Provsions of The Companies Act, 2013
If economic activity and growth are analogous to a wheel,then provisions of section 185 and 188 of the Companies Act, 2013 are surelyanalogous to disc brakes.
Efficiency of production requires efficient choice and free movement ofresources. Ideally, economic models assume complete mobility of resources andperfect competition throughout the world, both of which are far away from realworld scenario. The new law has been framed with all the good intentions. Butif the mechanism is not efficient, right things can have wrong consequences.
Resources include tangible, intangible, moveable, immovable and monetaryresources. While section 188 takes care of the tangible, intangible, moveableand immovable resource movement, section 185 and 186 takes care of the monetarycounterpart.
Section 188 has been a regulatory scare crow since its inception. The coverageof section 188 extends to sale, purchase and supply of goods and materials,property of any kind, lease transactions, services, appointment of agents,underwriting contracts and appointment to office or place of profit.
The coverage of section 185 extends to loans, guarantees and securities. Itrestricts loans, guarantees and securities to a director(s) as well as entitiesfalling within certain radius of the director(s) like directors of lendingcompany, holding company, relative or partner of director of such lending orholding company, any firm where the director or his relative is partner, anyprivate company where such director is a director or member, body corporatewhere such director singly or jointly with other director(s) hold 25% or morevoting power or the Board of which is accustomed to act in accordance with theDirector or the lending company.
While section 185 is a restrictive section, section 186 is an enabling section.Companies can lend, provide guarantee or security subject to the limits of andin compliance with section 186. Section 185 has a choking effect on themovement of intra-group funds. The exemption notification allows conditionalexemption to private companies on the basis of share capital having nocorporate investment, borrowing being less than lower of Rs. 50 Cr. or twicethe paid up capital and clean repayment record. However, three simultaneousconditions render the exemption look good on paper only.
The exemptions granted to private companies by MCA Notification dated June 5,2015 takes contracts of private companies with its holding, associate,subsidiary and with fellow subsidiaries out of the purview of section 188.Additionally, the said exemption permits participation of interested directorsin Board proceedings subject to disclosure of their interest. Further, relatedparties can vote in general meetings too!
Third proviso to Section 188(1) states that the sub-section shall not apply totransactions which are in the ordinary course of business as well as on arm’slength basis. While ordinary course of business may be interpreted to meantransactions that the company undertakes on regular and frequent basis, what isto be considered “arm’s length” has been left untouched which creates confusionand apprehensions of future trouble.
Consider the case of two defence manufacturers jointly acquiring a steel plantfor captive consumption. If steel was to be bought from the market the inputcost would be much higher for both. Now every time there is transfer of steelfrom the steel unit to the defence production unit, elaborate RPT rituals needto be undertaken. The only way out would be to get a wholly owned subsidiarywhich is permitted but may not be economically feasible or efficient.
There was a stark similarity between Indian politics and RPT provisions:Majority of minority. A significant change has come as the amendment to section188 replacing “special resolution” by “ordinary resolution”.
Source : from web info