Ch10 Investments & Disclosure of Interest - Sheet1 Flashcards
Definition of associated companies and undertakings [Section 2(4)]
“associated companies” and “associated undertakings” mean any two or more companies or undertakings, or a company and an undertaking, interconnected with each other in the following manner, namely:
if a person who is the owner or a partner or director of a company or undertaking, or who, directly or indirectly (through his spouse or minor children), holds or controls shares carrying not less than twenty per cent of the voting power in such company or undertaking, is also the owner or partner or director of another company or undertaking, or directly or indirectly, holds or controls shares carrying not less than twenty per cent of the voting power in that company or undertaking; or
if the companies or undertakings are under common management or control or one is the subsidiary of another; or
if the undertaking is a modaraba managed by the company;
(Modaraba is an Islamic financing activity, a set up created in order to ensure interest free financing. Modaraba Management Company is established as a public company which is licensed to float Modarabas which are separate legal entities).
However, following directorships or shareholdings shall not be considered while ascertaining the status of companies to be associated:
directorship of a person by virtue of nomination by the Concerned Minister of the Federal Government or a Provincial Government or a financial institution directly or indirectly owned or controlled by such Government; or
directorship of a person appointed as “Independent Director”
shares owned by the National Investment Trust or a financial institution directly or indirectly owned or controlled by the Federal Government or a Provincial Government; or
shares registered in the name of a central depository where such shares are not beneficially owned by the central depository.
Investment in associated companies [Section 199]
Definition: Investment
The term “investment” shall include equity, loans, advances, guarantees, by whatever name called, except for the amount due as normal trade credit, where the terms and conditions of trade transaction(s) carried out on arms-length and in accordance with the trade policy of the company.
Power to make investments in general
The investment decisions are within the power of directors exercised through their board meetings.
Restriction on investment in associated company
A company shall not make any investment in any of its associated companies except under the authority of a special resolution which shall indicate:
the nature;
period;
amount of investment; and
terms and conditions attached thereto.
An increase in the amount or any change in the nature of investment or the terms and conditions attached thereto shall be made only under the authority of a special resolution.
Condition: agreement for loan
The company shall invest in its associated company by way of loans or advances in accordance with an agreement in writing and such agreement shall inter-alia include:
nature of loan;
purpose of loan;
period of the loan;
rate of return;
fees or commission;
repayment schedule for principal and return;
penalty clause in case of default or late repayments; and
security, if any, for the loan
in accordance with the approval of the members in the general meeting.
Condition: return on investment
The return on such investment shall not be less than the borrowing cost of the investing company or the rate as may be specified by the Commission whichever is higher and shall be recovered on regular basis in accordance with the terms of the agreement, failing which the directors shall be personally liable to make the payment
Condition: due diligence
The directors of the investing company shall certify that the investment is made after due diligence and financial health of the borrowing company is such that it has the ability to repay the loan as per the agreement.
Exemptions and regulations
The Commission may specify certain classes of companies on which requirement of passing a special resolution etc. shall not be applicable. The Commission has also made regulations for imposing conditions and restrictions on making investments in associated companies.
Records
Every company shall maintain and keep at its registered office a register of investments in associated companies and undertakings containing such particulars as may be specified.
Investments of company to be held in its own name [Section 200]
Requirement
All investments made by a company on its own behalf shall be made and held by it in its own name.
Exceptions
The company may hold any shares in its subsidiary company in the name of any nominee of the company, if it is necessary to do so, to ensure that the number of members of the subsidiary company is not reduced below the statutory limit.
Where the company has a right to appoint or get elected any person as a director of any other company and a nominee of the company in exercise of such right has been so appointed or elected, the shares in such other company of an amount not exceeding the nominal value of the qualification shares which are required to be held by a director thereof, may be registered or held by such company jointly in its own name and in the name of such person or nominee, or in the name of such person or nominee alone.
Company may also place its investment in securities in the name of central depository company if it so desires and the securities are allowed to be kept in central depository system.
Register for investments not held in own name [Section 200]
Contents of the register
Where, due to exceptions discussed above, any shares or securities in which investments have been made by a company are not held by it in its own name, the company shall forthwith enter in a register maintained by it for the purpose at its registered office the nature, value and such other particulars as may be necessary fully to identify such shares or securities.
Open for inspection
The register shall be open to the inspection of members without charge, and to any other person on payment of fees fixed by company during business hours, subject to such reasonable restrictions, as the company may impose, so that not less than two hours in each day be allowed.
Certified copies
Any member may require a certified copy of register or any part thereof, on payment of such fee as may be fixed by the company. The certified copies requested shall be issued within a period of 7 days. A member seeking to exercise the rights must make a request to the company to that effect.
Order by registrar for allowing inspection
In case of contravention, the registrar may by an order compel an immediate inspection of the register or direct that copies required shall be sent to the persons requiring them.
Disclosure of interest by director [Section 205]
Why to disclose interest or concern
The directors are agents of the members of the company and they are in a fiduciary relationship with all the members of the company. So they are required to make all contracts and all transaction in good faith and in the best interest of the company. Hence if they make any transaction or enter into any contract on behalf of the company in which they are themselves interested by any means, they should give a complete disclosure of the fact so that their integrity is not questioned. There must not be any conflict of interest between the company and the directors.
