Meeting of Board and its Members (Part 1)
Section 173. Meetings of Board
173(1).
Every company must hold its first Board meeting within 30 days from the date of incorporation.
After that, the company must conduct at least four Board meetings every year, ensuring that no more than 120 days pass between any two consecutive meetings.
However, the Central Government has the power to exempt certain types of companies or modify these requirements through a notification.
173(2).
Directors can attend the Board meeting either physically (in person) or through video conferencing or other audio-visual means, provided the technology used can record, identify, and store the proceedings along with the date and time.
The Central Government can issue notifications specifying certain matters that cannot be discussed through video conferencing, for example, issues requiring physical signatures or confidential evaluations.
However, if quorum (minimum number of directors required) is physically present, other directors may join through video conferencing, even for those restricted matters.
173(3.
A minimum of seven days’ written notice must be given to every director at their registered address.
The notice can be sent by hand delivery, post, or electronic means (like email).
If urgent business arises, a meeting can be called at shorter notice, provided that at least one independent director (if the company has one) attends the meeting.
If no independent director is available, the decisions made must later be circulated to all directors and will be valid only after ratification by at least one independent director.
173(4).
If any company officer, who is responsible for issuing the meeting notice, fails to send it, they are liable to pay a penalty of ₹25,000.
173(5).
For a One Person Company (OPC), small company, or dormant company, compliance is simpler:
They need to hold at least one Board meeting in each half of the calendar year (i.e., one between January–June and one between July–December), and the gap between the two meetings must not be less than 90 days.
If the OPC has only one director, it is fully exempt from holding Board meetings under this section and Section 174.
Section 174. Quorum for meetings of Board
174(1).
For a Board meeting to be valid, a minimum number of directors, called a quorum, must be present.
The quorum shall be one-third of the total strength of the Board or two directors, whichever is higher.
For example, if a company has nine directors, one-third is three, so the quorum will be three.
If the company has four directors, one-third is 1.33, which is rounded off to two, so the quorum will be two.
Directors attending through video conferencing or other audio-visual means are also counted for quorum purposes.
174(2).
If there are vacancies due to resignation or other reasons, the remaining directors can continue to act as long as their number is not below the quorum.
However, if the number of remaining directors falls below the quorum, they can act only for two purposes:
(a) to increase the number of directors to reach the quorum.
(b) to call a general meeting of shareholders.
They cannot take any other business decisions until the quorum requirement is met.
174(3).
When two-thirds or more of the total number of directors are interested in a matter being discussed, the quorum shall be formed only by the remaining non-interested directors, and there must be at least two such directors present.
For example, if there are nine directors and six are interested, the remaining three non-interested directors can hold the meeting only if at least two of them are present.
The term “interested director” is defined under Section 184(2) as a director having a personal interest in any contract or arrangement under consideration.
174(4).
If a meeting of the Board cannot be held due to lack of quorum, and unless the company’s Articles provide otherwise, the meeting shall automatically stand adjourned to the same day, same time, and same place in the next week.
If that day happens to be a national holiday, the meeting will be held on the next working day at the same time and place.
Explanation:
(i) Any fraction in the calculation of quorum shall be rounded off to one.
(ii) “Total strength” means the total number of directors in office, excluding any vacant positions.
Section 175. Passing of resolution by circulation
175(1).
Normally, the Board of Directors passes resolutions in formal meetings.
However, under this section, a resolution may also be passed by circulation, meaning without holding a physical meeting, if certain conditions are fulfilled.
For this, a draft of the resolution along with any necessary supporting papers must be sent to all directors or committee members.
It must be sent to their registered addresses in India by any of the following means:
(a) hand delivery
(b) post
(c) courier
(d) electronic means such as email or any prescribed digital platformA resolution will be considered passed by circulation when a majority of the directors entitled to vote on it approve it.
