Whether Borrowing From Directors is Related Party Transaction

QUERY: Mrs. Bhawani, one of the directors in ABC Limited (Listed Entity) got evidence against Mrs. Gowri, Chief Financial Officer (CFO), that she is indulged in the revenue leakage activities in the Company. Mrs. Bhawani is scared to report the above matter since Mrs. Gowri is a very close relative of other Directors, and Mrs. Bhawani will not get adequate safeguards from the Company. Advise Mrs. Bhawani, referring to provisions of the Companies Act, 2013, regarding the vigil mechanism, on the following points :

i) Can Mrs. Bhawani (Director) use the safeguards mechanism option available in the company regarding the above reporting.

ii) Who is the reporting authority to whom victims can access to report the above matter?.

iii) What are the disclosure requirements of details of Vigil Mechanism?.

ANSWER: The provisions related to Vigil Mechanism is contained in Section 177 (9) and (10) of the Companies Act, 2013 (the Act) read with Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014.

(i) According to Section 177(9) of the Act, a vigil mechanism shall be formed by the listed companies for the directors and employees who may report genuine concerns in the manner prescribed in Rule 7 for adequate safeguards against their victimization by use of such mechanism and make provision for direct access to the Chairperson of the Audit Committee in appropriate or exceptional cases.

Accordingly, the answer is Yes, Mrs. Bhawani, Director can opt to use the safeguard mechanism available to her under the Vigil Mechanism Policy of ABC Limited against, Mrs. Gowri, CFO who indulged in the revenue leakage activities in the company and she may directly report the matter to the Chairman of the Audit Committee and in case the Chairman of the Audit Committee has interest (being a relative of CFO) in the matter, Mrs. Bhawani may directly report the matter to the Chairman of the Board.

(ii) Reporting Authority shall be the Chairman of the Audit Committee or the director nominated to play the role of the Audit Committee, as the case may be, in exceptional cases.

(iii) It is imperative for the company to disclose the details of the establishment of vigil mechanism on the website of the company and in the Board's report.

VIGIL MECHANISM

Vigil Mechanism shall provide for adequate safeguards against victimization of persons who use such mechanism and also make provision for direct access to the Chairperson of the Audit Committee in appropriate or exceptional cases.

Further sub-section (9) of section 177 read with Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the following classes of Companies are required to establish a vigil mechanism.

• Every listed company;
• Every other company that accepts deposits from the public;
• Every company that has borrowed money from banks and public financial institutions in excess of Rs. 50.00 (Fifty) Crores.

COMPANIES (MEETINGS OF BOARD AND ITS POWERS) RULES,2014

RULE 7. ESTABLISHMENT OF VIGIL MECHANISM

(1) Every listed company and the companies belonging to the following class or classes shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances-

(a) The Companies which accept deposits from the public;

(b) The Companies that have borrowed money from banks and public financial institutions in excess of fifty crore rupees.

(c) Every listed company.

(2) The companies which are required to constitute an audit committee shall oversee the vigil mechanism through the committee and if any of the members of the committee have a conflict of interest in a given case, they should recuse themselves and the others on the committee would deal with the matter on hand.

(3) In case of other companies, the Board of directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism to whom other directors and employees may report their concerns.

(4) The vigil mechanism shall provide for adequate safeguards against victimisation of employees and directors who avail of the vigil mechanism and also provide for direct access to the Chairperson of the Audit Committee or the director nominated to play the role of Audit Committee, as the case may be, in exceptional cases.

(5) In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the director nominated to play the role of audit committee may take suitable action against the concerned director or employee including reprimand.

DISCLAIMER: The article presented here is only for sharing information with the readers. The views expressed are personal views of the author and shall not be considered as professional advice. In case of necessity consult with professionals.