reserve Bank of India [RBI]
Reserve Bank has also granted general powers to an Indian company to make payment in rupees towards sitting fees or commission or remuneration and travel expenses to and from and within India to its non-whole time director who is resident outside India and is on a visit to India for the company’s work.
The Companies (Particulars of Employees) Rules, 1975 makes it compulsory for every company to provide prescribed details of all the employees that earns Rs.60.00 Lacs in a year or more than Rs.5.00 Lacs per month. Details of employees serving part of the year shall also be included based on the criteria of monthly remuneration i.e greater than Rs.5.00 Lacs.
The new limit of Rs.60.00 lacs has been enhanced from the earlier limit of Rs.24.00 lacs with effect from 31 March 2011.
Vide Circular No.22/76 File No.8/27 (217A) 75-CL V Dated 6th August, 1976 Department of Company affairs has clarified that the word remuneration means the entire remuneration paid to the employee in a commercial and common parlance this remuneration should be the Cost to Company [CTC]. The circular states
"....In this connection, I am directed to clarify that the expression "remuneration received" occurring in the aforesaid rules will include all expenses incurred by the companies in providing any benefit or amenity to the employees and the word 'remuneration' has the meaning assigned to it in section 198 of the Companies Act, 1956. All companies should, therefore, indicate the salary and perquisites drawn by the employees in term of the actual expenditure incurred by the company."
Below is the text to be included in the the Directors report to avoid specifying the entire list of employees who are earning salary beyond the limit specified under the Companies Act 1956
"As required under the provisions of Section 217(2A) of the Companies Act 1956, read with the Companies (Particulrs of employees rules 1975) as amended, the names and other particulrs of the employees are set out in the Annexure to the Directors' Report. However in terms of the provisions of Section 219(1)(b)(iv) of the Companies Act 1956, the Report and the Accounts is being sent to all shareholders of the Company excluding the aforesaid Annexure. Any shareholder interested in obtaining a copy of said Annexure may write to the Company Secretary at the Registered office of the Company."
Filing of Form 32 with Registrar of Companies on resignation of Director Filing form 32 is just a procedure to be completed after a Director has submitted his resignation. Failure to file form 32 to Registrar of Companies [ROC] does not vitiate the act of resigning of the Director from the post of the Directorship. His resignation will be considered from the date he has submitted his resignation to the Board of Directors.
Director's Relative (Office or Place of Profit) Rules, 2011
NOTIFICATION NO. G.S.R. 357(E), DATED 2-5-2011
In exercise of the powers conferred by clause (b) of sub-section (1) of section 642, read with sub-section (1B) of section 314 of the Companies Act, 1956, the Central Government hereby makes the following Rules in supersession of the earlier Notification No. GS.R. 89(E), dated 5-2-2003, namely:—
1. (1) Short Title and Commencement: (1) These rules may be called Director's Relative (Office or Place of Profit) Rules, 2011.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. Applicability : These rules shall apply to all companies registered under the Companies Act, 1956 except as provided in these rules.
3. Approval of the Central Government in case of Appointment of Relatives, etc. of Directors : No appointment for an office, or place of profit in a company shall take effect unless approved by the Central Government on an application, in respect of:—
(a) Partner of firmor relative of a Director or Manager; or
(b) Firm in which such Director, or Manager of relative of either is a partner; or
(c) Private Company of which such Director or Manager or relative of either is a Director, or member, which carries a monthly remuneration exceeding, Rs. 2,50,000 p.m.
(d) An individual who is a relative of a Director, or Manager and is appointed as an Advisor or Consultant and paid remuneration including commission on periodical basis.
4. Selection of Relatives of Directors and Directors to Hold a Place of Office/Profit:—
(a) The selection and appointment of a relative of a Director for holding office or place of profit in the company with a salary exceeding Rs. 2,50,000 per month shall be approved by adopting the same procedure applicable to non-relatives and approved by a Selection Committee.
