Everybody got confused whether the Section 297 is applicable in their company or not? So, that I am clarifying the section 297.
Section 297
BOARD'S SANCTION TO BE REQUIRED FOR CERTAIN CONTRACTS IN WHICH PARTICULAR DIRECTORS ARE INTERESTED.
(1) Except with the 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) after the commencement of this Act, for underwriting the subscripttion of any shares in, or debentures of, the company : Provided that in the case of the company having a paid-up share capital of not less than rupees one crore, no such contract shall be entered into except with the previous approval of the Central Government.
(2) 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 of 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 of the contract or contracts; or
Now, I would give some example that should be kept into mind while calculating the prevailing market price.
Monopoly
I am using the ABC Power Company’s connection in my house for the purpose of electricity and they charge me Rs. 3 per unit of electricity. As In Ahmedabad only ABC Power Company is there, I have to take electricity connection from ABC power Company. Now, on one day, Mr. Anil came to my house and offers me electricity at 10 paisa per Unit and he further said that their company (XYZ Power Company) would not levy any hidden charge from me. So, that My final electricity cost would be 10 paisa, if I purchase the electricity from XYZ Power Company. When I asked the CEO of ABC Power Company that, why you are charging more money from us? He replied that as they have monopoly in Ahmedabad, they are charging the higher rate from us.
So, what would be the Prevailing market price of Electricity here?
Goodwill
One day I went to Ice-cream parlour and order the Family pack ice-cream of a particular worth Rs. 75 and quantity aggregating of 750 ml. After that I go to the nearby Restaurant and asked the same Ice cream, with the same quantity and of the same company. But the price of the Ice cream at Restaurant was Rs. 300. I asked the Restaurant owner that Why you are taking such a high amount from me, though It has very low price? He replied that We are serving you Ice-cream in our Restaurant’s dishes and charges high because of our Restaurant’s Goodwill.
So, What would be the prevailing market price of the Ice-cream here?
Place
Once, I went to the Mount Abu hill, where I placed the order of 1 litre Cold drink at the store. The store owner sold me the Cold drink bottle for the Rs. 30 though the MRP of the bottle was Rs. 10. When I asked him that, why he was charging from me Rs. 30 though the MRP is Rs. 10? Then he replied that Sir, In this area I am the only person who sells the Cold drink. You will not find any one within the 30 KM's area selling the Cold drink. So, that I am taking more money than the usual, because I have to incur extra expenditure for the storage and others.
So, What would be the prevailing market price of Cold drink here?
Taste
One day I went to Restaurant and ordered the Pizza, When I saw the price the Pizza was costing Rs. 200 and in the very next shop, the same size and same type of Pizza was selling at the Rs. 150 per piece. When I asked the Restaurant owner about such a magnanimous price difference? Then he replied to me that Sir, Our Pizza is tastier than the our Neighbour's pizza. That’s why we are charging more money than the others.
So, What would be the prevailing market price of Pizza here?
Time
To the nearby of my office, the Tea stall owner was selling tea at the rate of Rs. 4 per cup and at the 2 K.M. to my office another Tea stall owner was selling the tea at the rate of Rs. 2 per cup. At the both tea stall the taste, quantity and other thing was equal. So, I asked to the tea stall owner that Why he was charging the double rate than another one? Then he replied me that Sir, People like to drink tea, when it is hot and If you would go to purchase at another tea stole, it would become the cold till it reaches to your client's hand and I am offering you the hot tea. So, that I am charging more than another.
So, What would be the prevalent market price of Tea here?
Personal Touch
I have decided to purchase the XYZ Company’s Computer for my company. When I asked about the warranty period from the Shop owner of the computer than, he replied that The company doesn’t give the warranty. So, that We can’t give you the warranty. Please note that the shop owner told me the price of Computer Rs. 21000. After that I go to our company’s director’s showroom they offer me the same computer but with a warranty of 3 years at a price of Rs. 24000. When I asked the director that Why he was charging much more than the actual price from me? Then he replied me that He was bearing the risk of Rs. 21000 for extra Rs. 3000.
So, What would be the prevalent market price of the Computer here?
After giving the answer of each question, You would find that the Nobody can ever find out the Prevalent market price of any goods/service. Because market price depends on many factors and cannot be calculated by taking into account any one factor.
So, It is advisable that Company Secretary asks the director that whether director is charging more money because of any special reason or not. And If their reason is valid than do not apply the Rigid procedure of Section 297.
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