This method helps the Board take quick decisions when calling a meeting is not practical
If one-third or more of the total number of directors demand that a resolution should be discussed in a Board meeting, the Chairperson must place the matter before the Board at a proper meeting.
Example: If the company has 9 directors and 3 of them (one-third) ask for a meeting, the resolution cannot be passed by circulation and must be discussed in an actual meeting.
175(2).
Every resolution passed by circulation must be noted at the next meeting of the Board or committee and be recorded in the minutes of that meeting.
Section 176. Defects in appointment of directors not to invalidate actions taken
If a person has acted as a director, and later it is discovered that:
There was some defect in his appointment.
He was disqualified from being a director.
His term had already ended as per the Companies Act or the company’s articles then:
Any actions or decisions he took while he was believed to be a valid director will still be considered valid and effective.
Section 177. Audit committee
177(1).
Every listed public company must constitute an Audit Committee.
The Central Government may also prescribe other classes of companies that are required to form an Audit Committee.
177(2).
The Audit Committee must consist of at least three directors.
A majority of these directors must be independent directors.
The Chairperson and the majority of members must be able to read and understand financial statements.
177(3).
Any company that had an Audit Committee before the commencement of this Act must reconstitute it within one year so that it complies with the new requirements given in 173(2).
177(4).
The Audit Committee shall act according to the written terms of reference provided by the Board of Directors.
These terms include:
(a) Auditor Appointment: Recommending the appointment, remuneration, and terms of auditors.
(b) Auditor Independence: Reviewing and monitoring the independence and performance of auditors and the effectiveness of the audit process.
(c) Financial Review: Examining the financial statements and auditors’ reports.
(d) Related Party Transactions:
Approving or modifying company transactions with related parties.
Giving omnibus approval for recurring related party transactions under prescribed conditions.
If the Committee does not approve a transaction (other than those covered under Section 188), it must recommend it to the Board for consideration.
If a transaction up to ₹1 crore is done without prior approval and is not ratified within three months, the transaction becomes voidable at the Committee’s option.
In such cases, the concerned director must reimburse any loss caused to the company.
These provisions do not apply to transactions between a holding company and its wholly owned subsidiary, except those covered under Section 188.
(e) Inter-Corporate Loans and Investments: Scrutinising inter-company loans and investments.
(f) Valuation: Reviewing valuation of undertakings or assets when required.
(g) Internal Controls: Evaluating the company’s internal financial controls and risk management systems.
(h) Funds Monitoring: Monitoring the use of funds raised through public offers and related matters.
177(5).
The Audit Committee may seek comments from the auditors about internal controls, audit scope, and financial statements before they are submitted to the Board.
It may also hold discussions on these matters with the auditors and the company’s management.
177(6).
The Audit Committee has the power to investigate any matter falling within its scope
It can seek professional advice from external experts and has full access to company records and information necessary for its work.
177(7).
The auditors and key managerial personnel have the right to attend meetings of the Audit Committee when the auditor’s report is discussed.
However, they are not entitled to vote at such meetings.
177(8).
The Board’s Report under Section 134(3) must include details of the composition of the Audit Committee.
If the Board has not accepted any recommendation made by the Committee, the Board must explain the reasons for not doing so.
177(9).
Every listed company and other prescribed classes of companies must establish a vigil mechanism that allows directors and employees to report genuine concerns such as fraud, unethical behaviour, or misconduct.
177(10).
The vigil mechanism must provide adequate safeguards against victimisation of individuals who use it and allow direct access to the Chairperson of the Audit Committee in appropriate cases.
The details of this mechanism must be disclosed on the company’s website, if any, and mentioned in the Board’s Report.
Section 178. Nomination and Remuneration Committee and Stakeholders Relationship Committee
178(1).
Every listed public company and other classes of companies (as may be prescribed by the Government) must form a Nomination and Remuneration Committee (NRC).
This committee must consist of three or more non-executive directors,
At least half of them must be independent directors.