Explanation : For the purpose of the sub-rule, in the case of listed public companies, the expression "Selection Committee" means a committee, consisting at least three members, the majority of which shall be independent Directors and an outside Expert:
Provided that in case of unlisted companies, independent Directors are not necessary but outside experts should be there in the Selection Committee:
Provided furtherthat in the case of private companies, Selection Committee is not necessary.
5. Procedure for Examination of Application : The application under rule 3 shall be examined with respect to the following, in addition to all other requirements under the Companies Act, 1956:—
(a) In the case of individual appointee, an undertaking from him that he/she will be in the exclusive employment of the company and will not hold a place of profit in any other company.
(b) The monetary value of all allowances and perquisites and of total remuneration package (monthly/annually proposed to be paid to the appointee and details of the services that will be rendered by him to the company.
(c) Details of shareholding pattern particularly the shareholding of the directors along with his/her/their relatives, the public holding, institutional holding (each institution separately) and the quantum of dividend paid by the company during the last three preceding financial years.
(d) Details of the educational qualification/experience, pay scale, allowances and other benefits of similarly placed executives.
(e) In case of the appointment of a relative, an undertaking from the Director/Company Secretary of the company that the similarly placed employees are getting the comparable salary.
(f) List and particulars of the employees who are in receipt of remuneration of Rs. 2,50,000 or more per month.
(g) The total number of relatives of all the Directors either appointed as Manager/Whole time Director, Manager or in any other position in the company, the total remuneration paid to all of them altogether as a percentage of profit as calculated for the purpose of section 198 of the Companies Act, 1956.
Section 297 (CA 1956) - Board’s sanction to be required for certain contracts in which particular directors are interested
(1) Except with the consent of the Board of directors of a company, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm, or a private company of which the director is a member or director, shall not enter into any contract with the company–
(a) for the sale, purchase or supply of any goods, materials or services; or (b) after the commencement of this Act, for underwriting the subscription of any shares in, or debentures of, the company: Provided that in the case of a company having a paid-up share capital of not less than rupees one crore, no such contract shall be entered into except with the previous approval of the Central Government. (2) Nothing contained in clause (a) of sub-section (1) shall affect– (a) the purchase of goods and materials from the company, or the sale of goods and materials to the company, by any director, relative firm, partner or private company as aforesaid for cash at prevailing market prices; or (b) any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for sale, purchase or supply of any goods, materials and services in which either the company or the director, relative, firm, partner or private company, as the case may be, regularly trades or does business: Provided that such contract or contracts do not relate to goods and materials the value of which, or services the cost of which, exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract or contracts; or (c) in the case of a banking or insurance company any transaction in the ordinary course of business of such company with any director, relative, firm, partner or private company as aforesaid. (3) Notwithstanding anything contained in sub-sections (1) and (2), a director, relative, firm, partner or private company as aforesaid may, in circumstances of urgent necessity, enter, without obtaining the consent of the Board, into any contract with the company for the sale, purchase or supply of any goods, materials or services even if the value of such goods or cost of such services exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract; but in such a case, the consent of the Board shall be obtained at a meeting within three months of the date of which the contract was entered into. (4) Every consent of the Board required under this section shall be accorded by a resolution passed at a meeting of the Board and not otherwise; and the consent of the Board required under sub-section (1) shall not be deemed to have been given within the meaning of that sub-section unless the consent is accorded before the contract is entered into or within three months of the date on which it was entered into. (5) If consent is not accorded to any contract under this section, anything done in pursuance of the contract shall be avoidable at the opinion of the Board. (6) Nothing in this section shall apply to any case where the consent has been accorded to the contract before the commencement of the Companies (Amendment) Act, 1960 (65 of 1960). Underlying Principle The provisions enacted in Section 297 of the Companies Act are founded on the principle that the director is precluded from dealing on behalf of the company as himself and from entering into engagements in which he has a personal interest conflicting or which may possibly conflict with the interest of those with whom he is bound by fiduciary duty.A director occupies a fiduciary position in relation to a company and he must act bona fide in the interests of the company. If a director makes a contract with the company and does not disclose his interest, he will be committing breach of trust. Section 297 embodies the principle of good faith and fiduciary relationship of a director and enjoins upon him certain statutory obligations. This section applies to : 1.all companies, public and private. 