The Hindu Business Line : `Related' revelations

DUTIES of good faith and fair dealings are owed by each director individually and are not merely a collective duty of the board. Directors should not place themselves in a position where their fiduciary duties towards the company conflict with their personal interests and in case this happens, the interest of the company should be given priority.

However, those governing the affairs of the company may at times take advantage of their position by using the company's assets, opportunities or information for their own profit which may be detrimental to the interests of the company and its stakeholders.

The Companies Act provides that a director should disclose his interest or concern in any transaction of the company. The current provisions are director-centric and they include only the person, companies and firms in which the directors are interested directly or indirectly for being a related party.

Any other company, firm or entity in which directors are not interested but the company itself has some interest or association are not within the ambit of the Companies Act, 1956 (that is, subsidiaries, fellow subsidiaries, associates, and so on).

The J. J. Irani Committee has tried to widen the scope of related parties and has recommended that details of transactions between a company and its subsidiaries, fellow subsidiaries and associate companies be brought under the umbrella of related party transactions.

Details of transactions of the company with its holding or subsidiary/fellow subsidiary or associate companies should be placed before the board through the audit committee, if any. Details of transaction with such related parties which are not on arm's length basis or in the normal course of business should form part of the annual report of the company along with management justification thereto.

The report has given greater emphasis on self-regulation and shareholder democracy, which lessen government control. The Committee has looked into international practices in this regard and has suggested "Shareholder Approval and Disclosure-based regime" for related-party transactions.

Certain related-party transactions shall take place only subject to the approval of the board/shareholders. A threshold limit may be fixed under the Rules in respect of the powers of the board in this regard and all the transactions beyond that limit shall be approved by the shareholders by a special resolution. The Central Government shall have no role to play in this corporate event.

The J. J. Irani Committee has recommended for detailed disclosure by the directors of their personal details, details of companies and entity in which they are interested and having shareholding and any transaction entered into with these entities.

It has also recommended that in case of failure to make disclosure, they should be held liable to strict penalties and 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. The Committee has also recommended that the directors concerned shall 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.

Shareholders' approval and proper disclosure in the annual report shall impose self-discipline and moral responsibility on directors/promoters to manage the affairs of the company in a prudent and transparent manner.

(The author is Council Member of the ICSI.)

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