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MCA starts enforcement for Register of Contracts or Arrangements (MBP-4) miss-outs. - MMJC
1. Background:
Section 188 of the Companies Act 2013 (‘Act’) converses about contracts or arrangements for related party transactions (‘RPTs’). In simple terms RPT is nothing but transactions undertaken between two or more related parties’ as per Companies Act. RPTs by nature are not illegal; however, such transactions have an element of conflict of interest and hence they are regulated under the Act. Section 184 is another section of the Act which deals disclosure of interest of directors and contracts or arrangements with parties in which directors may have direct or indirect interest.
2. Register of Contracts or Arrangements:
As per Section 189 of the Act, the contracts or arrangements to which sections 188(1) or 184(2) are applicable are required to be recorded in the statutory register in form MBP-4 and entries are to be made in the register need to be authenticated by the directors at the next board meeting and needs to be kept open for inspection by shareholders at the annual general meeting.
The obligation to maintain the required documentary evidence and making the records available for inspection to board of directors and shareholders is company’s responsibility. Therefore, the onus is on the company and its officials to maintain appropriate and adequate documentation in this regard about price, terms of supply and such other details relating to the contracts or arrangements for related party transactions.
Let us now understand the impact of non-compliance of provisions relating to maintenance of statutory register relating to RPTs and non-maintenance of adequate records by the company for entering such transactions.
3. Some Precedents
- ROC Adjudication Order – Adani Power Limited
Recently on May 16, 2023, Registrar of Companies (‘ROC’) Ahmedabad passed an adjudication order in the matter of Adani Power limited (‘APL’). The Registrar of Companies ordered inquiry under Section 206(4) of the Act.
During the course of inquiry, the presenting officer pointed out that APL was in violation of Section 189 read with Section 188 of the Act. The financial statements of APL for the financial years pertaining to 2017-18, 2018-19 and 2019-20 showed that it entered various contracts with parties covered under section l84(2) and contracts with related parties for transactions covered under section 188 of the Companies Act 2013.
However, APL did not enter the details of said contracts in the register of contracts which is to be maintained in form MBP-4 under section 189 of the Companies Act 2013. Hence ROC alleged that APL and its directors have committed a default and are in violation of section 188 read with section 189 of the Act.
Besides, APL was unable to produce the required documents to the investigating officer as required under section 189 of the Act. Hence with no supportive documents being available on record and no entry was made in the register of contract as per section 189 of the Companies Act 2013, ROC had sent the show cause notice.
The Authorised Representative on behalf of APL argued that all the transactions disclosed in financial statements were at arm’s length basis and in the ordinary course of business and thus not covered under the provisions of Section 188 of the Act, hence no penalty should be levied and penal provisions under section 189(6) should not be levied on company.
APL argued that the contracts or arrangements entered with related parties were not covered under section 188(1), but it is not clear whether adequate justification was presented before ROC as to why these contracts or arrangements were in ordinary course of business and arm’s length transaction for APL? It is also not clear that whether it was presented before ROC about applicability of section 184(2) to these contracts or arrangements, as this is also a section which triggers the requirement to make entries in the Register of Contracts as per Section 189.
The Presenting Officer stated that as the company was unable to produce the required documents to the inspecting officials under section 189 of the Companies Act 2013 hence every director of the company was liable for penalty under the provisions of section 189(6) of the Companies Act 2013 for each financial year separately. Penalty was therefore imposed on APL’s Chairman and Director, Managing Director, and Whole-time director – Rs.75,000 each (25,000*3 years – each year when default was committed).
This adjudication order is a classic example of how important it is to record proper justification in agenda and minutes of audit committee as to why and on what basis, a particular transaction with a related party is in ordinary course of business and arm’s length transaction and in the best interest of the Company. This rationale, if recorded in audit committee meetings minutes, can be a good ground for not taking such contracts or arrangements to board of directors for their approval, as they would be getting exempted from section 188(1) in that case.
Further this Order also highlights the importance of maintaining the statutory register relating to contracts or arrangements with related parties / parties in which director may have direct / indirect interest, which gets covered under section 184(2), even though it may get exempted from section 188(1).
- ROC Adjudication Order – Teleone Consumer Products Private Limited
Going further let us discuss another adjudication order passed by ROC NCT of Delhi and Haryana on May 25,2023 in the matter of Teleone Consumer Products Private Limited (‘TCPPL’).
The Registrar of Companies, NCT of Delhi & Haryana (‘ROC’) received the report from the inspecting officials pertaining to TCPPL after the inspection of the books of accounts and inquiry conducted pursuant to Section 206(4) of the Companies Act 2013.
The presenting officer identified non-compliance with section 189 of the Companies Act 2013 in the inspection report. The same was TCPPL did not furnish a copy of the MBP-4 register required to be maintained pursuant to section 189 of the Companies Act 2013 relating to contracts and arrangements in which directors are interested. Upon examining the financial statements of the company for three financial years (i.e., 2015-16, 2016-17 and 2017-18) it was observed that TCPPL reported related party transactions in the financial statements. It was further found that such related party transactions were not bought to the desk of directors in board meeting and no mentioning with respect to the same was done in minutes book as well.
The regulator noted that the particulars of such related party transactions were required to be entered in the register for each of these financial years as per the provisions of the Companies Act 2013.
The ROC, after taking into consideration the above facts of the case concluded that the company and its directors violated the provisions of section 189 of the Companies Act 2013 for the financial years 2015-16, 2016-17 and 2017-18. The show cause notice was then issued to the directors and the company.
However pertinently unlike in case of APL, no reply was submitted by the company and directors to the show cause notice issued.
Since the company and its directors did not respond to the show cause notice issued to them, the ROC, then decided to pass an ex-parte order of adjudication based on the documents and evidence available. The penalty was imposed under Section 189(6) of the Act on the Company and two directors amounting to Rs.75,000 each (25000*3 years of default).
4. Conclusion:
From the above-mentioned precedents, it can be seen that conscious effort must be taken to maintain sufficient documentary evidence of RPT transactions and entering the details of contracts or arrangements with related parties / parties in which director may have direct / indirect interest in MBP-4 register and the compliance to be done post entering the details of contracts in MBP-4 register.
It can be witnessed that if the company fails to maintain appropriate, adequate records/ documentation, the directors will lose opportunity to represent adequately before the Regulator and end up paying penalties. This is where the Company Secretary needs to play a major role and ensure that all relevant documents are prepared and maintained in the most appropriate manner. This can go a long way in supporting directors to prove that the decisions taken by them were always taken in the best interest of the Company and thereby enabling them to prove that they definitely fulfilled all their duties as a director as prescribed under Section 166 of the Act!!!!
The article is written by
Hasti Vora – Research Associate – hastivora@mmjc.in
Ruchira Pawase – Research Associate – ruchirapawase@mmjc. in
The article is published in Taxmann