2.contract for sale, purchase or supply of any goods, materials or services in which a director or any person connected with a director in any of the ways mentioned in sub-section (1) of section 297 is interested, 3.contract for underwriting subscription of any shares in or debentures of the company, 4.oral contract, if it can be proved by circumstantial evidence. Under the Indian Contract act, a contract need not be in writing, and an oral contract is also valid in law. The provisions of Section 297 will accordingly also apply in respect of an oral contract. This section does not apply to : 1.contracts between two public companies 2.transaction in immovable properties [Letter No. 9/4190-CL-X, dated 27th March, 1990], 3.contract of employment of a director or managing or whole-time director [Circular No. 8/11/75-CL-V, dated 5th June, 1975], 4.contract entered into by the company with a dealer on a principal to principal basis [Circular No. FM 8/297/56-PR, dated 2nd August, 1956], 5.professional services of the nature given by firms of solicitors and advocates, etc. [Circular No. 8/11/75-CL-V, dated 5th June, 1975], 6.indirect interest of a director as provided in section 299. unlike Section 299 this Section does not deal with indirect interest of a director, even though it may be substantial or real. 7.a government company in respect of contracts entered into by it with another Government company [Notification GSR No.233, dated 31st January, 1978]. 8.A company and a body corporate or a co-operative society in which a director or relative is a member or director. Applicability of the Section is to be determined at the time of entering into the contract. If no permission under this section is required at the time of entering into the contract, subsequent permission is not necessary even though there may be a change of circumstances which would require permission to be taken for a fresh contract. Scope of the Section
The Section requires the consent of the Board of Directors for all contracts [except those exempted under sub-section (2)] with the company by a director or a relative or a firm in which the director or relative of his, is a partner or any other partner of such firm or a private company in which such a director is a partner or a member.
This section does not apply to contracts between two public companies and also is not attracted to a transaction of loan made by a director to the company because it is not a sale or purchase of goods or a contract to render services.
For instance, if ‘X’ is a director of A Ltd and also a director/member of B Pvt. Ltd., then Section 297(1) will apply to contracts between these two companies, subject to the exceptions provided therein. However, if only the relatives of X are director/members of B Pvt Ltd. (and not X himself) the section will not apply. It may be noted that all contracts, whatever their value, with the directors and other persons mentioned in the section require the previous approval of the Central Government. Contracts will include service contracts such as appointment to offices. Advertisement Services have been held to be covered by this section.[5] “goods” – definition In the absence of any definition of ”goods” in the Act, reference may be made to the definition given under the Sale of Goods Act, 1930 according to which “goods” means every kind of moveable property. Thus, for the purpose of the Section, sale or purchase as also lease of immoveable property is outside the scope of the Section. However, if the machinery is not permanently attached to the earth, it may fall in the category of goods within the meaning of this section. Object of the Section The object of the Section is that the Board of Directors should have knowledge about the extent of interest of a director in any contractual dealings with the company, or of any person connected with the director in any of the ways mentioned in sub-section (1), and accord their consent to such dealings. Specific consent of the Board It is the specific consent of the Board of directors which is required for entering into contracts of the kinds specified in section 297. Such consent must be accorded by a resolution passed at a duly convened Board meeting and not by means of a resolution passed by circulation. The consent contemplated is not a general consent but a consent referable to each particular or specific contract or contracts. Consent requires knowledge of the specific facts and materials which leads to the consent and cannot be given in a general or abstract manner. However, sub-section (3) lays down that in case of urgent necessity, a contract may be entered into without obtaining the consent of the Board, even if the value of such goods or cost of such services exceeds Rs. 5000 in the aggregate in any year, provided consent of the Board is obtained within 3 months of the date on which the contract was entered into. It must be noted that this sub-section does not dispense with the necessity of obtaining previous approval of the Central Government, though it is possible that the Government may, by general order or notification, give general approval for certain classes or kinds of contracts. The applicability of section 297 of the Act is to be examined at the time of entering into the contract and the consent should be obtained within three months of entering into the contract. If a director becomes interested after the contract is entered into, there is no need to get Board’s consent. The term `director’ includes alternate director for the purpose of section 297 of the Act Procedure The Company Law Board in the case of Yashovardhan Saboo v Groz-Beckert Saboo Ltd. has observed that Section 297, 299 and 300 of the Companies Act are founded on the principle that a director occupies a fiduciary position in relation to a company. The are related provisions and have a combined effect. Thus the procedure for carrying out contracts in which any of the Company’s director is interested or concerned combines the provisions of Section 297, 299 and 300 and applies to all companies, public and private but not to contracts between two public companies.
