Companies Act 2013 : Loans, Advances and Related Party Transactions (Sec. 185, 186, 188)

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  • COMPANIES ACT 2013 Loans, Advances & RPTs CA Chintan N. Patel chintan@nareshco.com Naresh J. Patel & Co. Chartered Accountants Ahmedabad www.nareshco.com
  • LOANS & INVESTMENTS CA Chintan Patel chintan@nareshco.com Sec. 185 : Loan to Directors Sec. 186 : Loan and Investment by Company
  • Loans by Company To Directors OR To Any Other OR Company in which director are interested Sec. 185 Company Sec. 186 CA Chintan Patel chintan@nareshco.com
  • Section 185: A company cannot, directly or indirectly, give any loan, including loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in CA Chintan Patel chintan@nareshco.com interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.
  • Loan: A loan is defined by the Oxford English Dictionery as ‘a thing lent, something the use of which is allowed for a time, on the understanding that it shall be returned or an equivalent given; esp., a sum of money lent on these conditions and usually with interest.’ The essential requirement of a loan is the advance of money (or of some article) upon the understanding that it shall be returned, and it may or may not carry interest. CA Chintan Patel chintan@nareshco.com Indirect: The word ‘indirect’ used means that the co should not give a loan to director through the agency of one or more intermediaries. However the word ‘indirect’ cannot be read as converting what is not a loan into a loan. [Dr. Fredie Ardeshir Mehta v Union of India [1991] 70 Comp. Cas 210 (Bom.)
  • ‘any other person in whom director is interested’ : (a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director; (b) any firm in which any such director or relative is a partner; (c) any private company of which any such director is a director or member; (d) any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any CA Chintan Patel chintan@nareshco.com 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or (e) 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.
  • Body Corporate : Section 2(11) of 2013 Act: It includes a company incorporated outside India but does not include a co-operative society and any other as specified by CG. Characterstics Incorporated under some law, Perpetual succession, Ability to hold property in its own name , Legal entity apart from the members Examples: • All companies registered under Indian Companies Act • All companies registered under any Act outside India • Any Corporation registered under any special law in India or abroad CA Chintan Patel chintan@nareshco.com • Any Corporation registered under any special law in India or abroad • Public financial institutions u/s 2(72) of Companies Act 2013 • Nationalised banks incorporated under Banking Companies (Acquisition & Transfer of Undertakings) Act 1970 • LLPs (LLP Act 2008) Not Body Corporates: • Proprietorship concerns • Partnership firms (other than LLPs) • HUFs • Societies registered under Societies Registration Act • Mutual funds managed by trustees (UTI is a body corporate)
  • Prohibition on Loan by Company To Director Partnership Firm (If Director or Relative of Director is a partner) Individual Other than Individual Body Corporate (If BOD, MD or manager Sec. 185 Summary CA Chintan Patel chintan@nareshco.com Any Partner of Director Any Relative of Director Director of Holding Co. Pvt. Ltd. Co. (If Director is a director or member) Body Corporate (If Director/s having atleast 25% voting power) (If BOD, MD or manager accustomed to act as per directions of director/s, board of lending co. Subject to EXCEPTIONS
  • Exceptions of Sec. 185 Loan to Managing or Whole time Director LGS by a company in the ordinary course of business LGS by Holding Co. to Wholly Owned Subsidiary Co. GS by Holding Co. to Subsidiary Co. in respect of loan by Bank or FI CA Chintan Patel chintan@nareshco.com Provided that such Loans are utilised by the subsidiary for its principal business activities Interest is charged at a rate not less than bank rate As a part of condition of service to all employees OR Pursuant to scheme approved by members in SR
  • Section 185 : Practical Solutions Convert Lender & Borrower to LLP Convert Borrower Company to Limited Company (If Common Directors hold Less Than 25% of Borrowing company) Change in Directorship/ Shareholding 1) Appoint New i.e Uncommon Director 2) Resign Common Director from either Company (in which Director is not share holder) 3) Change the Shareholding in such a way that no Director of Borrower / Lender are shareholder of other company.(i.e. Director Should hold the share in which they are director.) 4) Shares/Directorship Held by Relatives of the Directors not considered. CA Chintan Patel chintan@nareshco.com
  • Penalties for Contravention of Sec. 185 LENDER COMPANY BORROWER IMPRISONMENT UPTO 6 CA Chintan Patel chintan@nareshco.com FINE RS.5 LACS TO 25 LACS MONTHS OR FINE Rs. 5 LACS TO Rs. 25 LACS OR BOTH
  • 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 (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. CA Chintan Patel chintan@nareshco.com
