Disclosure of Interest by Director under Companies Act, 2013.
[Section 184 of Companies Act 2013 (New Act) and Rule 9 of Companies (Meeting of Board and its Power) Rules 2014].
Under Companies Act, 1956 (Old Act): In the Old Act Section 297 and 299 and 301 and Schedule VI and read with Schedule-1A (relative of directors) help in identifying the related parties, related party transactions and the restrictions imposed for such transactions.
Section 297 of the Old Act requires board’s approval (Regional Director’s approval in case paid up capital is Rs. 1 crore or more) for entering into any contracts/arrangement with parties declared therein. subject to certain exceptions (regularly traded materials /services).
Section 299 of the Old Act requires a director to disclose his interest directly or indirectly in any transaction/arrangement and it is wider in its scope but the exception u/s 299(6) i.e. limit of less than 2% holding dilutes its effect.
Section 301 of the Old Act requires the company to maintain a register in which disclosures of directors, contracts or arrangements entered into with the approval of board or shareholders.
Section 184 of the New Act corresponds to Section 299 and 305 of the Old Act.
Section 184 of the New Act relates to ‘Disclosure of interest by directors’. The object of Section 184 of the New Act is to bring to the notice of the directors the conflict of interest and duty of any of their colleagues on the Board. The provisions are founded on the principle that a director is precluded from dealing on behalf of the company with himself and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interest of those to whom he is bound by fiduciary duty to protect. Section 184 of the New Act does not prohibit such engagements or contracts or arrangements, but it requires disclosure by the directors of their interests therein to their co-directors.
As per Section 184(1) of the New Act – Every director shall
i. At the first meeting of the Board in which he participates as a director and
ii. at the first meeting of the Board in every financial year ; or
iii. whenever there is any change in the disclosures already made, then at the first meeting held after such change,
disclose his concern or interest (including shareholding) in
in such manner as may be prescribed.
Note: The manner of disclosure has been specified under Rule 9(1) of Companies (Meetings of Board and its Power) Rules, 2014. The same has to be given by the Director in Form MBP-1.
Further, as per Section 184(2) of the New Act – If every director of a company who is any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contact or arrangement entered into or to be entered into-
i. with a body corporate –
ii. with a firm or other entity in which, such director is a partner, owner or member, as the case may be.
shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.
Provided that where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board of Directors held after he becomes so concerned or interested.
Note: In case of Private Company Section 184(2) shall apply with exception that the interested director may participate in such meeting after disclosure of his interest [Notification No. GSR 464(E), dated 05.06.2015].
In case of Section 8 companies, Section 184(2) of the Act shall apply only if the transaction with reference to Section 188 on the basis of terms and conditions of the contract or arrangement exceeds Rs 1 lakh [MCA Notification No. G.S.R. 466(E) dated 5-6-2015].
In case of an unlisted public company which is licensed to operate by Reserve Bank of India (RBI) or Securities and Exchange Board of India (SEBI) or Insurance Regulatory and Development Authority (IRDA) from the International Financial Services Centre located in an approved multi-services Special Economic Zones (SEZ) set-up under the Special Economic Zones Act, 2005 subsection (2) of Section 184 of the Act shall apply with the exception that the interested director may participate in such meeting provided, the disclosure of his interest is made by the director concerned either prior or at the meeting. [Notification No. G.S.R. 8(E) dated 4-1-2017].
“Body Corporate” – “body corporate” or “corporation” includes a company incorporated outside India, but does not include—
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act),
which the Central Government may, by notification, specify in this behalf; [Section 2(11) of the New Act]
According to the above provisions of Section 184(1) and 184(2) of the New Act, there are two types of discourse by Director –
General Disclosure by Directors u/s 184(1) of the New Act: Disclosure u/s 184(1) is a general notice of disclosure given by every director about his concern or interest in any company (ies), bodies corporate, firms or other association of individuals, along with shareholding. This is required to be given on 3 occasions mentioned above.
Specific Disclosure by Directors u/s 184(2) of the New Act: Disclosure u/s 184(2) is a specific disclosure given by the director at the meeting of the Board in which a contract or arrangement is discussed and entered into/proposed to be entered into with any entity in which such director has interest in the manner/ to the extent specified therein.
Exemption from applicability of the Section 184 of the New Act.
As per Section 184(5) of the New Act- nothing in this section shall apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of the one company or two or more of them together holds or hold not more than 2% of the paid up share capital in the other company. (Only for any contract or arrangement under section 184(2) above).
