10 - Chapter 4

CHAPTER- IV
ROLE OF DIRECTORS IN CORPORATE GOVERNANCE
The new Companies Act, 2013 makes a laudable contribution towards

stipulation and elucidation of the duties and responsibilities of the directors of a
company, more so of public limited companies. New Act not only fine tunes
corporate governance but goes a long a way in growth and prosperity of corporate
world in India; thereby removes the deficiencies of old Companies Act of 1956.
The new Companies Act, 2013 can be seen as offering a landmark piece of
legislation in this regard, which duly and explicitly clarifies, redefines, and
enlarges the ambit of duties and responsibilities of the directors. These newly
introduced provisions by Companies Act, 2013 regarding the duties and
responsibilities of the directors, including the independent directors, not only
provide greater certainty to the directors regarding their conducts and
responsibilities, and thus, ensuring better and impeccable corporate management
and governance; but also enable and empower the beneficiaries, regulators, and
the courts, to judge, regulate, and control the activities and obligations of the
directors more objectively and effectively. Ours this well-drafted web-article
offers very useful and fertile information exclusively about these new provisions
of the Indian Companies Act of 2013, connected with the roles, duties, and
responsibilities of the directors and independent directors of public limited
companies.
For duties and liabilities of the directors the legislation of Companies Act,
2013 is both fortified and enhanced by the revised corporate governance norms
(Revised and New Clause 49 of the Listing Agreement) of SEBI [the Securities
and Exchange Board of India], in order to bring the SEBI's corporate governance
norms in connection with the listed companies, in close harmony and consistency
with the provisions of the Companies Act, 2013.
While the several provisions of the Companies Act, 2013 related with
duties of directors have been made effective from April 01, 2014; the revised
SEBI's norms for corporate governance are likely to be in force from October 01,
2014.
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Here, it may also be briefly just mentioned that the Directors are regarded
as being the Key Managerial Persons of a company, with special importance to the
listed companies. They can hold multiple high and responsible positions in the
companies, such as the Managing Director, Manager, Whole Time Director, or an
Independent Director. Thus, efficient, flawless, and rather progressive
management of a company, and the desired growth and profitability of its
businesses, are certainly largely dependent on the competence and trustworthiness
of its directors. By the way, a Director means a Director appointed to the Board of
a company; and, the Board of a company represents the collective body of its
directors.
4.1 Legal Position of Director
I. Directors as Agents: A company as an artificial person acts through
directors who are elected representatives of the shareholders and who
execute decision making for the benefit of shareholders.
II. Directors as employees: When the director is appointed as whole time
employee of the company then that particular directors shall be considered
as employee director or whole time director.
III. Directors as officers: Director treated as officers of a company. They are
liable to certain penalties if the provisions of the companies act are not
strictly complied with.
IV. Director as trustees: Director is treated as trustees of the company,
money and property: and of the powers entrusted to and vested in them
only as trustee.
V. Director as “Officer” “officer” includes any director, manager or key
managerial personnel or any person in accordance with whose directions
or instructions the Board of Directors or any one or more of the directors is
or are accustomed to act.
4.2 Appointment of Directors
The success of a company depends upon the integrity and competence of
its directors. In Indian States Bank Ltd. v. Sardar Singh,1 it was held that it is
necessary that management of companies should be in proper hands. The
1
AIR 1934 ALL 855.
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appointment of directors is accordingly strictly regulated by the Act. There are
now special provisions for preventing management by undesirable persons. One
evil that is abolished by the Companies Act, 2013 is that of a company or firm
acting as a director of another company. Now only an individual can be appointed
as a director of a company and no company, firm or association can be appointed
as a director.2 No company is to appoint or appoint any individual as director
unless he has been allotted a Director Identification Number under section 154.3
4.2.1 Board of Directors
Every company should have a board of directors4consisting of individuals
as directors. A public company is to have a minimum of 3 directors and a private
company is to have 2 directors. In the case of one person company, only one
director is compulsory. There can be a maximum of 15 directors. A company may
appoint more than 15 only after passing special resolution. The Central
Government may prescribe a class or classes of companies who are to have at
least one woman director. These requirements are to be complied within 1 year of
enforcement of the Act of 2013. Every company is to have at least one director
who has stayed in India in the previous year at least for 182 days.5
4.2.2 Number of Directorships
A person cannot hold office of a director in more than 20 companies
including alternate directorships at the same time. Where a director already
holding office in 20 companies is appointed, the appointment shall not take effect
and shall become void unless within 15 days he vacates his office in some
companies to bring the number of directorships to 20. In the case of public
company, the maximum number of public companies in which a person can be a
director has been restricted to 10. The members of a company may by special
resolution specify any number of companies in which a director of the company
may act as directors. After the commencement of the Act, directors holding office
in companies more than those permitted under the section have to choose the
2
Section 149 of Companies Act, 2013.
