This article has been written by Ms. Shubhangi Kusum, a 4th year student of ICFAI University, Jharkhand.

 

Abstract

The article consists of the works related to the functioning and the qualification of the interference of the director with respect to the company. The company act guidelines ensures that there should not be any occurrence of the situation or the reasonable cause for the conflict of interest directly or indirectly or would not be the emergence of the situation like that. Basically, it can be said that the interest of the conflict arises from when a person’s interest or the individual’s interest lies in between the duties and responsibilities of its professionalism.

The professional duties and responsibilities should keep apart from its personal works and duties as the conflict of interest makes it all clear about a person or an individual working in that particular company. There should be the proper direction of working so that the both does not collapse at the same time. There should be a proper balance in between both of these in the direction of working. There is a need of balancing the working consideration of the personal and the professional duties and responsibilities.

Introduction

In the intricate landscape of corporate ethics, managing conflicts of interest is paramount. Conflict of interest is a critical aspect in the corporate world, ensuring ethical conduct and maintaining integrity. It can be said that if any individual’s or personal’s interest creates an obstruction in the capacity to carry out their professional responsibilities directly or indirectly, it can be considered as the conflict of interest. If we consider a workplace, the emergence of the conflict of interest can occurs by the divergence in their professional and personal considerations. The conflicts related to navigating the personal and the professional considerations should be kept in the balanced way so that there should be a settled mechanism to avoid the collapse between the personal and professional matter of things.  

Ethical guidelines and disclosure mechanisms can be established by the companies to address as well as mitigate the potential dispute, fostering an environment which gives opportunity to the employees to make decisions of their own with the organisation’s values and objectives. Managing conflict of interest effectively subscribe to a transparency of culture, integrity and trust within the workplace. There is a need of strong legal framework for resolving the issues.

To consider the legal framework for addressing the conflicts of interest at the workplace in India is primarily governed by the Companies Act,2013 and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations,2015. The main three categories considered are the Employees, Directors and Shareholders.

 This article explores the legal framework governing COI, emphasizing transparency, disclosure, and preventive measures. It delves into practical strategies for maintaining the integrity within organizations from the employee obligations to the director fiduciary duties.

Legal definition of Conflict of interest 

As stated in Black’s law dictionary Conflict of Interest is situation that can undermine person due to self interest and public interest. In other words Conflict of Interest as a situation where personal interest clashes with professional responsibilities, potential undermining impartiality.

In India, conflict of interest at the workplace is primarily governed by the Companies Act, 2013 and SEBI regulations.

It is often legally required, when such a situation arises, the party with the conflict of interest is customarily entreat to remove themselves.

Legal framework for Employees Conflict of Interest

While there are no specific COI regulations under the Companies Act,2013. As stated in SEBI regulations 26(5) for employees, senior management is required to disclose material, financial, and commercial transactions where their personal interest may conflict with the company’s interests. In the case of other employees and non-listed entities, COI situations are governed by the company’s code of conduct.

Legal framework for the Director’s Conflict of Interest

Directors owe a fiduciary duty to the company and its shareholders. This duty requires them to maintain the highest standards of conduct in their dealings with the company’s day-to-day affairs.

Section 166(4) of the companies act 2013, states that directors must not involve themselves in situations where their direct or indirect interest conflict with the company’s interest. The duties of the directors are to ensure to avoid the actual Conflict of Interest but also the potential Conflict of Interest. 

The act not only forbid the directors from conflict of interest but also give procedures to avert it. The provision for the same is:

• Section 184 of the Companies act 2013 states that the disclosure of interest by director. Every director shall disclose his interest or concern in any company or companies or corporate body, firms or other association of individuals.
• Section 188 of the Companies act requires a company to obtain approval of the board prior to any transaction or agreement with a related party.

In India the ownership and control in India is very detached. Companies run by families are almost 90%. The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations 2015, in addition to the Companies Act 2013, consists of the following mechanisms which can prevent the directors from avoiding the Conflict of interest situation :-

• At least half of the board to be independent under regulation 4(2) (iii)(8)
• There should be the consideration of the assignment of a sufficient and adequate number of non-executive members of the board of directors capable for exercising the independent judgement of their own to tasks where there is a potential for conflict of interest.

