A company normally enters into transactions with other companies or firms which are known as related party transactions. Section 297 is in respect of Board’s sanction to be required for certain contracts in which particular directors are interested. Section 299 relates to disclosure of interest by directors. Under Companies Act compliance of Section 297 appears to be very simple, whereas practically it is more complex.
Section 297 is applicable to both private limited companies and public limited companies in respect of Contracts relating to purchase or sale or supply of goods or services or materials or underwriting the subscriptions of shares or debentures. Companies Act stipulates certain conditions for such transactions.
Section 297 is an important section. In view of the fact that compliance of Accounting Standard 18 (AS 18) relates to related party transaction is mandatory, consequently it increases the importance of Section 297.
CONTRACT APPLICABLE TO:
Applicable for the contracts made between the company and
a) The director of the company
b) The relative of the director of the company
c) Firm in which director or his relative is partner
d) Partner of the firm in which director or his relative is partner
e) Private company in which the director is a director or member
The salient features of Section 297
1. Except with 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) for underwriting the subscription of any shares in, or debenture of, the company.
2. In the case of a company having a paid-up share capital of more than rupees one crore, such contract shall be entered into only with the previous approval of the Central Government (Regional Director).
Exemptions under Section 297
The following transactions are exempted from Section 297:
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 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 aforesaid.
The contract must be approved by a majority of disinterested directors. When incase of closely held public limited company, there is a possibility that all the directors will be interested in the resolution, and therefore no valid board resolution could be passed. To over come such situation the proposed contract shall be approved by the shareholders through Ordinary Resolution in General Meeting.
Prior approval of central government is required where the paid up capital of the company is more than one crore. There cannot be ex-post facto approval of the Central Government.
The offense under this section is compoundable under Section 621 A of the Companies Act.
NON – APPLICABILITY OF THE SECTION 297
Section 297 is not applicable in respect of following transactions:
DISTINCTION BETWEEN SECTION 297 AND 299
Section 299 is similar section which is relating to disclosure of information by the Director. Both Section 297 and 299 are applicable both Private Limited and Public Limited. The difference between Section 297 and Section 299 are given below:
1. Section 297 is relating to the contracts in respect sales, purchase and services in which directors are interested. Section 299 is relating to disclosure of interest by the director whether he is interested directly or indirectly and disclosure has to be given in Form 24AA.
2. Under Section 297, disclosure has to be given either before or after the transaction is entered. Under Section 299, the disclosure has to be given for every financial year and wherever he is becoming a director within 15 days from the date of becoming director.
3. Under Section 297, when the paid-up capital of the company is more than Rupees One Crore approval from Central Government (Regional Director) is required, otherwise only Board approval is required. For Disclosure under Section 299, only Board approval is required. No Central Government approval is required. For both the Sections, entries are required to be made in the Register maintained under Section 301 of the Companies Act, 1956.
4. Any violation of Section 297 is compoundable offence. Any violation under Section 299 is very serious and makes the director to vacate the office under Section 283 of the Act.
DIRECTORS’ INTERESTED CONTRACTS AND CENTRAL GOVERNMENT APPROVAL
When the paid up capital of the company is more than Rupees one crore and the company enters into a contract then approval from the Regional Director is required. For Example Ram Limited is a Public limited company and Lal limited is Private Limited and subsidiary of Ram limited. The directors of Ram Ltd are also Directors in Lal Limited. Ram Limited is selling electricity generated from its wind mill to Lal Limited. In such case approval from the Central Government is required. The approval may be obtained for a period of 3 years.
The relevant form for obtaining Central Government (RD) is Form 24A along with the following enclosures. The fee for each application is Rs. 2000.
After the approval from RD is obtained and due to some reasons the actual are exceeding the approval obtained it is necessary to apply to RD and get the approval limit extended well in advance.
REGISTER OF CONTRACTS UNDER SECTION 301 OF THE COMPANIES ACT
Every company must maintain a Register of Contracts. Companies and Firms in which the directors are interested and particulars of every contract or arrangement to which section 297 or 299 applies must be entered in the register giving following:-
a) the date of the contract or arrangement;
b) the names of the parties thereto;
c) the principal terms and conditions thereof;
d) in the case of a contract to which section 297 or section 299 (2) applies, the date on which it was placed before the Board;
e) the names of the firms and bodies corporate of which a general notice has been given by the director under section 299 (3); and
f) the names of the directors voting for and against the contract or arrangement and the names of those remaining neutral.
Particulars of a contract have to be entered in the register if section 297 is attracted even though section 299 is not applicable. Mere fact that one of these sections is exempted from application in a particular case does not ipso facto lead to an exemption of section 301. [DCA Circular No. 8/32(299) /69-CL-V dated 3 January 1970]. VI)
In the case of a contract or arrangement requiring the Board’s approval entries are to be made in the register within 7 days (excluding public holidays) of the meeting of the Board at which the contract or arrangement is approved. In the case of any other contract, the entries should be made in the register within 7 days of the receipt at the registered office of the company of the particulars of such other contract or arrangement or within 30 days of the date of such contract or arrangement, whichever is later.
The Register must be placed before the Board meeting held next after the particulars is entered in the register and all the directors present therein must sign it.
This register shall be kept at the registered office of the company and shall be open to inspection by any member without fee during business hours and extracts may be taken by any such member without fee but copies for the same shall be issued on payment of such fee as may be prescribed for every 100 words or fractional thereof.
No form of maintaining the register has been prescribed , thus it is advisable to split the register in two parts, the first containing the particulars of disclosure made by directors under section 299 (3) and the second part containing the particulars of the contracts and arrangements falling under sections 297 and 299.
From the statutory auditor point of view the Register maintained under 301 is to be verified and refer in his report to the shareholders of the company.
Check whether exempting provisions of Section 297 are applicable. If not, check that
1) Check form 24AA is obtained from all the directors and any contract is entered with any company or firm mentioned in the Form 24AA.
2) Consent of the Board of Directors is obtained by resolution passed a Board Meeting for entering into contracts.
3) Requisite resolutions have been incorporated in the Board minutes.
4) Prior approval of the RD has been obtained if the paid up capital of the company is more than Rs. One crore.
5) The particulars of contract were entered in the register of contracts maintained under Section 301 of the Companies Act.
To conclude in respect of the contracts in which directors are interested there should not be any omission or commission of the procedures mentioned under Section 297 and 301 of the Companies Act. Let us comply with procedures properly in accordance with the provisions of the Companies Act.
Practicing Company Secretary