Section 188 talks about the related party transactions:
Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—
(f) Such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company
Explanation: The expression “office or place of profit” means any office or place—
- Where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
- Where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, Private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
The 2 main conditions are:
- A person must hold an office or place under a company
- The office must be an office or place of profit
Before the amendment and coming of the section 188 on 1st April, 2014, office or place of profit was mentioned under section 314 of the act.
Section 314 of the companies act, 1956:
Meaning of ‘Office or Place of Profit’: any place or office in a Company in which a Director obtains anything by the way of remuneration other than the remuneration to which he is entitled to receive as director. Remuneration may either be in the form of salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence or otherwise. Section 314 of the Companies Act, 1956 regulates the provisions relating to appointment of a director or any relative of Director, a firm, body corporate in which such Director is interested, to an office or place of profit.
Object: The object of the Section is to prevent a Director from being placed in the inconsistent position of being both master and servant. This Section prohibits appointment of Directors or their relatives or firms or companies in which Directors are interested to hold the ‘office or place of profit’ without approval of members in all cases and approval of Central Government in certain cases.
Applicability: The provisions of this section are applicable to both public and private companies
Rule 15(3) companies (meetings of board and its powers) rules, 2014, A company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into is for the appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two or half lakh rupees as mentioned in the clause (f) of subsection (1) of section 188.
Section 188, explanation of the term, “office or place of profit”
(a) In case the director holds the office or place
If the director holding it obtains from the company anything by way of remuneration to which he is entitled as a director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence or otherwise
(b) In case an individual other than a director, firm, private company or other body corporate holds the office or place
if the individual, firm, private company or body corporate holding it obtains from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation as a place of residence or otherwise;
The meaning of (a)(i) of section 188 of 2013 is that, if the office or place of profit is held by the director and obtains from the company anything by way of remuneration to which he is entitled as a director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence or otherwise. It is related to all related parties and is not limited the directors. The term ‘related party’ includes relatives of the directors. Thus, a director shall be held to be holding an office or place of profit where the director receives from the company anything by way of remuneration over and above the remuneration to which he is entitled to as a director. Therefore, if any payment is made in salary and perquisites by way of fees for rendering technical services or rendering professional services, the office by virtue of which the director becomes entitled to additional remuneration is called as office or place of profit.
Thus the meaning of (a)(ii) of section 188 of 2013 is that, it refers to office or place of profit held by the individual, firm, private company or body corporate holding it obtains from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation as a place of residence or otherwise then such office is office or place of profit. This means every appointment to any office held by individual, firm, private company or body corporate who is a related party but is not a director will require approval of the board and if it carries a remuneration exceeding the limits prescribed under rule 15(3) of the companies (meetings of board and its powers) rules, 2014 then approval of the shareholders will be required.
Now the definition of the term,
OFFICE OF PROFIT: means an office capable of yielding profit or from which a person might reasonably be expected to make a profit. The actual making of profit is not necessary. The phrase means an office which yields income or profit. One of the essential necessity in determining the question whether an office is an office of profit or not is whether such office carries remuneration in the form of pay or commission. When a person is reimbursed expenses incurred by him, the essential condition that the office carries remuneration in the form of pay or commission is not satisfied. An ‘office of profit ‘must be capable of yielding a profit or pecuniary gain.
An office of profit really means an office in respect of which a profit may accrue. It is not necessary that it should be possible to predicate of a holder of an office or profit that he was bound to get a certain amount of profit irrespective of the duties discharged by him.
The expression “place of profit” means “any office or place in a company in which a director obtains anything by way of remuneration other than the remuneration to which he is entitled as a director”. For e.g., Let us say a director is entitled to commission on net profits as remuneration as approved by the Shareholders. Either director (in addition to his entitlement as director) or his relative or any firm in which director is a partner, a private company in which director or his relative is a member or director, receives any remuneration in the same company, it would be deemed that an office or place of profit is held in that company.
Unless an office or place held by a person under the company carries remuneration, this section cannot apply. Merely because a person holds any position in or under the company, he cannot be said to be holding an office or place of profit; it must carry remuneration in some form. For holding an office of profit, a person need not be in the service of the government.