The Chairperson of the company can be a member of the committee (whether executive or non-executive) but cannot act as the Chairperson of this committee.
178(2).
The Nomination and Remuneration Committee has the following duties:
It identifies qualified individuals who can become directors or be appointed in senior management positions, according to the criteria set.
It recommends their appointment and removal to the Board.
It must also specify how the performance evaluation of the Board, its committees, and individual directors will be conducted — whether by the Board, the NRC itself, or an independent external agency.
It also has to review the implementation and compliance of the evaluation system.
178(3).
The NRC must create:
Criteria for determining the qualifications, positive attributes, and independence of a director.
A policy on remuneration for directors, key managerial personnel (KMP), and other employees.
178(4).
While framing the remuneration policy, the NRC must ensure that:
(a) The remuneration structure is reasonable and sufficient to attract, retain, and motivate competent directors needed to manage the company
effectively.
(b) The link between remuneration and performance is clear and meets performance standards.
(c) There is a balance between fixed and variable (incentive-based) pay, aligning short-term and long-term goals of the company.
Additionally, this remuneration policy must be:
Placed on the company’s website (if any), and
The main features and any changes in the policy, along with its web address, must be disclosed in the Board’s report.
178(5).
If a company has more than 1,000 shareholders, debenture-holders, deposit-holders, or other security holders at any point during a financial year, the Board must form a Stakeholders Relationship Committee (SRC).
The Chairperson of this committee must be a non-executive director.
The Board may decide on other members of this committee.
178(6).
The Stakeholders Relationship Committee is responsible for considering and resolving grievances of security holders such as shareholders, debenture-holders, or other investors.
178(7).
The Chairperson of each committee formed under this section (or any member authorized by them) must attend the general meetings of the company to address shareholder queries or related matters.
178(8).
If the company violates the provisions of Section 177 (Audit Committee) or this section (178):
The company will be fined not less than ₹1 lakh and up to ₹5 lakh.
Every officer in default will be liable to a penalty of ₹1 lakh.
However, if the Stakeholders Relationship Committee acts in good faith and still cannot resolve a grievance, it will not be considered a contravention of this section.
Explanation.
The term “Senior Management” refers to the company’s core management team, excluding the Board of Directors.
It includes all executives one level below the executive directors, such as functional heads (for example, the heads of finance, operations, HR, etc.).
Section 179. Powers of Board
179(1).
The Board of Directors of a company has the authority to exercise all powers and perform all acts and functions that the company itself is authorised to do.
However, while exercising these powers, the Board must act within the limits set by the Companies Act, the Memorandum of Association (MoA), the Articles of Association (AoA), and any valid regulations made by the company in general meetings that are not inconsistent with these documents.
The Board cannot exercise any power that is required by the Act, the MoA, the AoA, or otherwise, to be specifically done by the company in a general meeting.
179(2).
If the company later makes any regulation in a general meeting, it shall not invalidate any act of the Board that was valid before such regulation was made.
Example: If the Board took a valid decision earlier, a later rule made by the company cannot make that past decision invalid.
179(3).
The Board must exercise certain important powers only through a formal resolution passed in a Board meeting.
These powers include:
(a) Making calls on shareholders for unpaid money on their shares.
(b) Authorising buy-back of the company’s shares or securities as per Section 68.
(c) Issuing securities, including debentures, within or outside India.
(d) Borrowing money for the company.
(e) Investing company funds.
(f) Granting loans, or giving guarantees or providing security for loans.
(g) Approving the company’s financial statements and the Board’s Report.
(h) Diversifying the company’s business.
(i) Approving amalgamation, merger, or reconstruction.
(j) Taking over another company or acquiring a controlling or substantial stake in another company.
(k) Any other matter prescribed by law.
Delegation of powers
The Board may delegate the powers mentioned in clauses (d), (e), and (f) that is, borrowing, investing, and granting loans to:
A committee of directors,
The managing director,
The manager or principal officer of the company, or
In the case of a branch office, its principal officer, subject to the conditions set by the Board through a resolution.