Now question arises that is it necessary for a director to give disclosure of his shareholdings in companies, irrespective of how much shareholding he has?
Yes, it is necessary for a director to give disclosure of any of his shareholdings in companies while giving the general disclosure of interest on each of the 3 occasions stated above. However, there is no exemption from the compliance of provisions of section 184(1) of the New Act.
Please note that the exemption stated in section 184(5)(b) of the New Act becomes applicable at the time of entering contract or arrangement i.e. in case of Specific disclosure by Directors u/s 184(2) of the New Act and not in case of general disclosure.
In order to ascertain whether any of the directors hold 2%, either individually or together with other directors, of the paid-up share capital in any other company, it is essential to have details of shareholding held by each director in such entities. Disclosure of information in Form MBP-1 obtained from such directors will form the basis to decide the same.
Impact on contract or arrangement in which interest of director is not disclosed.
A contract or arrangement entered into by the company without disclosure or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement shall be voidable at the option of the company. [Section 184(3) of the New Act]
Punishment in case of contravention of the provisions:
The punishment in case any director who fails to give the mandatory disclosure of interest as required under this section has been and shall be punishable with imprisonments for a term which may extend to one year or with fine which may extend to Rs. 1,00,000 or with both.
The Companies (Meetings of Board and its Powers) Rules, 2014.
1. Rule 9 provides that every director shall disclose his concern or interest in any company or companies or bodies corporate (including shareholding interest), firms or other association of individuals, by giving a ‘Notice’ in writing in Form MBP 1.
It shall be the duty of the director giving notice of interest to cause it to be disclosed at the meeting held immediately after the date of the notice.
2. All notices shall be kept at the registered office and such notices shall be preserved for a period of eight years from the end of the financial year to which it relates and shall be kept in the custody of the company secretary of the company or any other person authorized by the Board for the purpose.
Note: There are no provisions u/s 184 of the New Act to maintain the “register of contract”. But the “register of contract” shall be maintained pursuant to the provisions of Section 189 of the New Act. Moreover, under 184 of the New Act and rule thereof, Notice of Disclosure by Director (i.e. Form MBP-1) shall be kept at the registered office of the company and preserved for a period of eight years from the end of the financial year to which it relates.
Every director or KMP shall within 30 days of his appointment/relinquishment of office disclose to the company the particulars specified in sub-section 1 of Section 184 relating to his concern or interest in any company or body corporate, firms or individuals including his share holding and also contracts or arrangements in which he is directly or indirectly interested. [Section 189(2) of the New Act]
It is important to note that Section 189(2) of the New Act requires not just the disclosures at the time of taking up an office, but also relinquishment of the office. This requirement is the similar to the requirement under Section 305 of the Old Act. It is necessary in order to ensure that the register maintained is up to date and accordingly it may be determined whether provisions of section 188 become applicable in future while transacting with such company.
Further, subsequent to relinquishment of office, if the director also transfers the shares held in such company then any contract or arrangement with such company shall not attract provisions of Section 184(2) of the New Act. Thus, disclosure of relinquishment and change in director’s shareholding in any of the companies is essential to determine applicability of provisions of Section 184 and 188.
Requirement of filing of MGT-14 with Registrar of Companies [Removed w.e.f. 18.03.2015]
Pursuant to Section 117(3)(g) of the New Act, “Resolutions passed in pursuance of sub-section (3) of Section 179 need to be filed to the Registrar of Companies in Form MGT14 within a period of 30 days along with the fees as may be prescribed.”
As per Section 179(3) of the New Act, the Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely-
(k) any other matter as may be prescribed.
Please note that matters which have been prescribed as per Section 179(3)(k) of New Act are provided and mentioned in Rule 8 of the Companies (Meeting of Board and its Powers) Rules 2014. It is pertinent to mention that the power “to take note of the disclosure of director’s interest and Shareholding” was earlier prescribed in Rule 8(5) of the Companies (Meeting of Board and its Powers) Rules 2014.
However, by the Companies (Meeting of Board and its Powers) Amendment Rules 2015, w.e.f. 18.03.2015, the above power “to take note of the disclosure of director’s interest and Shareholding” has been removed. Therefore, w.e.f. 18.03.2015, there is no need to file Form MGT-14 with ROC regarding disclosure of interest by director.
Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.