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Disclosure - Key to good governance.

Transparency in the transactions is the key to unlocking and unleashing the governance mechanism of a Corporate in its right spirit. The said transparency is being achieved through some mandatory disclosures under the provisions of the Companies Act. The intention of those disclosures is to bring better transparency to the system and thereby improve the accountability of the management towards the shareholders, government and public at large.

Under the Companies Act 2013, the range and content of related party transactions have been made more complex and intricate. The 2013 Act has emphasized more on disclosures rather than approvals, one such area is related party transactions mentioned under section 188 of the Companies Act, 2013. In this article, a contrast comparative study of disclosure requirements under section 188 read with section 184 of the companies act is conferred.

As per section 188 read with rule 9(c) of the Companies (Meetings and Powers) Rules, 2014, the company needs the prior approval of its BoD for entering into any related party transaction irrespective of the capital of the company or value of the transaction. Also, prior approval of the shareholders is demanded by the Act in certain situations in addition to those mentioned above.

As per Section 184(2) of the Act, every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, or Chief Executive Officer of that body corporate shall disclose the nature of his concern or interest at the meeting of the Board in which the contract[1] or arrangement[2] is discussed and shall not participate in such meeting* and in cases where such director who is not so concerned or interested at the time of entering into such contract or arrangement, and becomes concerned or interested after the contract or arrangement is entered into, shall disclose his concern or interest when he becomes concerned or interested at the first meeting of the Board held after he becomes so concerned or interested.

In the situations where, when a company enters into a contract or arrangement with another company in such a way that any of the directors is substantially interested as mentioned in section 184(2) of the act and the director remains silent, willfully or otherwise on his interest, then the director shall be liable under various provisions of the Companies Act, 2013 in addition of committing crime under the Indian Penal Code, 1860. The substantial interest of the director shall be drawn upon from the MBP-1 submitted by the director pursuant to section 184 of the Act.

The non-disclosure of the substantial interest by the concerned director primarily renders the contract/agreement voidable at the option of the company and subsequently invites automatic vacation of his office under section 167 (1)(d) of the Companies Act,2013. Also, quoting Section 166 of the companies act 2013, by non-disclosure of his interest, he is violative of his duty as a director to act in good faith, to exercise his duties with due and reasonable care and not to make undue gains or advantages and thereby liable for imprisonment and fine as per the defaulted section.

Further to the mentioned default, he shall be convicted of fraud as per the provisions of Section 447 of the Companies Act under which he is liable for imprisonment for a term which may extend to five years or a fine or both. Beyond the breadth of the provisions of the Companies Act 2013, the defaulted director shall be liable to be punished for breach of Trust[3], willful concealment of facts which he is bound to disclose[4], under the relevant provisions of Indian Penal Code, 1860.

However, the defaulted director cannot hide behind the curtain by stating that he was unaware of the disclosure requirement mentioned under section 184(2) as the onus lies on him to act with due care and diligently on exercising his duties while holding the office of a director as per the provisions of the Companies Act,2022. Thus, it is hereby evident how relevant the act lays on the disclosure requirements and how stringent the penalties are imposed on the defaulted on committing the non-compliance.

Anagha S

The author is a CS aspirant and the views expressed in the article are personal.

[1] a written or spoken agreement, especially one concerning employment, sales, or tenancy, that is intended to be enforceable by law. [2] the action, process, or result of arranging or being arranged. * 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]. [3] W.r.t section 406 & 409 of IPC,1860 [4] W.r.t Section 107 of IPC,1860


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