Indian industry has lately witnessed several critical corporate governance lapses pertaining to 'conflict of interest'. A recent example is the Securities and Exchange Board of India's ("SEBI's") interim order in re Gensol Engineering Limited1, bearing the observation that 'what has been witnessed... is a complete breakdown of internal controls and corporate governance norms... as if the Company's funds were promoters' piggybank.' The legal framework concerning conflicts of interest in the context of corporate governance coevolves with industry practices, and mercurial regulatory and judicial landscapes. This article intends to explore certain nuances surrounding conflict of interest, including potential preventive and remedial measures.
Conflict of interest
Issues arising from conflict of interest in India are borne of what the National Corporate Governance Policy Committee, 2012, called the 'insider model'. The 'insider model' 'is characterized by cohesive groups of "insiders"... typically tend to have a controlling interest in the company and... the ability to exercise dominant control over the company's affairs.'2 Insiders may misuse their control to serve their own interests, even if conflicting with the company and its shareholders. The objective of effective corporate governance is to operate as a check on such insiders through effective internal controls in the company's and its shareholders' broader interests. To again quote the foregoing report, 'good corporate governance is the reconciliation of otherwise (possibly) diverging interests.' The same understanding is reflected in Regulation 4(f)(ii)(6) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations"), which lists 'Monitoring and managing potential conflicts of interest of management, members of the board of directors and shareholders...' as a key function of the board of directors of listed entities.
Indian jurisprudence has recognized the importance of minimizing conflict of interest. In A.C. Muthiah vs Board of Control for Cricket in India,3 the Hon'ble Supreme Court held that, conflict of interest is 'a much wider, equitable, legal and moral principle' which is (i) preventive and not curative, (ii) does not require the demonstration of any actual pecuniary gain or loss, and (iii) is marked by the existence of a potential situation which may affect the fair and valid discharge of one's duty.
Directors' Fiduciary Responsibilities
The centrality of directors to a company's affairs was noted by the Hon'ble Supreme Court in Life Insurance Corporation of India vs Escorts Ltd. & Ors,,4 stating that 'the modern practice is to confer on the directors the right to exercise all the company's powers except such as the general law expressly provides must be exercised in general meeting.' Correspondingly, Section 179(1) of the Companies Act, 2013 (the "Companies Act") entitles the board of directors to undertake all acts which the company is authorized to exercise and do, subject to the memorandum or articles and regulations made thereunder. Accordingly, minimizing conflicts of interest of directors is of utmost importance.
Section 166 of the Companies Act lists out certain duties of directors and guides their exercise of powers. In the context of conflict of interest Sections 166(2), 166(4), and 166(5) are of particular significance, and are described hereinbelow.
The Hon'ble Supreme Court described the ambit of Section 166(2) in Tata Consultancy Services Limited vs. Cyrus Investments Pvt. Ltd. and Ors,5 stating that: '...the duty of a Director to protect environment, in addition to his duties to (i) promote the objects of the company for the benefit of its members as a whole; and (ii) act in the best interests of the company, its employees, the shareholders and the community... there is always a conflict, a tug of war between competing interests and statutes cannot resolve these conflicts effectively.' These comments can be interpreted as a tacit acceptance that despite the expansive text of Section 166(2), the principal expectation on directors is to subserve the company's objects and advance shareholder interests. Further, in Bajaj Auto Ltd. vs. N.K. Firodia and Ors.,6 the Hon'ble Supreme Court held that the director owes simultaneous fiduciary responsibility to the company and its shareholders, and must act in a bona fide manner sans any collateral motive.
The Hon'ble Supreme Court, in Tata Consultancy Services Limited vs. Cyrus Investments Pvt. Ltd. and Ors.,7 also clarified that nominee directors have twin fiduciary responsibilities, i.e., towards their appointing entity as well as the company to which they have been appointed to. It may also be noted that in Nanalal Zaver and Anr. vs Bombay Life Assurance Co. Ltd.,8 the Supreme Court held such fiduciary responsibilities have an element of privity, i.e., are limited only to shareholders, and not prospective shareholders.