Banking company exceptions:
When a banking company accepts deposits from the public (repayable on demand or otherwise), it is not considered “borrowing of money” under this section.
Similarly, when a banking company deposits money with another bank, it is not treated as granting a loan.
Explanation.
Clause (d) regarding borrowing does not apply to borrowings made by a banking company from other banking companies, the Reserve Bank of India (RBI), the State Bank of India (SBI), or any other bank established under law.
Explanation.
In normal dealings with banks, “borrowing” refers to the overall arrangement made with the bank, such as overdraft or cash credit limits, and not the daily transactions of withdrawing or depositing money within that limit.
179(4).
The company, in a general meeting, has the right to impose restrictions and conditions on how the Board exercises its powers under this section.
Thus, while the Board holds broad authority, shareholders can limit or guide its use of such powers through resolutions in general meetings.
180. Restrictions on powers of Board
180(1).
The Board of Directors cannot exercise certain important powers unless the company gives its consent through a special resolution passed in a general meeting.
These powers include the following:
(a) Selling, leasing, or disposing of the whole or substantially the whole of the company’s undertaking
The Board cannot sell, lease, or otherwise dispose of the whole or a major part of the company’s business or property without prior approval of shareholders by a special resolution.
If the company owns more than one undertaking, such approval is required for the sale or disposal of the whole or a major part of any of those undertakings.
Explanation:
(i) The term “undertaking” refers to a unit or division of the company where:
The company’s investment is more than 20% of its net worth.
It generates 20% or more of the company’s total income in the previous financial year.
(ii) The expression “substantially the whole of the undertaking” means 20% or more of the value of that undertaking, based on the company’s audited
balance sheet of the previous year.
Example: If a company’s factory represents 25% of its total net worth, selling that factory would require approval through a special resolution.
(b) Investment of compensation money received from a merger or amalgamation
If the company receives any compensation or money from a merger or amalgamation, it can invest that amount in another business or asset only after obtaining shareholders’ approval through a special resolution.
It cannot do so freely as it does with trust securities or other regular investments.
(c) Borrowing beyond the prescribed limit
The Board must obtain prior approval by a special resolution before borrowing any amount that exceeds the combined total of:
Paid-up share capital,
Free reserves, and
Securities premium.
However, temporary loans taken from the company’s bankers in the ordinary course of business are not counted for this limit.
Explanation.
Temporary loans are those that are repayable on demand or within six months. Examples include short-term loans, cash credit arrangements, discounting of bills, or seasonal loans.
But loans taken for capital expenditure or long-term assets are not treated as temporary loans.
Banking company exception.
In the case of a banking company, accepting deposits from the public in the ordinary course of business (repayable by cheque, draft, etc.) is not considered borrowing under this section.
(d) Remitting or giving time for repayment of any debt due from a director
The Board cannot forgive, reduce, or extend the repayment time of any debt owed to the company by a director without approval from shareholders by a special resolution.
180(2).
When the company gives approval under clause (c) for borrowing beyond the prescribed limit, the special resolution must specify the maximum amount up to which the Board may borrow.
180(3).
The restriction under clause (a) relating to sale or lease of an undertaking does not affect:
(a) Any buyer or lessee who has acted in good faith. Their ownership or title remains valid even if the Board exceeded its authority.
(b) Any company whose ordinary business involves selling or leasing property, such as a real estate or leasing company.
180(4).
When the company approves a sale or disposal under clause (a), it may set certain conditions in the special resolution, such as:
How the sale proceeds will be used or invested.
Restrictions on disposal or reinvestment of those proceeds.
However, such conditions cannot authorise a reduction of share capital unless the company follows the specific provisions of the Act that deal with capital reduction.
180(5).
If the company borrows more than the limit approved by the shareholders, the excess debt will be invalid unless the lender proves that:
The loan was given in good faith, and
The lender had no knowledge that the company had already exceeded its borrowing limit.
