Chapter 10 Investments and Disclosures of Interests Flashcards
When must a director disclose their interest in a contract?
If directly or indirectly interested (including spouse, child, or parents).
When should the disclosure of interest in a contract be made by a director?
- At the meeting where the contract is first considered.
- At the next meeting if the director becomes interested after the first consideration.
What are the prohibitions for a director with an interest in a contract?
- Cannot participate in discussion.
- Cannot be counted for quorum.
- Cannot vote.
- Cannot be present in the meeting (for listed companies).
What is a general notice for a director’s interest?
A declaration given in advance regarding the director’s interest in transactions.
What is the validity of a general notice of interest?
- Expires at the end of the financial year.
- A fresh notice must be given in the last month of the financial year.
What does investment include?
- Equity investments.
- Loans
- Advances.
- Guarantees.
What is not considered an investment?
Normal trade credit.
What is an associated company?
A company is associated if:
1. A person is a common owner of two or more businesses.
- A person is a partner in two or more partnership businesses.
- A person is a director in two or more companies.
- A person holds or controls shares carrying not less than 20% of the voting power in two or more companies.
- Companies or undertakings are under common management or control, or one is the subsidiary of another.
- The undertaking is a modarba managed by the company.
What shares are considered when determining associated company?
Shares held personally, by a spouse or minor child are counted.
What are the exceptions to the definition of an associated company?
- Independent directors.
- Directors nominated by the government.
- Shares held by the National Investment Trust or financial institutions owned by the government.
- Shares held by a central depository.
What are the conditions for a public company to invest in an associated company?
- Approval by special resolution (stating terms and conditions).
- If it is a loan or advance:
a. Written agreement stating terms and conditions.
b. Rate of return not below borrowing cost.
c. Return must be recovered regularly.
d. Certificate by directors on due diligence. - Any changes in terms and conditions require another special resolution.
What are the exceptions to the requirement for investing in the company’s own name?
- To ensure the minimum number of members.
- Nominee directors (holding qualification shares).
- Central depository company.
What records must be maintained for investments not in the company’s name?
A register of investments not in the company’s name, containing the nature, value, and other particulars.
Who can inspect the investment not in the company name register?
- Members (free of cost).
- Others (on payment of a fee).
- Registrar’s intervention if inspection is refused.
How soon must a company provide a copy of the investment register to a member?
Within 7 days of request (upon payment of a fee).
Who is considered a related party?
- An associated company.
- A director, key manager, or their relative.
- A firm or company in which a director, key manager, or relative is a partner, member, or director.
- A company whose chief executive acts on the instructions of a director or key manager (and vice versa).
Who qualifies as a relative for related party transactions?
- Spouse.
- Siblings.
- Ascendants (parents, grandparents).
- Descendants (children, grandchildren).
What are the common types of related party transactions?
- Sale or purchase of goods or services.
- Sale, purchase, or lease of property.
- Appointment as a sales/purchase agent or to an office of profit.
What is an office of profit?
A position where a director receives remuneration or benefits, excluding board fees.
What are the approval requirements for related party transactions?
Approval as per board policy, except when:
1. The transaction is in the ordinary course of business.
2. The transaction is conducted on an arm’s length basis.
When is a special resolution required for related party transactions?
If a majority of directors are interested in the transaction.
What records must be maintained for related party transactions?
- Proper transaction records.
- Disclosure in the directors’ report, along with justification.
What is the status of a contract with a related party if it is not approved?
Voidable at the option of the Board if not ratified within 90 days.
What happens if a relative is involved in an unapproved transaction?
The concerned directors must indemnify the company against any loss.
What are the penalties for non-compliance in a listed company?
- Imprisonment up to 3 years.
- Fine of at least 5 million rupees.
- Both imprisonment and fine.
What is the penalty for non-compliance in an unlisted company?
Level 2 penalty.
Which areas require special attention in case studies?
- Definition of an associated company (and exceptions).
- Investment in an associated company (especially loans).
- Disclosure of directors’ interests in contracts.
In what cases is a company allowed to hold investments not in its own name?
- To ensure the minimum number of members.
- For nominee directors who hold qualification shares.
- For shares held in a central depository company.
What records must a company maintain for investments not held in its own name?
A register containing the nature, value, and particulars of such investments.
Who can inspect the register of investments not held in the company’s name?
Members (free of cost).
Others (on payment of a fee).
If inspection is refused, the Registrar can be approached.
What is the time limit for providing a copy of the investment register to a member?
Within 7 days of request, upon payment of a fee.
What happens if a related party transaction is conducted without approval?
It is voidable at the option of the Board if not ratified within 90 days.
What must directors do if a relative is involved in an unapproved transaction?
The concerned directors must indemnify the company against any loss.
What are the penalties for violating related party transaction regulations?
- For listed companies:
a. Imprisonment up to 3 years.
b. Fine of at least 5 million rupees.
c. Both imprisonment and fine. - For unlisted companies:
a. Level 2 penalty.
What are qualification shares, and how can they be held?
Qualification shares are shares held by directors to meet the minimum shareholding requirement. They can be held:
- Jointly in the name of the investor company and its non-executive director.
- Alone in the name of a nominee.
Why might a company invest in a subsidiary company in the name of a nominee?
A company might invest in a subsidiary company in the name of a nominee to ensure the minimum number of members required by law.
What conditions can a company impose on the inspection of the register of investments not in its name?
The company can impose reasonable conditions on the inspection of the register, such as limiting the time or manner of inspection.
What is the requirement for related party transactions conducted in the ordinary course of business?
Related party transactions conducted in the ordinary course of business and at arm’s length must be approved by the board of directors.
What happens if a related party transaction is not approved in advance?
If a related party transaction is not approved in advance, it must be ratified by the board within 90 days of the transaction.qaQQQQ
