Directors' Liability Heat-Map: Related Party & Financial Integrity

Where financial decisions turn into personal exposure. Each head is a working checklist, not an exhaustive statement of law. Checked against law as at September 2026.

Omnibus Approval Limits

*Efficiency against regulatory oversight.*

• Justification: Is there a clear business necessity for the repetitive transactions covered?
• Value cap: Are per-transaction and annual aggregate limits specified and aligned with the materiality policy?
• Validity period: Does the approval state that it holds for one financial year only?
• Review frequency: Is an actual-against-approved reconciliation placed before the Audit Committee quarterly?

The Indirect Interest Scan

*Identifying hidden related parties.*

• Upstream and downstream mapping: Have you mapped firms where a director or relative is a partner, and private companies where they are a member or director?
• Professional capacity check: Does the transaction involve a firm providing professional services, exempt under Section 188 but disclosable under LODR?
• MBP-1 annual refresh: Is each director's notice of interest updated immediately on any change in shareholding or directorship?
• Relative definition: Does the secretarial database track relatives strictly as defined under Section 2(77)?

CSR Spend against Impact

*Beyond cheque-writing.*

• Administrative overheads: Do overheads stay within 5% of total CSR expenditure?
• Impact assessment: For a CSR obligation of Rs 10 crore or more, has an independent agency assessed projects above Rs 1 crore?
• Surplus treatment: Is there a board-approved policy ploughing any surplus back into the project or a specified fund?
• Capital assets: Where CSR funds created a capital asset, is ownership held by a Section 8 company, a public authority or the beneficiaries - and not the company?

*The pending Corporate Laws (Amendment) Bill, 2026 proposes raising the CSR net-profit trigger from Rs 5 crore to Rs 10 crore and extending the unspent-transfer window from 30 to 90 days. The current Rs 5 crore and 30-day rules apply until notified.*

Internal Financial Controls

*Protecting the board from financial misstatement charges.*

• Risk control matrix: Does it cover inventory valuation, revenue recognition and procure-to-pay?
• Segregation of duties: Is there a digital audit trail showing the initiator of a payment is not its approver?
• IT general controls: Are ERP access logs reviewed periodically against unauthorised modification?
• Management testing: Has management tested operating effectiveness before the statutory auditors arrive?

Dividend Distribution Policy

*Shareholder expectation against liquidity.*

• Solvency benchmarks: Does the policy set internal debt-equity and current ratio thresholds to be met before declaration?
• Reserve adequacy: On inadequacy of profits, does withdrawal from accumulated profits respect the 10% cap?
• Tax impact: Has withholding tax across shareholder categories been factored in?
• Future capex needs: Is a retention ratio documented to justify why a higher dividend was not paid?

Loans to Directors (Section 185)

*Avoiding criminal liability.*

• The prohibited list: Is the loan to a director, a firm in which they are a partner, or a private company where they are a director or member? Generally prohibited.
• The exempted list: Where given to a wholly owned subsidiary, is it used strictly for that subsidiary's principal business activities?
• Special resolution: For entities in which a director is interested but not prohibited, has a special resolution been passed?
• Conditions of service: If the loan is part of terms offered to all employees, is it documented in HR policy?

*The wholly owned subsidiary exemption covers loans. A guarantee or security for a non-wholly owned subsidiary's debt is not covered and needs separate analysis.*

Inter-Corporate Deposits (Section 186)

*Managing the 60% and 100% limits.*

• Limit tracker: Do loans, guarantees and investments together exceed 60% of paid-up capital plus reserves, or 100% of free reserves?
• Interest yield: Is the rate above the prevailing yield on the government security closest in tenor to the loan?
• Prior approval: Where limits are exceeded, was a special resolution passed in advance rather than ratified later?
• Default status: Is the company free of any subsisting default on deposits or interest, which would bar further loans?

Statutory Auditor Rotation

*Independence and institutional memory.*

• Cooling-off period: After two terms of five years, has the five-year cooling-off been strictly observed?
• Common network check: Does the incoming auditor belong to the same network as the outgoing firm?
• Engagement partner rotation: Even where the firm continues, has the signing partner rotated?
• Audit fee benchmarking: Is the fee commensurate with the effort, so independence is not compromised by low-balling?

Unpaid Dividend and IEPF

*The seven-year statutory clock.*

• Transfer timeline: Are funds moved to the unpaid dividend account within seven days of the 30-day post-declaration period?
• Website disclosure: Is the statement of shareholders with unpaid dividends updated annually on the website?
• IEPF-4 filing: For shares transferring to the IEPF Authority, has the corporate action been initiated with the depository?
• Claimant assistance: Is a nodal officer designated to help shareholders reclaim shares?

Audit Committee Executive Sessions

*The vigilance quotient.*

• Frequency: Is at least one meeting a year held with the statutory and internal auditors without the CEO or CFO present?
• Scope check: Did the auditors feel limited in scope by management?
• Management responsiveness: Are internal audit recommendations implemented promptly?
• Tone at the top: Do the auditors perceive a strong culture of compliance at board level?