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Section 194 of Companies Act, 2013, part of chapter XII that deals with meetings and powers of the board of a company, lays down the provision for prohibition on forward dealings in securities of company by director or key managerial personnel. This section is no more a part of companies act, 2013 as it was omitted by companies’ amendment act, 2017. This section before omission put forth prohibition on forward dealings in securities of company by director or key managerial personnel. This section also lays down penalty for any director or key managerial personnel who receives shares through this means.
The legislative object or aim for this section, is to prohibit and thus prevent the directors and key managerial personnel of a company from acquiring right to call or put option in respect of shares in a relevant company, in which they have relation as they are likely to have insider sensitive information, which put would put order investors at a disadvantage position. If this were allowed it would result in directors and key managerial personnel working for their favour and gain rather than the profit of the relevant company. The situation as predicted by this section is now regulated by SEBI regulations on insider trading. This analysis will give a brief understanding of this section as it stood before omission.
Purpose of Section 194
This section briefly laid down following before its omission from the act:
- This section imposes prohibition on forward dealings in securities of a company by director or key managerial personnel. Thus, director/key managerial personnel can no longer be involved in forward dealing or buying options in shares/debentures of a company or its holding/subsidiary/associate company.
- No director of a company or any of its key managerial personnel shall buy in company, or in its holding, subsidiary or associate company (a) right to call for delivery or a right to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures (b) right, as he may elect, to call for delivery or to make delivery at a specified price and within a specified time, of a specified number of relevant shares or relevant debentures.
- For contravention of this section, the director or key managerial personnel shall be punishable with imprisonment for a term which may extend to two years or with fine which shall not be less than rupees one lakh, but which may extend to rupees five lakh, or both.
- Where a director or other key managerial personnel acquires any securities in contravention of the said provision, he shall be liable to surrender the same to the company and the company shall not register the securities so acquired in his name in the register, and if they are in dematerialized form, it shall inform the depository not to record such acquisition and such securities, in both the cases, shall continue to remain in the names of the transferors.
- The term “relevant shares” and “relevant debentures” have also been defined to mean shares and debentures of the company in which the concerned person is a whole-time director or other key managerial person or shares and debentures of its holding and subsidiary companies.
Situation Before Enactment of Section 194
This is a new provision, which has been incorporated to protect forward trading by directors and Key managerial personnel of any company. There is no corresponding provision under the Act of 1956. This provision is applicable not only to the key managerial personnel but also to all categories of directors of the company. This provision is applicable to all the companies with no exception carved out for the private limited companies. In the explanation of the said section, the meaning of the terms “relevant shares” and “relevant debentures” do not include the “associate companies” whereas, in the main body of sub-section (1) of the act, 2013, the holding, subsidiary or associate companies, all are covered.
Application of Section 194
This section comes into application when any director or key managerial personnel is involved in any forward dealing of the securities as laid down under this section. This section prohibited such transactions and ensured penalty of fine as well as imprisonment on directors and key managerial personnel who are involved in any such forward dealing of securities of a company.
This section has been amended by companies (Amendment) Act, 2017 whereby this section was omitted. This section as before omission was applicable to both public and private companies the same. The relevance of this section is more towards only public companies as this restriction is intended to prevent speculation in prices of the shares. It was taken into consideration for omission of this section. The regulations by SEBI for curbing insider trading and forward dealings are quite comprehensive and takes care of the situation predicted by this section as thus this section was omitted.
This section laid down the prohibition with respect to directors and key managerial personnel of a company, on forward dealing of securities of the company. This prohibition protected the interest of the company as well as safeguarded the rights of the shareholders. Because of this section directors or key managerial personnel couldn’t misuse their position and power to buy or deliver specified securities, which will be advantageous to them. This section enforces the fiduciary duty of the directors and key managerial personnel. This section provides protection against misguided acts of directors and key managerial personnel in dealing with securities of the company and curbs the instances of speculation about securities of the relevant company.
 The Companies (Amendment) Act, 2017, No. 1, Acts of Parliament § 64 (2018).
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