A Board meeting shall be convened to consider the terms of the contract. Board’s consent must be accorded by a resolution passed at a meeting of the Board and not by circulation.
Directors interested or concerned shall disclose the nature of their interest or concern at the meeting of Board of directors in Form No. 24AA of Companies General Rules and Forms as required under section 299(3).
So far as section 299 is concerned, instead of disclosing interest or concern every time, a general notice may be given annually in the last month of the financial year. Thus, the validity of such notice given by the director is for one financial year and it has to be renewed every year. Such general notice should be placed before the Board meeting for its recording by means of a resolution.
If the paid-up capital of the company is Rs. One Crore or more, an application shall be made to the Regional Director in Form No. 24A of Companies General Rules and Forms for its prior approval. The Section requires such an application to be made to the Central Government but the Central Government has delegated to the Regional Directors at Bombay, Calcutta, Madras and Kanpur the powers and functions under the Section vide Notification No. GSR 563 (E), dated 19-8-1993.
In case the Board cannot have requisite quorum of disinterested directors, then the contract shall be approved by shareholders by convening a general meeting.
Necessary entries shall be made in the register of contracts maintained under section 301, within 7 days of the Board meeting, and it shall be signed by all the directors present in the next Board meeting.
Except for some of the cases mentioned in section 300(2), an interested director shall not take part in the proceedings of Board meeting or voting in respect of a contract or arrangement in which he is interested or concerned. Such an interested or concerned director will not be counted for the purposes of quorum. Where the number of such interested directors exceeds or is equal to two-thirds of the total strength of the Board, then two disinterested directors present in the meeting will be deemed to be proper quorum.
Exceptions Sub-section (2) lays down three exceptions to the rule under sub-section (1). They are as follows : a)When the transaction for sale or purchase of goods and material is on cash basis at prevailing market prices the consent of the Board is not required. A cheque is considered equivalent to cash for the purpose of this section.[9] b)Where a party to the contract as specified in sub-section (2)(b), regularly trades or does business, provided that the aggregate value of transactions over a calendar year do not exceed Rs. 5000. c)In the case of banking or insurance company, any transaction with any director, etc., in the ordinary course of its business. Such transactions will neither require the consent of the Board nor the previous approval of the Central Government. Non-compliance The only consequence of not obtaining the consent of the Board is that in such case the Board is given the option to avoid the contract. If the Board chooses to condone the defect and pass a resolution not to avoid the contract or gives ex post facto consent, there is an end of the matter. The company in general meeting cannot interfere unless the Board’s act amounts to a breach of trust, resulting in loss to the company. Apart from consent of the Board, previous approval of the Central Government is also required where the paid – capital of the company is Rupees One Crore or more. In the absence of approval of the Central Government where necessary the contract shall be void. Thus, it appears that, where contracts entered into by companies when their paid – capital was less than Rupees One Crore, and raised upwards subsequently, approval of the Central Government would not be necessary until the expiry of the contract. Offence, Penalty and Compoundability Section 297 does not provide any penalty for non – compliance. The penalty therefore will be as per the provision of Section 629A. Entering into certain contracts with the company in which particular directors are interested without Board’s sanction and where paid-up share capital is not less than Rs. One Crore, without the previous approval of the Central Government (now Regional Director) the company and every officer in default shall be punishable with fine upto Rs. 5000 and further fine upto Rs. 500 for each day of default [sub-section (1)]. The offence punishable is compoundable under section 621A read with section 629A. Conclusion A fruitful source of misuse of power by directors is that which is exemplified by contracts entered into with the company of which they are directors by themselves or through their relatives or firms or companies in which they are interested for the sale, purchase or supply of goods, materials or services, as the case may be. Section 297 and its subsequent amendments strive to safeguard the interest of the company especially when directors are in a position to take advantage of inside information for personal gain. It provides for a two fold measure of ensuring that the interest of the company is not affected by a breach of trust by the directors.
