This article is written by Pragya Agrahari of Amity Law School, Lucknow. This article provides a detailed analysis of Section 189 of the Companies Act, 2013 and includes a comparison of this Section with provisions of the Companies Act, 1956.
It has been published by Rachit Garg.
Table of Contents
Introduction
It takes many procedures and steps to incorporate a single company. Even after the incorporation of the company, the directors and its promoters have certain duties to perform in order to remain accountable to the company.
The Companies Act, 2013 (“the Act”) provides the whole process of how the company can be incorporated, what documents are required, how the directors can be appointed, what are their powers and so on. Chapter XII of the Act comprising Sections 173 to 195 provides for “Meetings of Board and its powers”, which deals with provisions related to meetings of the Board of Directors, their powers, restrictions, the requirement of directors to make disclosure of interests, loans and investments, register of contracts or arrangements in which directors are interested, etc. Section 189 of the Act under the said Chapter provides for maintenance of the register by the company to give details of all contracts or arrangements in which the director is interested.
This article deals with Section 189 of the Companies Act, 2013 read with Rule 16 of the Companies (Meeting of Board and its Powers) Rules, 2014, its purpose and its applicability. It also traces the origin of this Section and its comparison with Section 301 of the Companies Act, 1956.
Origin of Section 189: Section 301 of Companies Act, 1956
Before the enactment of the Companies Act, 2013, the Companies Act, 1956 governed all the processes required to incorporate a company and the activities to be done after its incorporation. The provision regarding maintaining the registers by the board of directors to record each contract or arrangement in which the director is interested was initially provided in Section 301 of the Companies Act, 1956. After the enactment of the Companies Act, 2013, Section 301 of the Companies Act, 1956 was shifted to Section 189 of the Companies Act, 2013.
Purpose and applicability of Section 189 of Companies Act, 2013
The main purpose behind the enactment of Section 189 is to have a record of each and every contract or arrangement entered, or the contracts or arrangements in which the directors or other key managerial personnel of the company are interested or concerned. If the particulars related to such interests of the officers of the company remain disclosed, it will help the creditors or other shareholders of the company to assess the risk associated with the company. Moreover, it also maintains transparency in the affairs of the company.
This Section is applicable to all types of companies including banking and insurance companies.
What is Section 189 of Companies Act, 2013
Section 189 of the Act deals with the requirement to maintain registers by companies in order to record the particulars of all contracts or arrangements in which the director is interested. It forms a part of the duty of the director to disclose all the material information to the company and to discourage him from making any secret profit. It ensures that all the information remains disclosed in the company securing the interests of shareholders or creditors of the company.
Section 189(1) of Companies Act, 2013
Section 189(1) of the Act requires every company to maintain one or more registers to record the particulars of a contract or arrangement related to the following:
Contract or arrangement in which the director of a company is directly or indirectly interested (Section 184(2))
Under Section 184(2) of the Act, the director is required to disclose the particulars related to any contract or arrangement in which he is interested or concerned with respect to
- a body corporate in which the director is a promoter, Chief Executive Officer (CEO) or manager or holds a shareholding or
- a firm or any other entity, in which the director is a partner, owner or member.
In the case of a contract or arrangement with a body corporate in which the director holds less than 2% of the shareholding, the director is not required to disclose the particulars of such a contract or arrangement.
The director is also required to specify the nature of interest in such contracts or arrangements at the meeting of the Board. The director shall disclose his concern or interest at the first meeting of the Board soon after he becomes so concerned or interested.
Details about the transactions entered with related parties (Section 188)
Under Section 188 of the Act, the director is required to provide details of the contracts or arrangements entered into by him with the related parties. Although it is a general rule that the company cannot enter into contracts or arrangements with related parties with respect to the following matters:
- Sale, purchase or supply of goods,
- Selling or buying any property,
- Leasing of any property,
- Providing any services,
- Appointment of agent for the sale of goods, services, materials or property,
- Such related party appointment in the office of profit of the company, its subsidiary or associate company,
- Subscription of any securities or derivatives.
