Section 184 of the Companies Act, 2013 (The Act) and Section 184(2) of the Act


1.     Section 184 of the Companies Act, 2013 (The Act) deals with the disclosure of interest by a director.  It provides that every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year  or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern of interest in any company or companies  or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.   Rule 9 of (Meetings of the Board and its Powers) Rules 2014 provides that such disclosure shall be made in form MBP1.

2.     Section 184(2) of the Act requires the disclosure of any concern or  interest whether directly or indirectly by a director in a contract  or arrangement or a proposed contract or arrangement entered into or to be entered into


(a)   with a body corporate in which such director or such director in association with any other director holds more than 2% shareholding of that body corporate or is a promoter,  manager, Chief Executive Officer of that body corporate; or


(b)  with a firm or other entity in which such director is a partner, owner or member,
nature or concern of his interest at the meeting of Board in which contract or arrangement is discussed and shall not participate in such  meeting.  An explanation to section 174(3) of the Act dealing with the quorum for meetings of the Board also provides that an interested director means director within the meaning of sub-section 2 of Section 184.


A combined reading of the above sections in our opinion, leads to a conclusion that a director is required to make a disclosure in accordance with section 184(1) of the Act read with Rule 9 of the aforesaid Rules.  In case the director is interested in any contract or arrangement by virtue of the requirement laid down in section 184(2), he will not participate in such a meeting and also will not form part of the quorum for the purposes of such a meeting.  The disclosures made under section 184(1) of the Act are for the purposes of ascertaining the interest of the director as defined in section 2(49) of the Act which defines the term “Interested Director”.



The term “Free Reserves” has been defined by section 2(43) of the Companies Act, 2013 (The Act).  According to the said definition “Free Reserves” means such reserves which, as per the latest audited balance sheet of the company, are available for distribution as dividend.  The said definition excludes from the purview of the term “Free Reserves”, any amount representing un-realised gains, notional gains or any increase in value of assets on revaluation of assets or any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or liability at fair value.


The issue for consideration is whether capital redemption reserve or the securities premium reserve can be considered as free reserves.  Capital redemption reserve normally represents the amount transferred from free reserves at the time of redemption of redeemable preference shares out of profits of a company.  Securities premium on the other hand is received as and when shares are issued at a price higher than the paid up value of the share.  Though the aforesaid category of reserves are required to be shown  in Schedule IV of the Companies Act under head “Reserves and Surplus”,  in our opinion, the aforesaid category of reserves do not form  part of “Free Reserves” as the sum credited to the aforesaid accounts are not available for distribution as dividend.