Conversion of Firm under Part IX of the Companies Act, 1956 :- The firm may be converted into a company by following the provisions of Part IX of the Act, 1956. Sections 565 to 581 deal with conversion of firms into a company under theCompanies Act, 1956.
For the purpose of Part IX so far as it relates to the registration of companies limited by shares, a joint means a company having a permanent paid up or nominal share of fixed amount divided into shares, also of fixed amount, or held and transferable as stock, or divided and held partly in the one way and partly in the other, and formed on the principle of having for its the holders of thoseshares or that stock, and no other persons. Such a company, when registered with under the Companies Act, 1956 shall be deemed to be a companylimited by shares.
A company cannot be registered under part IX unless the assent of majority of itsmembers as are present in person or where proxies are allowed, by proxy, at a general meeting summoned for is obtained.
Since the liability of the members of is unlimited, when a firm desires to register itself as a company under Part IX as a , the majority required to assent as aforesaid shall consist of not less than ¾ of the members as are present in person or where proxies are allowed, by proxy, at a general meeting summoned forthe purpose.
Steps for incorporation of company under part IX
STEP 1
Hold a meeting of the partners to transact the following business
Assent of majority of its members as are present in person or where proxies are allowed, by proxy, at a general meeting summoned for the purpose of registeringthe firm under Part IX of the Companies Act, 1956. Since the liability of the membersof the firm is unlimited, when a firm desires to register itself as a company under Part IX as a limited company, the majority required to assent as aforesaid shall consist of not less than ¾ of the members as are present in person or where proxies are allowed, by proxy, at a general meeting summoned for the purpose.
To authorize one or more partners to take all steps necessary and to execute all papers, deeds, documents etc. pursuant to registration of the firm as a Company.
To execute a supplementary Partnership Deed to align it with the requirements as under:
There must be at least 7 partners in the partnership firm;
The firm may be registered with the Registrar of Firms;
There must be a fixed capital divided into units ;
There must be provision of converting a firm into company.
There must be an agreement by the partners to convert the partnership to a company. This can be done by a contract in writing to this effect to which the partner’s resolution for conversion can be attached as annexure.
Execute a settlement deed.
Step 2
APPLICATION FOR DIRECTOR’S IDENTIFICATION NUMBER AND DIGITAL SIGNATURERS CERTIFICATE
Ministry of Company Affairs has made Director’s Identification Number mandatory for each Director. Following details are required for DIN: Name(s) , Father’s Name(s), Permanent Residential Address(s), Present Residential Address(s), Occupation, Name of the Companies in which the promoter is Director/Promoter, Date of Birth , E-mail IDs (Minimum 2 for private company).
Ministry of Company affairs have initiated the process of E-filing of the Documents, wherein the either of the Director needs to have Digital Signature Certificate. For the matter of Convenience in submission of documents with Registrar of Companies and expediting the processing, it is advisable to obtain the Digital Signature Certificate from prescribed authorities.
Following documents are required for DIN/Digital Signature: Copy of Passport/ Voter ID/Ration Card/Driving License/ PAN Card/Telephone Bill/Electricity Bill/Bank Statement.
The application is required to be signed by the promoter(s).
