Financial Transactions

Under the Companies Act, 2013

Financial Transactions
Under the Companies Act, 2013

Capital Nature
Revenue Transactions
Transactions

Capital Commercial
Loans Dividends
issues Transactions

Auditors
Debentures Guarantees Managerial
Engagements /
Remuneration
Services
Borrowings Investments

ECBs Deposits

Related Party Non Related Party

Transactions Transactions
Financial Transactions General

Check the Object Clause of the Memorandum of Association

Impact of activities ultra virus to the provisions of the Memorandum of

Association

Personal Liability of Directors

Transactions Void / Voidable

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Action against the Directors / the Company
 Loan to Directors etc.
Section 185 of the Companies Act, 2013

Save as otherwise provided in the Act, a company is not allowed the followings,
directly or indirectly:
Advance any loans (including book debts ); or
Give guarantee or provide security in connection with loan
to directors or any person in whom the director is interested.
Exemptions
Ordinary course Transactions with
Loan to MD / WTD Private Limited
of business where WOS Guarantee /
as per company Companies subject
the interest security to bank
policy or to certain
charged is not for loan to its
shareholders conditions
less than RBI subsidiary.
approval (SR)
bank rate.
Loans made to are utilized for its principal business activities
 Loan to Directors etc.
Section 185 of the Companies Act, 2013

Who is the person in whom director is interested:

Directors of the Company or its holding company, their partners and
relatives
Firms of above directors, their relatives
Private companies in which such directors are director or member
Body corporates in which such directors hold more than 25% of voting rights
Body corporates whose Board, MD, or manager are accustomed to act in
accordance with direction of board or director(s) of lending company
Loan to Directors etc.
Section 185 of the Companies Act, 2013

Exemptions to Private Limited companies

[MCA notification No. F No. 2/11/ 2014- CL V dt. June 5, 2015]

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The provisions of Chapter XII, Section 185 does not apply to Private Limited
companies satisfying following criteria:
(a) In whose share capital no other body corporate has invested any money
(b) If the borrowing of such company from bank or financial institution or any
body corporate is less than twice of its paid up share capital or Rs. 50
crores, which ever is lower
(c) Such company has no default in repayment of such borrowings subsisting
at the time of making transaction under this section
Loan to Directors etc.
Section 185 of the Companies Act, 2013

Exemptions w.r.t. Subsidiaries / Wholly owned subsidiaries

The provisions of Section 185 does not apply :

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any loan made by a holding company to its wholly owned subsidiary
company or any guarantee given or security provided by a holding company
in respect of any loan made to its wholly owned subsidiary company; or
any guarantee given or security provided by a holding company in respect of
loan made by any bank or financial institution to its subsidiary company.
Provided that the loans made under clauses (c) and (d) are utilized by the
subsidiary company for its principal business activities.
Proviso to Sub section (1)
Inserted by the Companies (Amendment) Act, 2015
Loan to Directors etc.
Section 185 of the Companies Act, 2013

Ordinary Course of Business?

Business is different from trade or commerce

Relationship of the activity with the principle business activity of the

Company
Authorisation for the activity in the MoA
Frequency of the activity

Can a company give guarantee to a director for loan given to a third party
u/s. 185?

Only the guarantees / security in connection with Loan to a director is prohibited.

Guarantees to directors in connection with Loan to third parties is not prohibited.
Loans and Investments by a company
Section 186, 179 of the Companies Act, 2013]

Layers of Investment companies

A company shall unless otherwise prescribed, make investments through not
more than two layers of investment companies.
Investment Company means a company whose principal business is the
acquisition of shares debentures or other securities

What does the Principal Business means?