Section 181. Company to contribute to bona fide and charitable funds
The Board of Directors of a company has the power to donate or contribute money to genuine charitable institutions or to other bona fide funds (legitimate public welfare causes).
These contributions may include donations for:
Education, medical relief, poverty relief, disaster aid, environmental welfare, etc.
Other social or community development initiatives.
If the total amount of such donations in any financial year is more than 5% of the company’s average net profits of the last three financial years,
then the Board cannot make such contributions without prior approval of the company in a general meeting.
Therefore , the Board can donate freely up to 5% of the average net profits of the past three years.
If the total donation amount exceeds 5%, the company must get shareholders’ approval first.
Section 182. Prohibitions and Restrictions Regarding Political Contributions
182(1).
Eligibility to make political contributions.
A company can contribute money, directly or indirectly, to any political party, but two types of companies are not allowed to make such contributions:
Government companies, and Companies that have been in existence for less than three financial years.
So, only private companies or public non-government companies that are at least three years old can make political donations.
The company must also pass a Board resolution in a Board of Directors’ meeting approving the contribution.
This resolution serves as the company’s legal authorization for the contribution.
182(2).
Meaning of “political contribution”
Political contribution is not limited to direct payments to political parties.
Certain indirect payments or expenses are also treated as political contributions.
(a) If the company gives any donation, subscription, or payment to a person who is engaged in any activity that can reasonably be considered as
supporting a political party, that payment will be treated as a political contribution.
Example: If a company donates to an NGO that publicly supports a political party or its campaign, that donation is considered a political contribution.
(b) If the company spends money on advertisements in any souvenir, brochure, pamphlet, tract, or similar publication, then:
(i) If the publication is issued by or on behalf of a political party, the advertisement expense is treated as a contribution to that party.
(ii) Even if it is not issued by the party, but is for the benefit or advantage of a political party, the expense will still be treated as a political contribution.
Example.
If a company’s advertisement appears in a magazine printed for a political party’s annual convention, the advertisement cost counts as a political contribution.
182(3).
Every company must disclose in its Profit and Loss Account the total amount contributed during that financial year under this section.
182(3A).
All political contributions must be made only through traceable banking instruments, such as:
Account payee cheque,
Account payee bank draft, or
Electronic clearing system (ECS) through a bank account.
A company can also contribute using any other instrument or scheme notified under law, such as electoral bonds introduced by the government.
182(4).
If a company violates any provision of this section:
The company can be fined up to five times the amount contributed, and
Every officer in default can face:
Imprisonment up to six months, and
Fine up to five times the amount contributed.
Explanation.
For this section, the term “political party” means a party that is registered under Section 29A of the Representation of the People Act, 1951.
Section 183 – Power of Board and Other Persons to Make Contributions to National Defence Fund
183(1).
The Board of Directors, or any person or authority exercising the powers of the Board, or even the company in a general meeting, can contribute any amount to:
The National Defence Fund, or
Any other fund approved by the Central Government for the purpose of national defence.
This can be done notwithstanding anything mentioned in Sections 180, 181, or 182, or in the company’s memorandum, articles, or any other document.
Therefore, the company can freely donate to national defence funds without worrying about limits, approvals, or restrictions that usually apply to other kinds of contributions.
Example: Even if the company has reached its limit on charitable spending under Section 181, it can still donate any amount to the National Defence Fund.
183(2).
Every company must show in its Profit and Loss Account the total amount contributed under this section for the relevant financial year.
Section 184- Disclosure of Interest by Director
184(1).
Every director must disclose their interests at specific times:
At the first Board meeting in which they participate as a director.
At the first Board meeting of every financial year.
If a director’s situation changes after they’ve already given their disclosure, they must tell the Board about it at the next Board meeting after that change happens.
This disclosure must include details of the director’s concern or interest in:
Any company or body corporate,
Any firm, or
Any association of individuals, and must also mention the shareholding or position held by the director in such entities.