3
Section 152(3) of Companies Act, 2013.
4
Section 2(10) defines Board of Directors as “Board of Directors” or “Board”, in relation to a
company, means the collective body of the directors of the company.”
5
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companies in which he would like to continue and intimate his resignation to
others. After such resignation, he cannot accept directorship in more than the
specified number except up to 1 year. Contraventions of the provision are
punishable.6
4.2.3 Independent Directors
The liability regime of the Companies Act, 2013 not only imposes the
above-mentioned duties and responsibilities on the directors of Indian companies,
but also advocates for independence and equitableness of the board of a company,
especially a public limited company. Consequently, the roles, duties, and
responsibilities of the Independent Directors have also been stipulated by the new
Indian Companies Act of 2013. An Independent Director is that member of the
board of a company, who does not possess any financial relationship with the
company (except the sitting fees), nor can own shares in the company. The earlier
Indian Companies Act of 1956 had no explicit provisions for the independent
directors, and only the Old Clause 49 of the Listing Agreement of SEBI contained
prescriptions for induction of independent directors to the listed companies.
The new Indian Companies Act of 2013 dictates that every listed company
must contain at least one-third of the total magnitude of its directors, as the
independent directors; and it also empowers the Government of India to include
other categories of companies within the scope of this provision or requirement7.
Public limited companies composited as per the former Companies Act, 1956, are
granted a transition period of one year for making strict compliance with this
mandatory provision. Again, the independent directors are not permitted to hold
office for more than two consecutive terms of five-year periods.
In the new regime, the roles and duties of the independent directors
attained significant expansion, and many new other areas have been prudently
covered. Broadly, they are intelligently assigned the highly responsible role of the
arbiters among various constituencies within the corporation. Hence, the new
provisions for the independent directors of the limited companies are certainly
very constructive for transparent and sound corporate governance, and are hugely
6
7
Section 149 of the Companies Act, 2013.
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beneficial to the company and its all shareholders. Some of the most significant
functions, duties, and liabilities of the independent directors, are the following
(According to the Schedule IV of the Companies Act, 2013):
I. To assist in forwarding equitable and independent judgment to the board
II. To secure and promote the interests of all stakeholders of the concerned
company, particularly of the minority shareholders
III. To conciliate and balance the conflicting interests of the stakeholders
IV. To attend actively and constructively most of the board and committee
meetings
V. To pay proper and adequate attention to Related Party Transactions (RPTs)
VI. To report concerns honestly and impartially about any unethical behavior,
violation of the code of conduct, or any suspected fraud in the company
4.2.3.1 Manner of Election of Independent Directors and Maintenance of Data8
Independent directors have to be selected from a data bank containing
names, addresses and qualifications of persons eligible and willing to act as
directors. This has to be maintained by any body, institute or association as may
be notified by Central Government. A body to be notified should have expertise in
creation and maintenance of such data bank and put it on their website for use by
the company making the appointment of such directors. The responsibility of
exercising due diligence before picking up a person from such data bank is to be
that of the company.9 The appointment has to be approved by the company in
general meeting. Data bank has to be maintained in accordance with the rules as
may be prescribed. The Central Government may prescribe the manner and
procedure of selection of independent directors who fulfil the qualification and
requirements under the act.10
4.2.4 Appointment of Directors elected by Small Shareholders 11
A listed company may have one director elected by such small
shareholders as may be prescribed. For the purpose of this section a small
8
Section 150 0f Companies Act, 2013.
9
Section 150 (1) of Companies Act, 2013.
10
Qualification and requirements stated in section 149 of Companies act, 2013.
11
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shareholder is a shareholder holding shares of nominal value of not more than
Rs.20,000 or such other sum as may be prescribed.