Conflict of Interest and Disgorgement
One may note that the erstwhile Companies Act, 1956, did not have any specific corresponding Sections with respect to Sections 166(4) and 166(5) of the Companies Act. The enactment of these Sections has granted statutory recognition to previous judicial pronouncements, with these Sections holding that (i) directors ought not to enter into transactions that present a conflict of interest with respect to the company and/or the shareholders as a whole, and (ii) any undue gain or proceeds from such conflicts of interest may be disgorged in favour of the company. In Cook vs G.S. Decks,9 the Privy Council further held that (i) a director will be rendered a trustee on behalf of the company if such director is accruing any benefits from a contract in conflict with the company's interests, (ii) a subsequent shareholder ratification will not enable the directors to retain such benefits, and (iii) such benefits will belong in equity to the company. A director is also not expected to retain the profit they made by way of opportunities that have arisen consequent to the position they hold in the company, as held in Regal (Hastings) Ltd. vs. Gulliver.10
In Fateh Chand Kad vs. Hindsons (Patiala) Ltd,11 the Hon'ble Punjab & Haryana High Court held that the engagement of a director in a competing business, and utilization of their position and knowledge by virtue of such directorship against the interests of the company, is a breach of a director's fiduciary responsibilities.
One may note that responsibilities corresponding to those in Section 166 of the Companies Act in relation to acting with due diligence and care on a good faith and fully informed basis, and in the best interests of the shareholders while simultaneously taking into account interests of all stakeholders, are found in Regulations 4(2)(iii)(3) and 4(2)(iii)(6) of the LODR Regulations. However, unlike Section 166 of the Companies Act, which applies to individual directors, the aforementioned Regulations of the LODR Regulations apply to the board of directors as a whole.
Infringement of intellectual property rights may also have an interface with fiduciary responsibility. The Hon'ble Delhi High Court, in Rajeev Saumitra vs. Neetu Singh and Ors.,12 has held that in case a director diverts business to another concern, with such other concern giving the impression as being associated or affiliated with the entity where such a person is a director, such diverted business constitutes undue gains.
Further, resolution plans under the Insolvency and Bankruptcy Code, 2016 may also be invalidated if the resolution applicant becomes subject to a conflict of interest due to such plan's operation. The Hon'ble Supreme Court in M.K. Rajagopalan vs. Periasamy Palani Gounder and Ors.,13 invalidated a resolution plan where the properties of the corporate debtor were to be converted into a hospital, while the resolution applicant was simultaneously a managing director of a company operating another hospital.
Independent Directors
The crux of the 'independence' of an independent director lies in limiting their interests with respect to the company, its management, and its promoter group. Therefore, Section 149(6) prescribes extensive norms on the interests of a prospective independent director, inter alia, restricting pecuniary relationship other than directorial remuneration or having transaction not exceeding 10% of his total income with the company, its holding, subsidiary or associate company etc. The corresponding Regulation 16(1)(b)(iv) of the LODR prohibits 'material pecuniary relationship' of the director with the company etc., but does not provide any quantitative materiality threshold. SEBI, vide its informal guidance in re InfoBeans Limited,14 has indicated that such materiality has to be subjectively assessed by the board of directors on a case-to-case basis in light of the broader scheme of Regulation 16(1) of the LODR, separately and in addition to the 10% threshold in the Companies Act.
In Madhu Ashok Kapur & Ors. vs Rana Kapoor & Ors.,15 the Hon'ble Bombay High Court invalidated the appointment of independent directors who had, inter alia, been previously appointed as advisors to the company, were directly or indirectly nominees of promoters, and/or were previously classified as non-independent directors, posing concerns pertaining to conflict of interest due to previous relationships.
Schedule IV of the Companies Act contains a detailed code for independent directors (the "Code" that requires independent directors to, inter alia, 'moderate and arbitrate in the interest of the company... in situations of conflict between management and shareholder's interest.' SEBI, in re Dish TV India Limited, 2022,16 held independent directors to be in breach of the Code for not effectively managing a conflict between the promoters and the largest public shareholder.
The manner of appointment of independent directors has to be 'independent of the company management' per the Code, and be evaluated with respect to their ability to effectively discharge their duties. SEBI, in re Madhav Sapre and Ors. in re Sharon Bio-Medicine Limited,17 deprecated the appointment of independent directors to the audit committee when such independent directors did not have adequate knowledge of financial statements, permitting the promoters to carry out financial misrepresentation. In the said case, SEBI held that independent directors must effectively discharge their duties, and be fully aware of their responsibilities in doing so, as also to seek professional advice in the discharge of said duties if the need arises.