184(2).
If the company is entering into a contract or arrangement, and a director has any direct or indirect interest in it, that director must disclose the nature of their interest and cannot take part in discussions or voting on that matter.
This rule applies when the contract is with:
(a) A body corporate in which:
The director (alone or with other directors) holds more than 2% of the shareholding, or
The director is a promoter, manager, or CEO of that body corporate.
(b) A firm or entity in which the director is a partner, owner, or member.
Example: If a director owns 5% shares in another company, and the company wants to sign a deal with that company, the director must declare this interest and stay out of the meeting discussion or voting.
If a director was not interested when a contract was made but later becomes interested (for example, by acquiring shares or joining that company), they must disclose this at once, or at the first Board meeting held after becoming interested.
Example: A director later buys shares in a supplier company that already has a contract with their own company — they must declare this new interest immediately.
184(3).
If a company enters into a contract:
Without proper disclosure by the interested director, or
If the director participates in the meeting discussing that contract, then the contract becomes voidable at the company’s option.
184(4).
If a director fails to make the required disclosure under 184(1) or (2), they are liable to a penalty of ₹1,00,000 (one lakh rupees).
184(5).
This section does not affect:
(a) If there’s another law (outside the Companies Act) that already says “a director cannot be interested in a certain kind of company contract,” that rule still applies and Section 184 doesn’t replace it.
(b) Contracts or arrangements between:
Two companies, or
One or more companies and one or more bodies corporate.
(If the directors of one company hold not more than 2% of the paid-up share capital in the other company or body corporate.)
Section 185. Loan to directors
185(1).
A company cannot, either directly or indirectly, give any loan (including a loan represented by a book debt) or provide any guarantee or security in connection with a loan to:
(a) Any of its directors, or
(b) Any director of its holding company, or
(c) Any partner or relative of such director, or
(d) Any firm in which such director or relative is a partner.
The company cannot lend money to its own directors or to people closely connected to them, such as relatives or business partners, nor can it guarantee or secure such loans.
185(2).
However, the company may give loans, guarantees, or securities to certain persons if the conditions below are met:
(a) It may give a loan to a managing director (MD) or whole-time director (WTD) if:
It is part of the conditions of service extended to all employees of the company, or
It is approved by the company through a special resolution.
(b) It may give a loan or guarantee or provide security to:
Any private company in which any such director is a director or member, or
Any body corporate whose Board, managing director, or manager acts according to the directions or instructions of the Board or any director of the lending company.
But this is allowed only if:
A special resolution is passed by the company in a general meeting, and
The loans are given for the company’s principal business activities and the rate of interest is not lower than the prevailing government security rate (as prescribed under the Reserve Bank of India guidelines).
185(3).
The following cases are exempted from the restrictions in this section:
(a) Loans made by:
A banking company, or
An insurance company, or
A housing finance company, when the loan is given in the ordinary course of business.
(b) Loans or guarantees given by a company whose principal business is lending money (for example, an NBFC) if:
The interest charged is at least equal to the rate of interest declared by the Reserve Bank of India for such lending.
185(4).
If a company violates this section:
The company will be liable to a fine between ₹5 lakh and ₹25 lakh, and
The director or any other person who receives the loan, or for whose benefit the loan, guarantee, or security is given, will be punishable with:
Imprisonment up to 6 months, or
Fine between ₹5 lakh and ₹25 lakh, or both.
Section 186. Loan and Investment by Company
186(1).
A company cannot make investments through more than two layers of investment companies.
This means a company cannot create multiple levels of subsidiaries just to hide control or ownership.
However, this rule does not apply in two cases:
(a) When a company acquires another company incorporated outside India, even if that foreign company has more than two layers of investment
subsidiaries, provided it follows the laws of that country.
(b) When a subsidiary company has an investment subsidiary because the law or regulation requires it.
186(2).