4.2.5 Appointment of First Directors12
The first directors of the company are to be appointed by the subscribers of
the memorandum which are listed in the articles of the company. If no
appointment is made then all the subscribers who are individuals become
directors. The first directors hold office only up to the date of first annual general
meeting of the company and subsequent directors must be appointed in
accordance with the provisions of the act.
In Usha chopra v. Chopra Hospital (P) Ltd.13 it was held that the
appointment of directors in a two-member, two-director company both of them
NRIs with no record of board meeting or notice to directors, was wrong and
oppressive.
4.2.6 Appointment of Directors at General Meeting
The shareholders exercise control14 through their power of appointment of
directors. The person to be appointed has to furnish his Director‟s Identification
Number and a declaration that he is not disqualified to become a director under
the provision of the Companies Act.15 The person appointed as director has to file
his consent to act as director. The consent is to be filed with the Registrar within
30 days of his appointment in the prescribed manner.16
4.2.7 Appointment of Rotational Directors
The Articles of the company may provide for retirement of all the directors
by annual rotation. Otherwise only 1/3 can be given permanent appointment. The
effect of these provisions is that the rotational director has to be appointed at
general meetings except where the act provides otherwise. This provision
eradicates the mischief caused by self-perpetuating managements. In BR Kundra
12
13
(2006) 130 Comp Cas 483 (CLB).
14
According to section 2 (27) of Companies Act, 2013, “control” shall include the right to appoint
majority of the directors or to control the management or policy decisions exercisable by a
person or persons acting individually or in concert, directly or indirectly, including by virtue of
their shareholding or management rights or shareholders agreements or voting agreements or in
any other manner;
15
16
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v. Motion Pictures Assn17 it has been held by the Delhi High Court that directors
cannot prolong their tenure by not holding a meeting in time. They would
automatically retire from office on the expiry of the maximum permissible period
within which a meeting ought to have been held.
In Swapan Dasgupta v. Navin Chand Suchanti18 it was held that where a
director to be rotated out is also holding the office of managing director, the latter
office will also vacate with the former, but expiry of the term of, or removal from
managing directorship, doesnot entail the cessation of his office as a director.
4.2.8 Reappointment of Directors at General Meeting
The vacancies thus created should be filled up at the same meeting but the
general meeting may resolve not to fill the vacancies. If it has done neither, the
meeting shall be deemed to have been adjourned for a week. If at the reassembled
meeting also no fresh appointment is made, nor there is a resolution against
appointment, the retiring directors shall be deemed to have been reappointed,
except in the following cases.
(i) at that meeting or at the previous meeting a resolution for the re-
appointment of such director has been put to the meeting and lost;
(ii) the retiring director has, by a notice in writing addressed to the
company or its Board of directors, expressed his unwillingness to be so
re-appointed;
(iii) he is not qualified or is disqualified for appointment;
(iv) a resolution, whether special or ordinary, is required for his
appointment or re-appointment by virtue of any provisions of this Act;
or
(v) a motion to appoint two or more persons as directors by a single
resolution, if passed without unanimous consent, being void under
section 162, it shall not have the effect of reappointing rotated out
directors.
17
(1976) 46 Comp Cas 339 (Del).
18
(1988) 64 Comp Cas 562: (1988) 3 Comp LJ 76 (Cal).
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4.2.9 Fresh Appoint of Director at the General Meeting19
If a new director is to be appointed in place of a retiring director, a notice
in writing for his appointment should be left at the office of the company at least
14 days before the date of the meeting along with a deposit of Rs. 1,00,000 which
shall be refunded if the candidate gets selected as a director or gets more than 25%
of total valid votes cast either on show of hands or on poll on such resolution. The
company is required to inform the members about the candidature in prescribed
manner.
In S Pazhamalai v. Aruna Sugars Ltd.20 it was held that it is not necessary
for proposing a candidate by a special notice that the requirements of section 111
relating to circulation of member‟s resolution be complied with.
In Namita Gupta v. Cachar Native Joint Stock Co Ltd.21 it was held that
non-compliance with the requirements of procedure renders the appointment void.
In this case the members were not informed.
In Prakash Roadlines Ltd. v. Vijaykumar Narang22 it was held that on receiving a
notice the company becomes bound to inform the members and has no discretion
in the matter.
