Section 189 of the Companies Act, 2013 (the Act) read with Rule 16 of the Companies (Meetings of Board and its Powers) Rules, 2014 (the Rules) provides for maintenance, by every company, of a register to record particulars of all contracts or arrangements to which sub-section (2) of section 184 or section 188 of the Act applies as also to record particulars of interest or concern of every director in other companies or bodies corporate, firms or other association of individuals. In common parlance this register is referred to as ‘Register of Contracts and Arrangements in which Directors are Interested’ hereinafter referred to as ‘the Register’.
Rule 16(1) of the Rules provides as under:
16(1) every company shall maintain one or more registers in Form MBP-4, and shall enter therein the particulars of:
a. Company or companies or bodies corporate, firms or other association of individuals, in which any director has any concern or interest, as mentioned under Provided that the particulars of the company or companies or bodies corporate in which a director himself together with any other director holds two percent or less of the paid up capital would not be required to be entered in the register.sub section (1) of section 184:
b. Contracts or arrangements with a body corporate or firm or other entity as mentioned under sub section (2) of section 184 in which any director is directly or indirectly concerned or interested; and
c. Contracts or arrangements with a related party with respect to transactions to which section 188 applies.
Sub section (1) of section 184 of the Act casts a responsibility on every director to generally disclose his concern or interest in any company or companies or bodies corporate, firms or other association of individuals along with shareholding.
Sub section (2) of section 184 provides nature of interest to be disclosed by a director and in essence defines interested director. In this regard, reference is also invited to the observations made by the Companies Law Committee in its Report with respect to the phrase ‘interested director’. The relevant extracts are quoted here under:
Section 184(2) provides nature of interest to be disclosed by directors, but does not use the phrase ‘interested director’. The provision in essence, defined an interested director. Further the only reference to the term ‘interested director’ in the Act was in section 174(3), and an explanation to that provision clarified that the meaning of the term ‘interested director would be the same as for the purpose of section 184(2).
Sub-section (2) of section 184 is reproduced here under:
“Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into -
a. with a body corporate in which such director or such director in association with any other director, holds more than two percent shareholding of that body corporate, or is a promoter manager, Chief Executive Officer of that body corporate; or
b. with a firm or other entity in which, such director is a partner, owner or member, as the case may be:
shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting:
A combined reading of provisions of sections 184(1) and 184(2) of the Act and rules 16(1)(a) and 16(1)(b) of the Rules implies that to comply with these provisions:
1. a director is required to disclose his interest or concern in the following entities and the names of such entities are required to be recorded in the Register:
i. Companies and bodies corporate in which such director holds individually or in association with any other director of the company more than 2% shareholding.
ii. Companies and bodies corporate in which such director is a promoter, manager or CEO.
iii. Firms or other entities in which a director is a partner / member / owner.
2. a director is required to disclose his interest or concern in a contract or arrangement or proposed contract or arrangement entered into or to be entered into by the company with any of the entities specified in clause (a) or (b) of sub-section (2) of section 184 (entities specified in 1(i), 1(ii) and 1(iii) above) at the meeting of the Board in which the contract or arrangement is discussed and it is also provided that such director shall not participate in such meeting. Rule 16(1)(b) requires recording of contracts or arrangements, with any of the these entities, in the Register.
Sub-section (1) of section 189 of the Act read with rule 16(1)(c) of the Rules requires recording of particulars of all contracts of arrangements to which section 188 applies in the Register. The following categories of transactions with related parties which are either not in the ordinary course of business of the company or are not at an arm’s length price fall under the purview of section 188:
- Sale, purchase or supply of any goods or materials directly or through appointment of agents;
- Selling or otherwise disposing of, or buying property of any kind directly or through appointment of agents;
- Leasing of property of any kind;
- Availing or rendering of any services directly or through agent;
- Appointment to any office or place of profit in the company, its subsidiary or its associate company; and
- Remuneration for underwriting the subscription of any securities or derivatives thereof.
In terms of sub-section (5) of section 189 of the Act the provisions with respect to recording of particulars of contracts or arrangements, in which directors are interested or those with related parties, in the Register shall not apply in the following cases:
1. Contracts or arrangements of the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed five lakh rupees in the aggregate in any year.
2. Contracts or arrangements by a banking company for the collection of bills in the ordinary course of its business.
The other provisions relating to maintenance of the Register contained in Section 189 of the Act and Rule 16 of the Rules can be summarised below:
1. The entries of contracts or arrangements shall be made in the Register in chronological order and at once whenever there is a cause to make entry which implies that entry should be made as soon a contract or arrangement is entered into. After making entries in the Register it shall be placed before the next meeting of the Board and signed by all the directors present at the meeting.
2. The entries made in the Register shall be authenticated by the company secretary of the company or any other person authorised by the board of directors for the purpose.
3. The Register shall be kept at the registered office of the company and shall be preserved permanently and shall be kept in the custody of the company secretary of the company or any other person authorised by the board of directors in this regard.