A company cannot give loans, guarantees, securities, or make investments exceeding the higher of these two limits:
(a) 60% of its paid-up share capital, free reserves, and securities premium account, or
(b) 100% of its free reserves and securities premium account.Explanation: The term “person” in this section does not include employees, so loans to employees are not restricted by this rule.
186(3).
If a company wants to give loans, guarantees, or investments beyond the limit under 186(2), it must:
(a) Get shareholders’ approval through a special resolution in a general meeting
(b) Give full disclosure in the meeting notice about the purpose and details of the proposed loan, investment, or guarantee.Exception: This approval is not needed if:
(i) The loan, guarantee, or security is given to a wholly owned subsidiary or a joint venture company, or
(ii) The holding company acquires securities of its wholly owned subsidiary.However, such transactions must still be reported in the company’s financial statements under sub-section (4).
186(4).
The company must clearly disclose in its financial statements:
(a) The details of all loans, guarantees, securities, and investments made or given, and
(b) The purpose for which the recipient company will use those funds.
186(5).
(a) Every such loan, investment, or guarantee must be approved by the Board in a properly convened meeting with the consent of all directors present.
(b) If the company has a term loan from a public financial institution (PFI), it must also get the PFI’s prior approval.
Exception: Prior PFI approval is not required if:
(i) The total of all loans, guarantees, and investments does not exceed the limit in sub-section (2), and
(ii) The company has not defaulted on any loan or interest payment.
186(6).
Companies registered under Section 12 of the SEBI Act, 1992, belonging to a prescribed class, cannot take inter-corporate loans or deposits beyond the limit set by the Central Government.
They must disclose such transactions in their financial statements.
186(7).
A company cannot give a loan at an interest rate lower than the prevailing yield of Government securities for a similar period (1, 3, 5, or 10 years).
This prevents companies from giving low-interest or interest-free loans to related parties.
186(8).
If a company is in default of any deposit or interest payment (past or current), it cannot make new loans, guarantees, securities, or investments until the default is fully cleared.
186(9).
Every company that gives a loan, guarantee, security, or makes an acquisition under this section must maintain a register containing all the required details of such transactions.
186(10).
The register must be kept at the company’s registered office and be open for inspection to the company’s members.
Members can inspect the register during business hours and may obtain copies or extracts by paying the prescribed fees.
186(11).
Except for 186(1), the rest of Section 186 does not apply to the following:
Loans, guarantees, securities, or investments made by:
Banking companies
Insurance companies
Housing finance companies
Companies engaged in financing industrial enterprises
Companies providing infrastructural facilities
(b) Investments made by:
Investment companies
Companies subscribing to shares in a rights issue under Section 62(1)(a)
Non-Banking Financial Companies (NBFCs) registered under Chapter III-B of the RBI Act, whose principal business is acquisition of securities or lending
186(12).
The Central Government may make rules for carrying out the provisions of this section.
186(13).
If a company contravenes this section:
The company is liable to a fine between ₹25,000 and ₹5,00,000.
Every officer in default is punishable with imprisonment up to 2 years and/or a fine between ₹25,000 and ₹1,00,000.
Explanation.
“Investment company” means a company whose principal business is acquiring shares, debentures, or other securities.
A company will be deemed to be principally engaged in investment if 50% or more of its assets consist of investments, or 50% or more of its income is derived from investment activities.
(b) “Infrastructure facilities” refer to the facilities listed in Schedule VI of the Companies Act, such as roads, ports, power, and similar essential services.
Section 187. Investments of company to be held in its own name
187(1).
Every investment made or held by a company, whether in property, shares, securities, or any other asset must be recorded and held in the company’s own name.
This ensures that the company itself is the legal owner of the investment, and not any director or agent.
Exception
A company may hold shares in its subsidiary in the name of nominees, if necessary, to meet the minimum number of members required by law.
For example, if a subsidiary must have at least two shareholders, the holding company may hold one share in the name of its nominee to maintain that requirement.
