Tuesday, February 28, 2012
FOREIGN DIRECT INVESTMENT IN INDIA (Policies, Procedure and Legal Framework)
Foreign Direct Investment in India (Policies, Procedure and Legal Framework)
India is one of the fastest growing economies since last few years and witnessed a large amount of foreign investment in various sector. The government has formulated it Policy aiming towards attracting more and more funds considering the domestic business concerns simultaneously. This article throws a light upon what has been formulated and the procedure to be followed in the same. This present document is an analysis of the legal requirements, policies and procedures for FDI in India and is helpful for the investors’ lawyers, company secretaries and finance professionals.
POLICY AND REGULATORY FRAMEWORK TOWARD FDI
The Government has put in place a policy framework on Foreign Direct Investment. which is embodied in the Circular on Consolidated FDI Policy, issued which is updated every six months, to capture and keep pace with the regulatory changes. The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/ Press Releases which are notified by the Reserve Bank of India as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No.FEMA 20/2000-RB dated May 3, 2000).
The procedural instructions are issued by the Reserve Bank of India vide A.P. DIR. (series) Circulars. Thus, regulatory framework for FDI consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.
FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the Department of Industrial Policy & Promotion. Policy announcement by DIPP are subsequently notified by RBI under FEMA.
AUTOMATIC ROUTE
FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. The investors are required to notify the concerned Regional office of RBI of receipt of inward remittances within 30 days of such receipt and will have to file the required documents with that office within 30 days after issue of shares to foreign investors.
The present Automatic Route allows Indian companies engaged in all industries except for certain select industries/sectors to issue shares to foreign investors up to 100% of their paid up capital in Indian companies. There are also some areas where though Automatic Route is available, foreign investors cannot invest beyond a certain percentage of the paid up capital of the Indian companies or where investment is subject to some other conditions.
Foreign investors have to, however, keep in mind that they may invest freely under the Automatic Route described above but where such investment does not conform to policies of Government of India, a specific approval from Government must be sought. For example, there are Government guidelines on location of industrial units, or there are certain items like explosives or liquor that need an industrial licence. If the Indian company does not conform to the locational guidelines or needs an Industrial licence then it cannot issue shares under the Automatic Route.
GOVERNMENT APPROVAL ROUTE
All activities which are not covered under the automatic route, prior Government approval for FDI/NRI shall be necessary. Areas/sectors/activities hitherto not open to FDI/NRI investment shall continue to be so unless otherwise decided and notified by Government.
An investor can make an application for prior Government approval even when the proposed activity is under the automatic route.
Proposals requiring Government Approval
FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which will require approval of the Government:
Activities/items that require an Industrial License.
All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
Proposals in which the foreign collaborator has a previous/existing venture/tie up in India in the same.
Prior Government approval for new proposals would be required only in cases where the foreign investor has an existing joint venture, technology transfer, trade mark agreement in the same field. With the amendment of the Press Note 18, joint ventures formed with foreign investment before December 12, 2004 would be considered as “existing JVs” which will fall under the ambit of Press Note 18. The foreign partner in such JV has to obtain a No Objection Certificate (NOC) from the Indian partner for starting new venture in India in the “same” field of activity.
However, Government via Press Note No. 1 (2005 Series) made an exception that even in cases where the foreign investor has a joint venture or technology transfer/ trademark agreement in the 'same' field prior approval of the Government will not be required in the following cases:
a. Investments to be made by Venture Capital Funds registered with the Security and Exchange Board of India (SEBI); or
b. where in the existing joint-venture investment by either of the parties is less than 3%; or
c. where the existing venture/ collaboration is defunct or sick.
Application for proposals requiring prior Govt’s approval should be submitted to FIPB in fresh Application . The application shall be filed online through FIPB portal. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The following information should form part of the proposals submitted to FIPB: -
a) Whether the applicant has had or has any previous/existing financial/technical collaboration or trade mark agreement in India in the same or allied field for which approval has been sought; and
b) If so, details thereof and the justification for proposing the new venture/technical collaboration (including trade marks).
c) Applications can also be submitted with Indian Missions abroad who will forward them to the Department of Economic Affairs for further processing.
d) Generally foreign investment proposals received in the DEA (Department of Economic Affairs) are placed before the Foreign Investment Promotion Board (FIPB) within 15 days of receipt. The decision of the Government in all cases is usually conveyed by the DEA within 30 days.