Section 188 of the Act requires the company to obtain the approval of the Board or its members before entering into a contract or arrangement with related parties. Such contracts or arrangements must be referred to in the Board’s report to the shareholders along with the justification for entering into them.
If the approval or ratification of the Board or shareholders is not obtained within 3 months of entering into such contracts or arrangements, it will become voidable at the option of the Board or shareholders. However if such contracts or arrangements are with any related party to the director or if they are authorised by any director, the director will indemnify the company against any such loss. Moreover, the company is empowered to proceed against any director or employee of the company who entered into such a contract or arrangement for recovery of the loss sustained by the company as a result of it.
Any contravention of this provision will result in a penalty of 25 lakh rupees in the case of a listed company or a penalty of 5 lakh rupees in the case of other companies.
Section 189(2) of Companies Act, 2013
The director or key managerial personnel is required to disclose the particulars specified in Section 184(1) of the Act. Section 184(1) requires every director to disclose his interest or concern and their shareholding in any company, body corporate, firm, or association of individuals at the first meeting of the Board in which he participates and in the first meeting of the Board in every financial year. They also have to disclose these particulars if there is any change in the disclosures already made in the first meeting after such changes.
It is related to their interest or concern in a contract or arrangement with a body corporate, firm, association or other legal entity within a period of 30 days of their appointment or relinquishment in the company.
Section 189(3) and 189(4) of Companies Act, 2013
Section 189(3) and 189(4) of the Act enumerate certain provisions related to the register in which the particulars or other disclosures by the director of the company are recorded. These provisions are as follows:
- Every register shall be kept at the registered office of the company,
- The register must be open for inspection at the registered office during business hours,
- Any member can take extracts or copies of the register on the payment of prescribed fees,
- The company shall furnish such copies or extracts in the prescribed manner,
- Such registers must be produced at the commencement of every annual general meeting of the company,
- During the continuance of such meeting, the register shall be kept open and accessible for any person attending the meeting.
Exceptions to Section 189 of Companies Act, 2013
Section 189(5) of the Act provides two exceptions for the disclosure of certain particulars by the company in the register, which are as follows:
- Particulars related to contract or arrangement of sale, purchase or supply of goods, services, or materials if the value or cost of such goods, materials or services does not exceed 5 lakh rupees aggregate in a year,
- Particulars related to contract or arrangement entered by the banking company for collection of bills in ordinary course of business.
Penalty in case of failure
Section 189(6) of the Act provides a penalty in case of contravention of these provisions. The director who fails to comply with these provisions under the Act or rules shall be liable for a penalty of Rs. 25,000.
Comparison between Section 301 and Section 189 of Companies Act, 2013
Section 189 of the Companies Act, 2013, has amended various provisions that needed to be changed due to changes in time. Some of these changes are as follows:
- Section 301 of the 1956 Act excludes the contract or arrangement related to the sale, purchase or supply of any goods, materials or services if the cost of such goods, materials or services is not more than one thousand rupees in aggregate in a year whereas Section 189 of the 2013 Act increased this limit to five lakhs rupees.
- While Section 301 of the 1956 Act makes the company or other officers of the company liable for penalty upto five hundred rupees in case of any default or contravention of the Section, Section 189 of the 2013 Act increased the penalty to twenty-five thousand rupees.
- Section 189 also added the requirement to produce such a register at the commencement of every annual meeting of the company which was not there in the 1956 Act. This provision also requires that the register remain open and accessible during the meeting for any person who has attended that meeting.
Rule 16 of the Companies (Meeting of Board and its Powers) Rules, 2014
Section 189 of the Act is read with Rule 16 of the Companies (Meeting of Board and its Powers) Rules, 2014, which provides certain rules related to disclosure of contracts or arrangements in which the director is interested.