Notably, defaults of the Code can be recognized in accordance with Section 149(12) of the Companies Act. In V. Selvaraj vs The Reserve Bank of India,18 the Hon'ble Madras High Court laid down the ingredients for the foregoing section, viz when defaults occurred with the director's (i) knowledge, (ii) active participation in the company's day-to-day affairs, and (iii) with their consent, connivance or non-diligence. Such a view was reiterated in a Ministry of Corporate Affairs circular in 2020.19
Additionally, a cool-down period has been stipulated under Regulation 25(11) of the LODR Regulations, where an independent director cannot be appointed as an executive / whole time director on the board of the listed entity, its holding, subsidiary or associate company or on the board of a promoter group entities, unless a period of one year has elapsed from the date of their resignation. The purpose of the provision is to prevent independent directors from being subject to inducements in the form of future executive or whole-time directorships.
Disclosures of Interest
The principal mechanism under the Companies Act to control conflicts of interest are by way of adequate disclosures by directors, permitting the board of directors to take an informed decision.
Section 184(1) of the Companies Act requires every director 'to disclose his concern or interest (including shareholding) in 'any company or companies or bodies corporate, firms, or other association of individuals'. As held by the Hon'ble Supreme Court in R. Dalmia vs Commissioner of Income Tax, New Delhi,20 the term concern or interest is not limited to shareholding or direct control, and includes indirect control as well.
Under Section 184(2) of the Companies Act, similarly, every director of a company who is directly or indirectly concerned or interested in a contract or arrangement being entered into by the company, is (i) required to disclose the nature of his concern or interest at the meeting of the Board where such contract is discussed, and (ii) shall not participate in such meeting.
The corresponding Regulation 4(2)(f)(i)(1) of the LODR Regulations mandates board members and key managerial personnel to 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. Regulation 26(5) of the LODR Regulations places a similar disclosure requirement on senior managerial personnel.
Vide a Department of Corporate Affairs clarification over Section 299(1) of the erstwhile Companies Act, 1956,21 corresponding to Section 184(2) of the Companies Act, the 'contracts or arrangements' contemplated therein are such that 'the director has a personal interest conflicting with his duties towards the company as its director.' Further, if the director's relatives are interested in such contract, the director would be deemed 'indirectly interested'. Also, the use of the phrase 'in any way' widens and includes cases where a director may owe a duty or have a personal interest, whether pecuniary or otherwise, which may conflict with his fiduciary responsibility. Such a view was also taken by the Chancery Division of the High Court of Justice in England in Movitex Ltd. vs Bulfield.22
The regulation and disclosure of related party transactions ("RPTs") further constitute an essential element in preventing conflicts of interest. Section 188 provides the basic scheme of disclosures of RPTs, as well as thresholds for permitted RPTs. Further, a tiered system of approvals is mandated, where board approvals suffice for prescribed thresholds, beyond which prior shareholder approvals become necessary. All transactions thus entered into must also be mentioned in the board's report to shareholders, with corresponding justification. The identification and quantification of RPTs are specified under the Indian Accounting Standard (Ind AS) 24.
Moonlighting
In the wake of the Covid-19 pandemic, the transition to fully remote working, as well as the insecurities pertaining to the situation, motivated a wave of 'moonlighting', or parallelly and discreetly working in multiple organisations, contravening contractual obligations.
Section 27 of the Contract Act, 1872, renders void any agreement which restrains one from exercising a lawful profession, trade or business. However, the Hon'ble Supreme Court in M/s Gujarat Bottling Co. Ltd. & Ors. vs The Coca Cola Co. & Ors.,23 held that negative covenants restraining an employee from engaging with another master to undertake similar or substantially similar duties is permitted, provided the contract is not unconscionable, unreasonably harsh, or one-sided. Further, the Hon'ble Karnataka High Court in V.V. Sivaram and Ors. vs Foseco India Limited,24 held that restrictions on employees during the duration of their agreed service is valid. Accordingly, contractual terms stipulating exclusivity of service during the period of engagement are upheld, and breaches permit the engaging party to seek legal remedies.
