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Amitav Ganguly

{New Section 194 of the Companies Act 2013}


  • There exist well established judicial precedents as well laws that the directors have fiduciary obligations and also duties to act reasonably and honestly in the best interests of the companies where they hold such positions. Their duties emanate due to holding positions which may be synonymous to agents as well as trustees of their companies.

  • In view of the director occupying the position of an agent the general principles of agency would govern the relations of the director with the company and also govern the third parties who deal with the company through its directors. In Ferguson v. Wilson (1866) LR 2 Ch LR 77, the court had held that the company has no person, it can act only through directors and the case is, as regards those directors, merely the ordinary case of principal and agent.
  • The director is also considered as a trustee although not in the strict sense of the position. In Lands Allotment Co., Re, {1894} 1 Ch 616, 631, it was held by the court that although the directors are not, properly speaking, trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which are actually under their control and directors are held liable to make good monies which they have misapplied upon the same footing as if they were trustees
  • The Companies Act 2013 {new Act 2013} for the first time has laid down the duties of directors in unequivocal terms in section 166 in contrast to erstwhile Companies Act 1956. However, before the enactment of section 166 there had already been plethora of judicial decisions pronounced over decades, laying down many fiduciary obligations and duties of directors as precedent laws.
  • This new section emanates from the jurisprudence of such obligations & duties of directors of not making undue gain from their companies.
  • Interestingly this section covers whole time directors and key managerial personnel {KMP} and not directors who are commonly known as ordinary directors or director simpliciter which would also include independent directors.
  • Pertinently the duties of directors, whether whole time director or otherwise would remain the same and the background of this section would be would have been built keeping in view that directors are not to deal with the securities of the company including rights and interest in the securities based on non public price sensitive information which will be to make undue gain from the company. Thus this section deals and prohibits forward dealing in securities e. certain kinds of future contracts, in relation to the shares or debentures of the company/ holding/subsidiary/ associate companies.
  • In addition to the whole time directors, the Key Managerial Personnel {KMP} are also prohibited to do forward dealings.

At the outset it would be desirable to understand certain terms in the context of these provisions which have not been defined in Companies Act 2013.


Forward dealings would mean a contract where-under the parties agree for their performance at a future date at specified terms, notably price, determined on the date of contract. 


A futures contract means a legally binding contract to buy or sell the underlying securities {which would cover shares or debentures} on a future date specified in the contract, but the one which can be settled either by delivery of the underlying securities or in cash, i.e., by paying or receiving cash equal to the difference between the price contracted earlier and the price in the spot market at maturity.


An options contract is one that gives the buyer the right but not the obligation to buy/sell the underlying securities {which would cover shares or debentures} at the contracted price within or at the date specified in the contract. Thus, the buyer or holder of the option purchases the right to the option from the seller who is thus contractually bound to settle the option when the buyer exercises the right. The option to buy or sell the securities in future may be a ‘teji’, a ‘mandi’, a ‘teji mandi’, a ‘galli’, a ‘put’ or a ‘put and call’ option. An option to buy is called ‘call’ option and an option to sell a ‘put’ option.


The sub section {1} of section 194 prohibits the following persons:-

  • Any director of a company, or
  • any of key managerial personnel of a company

from buying:-

  • in the company, or
  • in its holding company, or
  • in its subsidiary company, or
  • in its associate company,

{a} the following:-

  • a right to call for delivery, or
  • a right to make delivery,

at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures; or

{b} a right, as he may elect:-

  • to call for delivery, or
  • to make delivery,

at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures.

  • Interestingly from the opening line of the sub section it appears that any director { whether he is an ordinary director, managing director, whole time director, or independent director or nominee director} shall come under the ambit of the provision, however, if one reads the explanation to sub section {3} it would be clear that only whole time director is covered. Even from the Notes on Clauses of the Companies Bill 2011 it is obvious that only whole time director is taken into account. It is not apparent why construction of the section is in this way.
  • The restriction is also on key managerial personnel who have been defined in section 2 {51} of the Companies Act 2013 as:-

1. the Chief Executive Officer or the managing director or the manager;

2. the company secretary;

3. the whole-time director ;

4. the chief financial officer ; and

5. such other officer as may be prescribed.

  • From the above definition one notes that the term “whole time director” appears. It is not apparent as to why restriction has also been imposed separately on whole time director in the sub section.
  • Significantly, the prohibition is not only relating to shares/debentures of the company where such whole time director or KMP holds position, but also relating to securities of holding/ subsidiary and associate companies.
  • Pertinently, the prohibition as laid down is in respect of buying only and not any other acquisition like through receipt of gift, pledge, etc. Moreover sale is not contemplated.
  • The words “a right to call for delivery or a right to make delivery” have not been defined. It, however, appears that the sub section provides for restriction on delivery of securities underlying an option being call or put and does not apply where there is no delivery of securities.
  • It may be noted from the above that although the director and KMP of a company are prohibited, their relatives or associated entities are not prohibited. This could be unintended lacunae in the provisions.
  • It may also be pointed out that this provision appears to apply to a private as well as to a public company, whether their securities are listed or not. However, in a practical sense these restrictions would be more apt in relation to listed securities.


This is a penal sub section {2} stating that if a director or any key managerial personnel of the company contravenes the provisions of sub-section (1), such director or key managerial personnel shall be punishable:-

  • with imprisonment for a term which may extend to two years, {but no minimum term has been laid down}, or
  • with fine which shall not be less than one lakh rupees but which may be maximum of five lakh rupees, or
  • with both.


  • The last sub section {3} lays down the consequences of contravention and provides that where a director or other key managerial personnel acquires any securities { which only refers to shares or debentures in sub section [1]} in contravention of sub-section (1), he shall, subject to the provisions contained in sub-section (2), be liable to surrender the same to the company.
  • Moreover the company is prohibited to register the transfer of the securities, {which only refer to shares and debentures}, in physical form, so acquired in the name of the director or other key managerial personnel, in its register of members or debenture holders. In case the shares/debentures are in dematerialised form, the company shall inform the depository not to record such acquisition of shares/debentures.
  • Further, such shares/debentures, in both the cases of physical or dematerialised forms, shall continue to remain in the names of the transferors. Hence there shall be no transaction of sale and purchase of said shares/debentures in contravention of this provision. Pertinently the penal provision in sub section {2} shall also apply.
  • The Explanation given in this sub section states that for the purposes of this section, ‘‘relevant shares’’ and ‘‘relevant debentures’’ mean shares and debentures of the company in which the concerned person is a whole-time director or other key managerial personnel. The shares and debentures of holding and subsidiary companies are also covered but not that of associate company which seems to be contrary to sub section [1].


Although the provision is new and the objectives are laudable, it would have been better to have more clarity on various terms used in the section as also on the interpretations. It is apparent that more difficult a provision is to interpret there will be more lapses on compliances. Government should issue clarifications to make this more effective.

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Mr. Amitav Ganguly is a Law Graduate and qualified Company Secretary with more than three decades of rich experience in senior positions; company secretarial, corporate legal affairs, management and corporate governance; in different industry sectors like investment, manufacturing and real estate. A View Full Profile

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June 2024