Related Party Transactions
1. While directors have the authority to regulate the affairs of the company collectively as Board, their duties of good faith and fair dealings are owed by each director individually. Directors have the duty not to place themselves in a position when their fiduciary duties towards the company conflict with their personal interests. And in case it happens, directors have the duty to prefer interests of the company. Directors should not use company’s assets, opportunities or information for their own profit.
2. The Committee deliberated on whether transactions/contracts in which directors or their relatives are interested should be regulated through a “Government Approval-based regime” or through a “Shareholder Approval and Disclosure-based regime”. The committee looked into international practices in this regard and felt that the latter approach would be appropriate in the future Indian context.
Director’s duty to disclose interest
3.1 The Law should impose a duty on every director to disclose to the company, the contracts or arrangements with the company, whether existing or proposed or acquired subsequently, in which he, directly or indirectly, has any interest or concern.
3.2 The manner, time limit and the extent of such disclosure should be specified in the Act. The notice for relevant disclosure should be made by the interested director to the Board of Directors at a meeting of the Board in which the transaction is to be discussed, so that information is available to the Board in a timely manner. The provisions in the existing Law to issue general notice by the directors in respect of their interest in contracts/arrangements by the company should continue.
3.3 Failure to make disclosure should be treated as a default. Director concerned should be held liable to penalties and he should be deemed to have vacated his office. This should also be a condition of disqualification to hold office of director of that company for a prescribed period.
3.4 Directors’ Responsibility Statement should include an additional clause to the effect that every director has made relevant disclosures as mentioned above.
3.5 Interested director should abstain from participating in the Board meeting during consideration of relevant agenda item in which he is interested.
3.6 The company should maintain a register, in which all transactions above a prescribed threshold value in respect of contracts/arrangements, in which directors are interested, should be entered. The register should be kept at registered office of the company and should be open to inspection to all members.
Certain transactions, in which directors are interested, to take place only subject to approval of Board/shareholders
4.1 In addition to disclosure requirements in respect of all transactions/contracts/arrangements in which directors are interested, certain transactions, between company and director or persons connected with director, in respect of sale, purchase of goods, materials or services should take place only with the approval of Board of Directors. A threshold limit may be fixed under the Rules in respect of powers of the Board in this regard.
4.2 Beyond a limit, the approval of shareholders, by special resolution, should be mandated. The particulars/details pertaining to such contracts/arrangements to be included in the explanatory statement (to relevant special resolution), to be sent to shareholders, should be specified in the rules.
4.3 Similar provisions should be applicable in respect of all transactions relating to transfer or lease of immovable property to/by the interested director by/to the company.
4.4 The existing exemption under Section 297 (2) (a) of the Companies Act in relation to transaction/contract/arrangement taking place for cash at market price should continue.
4.5 Details of Transactions of the Company with its Holding or Subsidiary / Fellow Subsidiary or Associate Companies in the ordinary course of business and transacted on an arms length basis should be placed periodically before the Board through the Audit Committee, if any.
4.6 Details of transactions not in a normal course of business and / or not on an arms length basis with Holding/Subsidiary/Fellow Subsidiary/Associate Companies should be placed before the Board together with Management justification for the same. A summary of such transactions with each party should form part of the Annual Report of the Company.
4.7 Non compliance of these provisions should result into:- (a) Penalty on director who authorized transaction/contract etc. without approval of Board/General meeting. (b) Transaction/Contract being voidable at the option of the Board/Company. (c) Director concerned to account to the company for any gain made by him and to indemnify the company against wrongful gain made at the cost of the company. (d) The Director concerned being deemed to have vacated his office. (e) Disqualification of the director to hold office in the company for a prescribed period.
Restrictions on Loan to director or holding office or place of profit by relative of director
5.1 Generally the directors should not be encouraged to avail of loans or guarantees from companies. They should be allowed remuneration or sitting fees only. In case company decides so, loans to directors should be allowed only when company by special resolution approves such loans. Disclosures to be made to shareholders, through the explanatory statement, should be specified in the rules. It should be open to a company to formulate schemes (such as Housing Loan Schemes) for the benefit of Executive Directors. Once such schemes are approved by the shareholders by special resolution, loans under such schemes may be allowed to eligible directors, without again going to shareholders for approval.
5.2 Transactions relating to short term Quasi-Loans to director or funding of director’s expenditure (to be reimbursed by director later on) up to a specified limit (by rules) may be allowed subject to approval by the shareholders through special resolution. [Quasi loan is a transaction where one party - the creditor agrees to pay or pays otherwise than in pursuance of an agreement, a sum for another (the borrower) or agrees to reimburse, or reimburses otherwise than in pursuance of an agreement expenditure incurred by a third party for the borrower on terms that the borrower would reimburse the creditor or in circumstances that give rise to a liability for the borrower to reimburse creditor.]
5.3 Funding of Director’s legitimate expenditure on duty to the company should be excluded from these regulations.
5.4 Special provisions may be made for loans or quasi loans by money lending companies to its employee including directors to be allowed, subject to regulations of RBI and other regulators.
5.5 The director or relatives of a director should be allowed to hold office or place of profit in the company upto a limit (to be specified by rules) only if shareholders, by special resolution, approve. (The office of MD or WTD should not be treated as office or place of profit.)
Duty on directors to disclose information relating to directorship and shareholdings in the company and in other companies
6.1 Every director should be under obligation to disclose to the company:- (i) Personal details as may be prescribed by way of rules. (ii) Directorships (including Managing Directorship, Whole Time-Directorship or Managership) held by him in any other company/firm. (iii) Shares or debentures held by him as well as his relative in the company and all other companies, as referred to in para 4.5 above. (iv) Names of Companies in which director either singly or along with his relatives hold not less than a specified percentage of shareholding as may be specified by Law. (v) Names of other entities in which he is directly or indirectly interested as partner, member or a key person, by whatever name called. (vi) Any changes in respect of above items [(i) to (v)] to the company should be informed within a time specified by Law.
6.2 Non disclosure of above information by any director should hold such director liable to pay fine.
6.3 The company should keep a register containing relevant details mentioned in para 6.1 in respect of each director. Register should be open for inspection by all members of the company.