Section 205 — Disclosure of interest by director

Statute text

(1) Every director of a
company who is in any way, whether directly or indirectly, concerned or interested
in any contract or arrangement entered into, or to be entered into, by or on behalf
of the company shall disclose the nature of his concern or interest at a meeting of
the board:

Provided that a director shall be deemed also to be interested or concerned
if any of his relatives, is so interested or concerned.
Explanation.— For the purpose of this section “director’s relatives”,
are—

(a) the director’s spouse;

(b) the director’s children, including the step children;

(2) The disclosure required to be made by a director under sub -section
(1) shall be made—
(a) in the case of a contract or arrangement to be entered into, at the
meeting of the board at which the question of entering into the
contract or arrangement is first taken into consideration or, if the
director was not, on the date of that meeting, concerned or interested
in the contract or arrangement, at the first meeting of the board held
after he becomes so concerned or interested; and

(b) in the case of any other contract or arrangement, at the first meeting
of the board held after the director becomes concerned or interested
in the contract or arrangement.

(3) For the purposes of sub-sections (1) and (2), a general notice given
to the board to the effect that a director is a director or a member of a specified body
corporate or a partner of a specified firm and is to be regarded as concerned or
interested in any contract or arrangement whi ch may, after the date of the notice,

be entered into with that body corporate or firm, shall be deemed to be a sufficient
disclosure of concern or interest in relation to any contract or arrangement so made.
(4) Any such general notice shall expire at the end of the financial year
in which it is given, but may be renewed for further period of one financial year at
a time, by a fresh notice given in the last month of the financial year in which it
would otherwise expire.
(5) No such general notice, and no renewal thereof, shall be of effect
unless either it is given at a meeting of the board, or the director concerned takes
reasonable steps to ensure that it is brought up and read at the first meeting of the
board after it is given.
(6) Any contravention or default in complying with requirements of
sub-sections (1) or (2) , shall be an offence liable to a penalty of level 1 on the
standard scale.
206. Interest of officers.− (1) Save as provided in section 205 in respect
of directors, no other officer of a company who is in any way, directly or indirectly,
concerned or interested in any proposed contract or arrangement with the company
shall, unless he discloses the nature and extent of his interest in the transaction and
obtains the prior approval of the board, enter into any such contract or arrangement.

(2) Any contravention or default in complying with requirement under
this section shall be an offence liable to a penalty of level 1 on the standard scale.
207. Interested director not to participate or vote in proceedings of
board.− (1) No director of a company shall, as a director, take any part in the
discussion of, or vote on, any contract or arrangement entered into, or to be entered
into, by or on behalf of the company, if he is in any way, whether directly or
indirectly, concerned or interested in the contract or arrangement, nor shall his
presence count for the purpose of forming a quorum at the time of any such
discussion or vote; and if he does vote, his vote shall be void:

Provided that a director of a listed company who has a material personal
interest in a matter that is being considered at a board meeting shall not be present
while that matter is being considered.
(2) If majority of the directors are interested in, any contract or
arrangement entered into, or to be entered into, by or on behalf of the company, the
matter shall be laid before the general meeting for approval.
(3) Sub-section (1) shall not apply to—
(a) a private company which is neither a subsidiary nor a holding
company of a public company;

(b) any contract of indemnity or insurance coverage executed by the
company in favour of interested director against any loss which he
may suffer or incur by reason of becoming or being a surety for the
company or while undertaking any transaction on behalf of the
company:

Provided that for the purpose of clause (b), a company shall
only insure the liability of interested director where such liability
arises out of a transaction validly approved by the board or the
members of the company as the case may be:

(4) Any contravention or default in complying with requirements under
this section shall be an offence liable to a penalty of level 1 on the standard scale.
208. Related party transactions.− (1) A company may enter into any
contract or arrangement with a related party only in accordance with the policy
approved by the board, subject to such conditions as may be specified, with respect
to—

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials,
services or property; and

(f) such related party's appointment to any office or place of profit in
the company, its subsidiary company or associated company:

Provided that where majority of the directors are interested
in any of the above transactions, the matter shall be placed befo re
the general meeting for approval as special resolution:

Provided also that nothing in this sub -section shall apply to
any transactions entered into by the company in its ordinary course
of business on an arm’s length basis.

Explanation.— In this sub-section—

(a) the expression “office of profit” means any office—

(i) where such office is held by a director, if the director holding
it receives from the company anything by way of
remuneration over and above the remuneration to which he
is entitled as director, by way of salary, fee, commission,
perquisites, any rent-free accommodation, or otherwise;

(ii) where such office is held by an individual other than a
director or by any firm, private company or other body
corporate, if the individual, firm, private company or body
corporate holding it receives from the company anything by
way of remuneration, salary, fee, commission, perquisites,
any rent-free accommodation, or otherwise;

(b) the expression “ arm’s length transaction ” means a transaction
which is subject to such terms and conditions as may be specified.

(i) a director or his relative:

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a
partner;

(iv) a private company in which a director or manager is a
member or director;

(v) a public company in which a director or manager is a director
or holds alongwith his relatives, any shares of its paid up
share capital;

(vi) any body corporate whose chief executive or manager is
accustomed to act in accordance with the advice, directions
or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a
director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall
apply to the advice, directions or instructions given in a
professional capacity;
(viii) any company which is—
(A) a holding, subsidiary or an associate d company of
such company; or
(B) a subsidiary of a holding company to which it is also
a subsidiary;
(xi) such other person as may be specified;
Explanation.—For the purpose of this section “relative” means spouse,
siblings and lineal ascendants and descendants of a person.
(2) Every contract or arrangement entered into under sub -section ( 1)
shall be referred to in the b oard’s report to the shareholders along-with the
justification for entering into such contract or arrangement.

(3) The Commission may specify the record to be maintained by the
company with regards to transactions undertaken with the related party.

(4) Where any contract or arrangement is entered into by a director or
any other employee, withou t obtaining the consent of the b oard or approval by a
special resolution in the general meeting under sub -section (1) an d if it is not

ratified by the board or, as the case may be, by the shareholders at a meeting within
ninety days from the date on which such contract or arrangement was entered into,
such contract or arrangement shall be voidable at the option of the board and if the
contract or arrangement is with a related party to any director, or is authorised by
any other director, the directors concerned shall indemnify the company against any
loss incurred by it.

(5) Without prejudice to anything contained in sub-section (4), it shall
be open to the company to proceed against a director or any employee who had
entered into such contract or arrangement in contravention of the provisions of this
section for recovery of any loss sustained by it as a result of such contract or
arrangement.

(6) Any director or any other employee of a company, who had entered
into or authorised the contract or arrangement in violation of the provisions of this
section shall be liable—

(a) in case of listed company, be punishable with imprisonment for a
term which may extend to three years or with fine which shall not
be less than five million rupees, or with both; and

(b) in case of any other company, to a penalty of level 2 on the standard
scale.