Transparency and accountability are two major pillars of good corporate governance. It is important for those in management and decision-making powers to be vigilant about their fiduciary responsibility, by making appropriate disclosure and not taking undue advantage of their role.
Companies Act, 2013 underlines the importance of ensuring proper disclosures from directors and actions in case conflict of interest arises. This is with an objective to ensure that the duty of director is not jeopardize due to his/her ‘interest’ or any unfair advantage is exercised, whether intentional or unintentional.
Disclosure of interest by directors.
Section 184 places a responsibility of disclosure on the Directors of the Board.
- Sub section 1: Disclosure of Concern/Interest in any company/companies/Body Corporate/Firm/Association of Individuals at following events (Form MBP-1):
- First Board Meeting after appointment
- Immediate Board Meeting after any change in existing disclosure
- First Board Meeting of each Financial Year
Preservation: To be kept at registered office for 8 years from the end of relevant financial year
Custody of: Company Secretary or any other person authorized by the Board for the purpose.
Takeaway:
Interest and Concern have not been defined in the law and hence should be construed broadly.
In the case of Mukkattukara Catholic Co. Ltd. V M.V. Thomas [1995], it was stated that the word ‘interest’ in this reference means personal interest and not official interest. But it is not limited to financial interest only and may include interest arising out of fiduciary duties or closeness of relationship. In other words, the interest should be an ‘interest’ conflicting with duty as director.
As the purpose of the disclosure is to ensure that the directors are not placed in apposition where they have to make a choice between their duty and their personal interest, it can be noted that all kinds of interest/concern, indirect or direct, should be intimated and recorded.
Further, section 184 read with Rule 9 of Companies (Meetings of Board and its Powers) Rules, 2014 states that shareholding interest shall also be disclosed.
- Sub section 2: Disclosure of direct or indirect concern/Interest in contract, arrangement, proposed contract or proposed arrangement with-
– Body Corporate where such director is Promoter, Manager, CEO, or holds more than 2% of shareholding (individually or in association with any other director)
-Firm/Entity where such director is a Director, Partner, Owner or member
> When to disclose?
At the meeting of the Board in which the contract or arrangement is discussed
> What is expected?
Such director(s) shall not participate in such meeting.
> Repercussions of non-disclosure or participation in discussion:
Contract/Arrangement shall be voidable at the option of the company.
> Director becomes concerned/ interested after the company enters the contract/arrangement:
Director shall disclose his interest forthwith or first meeting held after he becomes concerned / interested
In case of private companies/ Specified IFSC Public Company, an interested director can participate in BM after disclosing his interest.
In case of Section 8 company – Section 184 (2) shall apply, only if the transaction with reference to section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees
The office of a director shall become vacant in case he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184.
Takeaway:
- The subsection highlights the probability of influence of participation of a director having interest in contract or an arrangement. However, all kinds of contract or an arrangement cannot be barred from subjected director’s participation. Hence, while sub section 1 of the section is a general disclosure of all kinds of interest/ concern, sub section 2 specifies specific disclosure to be made where the criterion of disclosure is met. It further bestows the responsibility of non-participation.
- All interest, even if not direct, conflicts with the director’s duties towards the company shall be taken into account. Thus, interest of relatives shall also be considered.
- The parties to contract, arrangement, proposed contract or proposed arrangement wherein the directors’ may have interest will be by default covered in the disclosure under section 184(1) of the subjected director.
- The section also places a duty on the company that all the proposed contracts/arrangements shall be put-forth before the Board of Directors even if there is no specific regulation mandating the same. This is to ensure that the directors get a chance to intimate their interests.
Section 189: Register of Contracts or Arrangements in Which Directors are Interested (Form MBP-4)
Such register shall include:
1. company or companies or bodies corporate, firms or other association of individuals, in which any director has any concern or interest, as mentioned under sub-section (1) of section 184 (Excluding company or companies or bodies corporate in which a director himself together with any other director holds two percent. or less of the paid-up share capital)
2. contracts or arrangements with a body corporate or firm or other entity as mentioned under sub-section (2) of section 184, in which any director is, directly or indirectly, concerned or interested
3. contracts or arrangements with a related party with respect to transactions to which section 188 applies.
Not Applicable to:
- for the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed five lakh rupees in the aggregate in any year; or
- by a banking company for the collection of bills in the ordinary course of its business.
Disclosure of information as per section 184(1) which are required to be entered in the register, shall be made within 30 days of appointment/relinquishment of office by every director/KMP.
Authentication by: Company Secretary of the company or by any other person authorised by the Board for the purpose.
Preservation: Permanently at Registered Office Custodian: Company secretary of the company or any other person authorised by the Board for the purpose.
Inspection by members:
- at Registered office during business hours
- at the commencement of every annual general meeting of the company and shall remain open and accessible during the continuance of the meeting to any person having the right to attend the meeting.
Extract to members: within seven days from the date of request (Fees: as per AOA, not exceeding ₹10/per page)
Takeaway:
- The section specifies recording the information of KMP also. Hence, disclosure is required to be taken from KMPs as well.
- Disclosure is expected at the time of appointment as well as relinquishment of office.
- Though Section 184(1) of the Act prescribes a timeline of disclosure till the first Board Meeting after the appointment, this section requires the disclosure to be made within 30 days of appointment to update the register. Thus, the earlier date shall be complied. Practically, the board meeting in which the director is appointed is taken as his/her first board meeting as director and MBP-1 is to be placed there itself.
The expectations of the disclosure in the section are not to bar the directors from having any interest/concern in entities or contract/arrangement but to ensure that such interest is recorded (Form MBP-1) and appropriate measures are upheld for restraining abuse of duty.
To ensure that the law is followed in letter and spirit, following measures may be adopted:
- Education amongst directors: The directors shall be informed about the necessary disclosures expected from them, their relevance and importance.
- While appointment and at set frequency, the companies shall check and compare the disclosure with the information available in public about the directors to ensure completeness of disclosure. MCA Public search, Quarterly Corporate Governance Report (filed by listed entities), Websites of other companies, etc can be referred.
- Periodic confirmations from the directors can be sought.
- Updating records and registers immediately to avoid misses and delays.
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