Legal Framework for Conflict of Interest (COI) at Workplace

In the ever-changing modern workplace, ensuring ethical conduct is essential for maintaining integrity and trust. The organizations encounter many problems but one of the major challenges faced by them is managing conflict of interest among employees. When a person’s personal interests obstruct or appear to obstruct their capacity to carry out their professional responsibilities impartially, it is considered a conflict of interest. It takes a strong legal framework to solve this issue. In this article, we will explore the Legal Framework for Conflict of Interest at workplace.

Legal Definition of Conflict of Interest (COI)

According to Black’s Law Dictionary Conflict of Interest means a situation that can undermine a person due to self interest and public interest. In other words, Conflict of Interest refers to a situation where individual interests or relationships clash with professional responsibilities.

In India, Conflict of Interest (COI) at workplace is primarily governed by the Companies Act 2013 and Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2015. Provisions have been made under these regulations for conflict of interest termination between employees, directors and shareholders. We will be discussing each one of them.

Legal Framework for Employees Conflict of Interest

When it comes to legal framework for employees conflict of interest there is no specific COI regulations under Companies Act and SEBI (Listing Obligation and Disclosure Requirement) Regulation 2015. However, there is a provision but it specifically deals with the senior management disclosure. According to SEBI (LODR) Regulation, vide Regulation 26(5), senior management shall make disclosures to the board of directors relating to all material, financial and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the listed entity at large.

Legal Framework for Directors Conflict of Interest

In corporate governance legal framework for director’s conflict of interest is a crucial aspect to maintain transparency, fairness and integrity within organizations. Conflict of Interest and ethics among directors may arise when these director’s personal interest vary from the interests of company and therefore, Section 166(4) of Companies Act 2013, which states that a director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts or possibly may conflict with the interest of the company.

However, the Act does not only prohibit the directors from conflict of interest but also provides for mechanisms to prevent it. The provisions which deal with the same are:

• Section 184 of Companies Act which talks about the Disclosure of interest by director. It states that every director shall disclose his concern or interest in any company or companies or body corporate, firms or other association of individuals.
• Section 188 of Companies Act which requires a company to obtain approval of the Board prior to entering any transaction or agreement with a related party.

Non-compliance of the above provisions may also attract penalties.

• Another provision which attracts the concept of conflict of interest is Section 174 of Companies Act which has made provisions regarding the quorum of Board meeting and states a condition where at any time the number of interested directors exceeds or is equal to two-third of total strength of Board of Directors, then in such a situation the directors who are not interested directors and present at meeting not less than two, shall be the quorum.

Along with the above provisions Securities Exchange Board of India (Listing Obligation and Disclosure Requirement) Regulation 2014 also states certain rules regarding conflict of interest among directors relationship i.e.:

• It requires at least half of the Board of Directors to be independent directors.
• And according to Regulation 4(2)(f)(iii)(8) The board of directors shall consider assigning a sufficient number of non-executive members  of  the  board  of  directors  capable  of  exercising independent judgement to tasks where there is a  potential for conflict of interest.

Legal Framework for Shareholder’s Conflict of Interest

The legal framework for addressing the shareholder’s conflict of interest forms an integral part of corporate governance under the Companies Act 2013. Rules have been alluded to combat such conflict of interest under the Act. The second provision of sub-section(1) of Section 188 of Companies Act makes it mandatory for the members of company to not vote in any resolution approving any contract or arrangement entered by the company if such member is a related party. However, if in a company ninety percent or more members are relatives of promoters or are related party, then in such case the above provision shall not be applicable. Therefore, this framework aims to ensure a foundation for regulating the relationships and interactions among shareholders to ensure fairness, transparency and protection of company’s interest.

Conclusion

To preserve the integrity of the modern workplace, a robust legislation regarding conflicts of interest is essential. Employers that strive to foster an ethical culture and protect the interests of the company and its stakeholders must manage an intricate network of rules and regulations. Organizations can survive in long term by constantly changing business environment, promote confidence, and comply with legal requirements by fostering transparency, accountability, and ethical conduct.