  • LOANS & INVESTMENTS BY COMPANIES Section 186 NO Investments through more than two layers of Investment Co. Upto 1.Give loan to any person OR body corporate 2. Give guarantee or provide security in connection with loan 3. Purchase subscription, purchase securities Upto Higher of 60% of Paid up Capital (+) Free Reserves (+) Security Premium 100% of Free reserves (+) Security Premium Alternate Route : If Loan Exceeds the above threshold limit, then Prior Approval by Special Resolution at General meeting is MUST . (Subject to Exceptions) OR CA Chintan Patel chintan@nareshco.com
  • Exceptions to Prior Approval No Prior Approval required: - L G S to WOS - L G S to Joint Venture - Investment (Acquisition) by holding company by way of subscription, purchase or otherwise of securities of subscription, purchase or otherwise of securities of WOS CA Chintan Patel chintan@nareshco.com
  • Exception to Sec. 186 (a) L G S 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 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. CA Chintan Patel chintan@nareshco.com
  • Disclosure in Financial Statement • Full particulars of the L G S I and • Purpose for which it is proposed to be utilised by the borrower - L G S (Not I) . CA Chintan Patel chintan@nareshco.com
  • Unanimous Board Resolution Sec. 186(5) • No investment shall be made or loan or guarantee should be given unless the resolution is passed at board meeting with unanimous vote. • Interested Directors cannot vote in a resolution. • All Directors present at the meeting must vote in favour of the resolution. This is an exception to general provision that all decisions of Board are by simple majority. decisions of Board are by simple majority. • Thus, prior and unanimous approval of board of directors is must and circular resolution or committee’s approval is not sufficient as provided in sec. 179 (3) (e & f). • However, the board of directors unanimously can approve the upper limit for investment and can delegate the powers to Committee / MD, Manager specifying loan, nature and purpose, for making investment within that prescribed limit. CA Chintan Patel chintan@nareshco.com
  • Prior approval of Public Financial Insti. (PFI) • Prior approval of Public Financial Institution where any tem loan is subsisting if (i) Company has made default in repayment of loan or interest to PFI OR (ii)The aggregate of LGSI along with proposed exceeds the limit prescribed in sec. 186 (2) CA Chintan Patel chintan@nareshco.com
  • SEC 186 – Loan & Investment by company • 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.statements the details of the loan or deposits. • 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.. CA Chintan Patel chintan@nareshco.com
  • Defaulter in Repayment No company which is in default in the repayment of deposits accepted 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.make an acquisition till such default is subsisting. CA Chintan Patel chintan@nareshco.com
  • Register of L G S I • Every company to keep a register which shall contain the particulars. • To keep register 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 fees as prescribed in the Articles not exceeding Rs. 10 per page. CA Chintan Patel chintan@nareshco.com
  • Penalty u/s. 186 • Company: Fine : Rs. 25,000 to Rs. 5 lakhs • Officers Imprisonment : upto 2 years andImprisonment : upto 2 years and fine Rs. 25,000 to Rs. 5 lakhs CA Chintan Patel chintan@nareshco.com
  • RELATED PARTY TRANSACTIONSTRANSACTIONS CA Chintan Patel chintan@nareshco.com
  • Related Party Definition of Related Party : Sec. 2(76) Director, KMP or their relative Firm in which a director or manager or his relative is a partner Private Company in which director or manager is a member or director Public Company in which director or manager is a director AND holds along with his relatives > 2% of its paid up share capital Any Body Corporate whose BOD, MD or manager is accustomed to act in accordance with advise, director or manager (Except in professional capacity) Co. Act 13 CA Chintan Patel chintan@nareshco.com accordance with advise, director or manager (Except in professional capacity) Any person on whose advise, directions, or instructions, a director or manager is accustomed to act. (Except in professional capacity) Any Company which is H, S or A of Company or Subsidiary of H Co. Director, KMP of the holding company or relative 2(77) : Relative : Members of HUF, Husband or Wife, As may be prescribed Father(incld S-F), Mother (incld S-M), Brother (incld S-B), Sister (incld S-S) Son (incld S-S), Son’s Wife, Daughter, Daughter’s Husband
  • Related Party (a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries); (b) associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture; (c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any such individual; AS - 18 enterprise, and relatives of any such individual; (d) key management personnel and relatives of such personnel; (e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise. CA Chintan Patel chintan@nareshco.com Relative – in relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings with the reporting enterprise.
