Financial Daily from THE HINDU group of publications
Sunday, Dec 08, 2002
Financial Daily from THE HINDU group of publications Sunday, Dec 08, 2002 |
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Investment World
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Insight Corporate - Corporate Governance Prohibited dealings Aarati Krishnan
IN THE Indian context, instances of companies directly entering into contracts with their CEOs or directors have been rare. This is because the Companies Act, 1956 (through sections 295 to 301) severely restricts such transactions. A company is prohibited from the following transactions without prior approval of the Central Government. Loans or guarantees to directors The restriction also applies to relatives of directors, partnership firms in which the director is a partner, private limited companies in which a director is a member/director, and any company in which the director controls 25 per cent of the voting rights. Contracts for sale or purchase of goods/services with directors. The restriction also applies to relatives of the director, partnership firms in which a director is a partner, and private limited companies in which director is a member/director. In addition, directors are required to disclose contracts in which they are interested. Every company is required to maintain a register of all contracts in which any of the directors is directly or indirectly interested. The above restrictions leave out the following kinds of transactions: Loans/guarantees to a public limited company where a director exercises influence, but does not possess voting rights or control. Transactions for sale/purchase of goods/services between two public limited companies Transactions executed at market prices for cash Transactions other than those for sale/purchase of goods/services. Companies can still enter into the following transactions with related parties without the above restrictions. — Leasing, hire purchase or rental arrangements between a company and directors. — Licensing/royalty payments. — Sharing of expenses.
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