Loans, Investments and Related party transactions

any director of Co / its Hold Co or any partner / relative of any such director

Not possible

Not possible

any firm in which any such director / relative is a partner

Not possible

Not possible

any person in whom any of the director of the Co is interested:

• any private company of which any such director is a director / member
• any body corporate at a GM of which not < 25% of the total voting power may be exercised / controlled by any such director, or by two or more such directors, together
• any body corporate, the BoD, MD or manager, whereof is accustomed to act in accordance with the directions or instructions of the BoD, or of any director or directors, of the lending company

Not possible

Possible if:

• a special resolution is passed by the Co in GM (explanatory statement discloses the full particulars of the loans / guarantee given or security provided and the purpose for which the same is proposed to be utilised by the recipient and any other relevant fact; and
• the loans are utilised by the borrowing Co for its principal business activities

Exception: i.e. provisions not applicable to:

• Loan to MD / WTD
  • As part of conditions of service extended by Co to all employees
  • Pursuant to scheme approved by Special Resolution

✔

✔

• a Co which in the ordinary course of its business provides loans / gives guarantees or securities for the due repayment of any loan

And an interest is charged at a rate not < the bank rate declared by the RBI

✔

And an interest is charged at a rate not < the rate of prevailing yield of 1 /3 / 5 / 10 years Govt. security closest to the tenor of the loan

✔

• any loan made by a Hold Co to its WOS or any guarantee given / security provided by a Hold Co in respect of any loan made to its WOS #

✔

✔

• any guarantee given / security provided by a Hold Co in respect of loan made by any bank / financial institution to its Sub Co #

✔

✔

# utilised by the Sub Co for its principal business activities

Punishment for contravention of S.185:

• Co → fine not < ₹ 5 lakh up to ₹ 25 lakh

✔

✔

• Recipient of loan / guarantee / security → imprisonment up to 6 months OR fine not < ₹ 5 lakh up to ₹ 25 lakh, OR with both

✔

✔

• OID → imprisonment up to 6 months OR fine not < ₹ 5 lakh up to ₹ 25 lakh

—

✔

1.

Layers of subsidiaries – effective 20-Sep-2017 [S.186(1), & Cos. (Restriction on number of layers) Rules 2017]

• A Co shall not make investment through not > 2 layers of investment Cos
  • For computing the number of layers, one layer consisting of one or more WOS/s shall not be taken into account
• Exception: provisions not applicable to:
  • a Co acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;
  • a Sub Co from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force;
  • A banking Co as defined in S. 5(c) of the Banking Regulation Act 1949;
  • NBFC as defined in S.45-I (f) of the RBI Act 1934 registered with RBI and considered as (Systematically Important) SI-NBFC by the RBI;
  • an insurance Co which carries on the business of insurance in accordance with the Insurance Act, 1938 and the Insurance Regulatory Development Authority Act, 1999;
  • A Govt. Co referred to S.2(45) of the Co Act 2013.
• Every Co existing on 20-Sep-2017, having more than 2 layers of investment Sub Cos as mentioned above are required to:-
  • File a return in Form CRL1 disclosing the details specified therein within 150 days;
  • Shall not have any additional layer of subsidiaries over and above the layers existing on 20-Sep-2017;

• shall not, in case one or more layers are reduced by it subsequent to 20-Sep-2017, have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed as mentioned above, whichever is more.
• Provisions of the Rules shall not be in derogation of the proviso to S.186 (1) of Co Act 2013.

• Punishment for contravention:

2.

Ceiling on Loan / guarantee / security / investment [S.186(2), (3)]

3.

Approvals of BoD, PFIs [S. 186(5)]

• By a resolution sanctioning it is passed at a meeting of BoD with the consent of all the directors present at the meeting
• prior approval of the concerned PFIs where any term loan is subsisting (i.e. default in repayment of loan instalments / payment of interest thereon as per the terms and 
  conditions), in case of loans / investment / guarantee / security requiring Prior Special resolution

4.

Restrictions on [S. 186(6), (8) & R.11]

5.

Rate of interest [S. 186(7)]

• NOT lower than the prevailing yield of 1 / 3 / 5 / 10 year Govt. Security closest to the tenor of the loan

6.

