INTRODUCTION

Everywhere in the entire world, one has to follow certain rules and regulations. If one wants to be part of something he/she has to follow certain rules and regulations. An individual, if wanted to remain in society, has to obey the law of nature and respect nature, otherwise, this nature will destroy an individual. In the same way, if one wants to be a part of the corporate world, he/she has to follow rules and regulations as mentioned in the Companies Act. In this particular article, we are going to discuss section 194 i.e. prohibition on forward dealings in securities of companies by directors or key managerial personnel. The directors or key managerial personnel are not allowed to buy shares in any company. The result of buying shares in other companies would call for punishing the persons indulging in the same. The thing is that there exist well-established judicial precedents as well as laws that the directors have fiduciary obligations and duties to act reasonably and honestly in the best interest of the companies where they hold such positions. However, this section is no longer part of the Companies Act as it was amended by amendment of 2017. 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 the right to call or put option in respect of shares in a relevant company, in which they have a relationship 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 favor 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

1.      The main purpose of this section is to prohibit forward dealings in securities of a company by directors or key managerial personnel. So, the directors or key managerial personnel can no longer be involved in shares/debentures of a company.

2.      No director of a company or any of its member’s personnel shall buy into the company (a) the right to call for delivery or a right to make delivery at a specified time, of a specified number of relevant shares at a specified amount of relevant debentures (b) right, as he may elect, to call for delivery or to make delivery at a specified time of a specified number at relevant shares or relevant debentures.

3.      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 a fine which shall not be less than rupees five lakh, or both.

SITUATIONS BEFORE ENACTMENT OF SECTION 194

The present section is a new provision in the Companies Act about protecting companies from forward trading by directors and key managerial personnel. As there was no provision regarding this prohibition under the Act of 1956. This provision is not applicable to key managerial personnel but also to all kinds of directors of the company. This provision is applicable to all kinds of private limited companies.

APPLICATION OF SECTION 194

Basically, this section comes into the application when any director or key managerial personnel is involved in any forward dealing of the securities as laid down under this section. The purpose of this section is to prohibit such transactions and ensure a penalty of a fine as well as imprisonment on directors and key managerial personnel, involved in any such forward dealing of securities.

AMENDMENT

The particular section has been amended by the Companies (Amendment )Act,2017 whereby this section was omitted. This section as before 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 the prices of the shares. It was taken into consideration for the omission of this section. The regulations by SEBI for curbing insider trading and forward dealings are quite comprehensive and take care of the situation predicted by this section thus this section was omitted.

SUMMARY

So, basically, this section laid down a prohibition on forward dealings with respect to directors and key managerial personnel of a company. This provision 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.

REFERENCES

 Section -194 of the Companies Act 2013

 Section -324 of the Companies Act 1956

 The Companies Act 2017 (Amendment)

https://www.ssm.com.my/acts/fscommand/act125s0306.htm

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