PROHIBITED SECTORS FOR FDI IN INDIA
FDI is not permissible in the following cases
Gambling and Betting, or
Lottery Business, or
Business of chit fund
Nidhi Company
Housing and Real Estate business (to a certain extent has been opened. For details please see note on Construction)
Trading in Transferable Development Rights (TDRs)
Retail Trading (discussions are being held to open this area-B2B and Cash & Carry are permitted)
Atomic Energy
Agricultural or plantation activities or Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations(other than Tea plantations)
GENERAL PERMISSION OF RBI UNDER FEMA
RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors.
The companies are however required to notify the concerned Regional office of the RBI about receipt of inward remittances within 30 days of such receipt and to file the required documents with the concerned Regional offices of the RBI within 30 days after issue of shares to the foreign investors or NRIs.
FDI IN LIMITED LIABILITY PARTNERSHIPS (LLP’S)
Government of India recently allowed FDI in LLP’s however LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business. FDI in LLP is allowed with the previous approval of the Government. Further it is allowed with the Government’s approval only in those sectors in which 100% FDI is allowed under automatic route under the FDI policy. Thus those sectors which are not available under automatic route is not available for FDI in LLP. The followings are some conditions with respect to FDI in LLP’s.
LLPs with FDI will not be eligible to make any downstream investments.
Foreign Capital participation in LLPs will be allowed only by way of cash consideration.
Investment in LLPs by Foreign Institutional Investors (FIls) and Foreign Venture Capital Investors (FVCIs) will not be permitted.
LLP’s are not allowed to raise ECB (external commercial borrowings)
FDI IN EOUS/ SEZS/ INDUSTRIAL PARK/ EHTP/ STP
Special Economic Zones (SEZs)
100% FDI is permitted under automatic route for setting up of special Economic Zone. Units in SEZ qualify for approval through automatic route subject to sectoral norms. Details about the type of activities permitted are available in the Foreign Trade Policy issued by Department of Commerce. Proposals not covered under the automatic route require approval by FIPB.
100% Export Oriented Units (EOUs)
100% FDI is permitted under automatic route for setting up 100% EOU, subject to sectoral norms. roposals not covered under the automatic route would be considered and approved by FIPB.
Capitalization of Import Payables
FDI inflows are required to be under the following modes;
By inward remittances through normal banking channels or
By debit to the specified account of person concerned maintained in an authorized dealer/authorized bank.
Issue of equity to non-residents against other modes of FDI inflows or in kind is not permissible under automatic route. Issue of shares for consideration other than cash requires prior Government Approval.
However, Issue of equity shares against lump sum fee, royalty payable and external commercial borrowings (ECBs) in convertible foreign currency are permitted, subject to meeting all applicable tax liabilities and sector specific guidelines.
INDUSTRIAL LICENSING
Industrial Licensing Policy
Industrial Licenses are regulated under the Industries (Development & Regulation) Act, 1951. The requirements of Industrial licence has been progressively reduced. At present industrial licence for manufacturing is required only for the following:
Industries retained under compulsory licensing,
Items reserved for small scale sector; and
When the proposed location attracts locational restriction industries requiring Compulsory Licensing
The following industries require compulsory industrial license:
Distillation and brewing of alcoholic drinks;
Cigars and cigarettes of tobacco and manufactured tobacco substitutes;
Electronic Aerospace and defence equipment: all types;
Industrial explosives including detonating fuses, safety fuses, gun powder, nitrocellulose and matches;
Hazardous chemicals;
a) Hydrocyanic acid and its derivatives
b) Phosgene and its derivatives
c) Isocyanates and di-isocyanates of hydrocarbon, not elsewhere specified example: Methyl Isocyanate); and
Drugs and Pharmaceuticals (according to modified Drug Policy issued in September, 1994 and subsequently amended from time to time)
Prior Government approval required in all cases where Industrial Licence is required to start the business. i.e. all sectors requiring industrial license comes under approval route and requires Government approval.
INDUSTRIES UNDER SMALL-SCALE SECTOR
An industrial undertaking is defined as a small-scale unit if the capital investment in plant and machinery does not exceed Rs 10 million. Small-scale units can get registered with the Directorate of Industries/District Industries Centre of the State Government. Such units can manufacture any item, and are also free from locational restrictions.
