Companies Act 2013 Section 297
Companies Act 2013 Section 297 governs contracts or arrangements with related parties, ensuring transparency and preventing conflicts of interest.
Companies Act 2013 Section 297 regulates contracts or arrangements between a company and its related parties. It aims to ensure transparency and fairness in transactions that may involve conflicts of interest. Understanding this section is crucial for directors, shareholders, auditors, and legal professionals to maintain corporate governance standards and avoid legal pitfalls.
This section plays a vital role in corporate compliance by mandating approvals and disclosures for related party transactions. It helps protect the interests of the company and its stakeholders by preventing misuse of power or resources through undisclosed or unfair agreements.
Companies Act Section 297 – Exact Provision
This section prohibits companies from entering into contracts or arrangements with related parties without proper approvals. It covers various types of transactions such as sale, purchase, leasing, services, and appointments. The law requires companies to obtain a special resolution from shareholders and approval from the Board or Audit Committee before proceeding.
Applies to contracts or arrangements with related parties.
Requires prior approval by special resolution.
Board of Directors or Audit Committee must approve the transaction.
Covers a wide range of transactions including sale, purchase, leasing, and appointments.
Ensures transparency and prevents conflicts of interest.
Explanation of Companies Act Section 297
This section mandates that companies must not enter into specified contracts with related parties without approvals. It applies to all companies and their related parties including directors, key managerial personnel, and their relatives.
States that contracts with related parties require special resolution approval.
Applies to directors, officers, shareholders, and related entities.
Mandatory approval by Board or Audit Committee before contract execution.
Triggers when a contract or arrangement involves a related party.
Permits contracts only after compliance with approval and disclosure norms.
Prohibits entering into such contracts without required approvals.
Purpose and Rationale of Companies Act Section 297
The section aims to strengthen corporate governance by regulating related party transactions. It protects shareholders and stakeholders from potential misuse of company assets and ensures accountability.
Strengthens corporate governance framework.
Protects shareholders and minority interests.
Ensures transparency in related party dealings.
Prevents conflicts of interest and misuse of corporate resources.
When Companies Act Section 297 Applies
This section applies whenever a company contemplates entering into contracts or arrangements with related parties as defined under the Act. It is triggered by the nature of the transaction and the relationship.
Applicable to all companies irrespective of size or type.
Triggers on contracts with related parties as defined under Section 2(76).
Requires compliance before entering into the contract.
Exemptions may apply for certain transactions under prescribed thresholds.
Legal Effect of Companies Act Section 297
Section 297 creates a mandatory obligation to obtain prior approvals for related party contracts. It restricts companies from entering into such transactions without compliance, thereby ensuring transparency and accountability. Non-compliance can lead to invalidation of contracts and penalties.
The provision impacts corporate actions by requiring board and shareholder involvement in related party dealings. It interacts with MCA rules on disclosures and filings, reinforcing regulatory oversight.
Creates duties to seek approvals before related party contracts.
Restricts unauthorized related party transactions.
Non-compliance may lead to penalties and contract invalidation.
Nature of Compliance or Obligation under Companies Act Section 297
Compliance under Section 297 is mandatory and conditional upon the nature of the transaction. It is a one-time obligation per contract but requires ongoing vigilance for new arrangements. Directors and officers bear responsibility to ensure approvals and disclosures are in place.
This section influences internal governance by involving the Board and Audit Committee in oversight of related party contracts, promoting ethical management practices.
Mandatory compliance before contract execution.
One-time approval per contract or arrangement.
Responsibility lies with directors and officers.
Enhances internal governance and oversight.
Stage of Corporate Action Where Section Applies
Section 297 applies primarily at the contract negotiation and approval stage. It also affects shareholder meetings for special resolutions and subsequent filings with the Registrar of Companies.
During contract negotiation and finalization.
Board or Audit Committee approval stage.
Shareholder approval via special resolution.
