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CENTRAL GOVT APPROVAL REQUIRED OR NOT

MURAGAIAH MELANGI (ACCOUNTS MANAGER) (51 Points)

30 October 2009

Hi all,

We have one queiry, please give us your kind opinions:

We are a Pvt. Ltd. company, our Issued and paid up Capital is Rs.1.6 crores, we are doing trading and service with our other sister concern companies / firms, which is less than 1 crore Capital. This is our Regular Business / Trading, the purchase / sales / services are prevailing at Market Prices only, it is mentioned in our Audit Reports also, also our credit period is same like as other customers / suppliers. We have entered in the Agreements also.

Now my queiry is whether Sec.297 is applicable in the above conditions, Whether the Central Govt Approval is Required or not?

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15 Replies

Amol Gopal Kabra (CA,CS,DISA) (Practicing CA) (8539 Points)
Replied 30 October 2009

Subsection 2(a) of Section 297 indicates that the nothing contained in Subsection (1)(a) shall effect the purchase or sale of goods or materials to the persons and entities mentioned if the same is for cash at prevailing market price.

So, the the transaction is in cash and at the prevailing martket price, then previous approval of Central Govt. is not required. As you mentioned that it is on a credit basis, you shall be required to get a previous approval of Central Govt,. before entering into such contract. Because no where there is mentioned that this Section 297 shall not apply to a private company.

If any body has any different view or any judgement on the same, please share and correct me if i m wrong.

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CA.SKR (CA; CS-Final (One Group); DISA (ICAI); Insolvency Professional) (442 Points)
Replied 31 October 2009

Hi, I do not agree with the opinion of Mr. Amol Kabra. The relevant extract of Section – 297 is provided below for your ready reference. Please read it with the underlined and bold portion for better understanding.

“Section 297

(1) Except with the consent of the Board of directors of a company, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm, or a private company of which the director is a member or director, shall not enter into any contract with the company -

(a) for the sale, purchase or supply of any goods, materials or services; or

(b) after the commencement of this Act, for underwriting the subscripttion of any shares in, or debentures of, the company :

Provided that in the case of the company having a paid-up share capital of not less than rupees one crore, no such contract shall be entered into except with the previous approval of the Central Government.

(2) Nothing contained in clause (a) of sub-section (1) shall affect -

(a) the purchase of goods and materials from the company, or the sale of goods, and materials to the company, by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices; or

(b) any contract or contracts between the company on one side and any such director, relative, firm, partner of private company on the other for sale, purchase or supply of any goods, materials and services in which either the company or the director, relative, firm, partner or private company, as the case may be, regularly trades or does business :

Provided that such contract or contracts do not relate to goods and materials the value of which, or services the cost of which, exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract or contracts; or”

My Opinion: -

In your case the paid up capital of the Pvt. Limited company is Rs. 1.60 crores (more than Rs. 1 crore as provided in the first Proviso) and the value of contract is also more than Rs. 5,000/- (as provided in the second Proviso), hence in my opinion, prior approval of Central Govt. (thru. Regional Director) is very much required. It does not make any difference even if your company regularly trade in those goods / services and the contract is for cash at prevailing market prices.

If value of contract is upto Rs.5000/- in a year, no such CG approval is required.

Thanks,

CA. Satendar Kumar

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Rasesh (CS CWA MBA (Fin) B.Com LL.B (Spl)) (6501 Points)
Replied 16 January 2010

Agree with the views of Mr. Satendar Kumar

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CourseCart.in (Mentor at SHAYVIDZ Academy) (3756 Points)
Replied 22 January 2010

Hello All,

I m also agree wid all the learned members..

I want to add 1 more question in this forum..

whether seperate approval is required for each n every transaction? or it may be partywise ? e.g. if there are 200 purchase transactions then 200 seperate approval is reqd?

The same question is for Sec 299 too.. In case of pvt company hvng paid up capital less than 1 crore, if company purchases goods regularly from directors, is it necessary to disclose his nature of interest in EACH TRANSACTION??

Adarsh

2 Like

Ajay Mishra (Company Secretary) (74337 Points)
Replied 22 January 2010

Mr. Muragaiah

Section 297 does not apply to:

1. Giving or taking loans.

2.Contract in respect of immovable property (as it is not 'good' ).{Letter No. 9/4190-CL-X dated 27.03.1990}.