Disclosure in FS [S. 186(4)]

• full particulars of the loans / investment / guarantee / security given or provided
• purpose for which the loan / guarantee / security is proposed to be utilised by the recipient thereof

7.

Non-applicability 
¹¹[S. 186(11)]

8.

Register

[S. 186(9), (10) & R.12]

• in Form MBP 2
• to be kept at the registered office of the Co
• to be preserved permanently
• shall be open to inspection

1.

Definition of Related Party [S.2(76)]

"related party", with reference to a Co, means—

• a director / his relative;
• a KMP / his relative;
• a firm, in which a director, manager or his relative is a partner;
• a private co in which a director / manager / his relative is a member or director;
• a public co in which a director and 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 the # advice, directions or instructions of a director or manager;
• any person on whose # advice, directions or instructions a director or manager is accustomed to act:
• # Not applicable to the advice, directions or instructions given in a professional capacity
• any ¹² Co which is—
  • a Hold Co / Sub Co / Asct Co of such Co; or
  • a Sub Co of a Hold Co to which it is also a Sub Co i.e. sister concern; or
  • an investing Co / the venturer of the Co - i.e. a body corporate whose investment in the Co would result in the Co becoming an Asct Co of the body corporate.
• such other person as may be prescribed

2.

“office or place of profit” [Expl. (a) to S.188(1)]

means any office or place is held by —

3.

“arm’s length transaction” [Expl. (b) to S.188(1)]

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

4.

Board approval [S.188(1), R.15]

• by a resolution at a BM, provided the agenda of the BM at which the resolution is proposed to be moved shall disclose-
  • the name of the related party and nature of relationship;
  • the nature, duration of the contract and particulars of the contract / arrangement;
  • the material terms of the contract / arrangement including the value, if any;
  • any advance paid / received for the contract / arrangement, if any;
  • the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
  • whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
  • any other information relevant or important for BoD to take a decision on the proposed transaction.
• Interested director in any contract / arrangement with a related party shall not be present at the BMduring discussions on the subject matter of the resolution relating to such contract or arrangement.

5.

Prior approval of the Co by a resolution (at GM) [S.188(1), R.15]

i.r.o. RPT beyond the prescribed threshold –

(For prescribed threshold please refer Sr. no. 13 of Criteria under the Companies Act, 2013 triggering certain compliances)

• The explanatory statement to the GM notice shall contain :-
  • name of the related party;
  • name of the director / KMP who is related, if any;
  • nature of relationship;
  • nature, material terms, monetary value and particulars of the contract / 
    arrangements;
  • any other information relevant or important for the members to take a decision on the proposed resolution.
• A member of the Co who is a related party shall vote on such resolution to approve any contract or arrangement
  • Not applicable to: a Co in which ≥ 90% of members, in number, are relatives of promoters or are related parties

6.

Non-applicability of S.188(1) [4th Proviso to S.188(1)]

to any transactions entered into by the Co in its ordinary course of business other than transactions which are not on an arm’s length basis

7.

Disclosure in BoD report [S.188(2)]

Every contract / arrangement entered into u/s 188(1) shall be referred to in the BoD’s 
report to the shareholders along with the justification for entering into such contract or 
arrangement

8.

any contract or arrangement is entered without obtaining the consent [S.188(3), (4)]

• any contract / arrangement is entered into by a director / any other employee, without obtaining the consent of BoD / approval by a resolution in GM
  • may be ratified by BoD / the shareholders, as the case may be, at a meeting 
    within 3 months from the date on which such contract or arrangement was entered into,
  • if not →è such contract / arrangement shall be voidable at the option of BoD / the shareholders, as the case may be, and
  • if the contract / arrangement is with a related party to any director, or is authorised by any other director →è the directors concerned shall indemnify the Co against any loss incurred by it

open to the Co to proceed against a director / any other employee who had entered into such contract / arrangement in contravention of S.188 for recovery of any loss sustained by it as a result of such contract / arrangement

9.

contract or arrangement in violation of the provision of S. 188 [S.188(5)]

Any director / any other employee of a Co, who had entered into /authorised the contract / arrangement in violation of S.188 shall,—