  • Related Party • Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party, directly or indirectly, in making financial and/or operating decisions and includes the following : SEBI Individual (IND) Entity - Related party u/s. 2(76) CA Chintan Patel chintan@nareshco.com - Related party u/s. 2(76) - Control or joint control or significant influence over Co. (IC) - KMP of company or parent - Related party u/s. 2(76) - Entity and company are members of same group (each parent, subsidiary, fellow sub) - One entity is Asso./JV of other entity or of a member of a group of other entity - Both entities are JV of same third party - One entity is JV of third entity and other entity is Asso. Of third entity - Entity is post employment benefit for the benefit of employees of co. Or related co. - Entity Controlled/Jointly Conrolled by IND - IC has significant infl. over entity or parent
  • Related Party Transactions? Is it Specified Transaction? Transactions in ordinary course of business and Arms Length Pricing? Y Y N Sec. 188 Not Applicable No Prior Approval Y N Sec. 188 N CA Chintan Patel chintan@nareshco.com Transaction > Specified Amt or PC > Rs. 10 Cr? Approval of Sh. Holders by Sp. Resol. AND Board Approval Prior Approval of Board Y N N Director’s Report to disclose each Related Party Transaction (irrespective of its arms length nature) along with justification for entering into same.
  • Prior Approval of Company by Special Resolution for Specified but not Arms Length Transactions Is the Company Having Paid up share Capital > Rs. 10 Cr.? Prior Approval SR Required Y N Prior Approval SR Required ONLY IFGoods or Material Sale, purchase or Supply Directly or through Agent Services CA Chintan Patel chintan@nareshco.com > 25% of Annual Turnover Availing or rendering Directly or through Agent > 10% of Net Worth Property Buying, selling, disposing Directly or through Agent > 10% of Net Worth Leasing of Property > 10% of Net Worth Appointment To office or place of profit In Co., Subs, Asso > Rs. 2.5 Lacs p.m. Underwriting Remuneration for underwriting subscription of Sec. or derivative > 1% of Net Worth
  • Specified Transactions Co. Act 1956 Co. Act 2013 SEBI Listing Agreement Sale, purchase or supply of any goods, material or services -Sale, purchase or supply of any goods or material -Availing or rendering of any services Transfer of resources, services or obligations between a company and a related party, regardless, of whether a price is Underwriting the subscription of any shares in or debenture. Underwriting the subscription of any shares in or derivatives thereof. whether a price is charged.Selling or otherwise disposing of, or buying, property of any kind Leasing of property of any kind Appointment of any agents for purchase or sale of goods, materials, services or property; Related party’s appointment to any office or place of profit in the company, its subsidiary company or associate companyCA Chintan Patel chintan@nareshco.com
  • Related Party Transactions? Is it Material? Prior Approval of Audit Committee Prior Approval of Audit Committee Y Y No Action N SEBI N CA Chintan Patel chintan@nareshco.com Committee + Prior Approval of Sh. Holders by Sp. Resol. (Related Party can not vote) Audit Committee Material : if the transaction(s) to be entered into individually or collectively during a financial year exceeds: 5% of the Annual Turnover; or 20% of the networth; Whichever is higher
  • Disclosure of RPT • Details of all material transactions with related parties shall be disclosed quarterly along with the compliance report on corporate governance. SEBI corporate governance. • The company shall disclose the policy on dealing with Related Party Transactions on its website and also in the Annual Report. CA Chintan Patel chintan@nareshco.com
  • Sec. 188 Exceptions Not Apply to : Any transactions entered into in its ordinary course of business other than transactions which are not on an arm’s length basis. Arm’s length transaction: Transaction between 2 related parties that is conducted as if they were unrelated, so that there is no conflict of interest. Ordinary Course of business:Ordinary Course of business: • SA 550 Related Party: Examples of transactions outside the entity’s normal course of business: – Complex equity transactions, such as corporate restructurings or acquisitions. – Transactions with offshore entities in jurisdictions with weak corporate laws. – The leasing of premises or the rendering of management services by the entity to another party if no consideration is exchanged. – Sales transactions with unusually large discounts or returns. – Transactions with circular arrangements, for example, sales with a commitment to repurchase. – Transactions under contracts whose terms are changed before expiry. CA Chintan Patel chintan@nareshco.com
  • Sec. 188 Related Party Transactions office or place of profit : 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 remuneration, salary, commission, perqs, any rent free accommodation or otherwise If Not Approved: 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. Open to the co to proceed against director / any other employee for recovery of any loss CA Chintan Patel chintan@nareshco.com
  • Listed Co. - Imprisonment upto 1 year - Fine not less than Any Other Co. Fine not less than Rs.25,000/- may extend to Rs. 5 lacs Penalty for Contravention of Sec. 188 Any director/ any other employee of co who entered into / authorized such contract/ arrangement in violation, shall CA Chintan Patel chintan@nareshco.com - Fine not less than Rs.25,000/- may extend to Rs. 5 lacs or - Both may extend to Rs. 5 lacs
  • CA Chintan N. Patel chintan@nareshco.com +91-90999 21163 CA Chintan Patel chintan@nareshco.com Naresh J. Patel & Co. Chartered Accountants www.nareshco.com
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