Manufacture of items reserved for small-scale sector
Non-small scale units can manufacture items reserved for the small scale sector only after obtaining an industrial license. In such cases, the non-small scale unit is required to undertake an obligation to export 50 per cent of the production of SSI reserved items.
FDI IN SSI UNITS
A small scale unit can not have more than 24 per cent equity in its paid up capital from any industrial undertaking, either foreign or domestic. If the equity from another company (including foreign equity) exceeds 24 per cent, even if the investment in plant and machinery in the unit does not exceed Rs 10 million, the unit loses its small-scale status.
Locational Restrictions
Industrial undertakings are free to select the location of a project. Industrial Licence is required if the proposed location is within 25 KM of the Standard Urban Area limits of 23 city having population of 1 million as per 1991 census.
Locational restriction does not apply:
i) If the unit were to be located in an area designated as an ‘’industrial area’’ before the25th July, 1991.
ii) Electronics, Computer software and Printing and any other industry, which may be notified in future as “non polluting industry”, are exempt from such locational restriction.
The location of industrial units is subject to applicable local zoning and land use regulations and environmental regulations.
FOREIGN TECHNOLOGY AGREEMENTS
General Policy
For promoting technological capability in Indian industry, acquisition of foreign technology is encouraged through foreign technology collaboration agreements. Inductions of know-how through such agreements are permitted either through automatic route or with prior approval from the Government.
Scope of Technology Collaboration
The terms of payment under foreign technology collaboration, which are eligible for approval through the automatic route and by the Government approval route are technical know how fees, payment for design and drawing, payment for engineering service and royalty. Payments for hiring of foreign technicians, deputation of Indian technicians abroad, and testing of indigenous raw material, products, indigenously developed technology in foreign countries are governed by separate RBI procedures and rules and are not covered by the foreign technology collaboration approval. Similarly, payments for imports of plant and machinery and raw material are also not covered by the foreign technology collaboration approval.
Automatic Route
Government has delegated powers to Reserve Bank of India to allow payments for foreign technology collaboration by Indian companies under automatic route subject to the following limits:
(i). the lump sum payments not exceeding US $ 2 Million;
(ii). royalty payable being limited to 5 per cent for domestic sales and 8 per cent for exports. The aforesaid royalty limits are net of taxes and are calculated according to standard conditions.
Terms of payment qualifying for automatic route is irrespective of the extent of foreign equity in the Indian company.
Use of trademarks and brand name
Payment of royalty up to 2% for exports and 1% for domestic sales is allowed under automatic route for use of trademarks and brand name of the foreign collaborator without technology transfer. Royalty on brand name/trade mark shall be paid as a percentage of net sales, viz., gross sales less agents’/dealers’ commission, transport cost, including ocean freight, insurance, duties, taxes and other charges, and cost of raw materials, parts and components imported from the foreign licensor or its subsidiary/affiliated company.
In case of technology transfer, payment of royalty subsumes the payment of royalty for use of trademark and brand name of the foreign collaborator.
ENTRY OPTIONS FOR FOREIGN INVESTORS IN INDIA
Entry Options
A foreign company planning to set up business operations in India has the following options:
Incorporated Entity
1. By incorporating a company under the Companies Act,1956 through
Joint Ventures; or
Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.
As an Unincorporated Entity
As a foreign Company through
Liaison Office/Representative Office
Project Office
Branch Office
Such offices can undertake activities permitted under the Foreign Exchange Management (Establishment in India of branch or office of other place of business) Regulations,2000.
Incorporation of Company
For registration and incorporation, an application has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.
Liaison Office/Representative Office
The role of the liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India. Liaison office can not undertake any commercial activity directly or indirectly and can not, therefore, earn any income in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).
Project Office
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:
(i). Export/Import of goods
(ii). Rendering professional or consultancy services
(iii). Carrying out research work, in which the parent company is engaged.
(iv). Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
(v). Representing the parent company in India and acting as buying/selling agents in India.
(vi). Rendering services in Information Technology and development of software in India.
(vii). Rendering technical support to the products supplied by the parent/ group companies
(viii). Foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).