The office of profit means a position, which brings to the person holding it some pecuniary gain or advantage or benefit. The expression profit connotes an idea of pecuniary gain. If there is really some gain, its label –honorarium, remuneration, salary, is not material. It’s the substance and not the from which matters and even the quantum or amount of the pecuniary gain is immaterial; which needs found out is whether the amount of money receivable by the concerned person in connection with the office he holds, gives him some pecuniary gain, other than as compensation to defray out of his pocket expenses.
The word ‘anything’ in this provision should not be read in isolation but in conjunction with the words following it, namely ‘by way of remuneration’. In other words, the person holding an office of place of profit must obtain from the company something by way of remuneration.
Moreover the word ‘otherwise’ should be read ejusdem generis having regard to the preceding words, namely salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence. Ejusdem generis means ‘of the same kind or nature’.
Thus the expression remuneration encompasses only those payments (in cash or in kind) which forms part of the compensation agreed to be paid by a company to its employee for his services under a contract of service or contract of employment. As mentioned in the section 2(78) of the companies act, remuneration means means any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961”
OFFICE: employment or position as an official; a position of duty, trust or authority. It denotes a duty in the officeholder to be discharged by him as such. It consists in a right and correspondent duty, to execute a public or private duty. It includes place and employment. The term office is defined as one subsisting, permanent, substantive position which had an existence independent from the persons who filled it. The word does not necessarily imply that it must have an existence apart from the person, who may hold it. Cases are known, in which, in order to make use of the special knowledge, talent, skill or experience of certain persons posts are created which exist only for so long as they hold them. It will be difficult to hold that such persons are not holders of the offices. Place means a job, post or office; employment; position. Profit in its ordinary sense means advantage, gain, benefit; pecuniary gain.
Whether office holder must be company`s employee– there is nothing in the language of the section that restricts its scope to only employment positions. In other words the expression ‘office or place of profit’ does not imply that the scope of the section is limited to positions of employment (contract of service) held under the company thereby keeping outside its scope the positions which are in the nature of contracts for service. A director or any other person covered by this section may not be in the service or employment of the company and yet be the holder of an office or place of profit under the company.
The supreme court has pointed out in the context of Maharashtra municipality act, 1965, which disqualified a person who held an office or place of profit under the government from becoming a counselor, that for holding an office of profit under government one need not be in the service of government and there need be no relationship of master and servant; however, the substance has to be looked at, not the form; the legislative end is to avoid a conflict between duty and interest and to cut out the misuse of position to advance private benefit.
The supreme court has dealt with the above issue in the context of article 102(1) (a) of the constitution of India concerning the question whether being an auditor of a company by a firm of chartered accountant in which a person to be selected as a member of house of the people amounted an office of profit under the government,
“For holding an office of profit under the government, one need not be in the service of government and there need be no relationship of master and servant between them. The constitution itself makes a distinction between the holders of a government. An auditor as a holder of an office of profit in the two government companies, the Durgapur projects ltd., and the Hindustan steel ltd. Is really under the government of India. Thus he holds an office of profit under the government of India within the meaning of article 102(1) (a) of the constitution.
- Under the case: GURUGOBINDA BASU V SANKARI PRASAD GHOSAL
Also the article 102 (1)(a) of the constitution of India, says that a person shall be disqualified for being chosen as, and for being, a member of either house of parliament if he holds any office of profit under the government of India or the government of any state, other that the office declared by parliament by law not to disqualify its holder, it was held by the supreme court that before the provision of the article can be attracted, it must be established that the person was holding an office under the union or the state government and that the office was an office of profit. In other words, the office in question must have been held under a government and to that some pay, salary, emoluments or allowances is attached.
The test for finding if the office in question is an office of profit under the government or not, are:
Q1. Whether the government makes appointment?
Q2. Whether the government has the right to remove or dismiss the holder?
Q3. Whether the government pays the remuneration?
Q4.what are the functions of the holder? Does he perform them for the government?
Q5.does the government exercise any control over the performance of those functions?
The object of the provision is to secure independence of the MPs and to ensure that Parliament does not contain persons who have received favors or benefits from the executive and who consequently might be amenable to its influence.
Also there was an Act to declare that certain offices of profit under the Government shall not disqualify the holders thereof for being chosen as, or for being, members of parliament thus, India formed The Parliament (prevention of disqualification) act, 1959, it declared that certain offices of profit under shall not disqualify their holders. The act has been amended several times to exempt holders of various offices from the mischief of the office of profit law.