The commercial activities undertaken by the Company
As per object clause of the Company
RBIs 50:50 Asset income criteria
Loans and Investments by a company
Section 186, 179 of the Companies Act, 2013

Nature of Transactions: Loan, Investment in securities of a body corporates,

Guarantees / security in connection with loans.
Limits: Higher of 60% of the paid capital, free reserves and securities premium
or 100% of free reserves (including securities premium).
General Exemption:
Banking Company, Insurance, Housing Finance, NBFCs, Infrastructure facility
companies (except for investments)
Exemption from Special Resolution:
Wholly Owned Subsidiaries / Joint Venture Company.
All other requirements e.g. minimum interest, board approval, register
maintenance etc. applicable to such companies
Loans and Investments by a company
Section 186, 179 of the Companies Act, 2013]

Whether purchase of debentures by by a company an Investment or a Loan?

Does the investment by a company in Mutual Funds attracts the provisions

of Section 186?

If a company gives a sales tax surety (guarantee) for a company, does it

require compliance of Section 186?
Loans and Investments by a company
Section 186, 179 of the Companies Act, 2013]

X Limited with paid up share capital of 1000 Cr. want to give loan to its subsidiary in
which it hold 70% equity. The balance 30 % is held by a director of the Company.

The loan has to be in the ordinary course of business since the director hold >25%
voting rights in the Company.
Audit Committee approval under section 177 since this is a transaction with related
party.
Compliances under Section 186
Compliances under Section 184

Can the Board delegate its power to make investments etc. to its principle officer /
board committee under section 179?

The provisions of section 179 enable the board to generally delegate its power of
investments to the Principle officer / board committee. Since under section 186 there is
no specific provision, the Board cannot delegate its power to make investments etc. to
its committee or principle officers.
Related Party Transactions
[Section 2(76), 177, 188, Rule 15-Chapter XII,
F. No. 1/1/2014 dt.5/6/2015]

Who is a related party ?

Directors, KMPs of the Company or its Holding company and their relatives;

Firm in which a director, manager or his relative is a partner;

Private company in which a director or manager is a member or director;
Public company in which a director or manager is a director and along with
his relatives holds, two per cent or more of its paid-up share capital;
Any person on whose advice, directions or instructions the board of director
or MD or manager is accustomed to act, except in professional capacity;
Holding, subsidiary, fellow subsidiary associate companies or joint ventures.
(Does not apply to private limited companies)

Paid up share capital [Section (2(64) ] Vs. total share capital [Rule (2(r) of Chapter 1]
Related Party Transactions
[Section 2(76), 177, 188, Rule 15-Chapter XII,
F No. 1/1/2014 dt.5/6/2015]

Related Party under Section 2(76) is different from AS 18

Subject CA13 AS18
Investing entity with 20% or more investment in subject
matter entity other than Holding Companies (associate No Yes
company under AS 18)
CFO and CS and their relatives Yes No
Directors personal interest entities Yes No
Investing entity for Joint venture No Yes
Holding, Subsidiaries, fellow subsidiaries and Associates of
Pvt. Ltd. companies No Yes
Related Party Transactions
[Section 2(76), 177, 188, Rule 15-Chapter XII,
F No. 1/1/2014 dt.5/6/2015]

Transactions Covered under section 188

Sale, purchase and supply of any goods and material
Availing or rendering of any services
Selling or otherwise dispose off or buying property of any kind
Appointment of any agent for purchase or sale of goods , material,
services, property
Leasing of property of any kind
Underwriting the subscription of any securities of the company
Such RP appointment to any office or place of profit in the company, its
subsidiary or associate company
Related Party Transactions
[Section 2(76), 177, 188, Rule 15-Chapter XII,
F No. 1/1/2014 dt.5/6/2015]

Sale, purchase or supply of any goods and material directly or via agent
Limit: 10% of the turnover or 100 Crore whichever is lower.
Selling, buying or disposing of property of any kind directly or via agent
Limit: 10% of the turnover or 100 Crore whichever is lower.
Leasing of property of any kind
Limit: 10% of the turnover or 10% of net worth or 100 Crore whichever is lower.
Availing or rendering of any services directly or via agent
Limit: 10% of the turnover or 50 Crore whichever is lower.
RP appointment to any office or place of profit of company, subsidiary or associate
company
Limit: Monthly remuneration of 2.5 lakh.