Normally the process takes 5 to 7 working days after submitting the documents with DIN Cell.
Note: In case of a Private Limited Company at least two Directors should be appointed.
Step 3
NAME APPROVAL
An application in Form No. 1A needs to be filed with the Registrar of Companies(ROC) with following annexure(s) stating the fact that the partnership firm proposed to be converted under part IX of the Companies Act. (Annexure 1).
Certified true copy of Partnership Deed .
Certified true copy of the latest balance sheet of the partnership.
Certified true copy of the latest income tax assessment order/return.
Consent of all the partners stating that they have agreed to register the partnership firm as a Company .
Certified True Copy of the resolution passed by the firm in this regard .
The application is required to be digitally signed by one of the promoters.
The details to be state in the said application are as follows :
1. Maximum Six alternative names for the proposed company. (in order of preference)
2. Names , Father’s/ Husband’s Name, Permanent Residential Addresses, Present Residential Address, Occupation, Name of the Companies in which the Promoter is Director/Promoter , Date of Birth , DIN of the Promoters.
3. Authorised Capital of the proposed Company.
4. Main objects of the proposed company.
5. State of Registered Office of Company
6. Copy of Trade Mark Application/Certificate If name of proposed company based on a Trade Mark,
Note:
As per Indian Companies Act, 1956, a Private Company should have a minimum Paid up Capital of Rupees One Lac.
As per Indian Companies Act, 1956 there should be at least two promoters in a Private Limited Company.
The Registrar of Companies will ordinarily inform within a period of seven days from the date of submission of the application whether any of the names applied for is available.
If the name is not made available, the Registrar of Companies may reject the application and if it happens, new names to be provided for approval.
Step 4
Registration of Company
On obtaining the approval of name , file the following documents with the registrar of Companies within 60 days from the date of name approval
Two sets of Memorandum and Articles of Association of the Company. One set shall be duly stamped. A memorandum of association and articles of association may be made for the company which will be similar in all respects to a normal of Association except that it incorporate therein terms of settlement deed.
After drafting The Memorandum and Articles of Association is required to be stamped as per the Indian Stamp Act. (in Delhi its Rs. 200/- on MOA & 0.15% of Authorized Capital on AOA).
Thereafter these documents are required to be executed by the promoters in their own hand in the presence of professionals after the date of Stamping of Memorandum & Article of Association in duplicate stating their full name, father’s name, , occupation, number of shares subscribed for & Signature etc.
However, if any director is foreigner and not present in India after the date of Stamping of the Memorandum & Article of Association, in that case, his signature should be attested in Indian Embassy located in his home country.
Form No. 1 – This is a declaration to be executed on a non-judicial stamp paper by one of the directors of the proposed company or other specified persons such as Chartered Accountants, Company Secretaries, Advocates, etc. stating that all the requirements of the incorporation have been complied with. (Annexure 2)
Form No. 18 – This is a form to be filed by one of the directors of the company informing the ROC the registered office of the proposed company. (Annexure 3).
Form No.: 32 – This is a form stating the fact of appointment of the proposed directors on the board of directors from the date of incorporation of the proposed company and is signed by one of the proposed directors. (Annexure 4).
Power of Attorney signed by all the subscribers of MOA authorizing one of the subscribers or any other person to act on their behalf for the purpose of incorporation and accepting the certificate of incorporation.
Form No. 37 along with Form No. 39 (Annexure 5 & 6).
Declaration by two partners verifying the particulars set forth in the above mentioned documents.
Consent letters from Directors
Filing fees as may be applicable
Other information to be submitted:
i) A list showing the names, addresses and occupations of all persons who on a day named in the list, not being more than 6 clear days before the date of registration were members of the company, with the addition of the shares or stock held by them respectively, distinguishing, in cases where the shares are numbered, each share by its number.
ii) If the company is intended to be registered as a limited company, a statement specifying the following particulars :-
a) the nominal share capital of the company and the number of shares into which it is divided or the amount of stock of which it consists
b) the number of shares taken and the amount paid of each share
c) the name of the company, with the addition of the word “Limited” or “Private Limited” as the case may be, as the last word / words, in case the company is being registered with limited liability.