On the other hand, certain offices were declared to be non-profit. A list of non-profit offices have been mentioned in Part II of the Schedule to the Parliament (Prevention of Disqualification) Act, 1959. The membership of bodies listed in Part I of the same Schedule entails no disqualification on the ground of holding an office. Thus the final interpretation and decision whether a person is disqualified or not rests with the courts and not with Parliament.
- Sonia Gandhi, a member of Lok Sabha, was appointed the chairperson of national advisory council by the UPA 1 government. After the issue of office of profit was raised, she quit as an MP and sought re-election. The prevention of disqualification act was amended in 2006 to add the position of NAC chairperson to the list of exempted posts.
- The then Speaker Somnath Chatterjee, too, faced disqualification but was saved by amending the act.
- Samajwadi Party MP Jaya Bachachan lost her seat for holding the post of chairperson of the Uttar Pradesh Film Development Federation.
The act was again amended in 2013 to save the chairpersons of the national commission for the scheduled castes and national commission for the scheduled tribes from disqualification.
- Astley v new Tivoli limited
Article 104 of the articles of the company provided that the office of a director shall be vacated, if he accepts or holds any other office or place of profit under the company (except that of managing director). The plaintiff, a director of the defendant company, was by resolution of the board of directors appointed one of the trustees for the holders of debentures issued by the company, had vacated his office by reason of the aforesaid article. It was held that the trusteeship was a place of profit under the company though there may be difficulty in saying that it was an office under the company. The trusteeship (who was nominated and paid by the company) was held to be the holder of a “place of profit under the company” and therefore incapable of acting as a director under article 104.
- Ravanna subanna v kaggeerappa
The supreme court held that the plain meaning of the expression (office of profit) seems to be an office must be held (under government) to which any pay, salary, emoluments or allowances is attached. The word “profit” connotes the idea of pecuniary gain, if there is really an again. Its quantum or amount would not be material, but the amount of money receivable by a person in connection with the office he holds may be material in deciding whether the office really carries any profit. The fee of Rs. 6 given for the out-of-pocket expenses which a person has to incur for attending the meetings of a committee was held to be remuneration for office or place of profit.
The office of lambardar was held to not an office of profit as it was not a post held under the government and no salary or other remunerations was payable to him although he was being paid honorarium of Rs. 900 per month to meet his out of pocket expenses incurred in carrying out his duties.
- Dale v IRC
The testator by his will, under which the taxpayers was one of the five trustees, directed that the taxpayers should receive an annuity of 1,000 pound, a year free of income tax and surtax so long as he should continue to act as trustee. The duties of the trusteeship were onerous and the taxpayer had been chosen for his special qualification. He was assessed to the special contribution under the finance act, 1948, section47 (1), on the basis that his income as trustee was investment and not earned income. It was held that a trusteeship was an office if a testator attached remuneration to it, it was an office of profit.
Lord Normand said that the question is whether the annual sum receivable by the appellant under the testator’s will is income arising in respect of remuneration from an office of profit. The first point to consider is whether trusteeship is within the ordinary sense of the word “office”, thus office is an apt word to describe a trustee’s position, or any position in which services are due by the holder and in which the holder has no employer. A remunerated office is an office of profit. Equally clearly the income received by the appellant because he continues to act as a trustee is income arising in respect of remuneration from his office of trustee.
- Ashok Kumar Bhattacharya vs Ajoy Biswas (AIR 1985 SC 211)
The Supreme Court held that to determine whether a person holds an office under the Government, each case must be measured and judged in the light of the relevant provisions and sections.
