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Disclosure of Interest by Director under Companies Act, 2013

Background

Section 184 of the Companies Act, 2013 sets out the mandatory requirements for directors to disclose their interests in other entities and in contracts or arrangements involving the company. These disclosures are foundational to good corporate governance and are intended to ensure transparency, accountability, and the avoidance of conflicts of interest within corporate decision-making.

Applicability

All Directors of Private Limited Company, Public Limited Company & Listed Company

General Disclosure of Interests

Under Section 184(1), every director is required to make a general disclosure of his or her interests in other companies, bodies corporate, firms, or associations of individuals, including details of shareholding. This disclosure must be made at the first Board meeting in which the director participates, at the first Board meeting of every financial year, and at the first Board meeting held after any change in the previously disclosed information. This requirement ensures that the Board is continually aware of the director’s external affiliations that could potentially lead to conflicts of interest.

Disclosure Concerning Specific Contracts or Arrangements

Section 184(2) imposes a more specific disclosure requirement in cases where the director is directly or indirectly concerned or interested in a contract or arrangement, or a proposed contract or arrangement, that the company is entering into.

When the Contract Involves a Body Corporate

A director must disclose the nature of his or her concern or interest if:

The director, individually or together with any other director, holds more than two percent of the shareholding in that body corporate, or
The director is a promoter, manager, or Chief Executive Officer of that body corporate.

When the Contract Involves a Firm or Other Entity

A director must also disclose the nature of his or her concern or interest when the company enters into a contract or arrangement with a firm or other entity in which the director is a partner, owner, or member, as the case may be.

Requirement to Abstain

Upon making such disclosure at the Board meeting where the contract or arrangement is discussed, the interested director is prohibited from participating in that meeting. This ensures impartial consideration of the transaction by the non-interested members of the Board.

Subsequent Acquisition of Interest

If a director becomes concerned or interested in a contract or arrangement after it has been entered into, he or she must disclose the interest either immediately upon becoming aware of it or at the first Board meeting held thereafter. This ensures that disclosures remain current even when the interest arises at a later stage.

Disclosures In case of a Listed Company

The board of directors of the listed entity shall have the following responsibilities:(i)Disclosure of information:(1)Members of board of directors and key managerial personnel shall disclose to the board of directors whether they, directly, indirectly, or on behalf of third parties, have a material interest in any transaction or matter directly affecting the listed entity.

The board of directors and senior management shall conduct themselves so as to meet the expectations of operational transparency to stakeholders while at the same time maintaining confidentiality of information in order to foster a culture of good decision-making

Mandatory Compliances for Disclosures

As per Rule 9 of the Companies (Meetings of Board and its Powers) Rules, 2014:

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.
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.

Effect of Non-Disclosure

A contract or arrangement entered into by the company without compliance with Section 184(2), or one in which an interested director has participated despite being prohibited from doing so, is voidable at the option of the company. This means the company may choose to affirm or rescind the contract depending on what best serves its interests.

Exceptions

Section 184 includes certain exceptions to prevent the imposition of unnecessary or impractical compliance burdens.

Preservation of General Legal Principles

Nothing in Section 184 affects the operation of general principles of law that restrict directors from having interests in contracts with the company. These legal doctrines continue to apply in parallel.

Exception for Minimal Shareholding between Companies

The disclosure requirements under Section 184 do not apply to contracts or arrangements between two companies where the director or directors of one company together hold not more than two percent of the paid-up share capital in the other company or body corporate. This exception recognizes that such minimal shareholding is unlikely to influence decision-making or create a conflict of interest.

Penalty for Contravention

If a director fails to comply with the requirements of Section 184(1) or Section 184(2), the director is liable to a penalty of one lakh rupees. This monetary penalty underscores the seriousness of the disclosure obligations imposed under the Act and encourages strict compliance.

Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article.

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