In Mohinder Kumar vs The State of Punjab & Ors.,25 the Hon'ble Punjab & Haryana High Court used the term 'moonlighting' explicitly in the case of a doctor whose consulting services were terminated by an Indian company when he took an unauthorized leave to engage himself with a hospital in Saudi Arabia. It may be noted that neither party could present a written contract or record of their arrangement. The Hon'ble court held that, since doctors' work is of a specialized and technical nature, they are not 'workmen' under the Industrial Disputes Act, 1947, and the Indian hospital could terminate the doctor's services by way of an ex parte inquiry. Owing to the limited application of the term 'workman' as under the Industrial Disputes Act, 1947, in the modern economy, the termination of a professional due to moonlighting , even in the absence of a written contract, may be tenable.
Insider Trading and Unfair Trading Practices
There exists an interplay between the provisions of the Companies Act and the LODR Regulations pertaining to conflicts of interest with the provisions of the SEBI (Prohibition of Insider Trading) Regulations, 2015 ("PIT Regulations"), and provisions of the SEBI (Prohibition of Fraudulent and Unfair Trading Practices) Regulations, 2003 ("PFUTP Regulations"). In essence, both the PIT and PFUTP Regulations serve to prevent conflicts of interest, and protect broader investor interests. Parallelly, Regulation 30(4)(1) of the LODR requires a disclosure of certain information (subject to materiality thresholds), and includes '... (b) the omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date;'. Accordingly, the SEBI order in re Seya Industries Ltd.26, held that what is 'price sensitive' under the PIT Regulations is essentially 'material' under the LODR Regulations, but the converse is not true.
The general prohibition contained under Regulation 4(1) of the PIT Regulations is that 'insiders' shall not trade in securities that are listed or proposed to be listed while in the possession of 'unpublished price sensitive information ("UPSI"). In case such a prohibited trade does occur, it is presumed that such trade was motivated by the UPSI in the insider's possession. Thus, one of the objectives of the PIT Regulations is to prevent asymmetry of information favoring insiders to be used to garner undue gains.
The term 'insider' under the PIT Regulations is of very wide import, and includes (i) 'connected persons', and (ii) persons in possession of or having access to UPSI. 'Connected persons' under the PIT Regulations is itself an expansive class of individuals, body corporates and associations of persons, and includes, inter alia, any person associated with the company directly or indirectly in the previous six months (including directors, officers, employees, and persons having any business or fiduciary relationship with the company). A deeming fiction is also established in this regard for, inter alia, immediate relatives of connected persons, and holding, associate or subsidiary companies. UPSI means any information that is not generally available relating to the company or its securities which may directly or indirectly, likely to affect the price of the securities, and includes financial statements, changes in capital structure, mergers and acquisitions, etc. It may be noted that in SEBI vs Abhijit Rajan,27 the Hon'ble Supreme Court held that the term 'likely to affect' means that actual gain or loss is immaterial, instead, the motive for making a gain is essential under the PIT Regulations. Thus, the underlying theme of prevention of gains from a conflict of interest is reflected in the PIT Regulations.
Similarly, a combined reading of Regulations 3 and 4 of the PFUTP Regulations prohibits dealing in securities in a 'fraudulent' manner. The term 'fraud' 'includes any act, expression, omission or concealment committed whether in a deceitful manner or not... while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss'. Specific instances of fraudulent or deceitful conduct under Regulations 3 and 4 of the PFUTP Regulations includes, inter alia, 'any act of diversion, misutilisation or siphoning off of assets or earnings of a company'.
The interplay between the LODR Regulations, PIT Regulations, and the PFUTP Regulations is illustrated by the SEBI order in re Seya Industries Ltd.,28, where the same factum led to separate violations of separate regulations. A series of circuitous and fictitious transactions were entered into by the company with entities connected with the promoter group to inflate sale figures and siphon monies. Concomitantly, RPTs were not appropriately disclosed in the financial statements of the Company. The Company also did not intimate the stock exchanges of its accounts being declared non-performing assets ("NPAs") by certain banks, and the appointment of a forensic auditor by one of these banks in connection with such NPAs. SEBI, in consideration of the facts at hand, pronounced interrelated violations of the PIT and PFUTP Regulations, as follows:
- The failure to disclose RPTs, ipso facto, were held to be violations of, inter alia, Regulations 4(1)(a), 4(1)(b), 4(2)(e)(i), read with Part A of Schedule V of the LODR Regulations; However, the same misreporting of RPTs also stood in contravention of Regulation 4(2) of the PFUTP Regulations; and
- The non-disclosure of the NPAs and the corresponding appointment of a forensic auditor was violative of Regulations 4(1)(d), (e), (f), (g), (h), (i) ,(j), and Regulation 30(2) and (3) of the LODR Regulations; Simultaneously, such information constituted UPSI, and its non-disclosure was held to be a violation of Regulation 8(1) read with clause 1 of Schedule A of the PIT Regulations.