Branch Office on “Stand Alone Basis” in SEZ
Such Branch Offices would be isolated and restricted to the Special Economic zone (SEZ) alone and no business activity/transaction will be allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India.
No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities provided that :
(i) such units are functioning in those sectors where 100% FDI is permitted,
(ii) such units comply with part XI of the Companies Act (Section 592 to 602),
(iii) such units function on a stand-alone basis,
(iv) in the event of winding-up of business and for remittance of winding-up proceeds, the branch shall approach an Authorised Dealer in Foreign Exchange with the documents except (A) listed in Regulation 6 (I) (iii) of Notification No. FEMA 13/2000-RB dated 3rd May 2000.”
The aforementioend information of FDI in India is limited and to be read with the extant government policy and prevailing laws.
Sunday, November 27, 2011
COMPOUNDING OF OFFENCES UNDER FEMA, 1999 (Checklist and Procedure)
COMPOUNDING OF OFFENCES UNDER FEMA, 1999 (Checklist and Procedure)
The compounding of contraventions under Foreign Exchange Management Act (FEMA), 1999 is a voluntary process by which an applicant can seek compounding of an admitted contravention of any provision of FEMA, 1999 under Section 13(1) of the FEMA, 1999
For compounding of offences Foreign Exchange (Compounding Proceedings) Rules, 2000 have been framed and published by the Government of India empowering the Reserve Bank to compound contraventions under FEMA, 1999. The provisions of Section 15 of FEMA, 1999 permit compounding of contraventions and empower the Compounding Authority to compound any contravention as defined under Section 13 of the Act on an application made by the person committing such contravention either before or after the institution of adjudication proceedings.
The Government of India has, in consultation with the Reserve Bank placed the responsibility of administering compounding of contraventions with the Reserve Bank, except contraventions under Section 3(a) of FEMA, 1999. Accordingly, the procedure for compounding of contraventions under FEMA, 1999 has been framed with a view to provide comfort to the citizens and corporate community by minimizing transaction costs, while taking severe view of willful, malafide and fraudulent transactions.
CONSEQUENCES OF NON-COMPLIANCE OF FEMA PROVISIONS
Non compliance of FEMA provisions and rules and regulations made thereunder would attract the penal consequences.
As per section 13(1), Chapter IV of FEMA, 1999, If any person contravenes any provision of FEMA, 1999, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees Two lakh, where the amount is not quantifiable and where the contravention is a continuing one, further penalty which may extend to Rupees Five thousand for every day after the first day during which the contravention continues.
The provision for penalty has been provided under Section 13(1) of FEMA, 1999 which is reiterated below:
“if any person contravenes any provision of FEMA, 1999, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees two lakh, where the amount is not quantifiable and where the contravention is a continuing one, further penalty which may extend to Rupees five thousand for every day after the first day during which the contravention continues”.
Further section 13 (2) of FEMA, 1999 provides for the following:
“any Adjudicating Authority adjudging any contravention under sub-section (1), may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings, if any of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf”
REMEDY FOR NON-COMPLIANCE/ COMPOUNDING
The contraventions of any provision of Foreign Exchange Management Act (FEMA), 1999 under Section 13 of FEMA, 1999 can be compounded under Section 15 of the FEMA, 1999 and in the manner as provided in Foreign Exchange (Compounding Proceedings) Rules, 2000 and Master Circular on Compounding of Contraventions under FEMA, 1999 issued by the RBI from time to time. The compounding of contraventions under Foreign Exchange Management Act (FEMA), 1999 is a voluntary process by which an applicant can seek compounding of an admitted contravention of any provision of FEMA, 1999.
COMPOUNDING PROCESS UNDER FEMA
(i) Obtaining requisite approvals and compliances
At the outset, all requisite approvals should be obtained and all compliances should be made before seeking compounding of contravention under FEMA, 1999. Compounding can be done only after rectifying the records by way of obtaining post-facto approvals or unwinding the transactions in cases where such transactions are not permissible under FEMA, 1999.