Prohibited transactions are not validated by disclosure
If directors are forbidden to make certain transactions with the company by provisions of any law, those provisions shall prevail, and disclosure of those transactions cannot justify the contravention of law. Even for transactions which are not prohibited, disclosure of interest must be made and certain transactions may carry additional approval requirement.
Requirement
Every director of a company who is concerned or interested in any contract or arrangement entered into, or to be entered into, by the company shall disclose the nature of his concern or interest at a meeting of the board.
A director shall be deemed also to be interested or concerned if any of his relatives (spouse, children including step children and parents), is so interested or concerned.
Timing of disclosure
The director should give the notice of his interest in transactions or arrangements:
in first board meeting, in which such transaction or arrangement is discussed, if such transaction requires directors’ approval;
if he was not interested at the time of first discussion, in first board meeting held after he becomes so interested, if such transaction requires directors’ approval;
in first meeting held after the transaction or arrangements is entered into, if such transaction does not require directors’ approval.
General notice
Instead of making a disclosure at separate intervals on each transaction, the director may give a general notice regarding his directorships or memberships in other body corporate or partnership in firms so that he may be considered as interested in any transaction, contract or arrangement entered into with these businesses.
Such notice should be given at the directors’ meeting or the concerned director may take reasonable steps to ensure that it is brought up and read at the first meeting of the board after it is given.
This general notice shall expire at the end of the financial year in which it is given and may be replaced by fresh notice to be given in last month of financial year.
Interested director not to participate or vote [Section 207]
Not to participate or vote
A director shall not, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement, nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void.
Not to be present
A director of a listed company who has a material personal interest in a matter that is being considered at a board meeting shall not be present while that matter is being considered.
Approval from members
If majority of the directors are interested in, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, the matter shall be laid before the general meeting for approval.
Exception
The above provisions shall not be applicable under the following circumstances:
If the person is a director of a private company which is neither a subsidiary nor a holding company of a public company;
when the director has acted as surety of the company and the resolution under consideration relates to the indemnification or insurance coverage of the surety director against any loss incurred by the director for becoming surety of the company.
Disclosure of interest by officers other than directors [Section 206]
Other officer of a company who is directly or indirectly concerned or interested in any proposed contract or arrangement with the company shall not enter into any such contract or arrangement unless he discloses the nature and extent of his interest in the transaction and obtains the prior approval of the board.
Related party transactions [Section 208]
Expression: related party
The expression “related party” includes:
i. a director or his relative:
ii. a key managerial personnel or his relative;
iii. a firm, in which a director, manager or his relative is a partner;
iv. a private company in which a director or manager is a member or director;
v. a public company in which a director or manager is a director or holds along with his relatives, any shares of its paid up share capital;
vi. any body-corporate whose chief executive or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager (exception: advice, directions or instructions given in a professional capacity);
vii. any person on whose advice, directions or instructions a director or manager is accustomed to act (exception: advice, directions or instructions given in a professional capacity);
viii. any company which is:
a holding, subsidiary or an associated company of such company; or
a subsidiary of a holding company to which it is also a subsidiary;
ix. such other person as may be specified.
Here, the term “relative” means spouse, siblings and lineal ascendants and descendants of a person.
Expression: office of profit
The expression “office of profit” means any office:
i. where such office is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
ii. where such office is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise.
Requirement of approved policy for related party transactions
A company may enter into any contract or arrangement with a related party only in accordance with the policy approved by the board, subject to such conditions as may be specified, with respect to:
a) sale, purchase or supply of any goods or materials;
b) selling or otherwise disposing of, or buying, 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; and
f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associated company.
Requirement of special resolution
Where majority of the directors are interested in any of the above transactions, the matter shall be placed before the general meeting for approval as special resolution.
Exception: certain transactions
The above requirements of approved policy or special resolution do not apply to any transactions entered into by the company in its ordinary course of business on an arm’s length basis.
The expression “arm’s length transaction” means a transaction which is subject to such terms and conditions as may be specified.
Requirement to refer and justify in directors’ report
Every contract or arrangement entered into with related party shall be referred to in the board’s report to the shareholders along-with the justification for entering into such contract or arrangement.
Requirement to maintain records
The Commission may specify the record to be maintained by the company with regards to transactions undertaken with the related party.
Status of contracts in contravention by director or employee
Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the board or approval by a special resolution in the general meeting as required and if it is not ratified by the board or, as the case may be, by the shareholders at a meeting within 90 days from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the board and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.
Regardless of the above provision, it shall be open to the company to proceed against a director or any employee who had entered into such contract or arrangement in contravention of the provisions relating to related party transactions for recovery of any loss sustained by it as a result of such contract or arrangement.
Penalty
Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the above provisions shall be liable:
a) in case of listed company, be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than five million rupees, or with both; and
b) in case of any other company, to a penalty of level 2 on the standard scale.