 

Legal framework for Shareholders Conflict of Interest

There is a legal framework as well as the regulatory mechanism for addressing the shareholder’s conflict of interest creates an integral part of corporate governance under the Companies Act 2013. For the further example we can refer to the section 188 of the Companies Act 2013 which states that there is certain requirements for a company to obtain the approval of the Board and of the members of the board, in certain situations, prior to entering of any transaction or agreement with a related party and it is applicable to both private and public companies. There is also the proviso to the sub section (1) of the section 188 which serves as a safeguard, inhibiting shareholders from participating in the voting process pertaining to a resolution sanctioning a related party transaction. However, in the same contrast if there is a company then the company’s ninety percentage of members are of the relatives of prompters or are of the related party, then in such a case the above provision shall not be applicable. This regulatory framework mainly aims to fulfil and maintain the transparency, integrity and the fairness in the corporate dealings and ensures that the decisions made or taken are with due regard to the potential conflict of interest.

How can Companies prevent Conflict of Interest

Companies can take several measures to prevent conflicts of interest:

• Clear Policies and Codes of Conduct:

• Develop and communicate clear policies that outline expectations regarding conflicts of interest.

• Codes of conduct should address situations where personal interests may conflict with company interests.

1. Disclosure and Transparency:

• Employees and directors should disclose any potential conflicts promptly.
• Transparent reporting ensures that relevant parties are aware of potential conflicts.

1. Avoiding Dual Roles:

• Separate personal interests from professional responsibilities.
• Avoid dual roles that could create conflicts (e.g., serving on the board of a competitor).

1. Recusal and Abstention:

• Recusal: When a conflict arises, the involved party should step back from decision-making.
• Abstention: Refrain from participating in discussions or voting on matters related to the conflict.

1. Independent Committees:

• Establish independent committees to review and address conflicts.
• These committees can provide unbiased assessments.

1. Regular Training and Education:

• Educate employees and directors about COI risks and prevention.
• Regular training reinforces awareness.

1. Monitoring and Auditing:

• Regularly monitor transactions and relationships.
• Internal audits help identify potential conflicts.

1. Whistleblower Mechanisms:

• Provide confidential channels for reporting conflicts.
• Encourage employees to report concerns.

1. Ethical Culture:

• Foster an ethical organizational culture that prioritizes integrity.
• Lead by example from top management.

1. Legal Compliance:

• Adhere to legal requirements outlined in the Companies Act and other relevant regulations.

• Significance of Compliance: Adhering to legal requirements outlined in the companies act and other relevant regulations is crucial. Companies that effectively manage conflict of interest contributes to trust, reputation, and sustainable business practices.

Some common types of Conflict of Interest

Conflict of Interest (COI) can arise in various situations, where personal interests clash with professional responsibilities. Here are some common types of conflicts of interest:

1. Financial Conflict of Interest:

• Occurs when an individual’s financial interests (such as investments, ownership, or financial relationships) interfere with their professional duties.
• Example: A company executive advising a client to invest in a business owned by their spouse.

1. Personal Conflict of Interest:

• Arises when personal relationships or affiliations impact decision-making.
• Example: Hiring an unqualified friend or family member for a job within the company.

1. Contractual Conflict of Interest:

• Involves situations where an individual or organization has competing contractual obligations.
• Example: A consultant working for two competing companies simultaneously.

1. Professional Conflict of Interest:

• Pertains to professional roles and responsibilities.
• Example: A lawyer representing a client with whom they have a personal relationship.

Penalties for violation of COI guidelines

Violating Conflict of Interest (COI) guidelines can have serious consequences. Here are some of the penalties:

1. Civil and Criminal Liability:

• Civil Penalties: Companies may take legal action against employees or directors who breach COI rules. This can result in fines, compensation claims, or other financial penalties.
• Criminal Charges: In severe cases, criminal charges may apply if the violation involves fraud, misrepresentation, or embezzlement.