(ii) Filing of application along with requisite documents
A duly completed application, in duplicate, for compounding of a contravention under FEMA, 1999 may be submitted to the Compounding Authority (CA) on being advised of a contravention under FEMA, 1999, either through a memorandum or suo moto on being made or on becoming aware of the contravention. The format “Form” of the application is appended to the Foreign Exchange (Compounding Proceedings) Rules, 2000 (Annexure-I) along with a demand draft of Rs.5000/- towards application fee in favour of “Reserve Bank of India” and payable at the centre where the application shall be processed/was processed and the compounding order was issued. Further the applicant must indicate the following information about the authorized person of the entity who would be handling the complete process of the compounding:
Ø Name and Designation of the authorised person for the contravener
Ø Telephone/Fax/Email of the authorized person
(iii) Submission of application
The application may be submitted may be submitted to the Chief General Manager, CEFA, Reserve Bank of India, 5th floor, Amar Building, Sir P.M. Road, Mumbai 400 001 or can be sent to the Compounding Authority, [Cell for Effective implementation of FEMA (CEFA)], Foreign Exchange Department, 3rd floor, Amar Building, Sir P.M. Road, Fort, Mumbai- 400001 or as advised in the memorandum issued by the office of the Reserve Bank.
(iv) Examination of the application
The Reserve Bank makes a scrutiny of the application and will examine and decide if the contravention is technical, material or sensitive in nature. If technical, the applicant will be issued a cautionary advice. If the contravention is material, it will be compounded by imposing a penalty after giving an opportunity to the contravener to appear before the compounding authority for a personal hearing. If the contravention is sensitive in nature requiring further investigations, the same would be referred to the Directorate of Enforcement (DoE) for further investigation/ action.
After getting the hearing notice, the contravener or any authorized person on his behalf may appear before the compounding authority to make his submissions. However it is not mandatory to attend the personal hearing. In case of any difficulty, the applicant may give in writing to the Compounding Authority, his consent to proceed with the disposal of the application based on the documents submitted with the application expressing his inability to appear in person.
(v) Compounding Order
The Compounding Authority may pass an order indicating details of the contravention and the provisions of FEMA, 1999 that have been contravened. The sum payable for compounding the contravention is indicated in the compounding order. The contravention is compounded by payment of the penalty imposed.
(vi) Post-compounding Procedure
The amount should be paid within 15 days from the date of the order by way of a demand draft drawn on "Reserve Bank of India" and payable at Mumbai.
(vii) Compounding Certificate
On realization of the sum for which contravention is compounded, a certificate shall be issued by the Reserve Bank indicating that the applicant has complied with the order passed by the Compounding Authority. In case of non-payment of the amount indicated in the compounding order within 15 days of the order, it will be treated as if the applicant has not made any compounding application to the Reserve Bank and the other provisions of FEMA, 1999 regarding contraventions will apply. Such cases will be referred to the Directorate of Enforcement for necessary action.
Once a contravention has been compounded, no proceeding or further proceeding, as the case may be, can be initiated or continued, as the case may be, against the person committing such contravention under that section, in respect of the contravention compounded. As compounding is based on voluntary admissions and disclosures, there cannot be an appeal against the order of the Compounding Authority.
(viii) Time Frame
The compounding process is normally completed within 180 days from the date of receipt of the application complete in all aspects, by the Reserve Bank.
Tuesday, October 18, 2011
Transactions under Section 297 of the Companies Act, 1956: A Brief Analysis
Transactions under Section 297 of the Companies Act, 1956: A Brief Analysis
By this article I attempted to elaborate and interpretation Section 297 of the Companies Act, 1956, which deals with ‘Board’s sanction to be required for certain contracts in which particular directors are interested’.
What section 297 says (bare act):
(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, material or services; or
(b) after the commencement of this Act, for underwriting the subscription of any shares in, or debentures of, the company:
[Provided that in the case of a 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 or 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
(c) in the case of a banking or insurance company any transaction in the ordinary course of business of such company with any director, relative, firm, partner or private company as aforesaid.
(3) Notwithstanding anything contained in sub-sections (1) and (2) a director, relative, firm, partner or private company as aforesaid may, in circumstances of urgent necessity, enter, without obtaining the consent of the Board, into any contract with the company for the sale, purchase or supply of any goods, materials or services even if the value of such goods or cost of such services exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract; but in such a case, the consent of the Board shall be obtained at a meeting within three months of the date on which the contract was entered into.