- A R Sundarasanam v Madras PHJS Nidhi Limited (1985) Comp Cas 776 (Mad)
The Madras High Court in held that the office or place of profit held by a relative of a director is attracted by this section only if the director himself holds an office or place of profit. The words “such director’ in subsection (1) (b) of section 314, referred to the director already holding the office of profit and not to any other director. This lacuna in law is proposed to be plugged by the Companies (Amendment) Bill, 2003 as the article ‘a’ has substituted the words ‘such’ before the word director.
d. A firm in which such director or relative is a partner
e. Any private company of which a director is a director or member
f. Any director or manager of such a private company
A director receiving only sitting fee for attending meetings is not holding an ‘office or Place of profit’
- Gobind Pritamdas Malkani v Amarendra nath Sircar, (1980) 50 Com Cases 219, 233 (Cal)
The object of section 314 is to prohibit a director and any person connected with him from holding any office or Place of Profit of such sum as may be prescribed unless the company approves it by m
- Ravinder Kumar Sangal v Auto lamps ltd. (1984)55 Comp Cas 742(Del)
The provisions of this section 314 will be attracted if any of the entities referred to in (b) to (f) receive monthly remuneration of Rs 10,000 or more but less than Rs 50,000 per month. The Delhi High Court held that the word “monthly” necessarily connotes anything taking place once a month, relating to a month, payable every month, based on a month, having a duration of one month, occurring, appearing or being done or acted upon every month or once a month. No other implication has been stressed. Considered in this context, the payment of bonus, reimbursement in lieu of privilege leave not availed, employer’s contribution to provident fund, reimbursement of medical expenses, etc., cannot be treated as events of monthly regularity of occurrence. They are dependent upon certain events happening during the course of the entire year, and as and when they take place.
[TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY
PARTII , SECTION 3, SUB-SECTION (i)]
GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAAIRS
New Delhi, 2nd May, 2011
G.S.R. – In exercise of the powers conferred by clause (b) of sub section (1) of Section 642, read with sub-section (1B) of Section 314 of the Companies Act, 1956, the Central Government hereby makes the following Rules in super session of the earlier Notification No. GSR 89(E) dated 05.02.2003 namely:-
- (1) SHORT TITLE AND COMMENCEMENT: (1) These rules may be called Director’s Relative (Office or Place of Profit) Rules, 2011.
(2) They shall come into force on the date of their publication in the Official Gazette.
- APPLICABILITY: These rules shall apply to all companies registered under the Companies Act, 1956 except as provided in these rules.
- APPROVAL OF THE CENTRAL GOVERNMENT IN CASE OF APPOINTMENT OF RELATIVES, etc. OF DIRECTORS: 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 of firm or relative of a director or manager; or
(b) Firm in which such director; or manager of 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, which carries a monthly remuneration exceeding, Rs. 2,50,000/- p.m,
(d) An individual who is a relative of a director; or a manger and is appointed as an Advisor or Consultant and paid remuneration including commission on periodical basis.
- SELECTION OF RELATIVES OF DIRECTORS AND DIRECTORS TO HOLD A PLACE OF OFFICE/PROFIT:-
(a) The selection and appointment of a relative of a director for holding office or place of profit in the company with a salary exceeding Rs. 2,50,000/- per month shall be approved by adopting the same procedure applicable to non-relatives and approved by a Selection Committee.
EXPLANATION: For the purpose of the sub-rule, in the case of listed public companies, the expression “Selection Committee” means a committee, consisting at least three members, the majority of which shall be independent directors and an outside Expert. Provided that in case of unlisted companies, independent directors are not necessary but outside experts should be there in the Selection Committee. Provided further that in the case of private companies, Selection Committee is not necessary.
- PROCEDURE FOR EXAMINATION OF APPLICATION : The application under rule 3 shall be examined with respect to the following, in addition to all other requirements under the Companies Act, 1956 :-
(a) In the case of individual appointee, an undertaking from him that he/she will be in the exclusive employment of the company and will not hold a place of profit in any other company.
(b) The monetary value of all allowances and perquisites and of total remuneration package (monthly/annually) proposed to be paid to the appointee and details of the services that will be rendered by him to the company.
(c) Details of shareholding pattern particularly the shareholding of the directors along with his/her/their relatives, the public holding, institutional holding (each institution separately) and the quantum of dividend paid by the company during the last three preceeding financial years.
(d) Details of the educational qualification/experience, pay scale, allowances and other benefits of similarly placed executives.
(e) In case of the appointment of a relative, an undertaking from the Director/Company Secretary of the company that the similarly placed employees are getting the comparable salary.
(f) List and particulars of the employees who are in receipt of remuneration of Rs 2,50,000/- or more per month.
(g) 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 all of them altogether as a percentage of profit as calculated for the purpose of Section 198 of the Companies Act, 1956.
Joint Secretary to the Government of India