Section 188 of the Companies Act, 2013, plays a crucial role in regulating related party transactions to ensure transparency and prevent conflicts of interest within corporate governance. However, the practical application of its provisions often raises complex questions for corporate directors and stakeholders. This article delves into some of the contentious issues under Section 188, providing clarity and insights into its implications.

We will explore whether the sitting fee received by a director falls under the scope of an office or place of profit, analyse the treatment of dividends received by directors or related parties and examine whether a lease and license agreement constitute property leasing under the Act. Additionally, we will discuss whether providing a corporate guarantee by a holding company for a subsidiary's loan triggers the provisions of Section 188 and consider if the sale or purchase of shares with related parties should be treated as the sale or purchase of goods.

1. Should the sale or purchase of shares with related parties be considered as the sale or purchase of goods under Section 188(1)(a)?

   To understand whether the sale or purchase of shares with related parties is to be considered as the sale or purchase of goods under section 188(1)(a), we need to understand the definition of goods provided under Section 2(7) of the Sale of Goods Act, 1930 which are as follows:
   
   'Goods means every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;'
   
   It means, shares are included in the definition of goods. Apart from this, in general, shares are often treated as a type of property or asset. Shares can be bought, sold, and traded similarly to goods. This perspective supports the idea that shares fall under the broader definition of goods, especially in contexts like trading and commerce. Once shares are allotted to a shareholder, they become the property of that shareholder. This means the shares can be bought, sold, transferred, or otherwise dealt with similarly to other forms of property or goods.
   
   Therefore, shares are considered goods, and the sale or purchase of shares with related parties can be regarded as the sale or purchase of goods under Section 188(1)(a) of the Companies Act, 2013.
    

2. Leasing of any property is covered under Section 188(1)(c). Does a leave and licence agreement fall under the category of property leasing?

   The basis of the leave and licence agreement is found in section 52 of the Indian Easements Act, 1882 which are as follows:
   Where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful and such right does not amount to an easement or an interest in the property, the right is called a license.
   
   A Leave and Licence agreement is not treated as equivalent to the leasing of property. It is the nature, intent, and rights granted to the persons concerned that distinguish the two notions from one another.
   A few differences to help us understand the concept better are as below:
   • Ownership and transfer of interest
     • Lease: Gives the lessee a share in the property. For a predetermined amount of time, the lessee is granted the sole right to use and possess the property.
     • Leave and Licence: No interest in the property is transferred by the leave and licence. The licensor retains ownership and control of the property, and the licensee simply receives the right to use it.
        
   • Legal rights
     • Lease: Creates a right in rem (against the property). The lessor is not exempt from the lessee's ability to assert their rights.
     • Leave and Licence: Creates a right in personam (against the person). Only the licensor can be sued by the licensee to enforce their rights.
        
   • Duration:
     • Lease: Usually lasting a longer time and sometimes includes more intricate terms for ending the agreement.
     • Leave and Licence: Generally, for a shorter duration and more easily cancelled, frequently with notice.
   Because of the above-mentioned reasons, a leave and license agreement is not equivalent to leasing of property. While a lease gives the lessee a more solid and secure interest in the property, a leave and licence agreement is intended to be a more flexible, revocable arrangement without giving the user a long-term interest in the property. Hence, leave and licence agreements are not covered under Section 188(1)(c).
    

3. Does providing a corporate guarantee by a holding company to a bank for a loan taken by its subsidiary company be considered as rendering of services under Section 188(1)(d)?

   Giving a guarantee is merely an assurance to the bank that the holding company will fulfil the loan obligations if the subsidiary fails to do so. This does not directly fall into the category of services mentioned in Section 188(1)(d). No act of service is being done by the holding company; they are merely acting in precaution to fulfil the obligation if something goes wrong. Therefore, a corporate guarantee provided by a holding company to a bank for a loan taken by its subsidiary is generally seen as a form of financial assistance rather than a service provided by holding company.
   
   For a corporate guarantee to be considered under Section 188 and as a service, it must be within the ordinary course of business. If the business of a company includes providing guarantees, then a guarantee provided to a subsidiary company will be termed as a service provided by the holding company and will fall under the ambit of a related party transaction.
   
   Hence, providing a corporate guarantee by a holding company, apart from its ordinary course of business, to a bank for a loan taken by its subsidiary company typically does not trigger the provisions of Section 188 of the Companies Act, 2013.
    

4. Does the sitting fee received by a director fall under the scope of an office or place of profit under Section 188(1)(f)?

   This query is based on the applicability of certain provisions of Explanation provided under Section 188(1) of the Companies Act, 2013 which are as follows:
   
   The expression "office or place of profit" means any office or place:
   
   1. 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;
   Sitting fees are payments made to directors for attending board meetings or committee meetings. According to Section 197(5) of the Companies Act, 2013, read with Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, sitting fees are considered part of the permissible remuneration for directors. A company may pay a sitting fee to a director for attending meetings, as decided by the Board of Directors, which shall not exceed Rs. 1 lakh per meeting of the Board or any committee thereof.
   
   Hence, sitting fees do not qualify as an office or place of profit under Section 188(1)(f) since such fee are part of a director's remuneration. However, if a director receives sitting fees in excess of the prescribed limit outlined in Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, then such sitting fees shall be considered as an office or place of profit and must comply with the requirements of Section 188.
    

5. Do dividends received by a director or any other related party fall within the scope of an office or place of profit under Section 188(1)(f)?

   This query is again based on the applicability of certain provisions of Explanation provided under Section 188(1) of the Companies Act, 2013 which are as follows:
   The expression office or place of profit means any office or place:
   
   1. 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;
   2. 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 term "office or place of profit" generally refers to any office or position held by a director or a related party which provides them with any benefit, such as a salary, fee, commission, or any other monetary advantage over and above the normal compensation to which they are entitled as a director.

However, dividends are investment returns distributed to shareholders from the company's earnings and are not considered remuneration. Dividends are allocated based on shareholding, not on the shareholder's office or position in the company. Therefore, dividends do not fall within the scope of an "office or place of profit."

Conclusion
Section 188 of the Companies Act, 2013, serves as a critical regulatory framework to ensure transparency and prevent conflicts of interest in related party transactions within corporate governance. The practical application of its provisions, however, often presents challenges that require careful consideration and interpretation.

This article has explored several contentious issues under Section 188, shedding light on their implications. We have established that the sale or purchase of shares with related parties can be regarded as the sale or purchase of goods, falling under the purview of Section 188(1)(a). Additionally, we clarified that a leave and license agreement does not constitute property leasing under Section 188(1)(c) due to the fundamental differences between leasing and licensing agreements.

Furthermore, it has been determined that providing a corporate guarantee by a holding company for a subsidiary's loan does not typically constitute the rendering of services under Section 188(1)(d) unless it falls within the ordinary course of the holding company's business. Regarding directors' remuneration, sitting fees, within the prescribed limits, do not fall under the scope of an office or place of profit under Section 188(1)(f). However, exceeding these limits necessitates compliance with Section 188. AND dividends received by directors or related parties are not considered remuneration and thus do not fall within the scope of an office or place of profit.

In conclusion, navigating the provisions of Section 188 requires a nuanced understanding of both the legal definitions and the practical context of transactions. Corporate directors and stakeholders must remain vigilant and well-informed to ensure compliance and uphold the principles of transparency and fairness in their operations. This approach not only mitigates risks but also reinforces the integrity and trust essential for robust corporate governance.

Written By: Ishita Arora
Email- [email protected]

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