Rule 16 requires every company to maintain a register or registers on Form MBP-4. It is the responsibility of the director to disclose the particulars related to transactions done with related parties or contracts or arrangements in which the director is interested.
The following particulars are required to be mentioned in the form:
- Particulars of the company, body corporates, firms, associations or other legal entity in which the director is directly or indirectly interested,
- The contracts or arrangements with such body corporates, firms, associations, or other legal entity in which the director is interested,
- Provided that no such disclosure is required in cases where the director contracted with body corporate and himself holds 2 percent or less paid-up share capital in it,
- Contracts or arrangements with related parties and particulars related to such transactions.
Other rules related to the register maintained by the company are as follows:
- The entries in the register must be made at once and in chronological order,
- After making such entries, it must be authenticated by the Company Secretary or other member of the Board authorised to do so,
- Such registers must be preserved permanently at the registered office and in the custody of the Company Secretary of the company or other member of the Board authorised to do so,
- The company must provide the extracts from such register to the members who are making request within 7 days from the date of making such request,
- Such extracts may be provided to the members of the company in exchange for prescribed fees which should not exceed Rs. 10 per page.
Conclusion
Section 189 of the Companies Act basically deals with the maintenance of registers by the company to record the particulars of other companies, body corporates, firms, associations, or other legal entities in which the director is interested and the particulars of any contract or arrangement entered into with them. Rule 16 of the Companies (Meeting of Board and its Powers) Rules, 2014, provides the Form MBP-4 in which disclosure can be done by the directors of the company in the registers.
These registers will act as an information hub for any shareholder, creditor or other member of the company. With its help, they can assess the profitability or current status of the company by analysing all its transaction details or transactions in which the directors were interested. They will get to know the risks associated with the company and can regulate their expenses in the company accordingly. Hence, in this way, this provision helps in establishing transparency in the corporate affairs of the companies.
Frequently Asked Questions (FAQs)
Who has the right to inspect the register maintained by the company under Section 189?
According to Section 189(3) of the Companies Act, 2013 read with Rule 16 (4) of the Companies (Meetings of Board and its Power) Rules, 2014, any member of the company can obtain a copy of the register maintained by the company by furnishing prescribed fees, which cannot exceed Rs. 10 per page.
What details need to be disclosed in Form MBP-4?
The details that are needed to be disclosed under Form MBP-4 are as follows:
Part-A
- Date of the contract or arrangement,
- Name of the party with which such contract is entered into,
- Name of the director who is interested,
- Relation with director or company or nature of concern/ interest,
- Principal terms and conditions,
- Whether the transaction is at arm’s length basis,
- Date of approval at the meeting of the Board,
- Details of voting on such resolution
- Number of directors present in the meeting,
- Voting in favour,
- Voting in against,
- Neutral votes,
- Date of next meeting at which register was placed for signature,
- Reference of specific terms under Section 188 (1),
- Amount of contract,
- Date of shareholders approval,
- Signature,
- Remarks (if any).
Part-B
- Name of company/ body corporate/ firms/ association of individuals,
- Name of the director who is interested,
- Nature of interest/ concern or change in concern/ interest,
- Shareholding (if any),
- Date on which such interest/ concern arose/ changed.
References
- https://taxguru.in/company-law/related-party-transaction-companies-act-2013-section-184188-189.html
- https://www.rna-cs.com/register-of-contracts-or-arrangements-in-which-directors-are-interested/
- https://vassociates.in/images/pdf/Companies_Act_2013_Vs_Companies_Act_1956.pdf
- https://www.caclubindia.com/articles/section-189-of-the-companies-act-2013-25315.asp
- http://corporatelawreporter.com/companies_act/section-189-of-companies-act-2013-register-of-contracts-or-arrangements-in-which-directors-are-interested/
- https://thecompaniesact2013.com/article_detail.php?id=17
- https://www.aubsp.com/section-188-related-party-transactions/
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