In a workplace setting, a conflict of interest (COI) emerges when there is a divergence between an individual’s personal interests and their professional duties or responsibilities. This misalignment has the potential to benefit the employee or a related entity, often to the detriment of the company as a whole. Personal interests encompass a broad spectrum, including financial gains, elevated status, proprietary knowledge, interpersonal relationships, or the preservation of one’s reputation.
The presence of a conflict of interest can prompt employers to scrutinize the motives behind an individual’s actions and raise concerns about their ability to make impartial decisions. The fundamental issue lies in the possibility that personal interests may compromise the individual’s objectivity and lead to decisions that prioritize personal gain over the best interests of the company.
Navigating conflicts of interest requires a delicate balance between personal and professional considerations. Companies often establish ethical guidelines and disclosure mechanisms to address and mitigate potential conflicts, fostering an environment where employees can make decisions that align with the organization’s objectives and values. Effectively managing conflicts of interest contributes to a culture of transparency, integrity, and trust within the workplace.
The legal framework for addressing conflicts of interest (COI) at the workplace in India is primarily governed by the Companies Act, 2013, and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2015. The three main categories considered are employees, directors, and shareholders.
1. Legal Framework for Employees’ Conflict of Interest
In so far as the COI related to employees of the company, there is no law prescribed in this regard except for Senior Management as prescribed by Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations 2015 vide Regulation 26(5) and that is – senior management shall make disclosures to the board of directors relating to all material, financial and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the listed entity at large. In case of all other employees and non-listed entities, the COI situations would totally be governed by the code of conduct framed and implemented by the company.
2. Legal Framework for Directors’ Conflict of Interest
Directors owe fiduciary duty to the company and its shareholders which requires them to adopt highest standards of conduct in their dealings with the day-to-day affairs of the company. Section 166(4) of the Companies Act, 2013 (“Act”) states as under:
“A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company”.
Thus, the directors are entrusted with the duties to ensure that they avoid not only the actual COI situations but the potential COI situation as well. But the important point one should note here is that the Act does not only prohibit the directors from indulging in any COI situations but also provide for the mechanism to avoid such situations. Let us have a look at them:
Disclosure of Interest by directors under section 184 and Board’s consent followed by shareholders’ approval in certain related party transactions under section 188 of the Act are the important steps to ensure compliance with section 166 of the Act. Non-compliance to the COI related provisions does not only attract the fines but may also lead to vacancy in the office of the concerned director as per section 164(1)(g) of the Act, in case the director was convicted of an offence under section 188 in the last preceding five years.
Another important mechanism to prevent the directors from involving into a COI situation is the provisions of section 174 of the Act which fix the quorum for a Board meeting and addresses the situation where the number of interested Directors exceeds or is equal to two thirds of the total strength of the Board of Directors, or where the number of directors on the Board is reduced below the quorum fixed by the Act for a meeting of the Board.
The aforesaid provisions of the Act are in contrast to the erstwhile Companies Act of 1956, which (“erstwhile act”) did not provide explicit provisions governing and enforcing duties of a director. Under Section 299 of the erstwhile act, there was a requirement for a director to disclose any conflict of interest at the meeting of the board. The company was still entitled to enter into a particular transaction provided the interest of director was disclosed and the transaction was made on bona-fide and fair-grounds.
The ownership and control in India is not very discrete. Almost 90% of private companies are run by families. In such a scenario, where the board is dominated by a few individuals, the Act of 2013 clearly separates ownership and control to preserve shareholder’s interest and to prevent director’s from making personal gains. A number of mechanisms have been incorporated under the Act in this regard, e.g. minimum number of two (2)/three (3) independent directors in certain public/listed public companies, comprehensive definition of independent directors to eliminate any kind of conflicts, etc.
In addition to the Companies Act 2013, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations 2015, also contains the following mechanisms to prevent directors from avoiding COI situation:
- At least half of the Board to be independent;
- Regulation 4(2)(iii)(8): The board of directors shall consider assigning a sufficient number of non-executive members of the board of directors capable of exercising independent judgement to tasks where there is a potential for conflict of interest.
3. Legal Framework for Shareholders’ Conflict of Interest
In certain instances, shareholders of a company may find themselves entangled in a Conflict of Interest (COI) scenario. An illustrative case of such a situation is elucidated in section 188 of the Companies Act, 2013. The second proviso to sub-section (1) of section 188 serves as a safeguard, inhibiting shareholders from participating in the voting process pertaining to a resolution sanctioning a related party transaction. This prohibition specifically applies if the concerned shareholder is categorized as a related party. However, an exception exists in cases where a striking ninety percent or more of the members, in terms of number, either comprise relatives of promoters or fall under the classification of related parties. In such instances, the shareholder’s eligibility to participate in the voting process is preserved. This regulatory framework aims to maintain transparency, integrity, and fairness in corporate dealings, ensuring that decisions are made with due regard to potential conflicts of interest.
Conclusion: Understanding and navigating the legal frameworks for COI at the workplace in India is imperative for maintaining ethical standards and protecting the interests of employees, directors, and shareholders. The proactive implementation of these frameworks ensures a robust foundation for organizational integrity and fosters a culture of transparency and trust.
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