(4) Every consent of the Board required under this section shall be accorded by a resolution passed at a meeting of the Board and not otherwise; and the consent of the Board required under sub-section (1) shall not be deemed to have been given within the meaning of that sub-section unless the consent is accorded before the contract is entered into or within three months of the date on which it was entered into.
(5) If consent is not accorded to any contract under this section, anything done in pursuance of the contract shall be voidable at the option of the Board.
(6) Nothing in this section shall apply to any case where the consent has been accorded to the contract before the commencement of the Companies (Amendment) Act, 1960.
Sub-Section wise Analysis:
Sub-Section | Deals with |
297 (1) | Charging / Fixing responsibility to obtain consent of board for entering into contract |
297 (2) | Exemptions / Gateways |
297 (3) & (4) | Modus operandi for obtaining consent |
297 (5) | Consequences of not obtaining consent |
It is now clear that Section 297 states about obtaining consent of the board of directors, for entering into certain contracts in which particular directors are interested. Thus, not every contract requires consent of the board, only those contracts in which directors are interested require the consent of board. It is to be noted that usually a contract is entered into with the approval of the board, or even with the authority of the Managing Director/CEO/VP, or with the sanction of the Management Committee. But, here the only way of getting sanction for the contracts (in which directors are interested) is board’s sanction.
Section 297 (1):
Board’s sanction is required if:
i. a director;
ii. or his relative;
iii. a firm in which such a director or relative is a partner;
iv. any other partner in such a firm ( ie; a firm as stated in (iii) above);
v. a private company of which the director is a member or director;
enters into a contract with the company (a) for the sale, purchase or supply of any goods, materials or services; or (b) for underwriting the subscription of any shares in, or debentures of the company.
Further, the board’s sanction to be supported by the PREVIOUS approval of the Central Government, if the company’s paid-up capital is not less than Rs.1 Crore.
Section 297 (2):
Exemption to board’s sanction - to the contract for the sale, purchase or supply of goods, materials or services, ie: Section 297 (1) (a) doest not apply, to the following:
§ purchase / sale for cash at prevailing market prices; or
§ regular trade / business between the company and party (director etc.), up to Rs.5,000/- per annum for the contract period;
§ any transaction in the ordinary course of business (exemption only for banking / insurance company)
Section 297 (3) & (4):
The board should accord its sanction only through a resolution passed at a board meeting (ie; it should not be a circular resolution) before the contract is entered into or within three months of the date on which the contract was entered into (three months allowed only in the case of urgent necessity – sub-section (3)
If the board’s sanction is not obtained, either before the contract date or within three months (in urgent cases), it will be deemed that the board’s sanction is not obtained, under Section 297.
Section 297 (5):
This sub-section states the consequence of not obtaining board’ sanction, as stipulated under section 297. As per 297 (5), if the consent is not accorded to any contract, anything done in pursuance of the contract shall be VOIDABLE AT THE OPTION OF THE BOARD.
CRITICAL INTERPRETATION:
Now, we will go into few critical interpretation of Section 297.
Aspect | Interpretation |
Consent of Board | Consent of board means ‘a consent throughresolution at a duly convened board meeting, and not by mere circular resolution. |
Contract between a company and director / interested director / relative / firm / private company. | The, the section does not apply to a contract between two public limited companies, because the word used is ‘private company’. If the word used is ‘company’, then it may be interpreted as any type of company (public / private). Thus, the two parties of the contract must be 1st party - any type of company, and 2nd party - director / relatives / firm / private company. |
Any other partner in such a firm. | Section is attracted to the contract entered into by the company and any other partners, of the firm of in that the director / his relative are a partner. |
Sale or purchase of any goods, materials or services. | Section does not apply to a contract of immovable property (eg: purchase of land, building etc.), because the terms used is goods, materials or services – all are movables. Thus contract for movables only get attracted by the section, immovable properties contracts are excluded. |
Exemptions under sub-section (2) | Exemptions are independent provisions, because the words “or” is used to separate the provisions. |
Exemption to transactions in the ordinary course of business. | Exemption applies only to banking and insurance companies, and not for all companies. |
Rs.5000/- Exemption limit. | Calculated on Annual Basis, only for the period of contract. |
Effect on not obtaining consent of board. | Contract voidable at the option of the board, and not void (invalid). The contract is voidable ie; can be ratified by the board. |