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Steering clear of conflicts of interest can be the difference between life and death for private equity investments, writes PM Devaiah

It may be trite to say that trust is the force that drives the private equity business. Conflicts of interest arise when someone is unable to carry out a legitimate activity without fear or favour, and without prejudice or malice. The possibility of a clash between a person’s self-interest and professional interests can lead to unfair outcomes.

Regulators across the globe are proactively identifying conflicts and using prescriptions in the form of codes and regulations spanning general laws, special securities laws and other governance requirements.

private equity
PM Devaiah

Indian regulators have been proactive too, putting in place several laws and regulations. For instance, section 184 of the Companies Act, 2013, mandates that all directors must disclose their interests and prescribes serious consequences for failing to do so. In addition, the act (unlike its predecessor, the Companies Act, 1956), codifies the duties of directors, covering various conflicts of interest, so as to mandate a positive obligation to be followed by all directors while performing their duties.

Similarly, the Securities and Exchange Board of India (SEBI) regulations, including the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, require a disclosure of conflicts of interest of directors in the offer document. The Insolvency and Bankruptcy Code, 2016, for instance, prescribes stringent norms regarding conflicts for insolvency professionals. In addition, The Code of Criminal Procedure, 1973, one of the oldest laws dealing with this issue, prevents judges and magistrates from taking up cases where they have conflicts of interest.

While this is an indicative list of laws and regulations, the intent is clear – conflicts must be avoided as they can undermine the trust and robustness of the business environment.

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