(Turnover/Net-worth to be taken from previous year audited Financials)Section 134(3)(q),

Rule 8(1) , 5(iv) of the Companies (Accounts) Rule 2014]
Related Party Transactions
[Section 177, 188, Rule 15-Chapter XII,
F No. 1/1/2014 dt.5/6/2015]

Related Party Transactions

A related party transaction is a transfer of resources, services or obligations
between a company and a related party, regardless of whether a price is charged.

Explanation: A transaction" shall be construed to include single transaction or a

group of transactions in a contract

All material Related Party Transactions shall require approval of the shareholders
through special resolution and the related parties shall abstain from voting on
such resolutions.

Provided that a transaction with a related party shall be considered material if the
transaction / transactions to be entered into individually or taken together with
previous transactions during a financial year, exceeds ten percent of the annual
consolidated turnover of the company as per the last audited financial statements
of the Company.
Related Party Transactions
[Section 177, 188, Rule 15-Chapter XII,
F No. 1/1/2014 dt.5/6/2015]

Board Approval
Related party + Specified transactions + within the exemption limits
specified.

Board approval + Ordinary resolution

Related Party + Specified transactions + not falling within the exemption
limits specified.

Neither Board approval nor Ordinary resolution

Transaction in ordinary course of business and at Arms length.

Approval of Audit Committee(u/s 177 of Companies Act, 2013)

All the transactions (specified or not, in ordinary course or not, at Arms
length or not) with the related parties require approval of Audit
Committee.
Related Party Transactions
[Section 188, Rule 15-Chapter XII,
F No. 1/1/2014 dt.5/6/2015]

Transactions with Related Parties u/s. 177

Every Audit Committee shall act in accordance with the terms of reference
specified in writing by the Board which shall inter alia include:

(iv) Approval or any subsequent modification of transactions of the company

with related parties

Provided that the Audit Committee may make omnibus approval for the
related party transactions proposed to be entered into by the company
subject to such conditions as may be prescribed.

How should a company deal with the following transactions with related
parties?
Dividends, Managerial Remunerations, Capital issues, Loans etc.
Deposits
[Section 73-76 of the Companies Act, 2013
The Companies Acceptance of Deposit Rules 2014]

No company shall invite, accept or renew deposits under this Act from public except in
a manner provided under Chapter V of the companies Act, 2013.
Deposits includes any receipt of money by way of deposit or loan or any other form by
a company but does not include:
(a) Receipts from Government (b) Loans / fin. assistance from banks / PFIs
(c) Commercial papers (d) Inter corporate transactions
(d) Share application money Thank You
(e) Loan from directors
(f) Secured / compulsory convertible (g) Security deposits from
bonds / debentures employees upto 1 year salary
(h) Normal advance against goods/services (i) Security deposit under a contract
(j) Advance for supply of capital goods (k) Relatives of directors of Pvt. Of Cos.
(w.e.f. Sept 15, 2015)
Deposits
[Section 73-76 of the Companies Act, 2013
The Companies Acceptance of Deposit Rules 2014]

Doctrine of Ejusdem Generis to understand the meaning of any other form.

Where specific words are followed by a general expression, the general expression is

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limited to the shared characteristics of the specific words, even though the general
expression may ordinarily have a much broader meaning

Would the following transactions fall in the definition of Deposit:

Gold Schemes

Unsecured debentures to other companies

The transactions under litigation

Financial Transactions
Under the Companies Act, 2013

Loans to
Directors &
related
Investments entities
Loans/Guaran 185
-tee/security Related Party
by companies Transactions
186 188

Contracts
in which
directors
Borrowings interested Deposits
180 184 73

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 Thank You
CS Rajendra Chopra
Sr. Vice President & Company Secretary
Bharti Airtel Limited
rajendra.chopra@bharti.in