CA Kamal Garg
Background
Under the provisions of Section 299 of the Companies Act, 1956, every director of a company, whether directly or indirectly, who is concerned or interested in a contract or arrangement entered or to be entered, is required to disclose the nature of his concern or interest at the meeting of Board of Directors. A general notice given to the board under section 299(3) to the effect that he is a director or member of a specified body corporate or is a member of a specified firm and is to be regarded as concerned or interested in any contract or arrangement which after the date of notice, be entered into with the body corporate or firm, shall be deemed to be a sufficient disclosure.
Further in terms of Section 299(6), the Section is not applicable to any contracts or arrangements, if any of the directors of one company or two or more of them together holds or hold not more than 2% of the paid up share capital in another company. Now because of the provisions of Section 299(6), the question arises, if combined shareholding of directors in contracting companies does not exceed 2%, then, whether a director is to be considered as concerned or interested merely because he is a director in the other company? Provisions of Section 299(3) imply to define interest or concern of the director either by way of directorship or by way of membership. However, Section 299(6) implies that if the directorship is not backed by more than 2% combined holding, then the whole section is inapplicable. Directorships of directors in other companies are irrelevant. What is relevant is the membership or shareholding of directors in the other company. However, disclosure in the form of general notice of directorships is given only to comply with Section 299(3).
A declaration of the percentage of share-holding is a must in order to conclude whether Section 299 is applicable or not. Under section 299(6) one can come to a conclusion that none of the provisions of section applies if the combined shareholding of the directors is less than 2% only from the assessment of disclosure given in form of general notice of extent of his shareholding.
Thus, all contracts and arrangements between companies with common directorships are out of the ambit of Section 299, if directors together of one company do not hold more than 2% of the paid-up share capital in the other company.
Under Section 301(3) all parties disclosed in general notice under section 299(3) should be listed in the register under section 301 of Companies Act, 1956. In case Section 299 becomes inapplicable on account of Section 299(6), as explained above, then the contracts or arrangements are not to be noted in the register under section 301. Section 301 applies only to transactions, contracts and arrangements to which Section 297 and Section 299 are applicable.
Reporting requirements under CARO, clause 4(iii) and 4(v):
Under clause 4(iii), an auditor is required to report — “has the company either granted or taken any loan, secured or unsecured to/from companies, firms or other parties covered in the register maintained under Section 301 of the Act. If so, give the number of parties and amount involved in the transaction.”
Thus, any loan given or granted to the parties listed in the register under section 301(3) on the basis of general notice given under section 299(3) will have to be reported, even though the loan transaction is not entered in the register under section 301. A loan transaction will not be entered in the register under section 301 if by virtue of Section 299(6), the transaction is out of the scope of Section 299. The loan transaction being not specifically covered under section 297 will not be consequently covered under section 301 through Section 297. Section 297 relates to contracts for sale, purchase, service or underwriting of subscription of any shares or debentures of the company.
Under clause 4(v) the auditor is required to report “Whether transactions that need to be entered into a register in pursuance of Section 301 of the act have been so entered.”
As mentioned earlier, transactions covered under section 297 and Section 299 are required to be entered in the register under section 301. In case loan transactions or other contracts/arrangements are out of the scope of Section 299 by virtue of sub-section (6) of Section 299, then there will be a case where parties listed in general notice under section 299(3) are listed in terms of Section 301(3), whereas loans given to or taken from such parties, are not entered in the register under section 301 as Section 299 is not applicable. In such cases, the question is whether the auditor will be required to report loan transactions even when they are not registered under section 301.
Under clause 4(iii), one has to report whether a company has granted or taken any loan from companies, firms or other parties ‘covered’ in the register maintained under section 301. If the use of the word ‘covered’ is interpreted to mean, ‘listed’, then all loans given or taken to parties listed under section 301(3) will be required to be reported, even if such loan transactions are not registered under section 301.
In such a case, a statement giving the number of parties involved and the amount of transactions will have to be obtained.
If the auditor takes a stand that loan transactions entered with parties listed under section 301(3) on the basis of general notice given under section 299(3), but not registered under section 301 because the transactions fall out of the scope of Section 299 on account of section 299(6), will not be required to be reported, then the auditor may report that:
“There are loans granted or taken from parties listed under section 301(3), however, such loans transactions are not entered in the register under section 301 as provisions of neither section 297 nor 299 are applicable to such transactions and, therefore, the number of parties involved and the amount of such transactions are not reported.”
In the absence of any clear observation, comment or guidelines in the statement on CARO, it is conservative to report on all loans given to or taken from parties covered under section 301, irrespective of the fact whether loan transactions are entered in the register under section 301 or not.
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Compiled by CA Kamal Garg, a Fellow Member of ICAI. He is engaged in IFRS – Audit and Advisory, FEMA, Valuation and XBRL Services. He can be approached at cakamalgarg@gmail.com, 9811054015
Author Bio
If a director of a company is holding directorship in a bank n is holding less than 2% of paidup capital of bank, whether 301 will attract.he has disclossed in form24aa
Section 297 is applicable in case of common directorship even with nil shareholdings.
Accordingly reportable under CARO 4(v)