4. The Register can be inspected by any member during the business hours.
5. The Register shall be produced at the commencement of every annual general meeting of the company and shall remain open and accessible to any person having the right to attend the meeting. Here proxy holder and authorised representatives of bodies corporate though not members of the company get right to access the Register.
6. The company shall provide extracts from the Register to a member of the company on his request within seven days from the date on which such request is made upon payment of such fee as may be specified in the articles of the company but not exceeding ten rupees per page.
7. In terms of sub-section (6) of section 189 every director who fails to comply with the provisions of section 189 and rules made there under shall be liable to a penalty of twenty five thousand rupees.
To ensure compliance with provisions of Section 189 of the Act, the most important step is to identify the entities which fall under the purview of section 184(2) i.e., entities in which directors are interested as also those fall under the purview of section 2(76) i.e., entities which are related parties. Identification of the aforesaid entities is mainly based on disclosures made by the directors and key managerial personnel. Section 184(1) of the Act read with Rule 9(1) of the Rules provides for furnishing of disclosure by the directors by giving a notice in writing in Form MBP-1.
To comply with the provisions of sections 184(1) and 184(2) of the Act and rules 16(1)(a) and 16(1)(b) of the Rules as discussed above disclosures may be obtained from a director covering:
1. Companies and bodies corporate in which such director holds individually or in association with any other director of the company more than 2% shareholding.
2. Companies and bodies corporate in which such director is a promoter, manager or CEO.
3. Firms or other entities in which a director is a partner / member / owner.
Section 184, rule 9 and rule 16 have reference to ‘director’ and as such are applicable to directors only. There is no reference to key managerial personnel in these sections / rules. However, section 189(2) contains reference to key managerial personnel also. The provision is reproduced hereunder:
189(2) Every director or key managerial personnel shall, within a period of thirty days of his appointment, or relinquishment of his office, as the case may be, disclose to the company the particulars specified in sub-section (1) of section 184 relating to his concern or interest in the other associations which are required to be included in the register under that sub-section or such other information relating to himself as may be prescribed.
An analysis of this provision reveals that the disclosure as specified in section 184(1) is also required to be furnished by the key managerial personnel. However, rule 9 and rule 16 of the Rules do not contain any reference to key managerial personnel. It seems that in respect of a key managerial person who is not a director of the company these details are not required to be recorded in the Register and only a disclosure is required. However, this is not clear why a disclosure is required on relinquishment of office by directors or key managerial personnel?
However, the entities specified in section 184(2) of the Act and disclosures received from the directors / key managerial personnel pursuant to section 184(1) and 189(2) do not cover all the entities who become ‘Related Parties’ with the company by virtue of such director / key managerial personnel occupying the office of director / key managerial personnel in the company. In terms of Section 2(76) of the Act, the director / key managerial personnel and the following persons and entities related to such director / key managerial personnel will become ‘Related Parties’ with the company:
1. The director / key managerial personnel.
2. Relatives of such director / key managerial personnel:
- members of HUF of which such director is a member;
- father (including step father);
- mother (including step mother);
- son (including step son);
- son’s wife;
- daughter’s husband;
- brother (including step brother);
- sister (including step sister)
3. A private company in which such director / manager or his relative is a director or member.
4. A public company in which such director / manager is a director and holds along with his relatives more than 2% of its paid up share capital.
5. Body corporate (including a company) whose board of directors, managing director or manager is accustomed to act on the advice, directions or instructions of such director / manager other than in professional capacity.
6. Firm in which such director / manager or his relative is a partner.
The entities listed at 3 to 6, related to key managerial personnel who is not a director of the company, do not become related parties with the company except in case of entities related to manager.
Disclosures required pursuant to provisions of Section 184 of the Act do not cover all the persons and entities covered above from 1 to 6 and thus are required to be supplemented to identify the ‘Related Parties’ in terms of section 2(76) of the Act.
There may be two ways to supplement such disclosure- one is to incorporate the details required for identification of ‘Related Parties’ in form MBP 1 itself or the other way is to obtain separate disclosure to identify ‘Related Parties’.
The author can also be reached at firstname.lastname@example.org
Contents of this work have been prepared based on provisions of law. The conclusions, if any, have been drawn on the basis of provisions, case laws and understanding of applicable Acts, Rules and Regulations. There may be certain interpretational issues and the opinions may differ.
The information / opinions provided in the article do not constitute professional guidance or legal opinion and no representation or warranty is made as to its accuracy, completeness or correctness. This work is not intended to be a substitute for professional, technical or legal advice. All opinions expressed herein are subject to change without any notice.
No reader should act on the basis of any statement contained herein without seeking professional advice. The author expressly disclaims all and any liability to any person who has read this work or otherwise in respect of anything or consequences of anything done or omitted to be done by such person in reliance upon the contents of this work.
Tags Corporate Law