Section 188: Related Parties - Unrelatable phrasing
I'll try to keep this one short. I found out something wicked and here it is.
FYI This is not me nerding out (in a real sense). Rather, this is something that's bugging me, making me itch.
The companies Act 2013 has 470 sections. Well the actual count might be more due to later additions, but the last section is 470. However, today I'm going to talk about a different section. Section 188 Related Parties.
The section deals with how related party transactions are to be made by a company. The first sub section lays out the cases where board approval is mandatory which includes sale and purchase of goods and immovable property, leasing property, services, appointments in offices, and underwriting etc..
Until now, everything is good: Nothing's making me wanna pull my hair off.
The PROBLEM is with the first proviso.
Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution:
I bet you didn't notice anything wrong in the first read. Neither did I. However, I had to read it a second time and there was a problem.
- paid-up share capital of not less than such amount- okay makes sense, you want people who have more money to transact to be watched more closely.
- transactions not exceeding such sums. Okay. What?
BUT
if you dare to do a 99cr transaction, or a Rs. 10,000 transaction between your company and your dad, you can't just do it with the boards' approval, you'll need to get the company to vote in your favor?
I tried different ways that I could make sense of it.
1. The illogical interpretation as above.
2. (This is going to make things worse) I actually got to sec 188 after reading Section 177 Audit Committee -3rd Proviso to subsection 4 insists that "in case any transaction involving any amount not exceeding One crore rupees is entered into by a director, or officer of the company without obtaining the approval of the audit committee and is not ratified by the AC within 3 months from the date of transaction, such transaction shall be voidable at the option of the AC and if the transaction is with the related party to any director or is authorized by any other director, the director concerned shall indemnify the company against any loss incurred by it."
At first I was like, "ARE YOU KIDDING ME!?", but then I coerced all my mental faculties and tried to convince myself that there's a way to make sense of it - if you're getting on with a transaction with a related party, you'll have to get boards approval and in addition to that, if the transaction is under 1 cr, you'll need the approval of AC. The higher transactions will then be protected by a higher power, let's say RoC - about which I would have to read in later sections. But that didn't happen either (you don't need RoC approval for RPTs).
3. "Common sense" and other explanations on the internet told me that they're just trying to say that when a company exceeds a certain limit on a related party transaction, it should get a shareholder approval and not just a board approval. and that it was just an error in the act.
A plain error like that? Really? After 11 years?
So no that didn't make any sense either. (I did search for "SECTION 188 companies ACT" and found that it wasn't a printing mistake in my copy).
I kept looking. Chatgpt even tried selling me that the "not exceeding" is contextual to the limits prescribed in the rules. Sigh...
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