Step 5
On completion of the formalities, the registrar shall register the Company under Part IX of the Act and issue a certificate of incorporation.
Steps for Incorporation of a public limited company
First Five stages are almost same for incorporation of a public limited company except there should be at least seven subscribers, three directors and the minimum paid up capital are Rs. 5 lacs.
After completion of first three stages a private limited company may commence its business but a public limited company is required to obtain certificate for commencement of business from Registrar of Companies. For obtaining the Certificate for commencement of its business, the Company is required to submit following documents with Registrar of Companies:
Form 20 to be executed on a non-judicial stamp paper (Annexure 5)
Statement in lieu of Prospectus
Affidavit from each directors stating that the Company has not commenced its Business
Details of Preliminary expenses
Board Resolution for approval of preliminary expenses.
Board resolution for appointment of first Auditors
Consent letter from the Auditors for acting as there Statutory Auditors.
Registrar of Companies thereafter shall process the documents and if all the documents are in order then it will issue a Certificate for commencement of Business.
Steps after incorporation of private company
Once the new company is formed, the takeover agreement would be entered between the Partnership Firm and the newly incorporated company.
Convene a Board Meeting after giving notice to all the directors of the newly incorporated company immediately after incorporation as per section 286 of the Companies Act, 1956 to adopt the agreement entered into by the company and the partner of the firm for the acquisition of business of the firm.
In such a situation, the entire business of the firm along with all its assets and liabilities is transferred to the company.
The company may issue shares or other securities to the Partner of the firm.
Steps after incorporation of public company
Once the new company is formed, the takeover agreement would be entered between the Partnership firm and the newly incorporated company.
Convene a Board Meeting after giving notice to all the directors of the newly incorporated company immediately after incorporation as per section 286 of the Companies Act, 1956 to adopt the agreement entered into by the company.
In the above Board Meeting also fix up the date, time , place and agenda for calling a General Meeting to pass a Special Resolution under section 81(1A) of the Companies Act, 1956 giving powers to the Board of Directors to issue and allot equity shares to Partners of the firm.
Effect of Registration under part IX
Vesting of Property : All property, movable as well as immovable belonging to or vested in the firm at the time of registration shall, on such registration pass to and vest in the company as incorporated under Part IX.
The Registration of a company under Part IX shall not in any manner affect its rights or liabilities in respect of any debt or obligation incurred or any contract entered into, by, to, with or on behalf of the firm before registration.
All suits and other legal proceedings taken by or against the company or any public officer or member thereof which where pending at the time of registration may be continued in the same manner as if registration had not taken place. However, no execution can be done against the property or person of any individual member of the company on any decree or order obtained in such suit or proceeding. If the property of the company is inadequate to satisfy the decree or order, an order for winding up the company may be obtained.
All provisions of any Indian law or other instrument constituting or regulating the company shall apply to the registered company in the same manner as if the company had been formed under the Companies Act, 1956 and those conditions were required to be contained and were contained in its Memorandum and Articles of Association.
As per section 383A of the Companies Act, if the paid up capital of the Company is Rs. 500 lacs or more than the company is required to appoint a full time Company Secretary.
As per section 269 of the Companies Act, 1956 if the paid up capital of the company is Rs. 500 Lacs or more than the Company is required to appoint either Managing Director or Whole Time Director or Manager.
Debts and liabilities are not automatically transferred to the new company and therefore a novation agreement will have to be entered into by the company with its debtors and creditors.
Obtain an indemnity from the company to the partnership firm for all acts, deeds and things done after the registration under Part IX and vice versa.
Comply with all the relevant provisions of the Companies Act, 1956 i.e. call requisite meetings, register charges, comply with section 58A if necessary, etc.
Stamp duty. Conversion of firm to company is exempted from payment of stamp duty as there is no change in the ownership and no transfer is involved.