In re Reliance Industries Limited,29 the Hon'ble Securities Appellate Tribunal ("SAT") dealt with a case with an interplay of the LODR Regulations and the PIT Regulations. In the foregoing matter, news concerning negotiations at an advanced stage between Facebook, Inc. and Reliance Industries Limited ("RIL"), for an acquisition of equity shareholding in an unlisted subsidiary of RIL, was leaked to the media and published prior to any announcements by either party. The inadvertent disclosure of the news, followed by the non-confirmation of the same, constituted contraventions of the PIT and LODR Regulations simultaneously:
- The SAT held that Regulation 30(11) of the LODR Regulations was of a mandatory nature, and made it incumbent upon RIL to confirm or deny the media reports post-leak; and
- The SAT, thereafter, held that a binding agreement need not be entered into for information to be considered credible and concrete, and a 'discussion/nod at the highest level in both groups' where details such as the total number of equity shares to be purchased were finalized, was sufficient for information pertaining to the prospective transaction to be considered UPSI; The media reportage of the transaction post-leak required RIL to make such UPSI 'generally available' vide clause 4 of Schedule A of the PIT Regulations, which mandates 'prompt dissemination of unpublished price sensitive information that gets disclosed selectively, inadvertently or otherwise to make such information generally available.' Thus, Regulation 8(1) of the PIT Regulations read with clause 4 of Schedule A of the PIT Regulations stood violated.
SEBI's recent initiative to mitigate conflict of interest
SEBI has constituted a 'High Level Committee on Conflict of Interest, Disclosures and related matters' on April 9, 2025.30 It may be noted that the foregoing committee's scope and objective is limited to the SEBI's board members and officials – a welcome stance by a regulator underscoring the importance of corporate governance norms in its own conduct, critical to maintaining the confidence of market participants.
Conclusion
Conflicting interests are inevitable in corporate conduct, and as discussed above, may have variegated regulatory approaches that are context specific. Effectively, a conflict management framework would essentially require robust processes for reconciliation of divergent interests, and preventing such interests from impacting the company. Such management has to account for innate subjectivity, legal nuances, and matters of principle, some of which have been briefly described hereinabove. Applying such effective conflict management would ensure justice to the spirit of the law thereby instilling a better culture of good corporate governance amongst all stakeholders.
Footnotes
1. SEBI Order No. WTM/AB/CFID/CFID-SEC1/31379/2025-26 dated April 15, 2025
3.( 2011 ) 6 SCC 617
4. (1986) 1 SCC 264
5. (2021) 9 SCC 449
6. 1971 AIR 321
7. (2021) 9 SCC 449
8. 1950 AIR 172
9. AIR 1916 PC 161
10. [1942] 1 All ER 378
11. AIR 1956 Pepsu 89
12. 2016 SCC OnLine Del 512
13. (2024) 1 SCC 42
14. SEBI Interpretive Letter No. SEBI/HO/CFD/PoD2/OW/P/2025/13133/1 dated May 14, 2025
15. 2015 SCC OnLine Bom 5818
16. SEBI Final Order No. WTM/SM/CFD/CMD-1/15312/2021-22 dated March 7, 2022
17. SEBI Adjudication Order No. Order/MC/RM/2022-23/16813-16819 dated May 31, 2022
18. 2019 SCC OnLine Mad 38930
19. Ministry of Corporate Affairs General Circular No.1/2020 F. No. 16/1/2020- Legal, dated March 2, 2020
20. 1977 AIR 988
21. Circulars & Clarifications on Company Law, Taxmann, 2006. p 448
22. [1988] BCLC 104 (Ch D)
23. 1995 AIR 2372
24. [2006] 133 Comp Cas 160 (KAR)
25. MANU/PH/3469/2014
26. SEBI Order No. WTM/AN/CFID/CFID/31392/2025-26 dated May 2, 2025
27. 2022 SCC OnLine SC 1241
28. SEBI Order No. WTM/AN/CFID/CFID/31392/2025-26 dated May 2, 2025
29. SAT Order in Appeal No. 603/2022, dated May 2, 2025
30. SEBI PR No.: 21/2025 dated April 9, 2025
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