187(2).
The Act allows some practical exceptions where investments may temporarily or necessarily be held in another name without violating this section.
(a) Depositing securities with a bank for collection:
A company can deposit its shares or securities with its banker (like a scheduled bank) to collect dividends, interest, or payments due on them. This is allowed for convenience and does not mean the company has transferred ownership.
(b) Temporary transfer to banks to facilitate transfer:
A company may temporarily transfer shares or securities to the State Bank of India or any scheduled bank if it helps in completing a transfer of those securities.
However, if the transfer is not completed within six months from the date of such deposit or transfer, the company must re-transfer them into its own name as soon as possible.
(c) Pledging securities as collateral:
A company can deposit or transfer shares or securities to any person as security for a loan or for the performance of an obligation.
This is a normal business activity, such as pledging shares to secure financing.
(d) Holding investments in the name of a depository:
When investments are held in dematerialised form, they may be held in the name of a depository.
In such cases, the depository is the registered owner, while the company remains the beneficial owner with all rights attached to those securities.
187(3).
When a company holds securities under clause (d) above (in the name of a depository), it must maintain a register at its registered office.
The register must contain details such as:
(a) The description of the securities.
(b) The quantity.
(c) The name in which they are held.
(d) The reason for holding them in that name.
Inspection rights:
Members and debenture-holders can inspect this register free of cost during business hours.
However, the company can prescribe reasonable restrictions regarding timing or procedure through its Articles or by resolution in a general meeting.
187(4).
If a company fails to comply with any requirement under this section:
(a) The company will be liable to a penalty of ₹5,00,000, and
(b) Every officer in default will be liable to a penalty of ₹50,000.
Section 188. Related party transactions
188(1).
A company cannot enter into certain transactions with a related party unless it has the approval of the Board of Directors or, in some cases, the approval of the shareholders by an ordinary resolution.
These transactions include:
(a) Sale, purchase, or supply of any goods or materials.
(b) Selling or otherwise disposing of, or buying, any property of any kind.
(c) Leasing of property of any kind.
(d) Availing or rendering of any services.
(e) Appointment of any agent for purchase or sale of goods, materials, services, or property.
(f) Appointment of a related party to any office or place of profit in the company, its subsidiary, or associate company.
(g) Underwriting the subscription of any securities or derivatives of the company.
The Board’s consent must be given by a resolution passed at a Board meeting before entering into such contracts or arrangements.
When shareholder approval is required:
If any of the transactions listed above exceed the prescribed monetary thresholds, the company must also obtain approval by an ordinary resolution in a general meeting.
The related party to whom the transaction relates cannot vote on that resolution — neither to approve nor to disapprove it whether that related party is a member of the company or not.
188(2).
If the company enters into a related party contract without the necessary approval, or without ratification within the prescribed time, then:
The contract or arrangement is voidable at the option of the company.
That means the company may cancel the contract if it wishes.
If the contract is with a related party to any director, or is authorized by any other director, then the concerned director must indemnify (compensate) the company against any loss caused to it.
188(3).
When any such related party transaction is discussed in the Board meeting, the independent directors of the company must be present at that meeting.
188(4).
All details of such contracts or arrangements with related parties must be disclosed:
(a) In the Board’s report to the shareholders along with justification for entering into them.
188(5).
If a director or any other employee of the company enters into or authorizes a contract in violation of this section:
(a) In case of a listed company, the person is liable to imprisonment up to one year, or a fine between ₹25,000 and ₹5,00,000, or both.
(b) In case of any other company, the person is liable to a fine between ₹25,000 and ₹5,00,000.
Explanation. Meaning of “related party”:
For this section, “related party” means any person or entity that is related to the company under Section 2(76) of the Companies Act.
This includes Directors and their relatives, Key managerial personnel and their relatives.
This also includes Firms, companies, or entities in which such persons have control, interest, or significant influence, among others.
