Section 297-comparion with clause 188 of the new Act

Section 297

Applicability

·         Section 297 is applicable to both Private and Public Companies.

·         This Section is applicable to the following contracts only §  For sale, purchase or supply of any goods or material or services; and §  For underwriting subscription to any shares or debentures of the Company.

Approval Requirements:

·         If the paid up capital of the Company is one crore or more, then to entering such contracts by the Company with specified persons(given below), requires prior approval of Central Government. ·         Otherwise prior consent of Board approval is sufficient. ·         Board consent through a circular Resolution is not possible. ·         In case of urgency, the consent of the Board should be obtained within three months of the contract.

Specified persons:

i.        Director of the Company     ii.        Relative of such Director as given in Section 6 of the Companies Act.   iii.        A firm in which such Director or his relative is a partner.   iv.        Any partner of a firm in which a Director or his relative is a partner.    v.        Private Company in which a Director is a Director/member.

Non-applicability:

The following situations not come under the purview of this section: ·         Contracts between two public Companies. ·         Contracts entered into by the Company on principal to principal basis. ·         Professional services rendered. ·         Contract of employment of Managing Director or Whole time Director. ·         Loan made to a Director ·         Contract of sale, purchase or lease of immovable property except as stock in trade. ·         Contract between Government Companies (Notification by ministry)

The offence under this Section is compoundable with the provisions of Section 621A of the Companies Act, 1956.

New Companies Act

The corresponding clause in the new Act for the Section 297 of the Companies Act, 1956 is 188. In fact the Sections 314 and 217 are combined in clause 188 as related party transactions. The main modifications are given: ·         No Central Government approval is required for any related party transactions. ·         No Central Government approval is required for any appointment of office or place of profit in the Company or its subsidiary. ·         Selling or buying of property of any kind requires comes ur the purview of this clause and requires the approval of the Board ·         Leasing of property requires Board Approval ·         Appointment of any agents for purchase/sale of goods, materials, services or property requires Board approval ·         Board approval requires for the appointment of any related party to an office/ place of profit in the Company, its subsidiary or Associate.

All exceptions given in Section 297 have been withdrawn.

Sub Section 2 to clause 188 specifically provides that details of such contract should be referred in the directors’ report together with the justification for entering into such contracts. Violation of this Section may leads to punishment of imprisonment up to one year or with fine (between twenty five thousand and five lakh rupees) or with both.