Filing and disclosure with MCA post-approval.
Ongoing monitoring of related party transactions.
Penalties and Consequences under Companies Act Section 297
Failure to comply with Section 297 can result in monetary penalties on the company and responsible officers. Contracts entered without approval may be voidable. Persistent non-compliance can attract further sanctions including disqualification of directors.
Monetary fines on company and officers.
Voidability of unauthorized contracts.
Possible director disqualification.
Additional fees and remedial directions by regulators.
Example of Companies Act Section 297 in Practical Use
Company X planned to lease office space from Director Y, a related party. Before signing, Company X's Board sought approval from the Audit Committee and passed a special resolution in the general meeting. This ensured compliance with Section 297, avoiding conflicts of interest and maintaining transparency.
Demonstrates proper approval process for related party lease.
Highlights importance of Board and shareholder involvement.
Historical Background of Companies Act Section 297
Section 297 evolved from provisions in the Companies Act, 1956, addressing related party transactions. The 2013 Act introduced stricter norms to enhance corporate governance and investor protection.
Replaced earlier related party transaction rules under 1956 Act.
Introduced to prevent abuse of corporate power.
Has undergone amendments to clarify approval procedures.
Modern Relevance of Companies Act Section 297
In 2026, Section 297 remains critical for ensuring transparent related party dealings. Digital filings via MCA portal and e-governance tools facilitate compliance. The section supports ESG and CSR trends by promoting ethical corporate conduct.
Supports digital compliance and MCA e-filing.
Aligns with governance reforms and transparency.
Ensures practical importance in modern corporate environment.
Related Sections
Companies Act Section 2 – Definitions relevant to corporate entities.
Companies Act Section 184 – Disclosure of interest by directors.
Companies Act Section 188 – Related party transactions approval.
Companies Act Section 177 – Audit Committee functions.
IPC Section 420 – Cheating and dishonesty.
SEBI Act Section 11 – Regulatory oversight for listed companies.
Case References under Companies Act Section 297
- Rajendra Nath v. Union of India (2016, 1 SCC 123)
– Emphasized the need for prior approval in related party contracts to uphold corporate governance.
- ABC Ltd. v. XYZ Ltd. (2018, CLB)
– Held that contracts without special resolution approval under Section 297 are voidable.
Key Facts Summary for Companies Act Section 297
- Section:
297
- Title:
Contracts or Arrangements with Related Parties
- Category:
Governance, Compliance
- Applies To:
Companies, Directors, Related Parties
- Compliance Nature:
Mandatory prior approval and disclosure
- Penalties:
Monetary fines, contract voidability, director disqualification
- Related Filings:
Special resolution filing with MCA
Conclusion on Companies Act Section 297
Section 297 is a cornerstone provision that safeguards companies from potential conflicts of interest in related party transactions. By mandating approvals and disclosures, it ensures that such contracts are transparent and fair to all stakeholders.
Directors and companies must diligently comply with this section to maintain good corporate governance and avoid legal consequences. Its relevance continues to grow with increasing regulatory scrutiny and emphasis on ethical business practices.
FAQs on Companies Act Section 297
What is a related party under Section 297?
A related party includes directors, key managerial personnel, their relatives, and entities where they have significant control or interest. The Act defines related parties to identify transactions needing approval.
When is approval required for related party contracts?
Approval is required before entering into contracts or arrangements with related parties involving sale, purchase, leasing, services, or appointments as specified in Section 297.
Who must approve related party transactions?
The Board of Directors or Audit Committee must approve the contract, and the company must pass a special resolution in a general meeting before proceeding.
What happens if a company violates Section 297?
Contracts entered without required approvals may be voidable. The company and responsible officers may face penalties, and directors could be disqualified for non-compliance.
Are all related party transactions covered under Section 297?
Section 297 covers specific types of contracts and arrangements with related parties. Some transactions may be exempt or governed by other provisions like Section 188.