Irked by the frequency of visiting relatives to his residence, it is stated that a man solved the issue by borrowing from the rich ones and lending to the poor ones after which none came back.
Transactions with related parties have always been under the scanner and detailed disclosure requirements are laid down by accounting standards. China initially raised objections to the detailed disclosure as required by International Financial Reporting Standards (IFRS) before falling in line with the requirements of the IASB. Apart from transactions with related parties, regulations exist for appointment of relatives also.
As a part of the supporting legislation to the Companies Act, the Directors' Relatives (Office or Place of Profit) Rules were implemented in 2003.
It starts with an embargo by stating that no appointment for an office or place of profit in a company shall take effect unless approved by the Central Government on an application in respect of a) Partner or relative of a director or manager; (b) Firm in which such director or manager, or relative of either is a partner; or (c) Private company of which such director or manager or relative of either is a director or member.
The trigger limit to determine office or place of profit was fixed at Rs 50,000/ month. The application for permission had to be documented with an undertaking from the appointee that he will be in the exclusive employment of the company and not hold a place of profit in any other company, disclosure of the monetary value of all allowances and perquisites and of total remuneration package proposed to be paid to the appointee and details of the services that will be rendered by him to the company and shareholding pattern, particularly the shareholding of the directors along with his relatives, the public holding and institutional holding.
The educational qualification/experience, pay scale, allowances and other benefits of similarly placed executives have to be disclosed.
In case of the appointment of a relative, then, an undertaking from the director/Company Secretary of the company that similarly placed employees are getting comparable salary shall also be enclosed along with the application.
Information would need to be given on the total number of relatives of all the directors either appointed as Managing/ Whole time director, manager or in any other position in the company; the total remuneration paid to each relative and the total remuneration paid to them altogether as a percentage of profits as calculated for the purpose of section 198 of the Companies Act, 1956.
The selection and appointment of a relative of a director for holding office or place of profit in the company shall be approved by adopting the same procedure as applicable to non-relatives.
However, in the case of public companies, the selection of a relative of director for holding place of office or profit in the company shall have to be also approved by a Selection Committee which has been defined to mean a committee, the majority of which shall consist of independent directors and an expert in the respective field from outside the company.
Though relative is not defined in the Rules, one would expect that the two types of relatives envisaged by Section 6 and the 22 examples listed in Schedule 1A of the Companies Act, 1956.
Amendments
Vide Notification No F.NO. 17/75/2011-C.L, dated 6-4-2011, the monetary limit has been increased five-fold to Rs 2,50,000/- and the selection committee requirement is only for public listed companies as against public companies. In the case of unlisted companies, independent directors are not necessary but outside experts should be there in the Selection Committee and in the case of private companies, both independent directors and outside experts are not necessary. If the erstwhile Rules gave an impression of having been hurriedly drafted with a view to putting in something on appointment of a relative, the amendment seems to have been legislated even faster.
The Notification seeks to make the above changes through an amendment to Rule 7 of the old Rules which does not have a Rule 7. It appears that the intention has been to amend Rule 4(7). The generous increase in the monetary limits would result in disclosure being made about middle or senior level executives who are relatives. The new category of outside experts comes without a definition which can mean anyone.
The relaxations seem to be with a view to ensuring that information is provided about relatives who occupy pivotal positions in the company. The requirement to run to the Central Government for approval to appoint a relative appears needless now. Appointment of relatives should be at the discretion of the management of a company with appropriate disclosures.