FAQs on section 184: disclosure of directors’ interest

 

1. What is the inherent philosophy of section 184?

 

The inherent philosophy is to ensure that the Directors never compromise on the fiduciary position that they occupy in relation to a Company and accordingly exclude themselves from the decision making in the matter of such contracts or arrangements wherein there is a personal interest involved.

 

2. There are two separate disclosure requirements in sec 184 – sec 184 (1) and sec 184 (2). What is the respective scheme of these two?

 

Disclosure u/s 184 (1) is a general notice of disclosure given by every director about his concern or interest in any company (ies), bodies corporate, firms or other  association of individuals, along with shareholding. This is required to be given on 3 occasions mentioned under answer to Query 4:

 

Disclosure u/s 184 (2) is a specific disclosure given by the director at the meeting of the Board in which a contract or arrangement is discussed and entered into/proposed to be entered into with any entity in which such director has interest in the manner/ to the extent specified therein.

 

3. Who all are covered by the disclosure requirements?

 

All directors of a Company are covered under the disclosure requirement given u/s

184(1).

 

Disclosure u/s 184 (2) is a specific disclosure which is to be given when the Company enters/ proposes to enter into a contract with an entity.

 

Following directors are covered under the same in case of contract/ arrangement with a body corporate:

• Director who individually or in association with another director holds a shareholding of that body corporate of more than 2%.

• Director who is a promoter/manager/ CEO of the other body corporate.
• Director who is partner/ owner or member of the firm/ other entity.

 

 

Disclosure u/s 184 (1) is required to be given by every director on 3 occasions:

 

• At the first Board Meeting in which he participates as a Director post appointment;
• At the first Board Meeting held in every financial year;
• At the first Board Meeting held after any change in the interest or concern in the disclosures already made earlier.

• This means that the concerned director needs to evaluate the position from the last disclosure given and accordingly if there is any change the same has to be disclosed at the ensuing Board Meeting.

 

 

4. Is it necessary for a director to give disclosure of his shareholdings in companies, irrespective of shareholding he has?

 

Yes, it is necessary for a director to give disclosure. The exemption stated in section 184 (5) (b) becomes applicable at the time of entering contract or arrangement. However, there is no exemption from the compliance of provisions of section 184 (1). In order to ascertain whether any of the directors hold 2%, either individually or together with other directors, of the paid up share capital in any other company, it is essential to have details of shareholding held by each director in such entities.

 

Section 184 (2) not only stipulates disclosure requirement by the interested director but also mandates to ensure that the interested Director does not participate in the Board proceedings at such meeting.

 

 

5. Section 189 requires not just the disclosures at the time of taking up an office, but also relinquishment of the office. Is this sensible?

 

This requirement is the similar to the requirement u/s 305 of the Companies Act, 1956.

It is necessary in order to ensure that the register maintained is up-to –date and accordingly it may be determined whether provisions of section 188 become applicable in future while transacting with such company.

 

 Further, subsequent to relinquishment of office if the director also transfers the shares held in such company then any contract or arrangement with such company shall not attract provisions of Section 184 (2).

 

 Thus, disclosure of relinquishment and change in director’s shareholding in any of the companies is essential to determine applicability of provisions of Section 184 and 188.

 

6. Sec 189 seems to require the entering of the general disclosure u/s 184 (1) also in the register of contracts. Is that true?

 

Yes, Part B of form MBP-4 requires entering every detail obtained from director in the form of general disclosure of interest u/s 184 (1) in form MBP.1 in the register of contracts.

 

7. Who all have the right to inspect the register of contracts?

 

As per section 189 (3) read with Rule 16 (4) of the Companies (Meetings of Board and its Power) Rules, 2014, any member of the company has the right to inspect the register of contracts and the extracts from the register maintained may be furnished to any member.

 

8. What is the effect of non-compliance of the provisions pertaining to disclosure?

 

By virtue of provisions of Section 184 , if a director contravenes the provisions of subsection

1. or sub-section (2), such director shall be punishable with:

 

(i) imprisonment for a term which may extend to 1 year;

 

(ii) With fine which shall not be less than Rs. 50,000 but may extend to Rs. 1,00,000; Or

 

• Both Further, by virtue of Section 189 (6), every director contravening provisions of the section shall be liable to a penalty of Rs. 25,000.

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