1. Disqualification and Removal:

• Directors: If directors are found guilty of COI, they may face disqualification from serving as directors in any company for a specified period.
• Employees: Employees violating COI norms may face termination or other disciplinary actions.

1. Reputational Damage: COI violations tarnish an individual’s reputation and erode trust within the organization and the business community.
2. Market Impact: For listed companies, COI breaches can impact stock prices, investor confidence, and overall market perception.
3. Regulatory Actions:

• Regulatory bodies such as the Securities and Exchange Board of India (SEBI) can act against listed entities and their management for non-compliance with COI norms.
• SEBI may impose fines, issue warnings, or even suspend trading of the company’s shares.

1. Shareholder Lawsuits: Shareholders can file lawsuits against the company or its management for losses incurred due to COI violations.

Some examples of Conflict of interest

1. Nepotism: Nepotism occurs when someone in a position of authority hires, promotes, or provides special treatment to a family member or close friend. This can lead to job perks for the family member that they may not necessarily qualify for. To prevent this, transparency is crucial, and relationships should be disclosed during hiring or promotion decisions.
2. Self-dealing: Self-dealing happens when an individual with financial responsibilities within an organization uses their knowledge of company finances or access to funds for personal gain. To avoid this conflict, individuals should remain neutral and act as if they didn’t possess any special knowledge.
3. Gift issuance: Gift issuance occurs when an employee accepts gifts from clients, vendors, or other business associates. While some exchanges may be innocent, many companies establish policies to prohibit this practice. Accepting gifts can raise questions about the professionalism of the relationship, so it’s best to politely decline them.
4. Insider trading: Insider trading involves using confidential information for personal benefit. When an individual with access to non-public information trades stocks or securities based on that knowledge, it creates a conflict of interest. Such actions can harm other investors and undermine market integrity.
5. Representing family members in court: If a lawyer represents a family member in a legal matter, their personal relationship may conflict with their professional duty to provide unbiased legal advice.
6. Starting a competing business: An employee who starts a business that competes with their full-time employer may face a conflict of interest. Balancing their loyalty to the existing company with their entrepreneurial aspirations can be challenging.
7. Advising investments in a spouse’s company: Financial advisors or consultants who recommend investments in a company owned by their spouse may compromise their objectivity and create a conflict of interest.
8. Hiring unqualified relatives or friends: Hiring close relatives or friends without proper qualifications can lead to favouritism and undermine fair hiring practices

Conclusion

Remember, adhering to COI guidelines is crucial for preventing and maintaining ethical standards, organizational integrity, and sustainable business practices. It’s essential to disclose any potential conflicts promptly and act in the best interests of the company and its stakeholders. Maintaining transparency, ethical conduct, and accountability is essential for the long-term success of any organization. If there will be proper regulations and principles for avoiding the conflict of interest, it will make parties and the companies more efficient in their field of working, it will increase the transparency of works and it will create such a healthy environment which uplifts the working culture and values of the company.

Effectively managing conflicts of interest contributes to a culture of transparency, integrity, and trust within the workplace. By adhering to these guidelines, companies can ensure ethical conduct and maintain the highest standards of corporate governance. Conflicts of interest can have legal ramifications and may require individuals to recuse themselves from certain decisions. As companies embrace these guidelines, they fortify their foundations, ensuring a harmonious symphony of business ethics.

References

• This article was originally written by miscellaneous published on legal window website. The link for the same is herein. https://www.legalwindow.in/legal-framework-for-conflict-of-interest-at-workplace/
• This article was originally written by CS Abhay Sharma published on tax guru website. The link for the same is herein. https://taxguru.in/company-law/legal-framework-conflict-interest-coi-workplace.html
• This article was originally written by Troy Segal published on Investopedia website. The link for the same is herein. https://www.investopedia.com/terms/c/conflict-of-interest.asp
• This article was originally written by Jamie Birt published on indeed website. The link for the same is herein. https://www.indeed.com/career-advice/career-development/conflict-of-interest
• This article was written by Shalie Reich published on eddy website. The link for the same is herein. https://eddy.com/hr-encyclopedia/conflict-of-interest/