3.Contract between two public Companies.

4.Contract of employment of director or managing or whole time director.[ Circuler No.8/11/75-CL-V dated 27.03.1975]

5.Contract for employment of relative of director.

6.Contract entered into by the company with the dealer on principle to principle basis. [Circuler No. FM 8/297/56-PR dated 02-08-1956]

7. Professional services of the nature given by firms of solicitors and advocates, etc.[circuler No. 8/11/75-CL-V dated 05.06.1975]

8.hiring of office premises on rent as the transaction is in immovable property. [Department Clarification dated 10-09-1990]

Regards

Ajay

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CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)
Replied 22 January 2010

Dear Muragaiah,

Section 297 is applicable in your case.Approval is required for contract to contract basis and not on transaction basis and the interest is also required to be disclosed to the board before entering into the contract.

2 Like

CourseCart.in (Mentor at SHAYVIDZ Academy) (3756 Points)
Replied 25 January 2010

Originally posted by : Ankur Srivastava
	Dear Muragaiah, Section 297 is applicable in your case.Approval is required for contract to contract basis and not on transaction basis and the interest is also required to be disclosed to the board before entering into the contract.

Dear Ankur,

U mean to say that if same parties are involved in morethan 1 transaction on REGULAR basis then this will constitute a SINGLE CONTRACT???? n only 1 approval is required???? (point is that if they do transactions on regular basis then the amount involved in forthcoming transactions cannot be defined, then wat will be the procedure?)...

Adarsh

2 Like

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)
Replied 09 February 2010

Dear Adarsh,

In case a series of transactions are taking place under 1 contract or to complete 1 contract. Only contract is required to be approved in the BM and not the transaction.

CA.SKR (CA; CS-Final (One Group); DISA (ICAI); Insolvency Professional) (442 Points)
Replied 09 February 2010

Originally posted by : Ankur Srivastava
	Dear Adarsh, In case a series of transactions are taking place under 1 contract or to complete 1 contract. Only contract is required to be approved in the BM and not the transaction.

Agree with Ankur but still prior approval of Central Govt. (thru. Regional Director) is very much required because paid up capital of the Pvt. Limited company is Rs. 1.60 crores (more than Rs. 1 crore) and the value of contract is also more than Rs. 5,000/-. If value of contract is upto Rs.5,000/- in a year, no such CG approval is required.

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)
Replied 09 February 2010

Dear Satender,

I already agreed, but in last reply i was just talking about the Approval of Contract.

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CA.SKR (CA; CS-Final (One Group); DISA (ICAI); Insolvency Professional) (442 Points)
Replied 09 February 2010

Dear Ankur,

I just added provisions of prior approval of CG, so that the readers get complete picture. I knew that you are fully aware of all these provisions.

Thanks

Pavan Jain S (Chartered Accountant) (1575 Points)
Replied 10 February 2010

I have a reservation as regards the approval of central govt in case of transactions in cash at prevailing market prices. The proviso mentioned in sub sec (2) acts as a rider to clause (b) meaning thereby that in case the company regularly trades in such goods and the value exceeds Rs. 5,000, approval of BM and CG is required. As regards the transaction which are of the nature mentioned in (a) of sub sec (2), the proviso do not apply. This opinion is based on the premise that CG approval is not required when the transactions are at cash [no risk of bad debt - siphoning off of funds] and at prevailing market prices [no transfer pricing].

In my view, CG approval is not required even if the value of contract exceeds Rs. 5,000 provided clause (a) of sub sec (2) of section 297 is satisfied.

1 Like

CourseCart.in (Mentor at SHAYVIDZ Academy) (3756 Points)
Replied 26 February 2010

Originally posted by : Ankur Srivastava
	Dear Adarsh, In case a series of transactions are taking place under 1 contract or to complete 1 contract. Only contract is required to be approved in the BM and not the transaction.

Dear Ankur Ji...

I think borad resolution for approval of such contact will be like this...

“RESOLVED THAT pursuant to the provisions of section 297 read with section 301 of the Companies Act, 1956 the approval of the Board of Directors of the Company be and is hereby accorded for the contracts in which the directors of the company are interested and the register of contracts described the following contracts as placed before the Board be and is hereby ratified and approved.”