4.2.10 Appointment of Director by Nomination23
An agreement among the shareholders may be imbibed in the articles to
the effect that every holder of 10% shares shall have the right to nominate a
director on the board. The phenomenon of nominee directors is now part of the
corporate scenario. Subject to the articles of a company, the Board may appoint
any person as a director nominated by any institution in pursuance of the
provisions of any law for the time being in force or of any agreement or by the
Central Government or the State Government by virtue of its shareholding in a
Government company.
19
20
(1984) 55 Comp Cas 500 (Mad).
21
(1999) 98 Comp Cas 655 (CLB).
22
(1993) 4 KLJ 561: (1995) 83 Comp Cas 569: ILR 1994 KAR 408.
23
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4.2.11 Appointment by Voting on Individual Basis24
At a general meeting of a company, a motion for the appointment of two
or more persons as directors of the company by a single resolution shall not be
moved unless a proposal to move such a motion has first been agreed to at the
meeting without any vote being cast against it. A motion for approving a person
for appointment, or for nominating a person for appointment as a director, shall be
treated as a motion for his appointment. A person who has been appointed as a
director for the first time is required to submit within 30 days of his appointment a
written consent to act as a director to the Registrar of companies.25
4.2.12 Appointment by Proportional Representation26
It is apparent from that the basic method adopted for the appointment of
directors is election by simple majority. All the directors of a company can,
therefore, be appointed by a simple majority of shareholders and a substantial
minority cannot succeed in placing even a single director on board. Section 163
provides opportunity to the minority to place their representatives on the board.
This provision enables a company to provide in its articles the system of voting by
proportional representation for the appointment of directors. It is devised to make
minority votes effective.
4.2.13 Appointment by Board
While the general power to appoint directors is vested in the general
meeting of shareholders, there are at least two cases when the board can also
appoint new directors. Firstly, articles may empower the directors to appoint
additional directors subject to the maximum number fixed therein.27
In BN Viswanathan v. Tiffins Baryt Asbestos (P) Ltd.28 there was conflict
between the general meeting and the directorate it was held that at the time of
general meeting there was no director validly in office and, therefore, the
members had the right to elect.
24
25
26
27
28
AIR 1953 Mad 520: (1953) 1 MLJ 346: (1953) 23 Comp Cas 79.
129
In Ram Kissendas Dhanuka v. Satya Charan Law29 held that the articles
may, however, be so expressed as to delegate the power of appointing new
directors to the board to the exclusion of the general meeting.
4.2.14 Appointment by the Tribunal
The Company Law Tribunal has power to appoint directors for prevention
of oppression and mismanagement.30 In Rolta India Ltd. v. Venire Industries
Ltd.31 an agreement between groups of shareholders not to increase the number of
directors and capital of the company and also not to do anything disturbing the
existing pattern of management was held to be not binding on the company so as
to prevent it from doing any of those things.
4.2.15 Director Identification Number
4.2.15.1 Application for allotment of number
Every individual intending to be appointed as director of a company shall
make an application for allotment of Director Identification Number to the Central
Government in such form and manner and along with such fees as may be
prescribed.32 The Central Government shall, within one month from the receipt of
the application under section 153, allot a Director Identification Number to an
applicant in such manner as may be prescribed.33
4.2.15.2 Prohibition on more than one Identification number
No individual, who has already been allotted a Director Identification
Number under section 154, shall apply for, obtain or possess another Director
Identification Number.34
4.2.15.3 Director to intimate Identification Number
Every existing director shall, within one month of the receipt of Director
Identification Number from the Central Government, intimate his Director
Identification Number to the company or all companies wherein he is a director.35
29
(1949-50) 77 IA 128: AIR 1950 PC 81. See also, A Ananthalakshmi Ammal v. Indian Trades &
Investment Ltd, AIR 1953 Mad 467 and MK Srinivasan v. WS Subramania Iyer, (1932) 32
Comp Cas 147: AIR 1932 Mad 100, where the power of appointment vested in the
shareholders, having been usurped by the directors, the appointments were held to be void.
30
Section 242 (j) of Companies Act, 2013.
31
(2000) 100 Comp Cas 19: (2000) 2 Bom CR 241: (2000) 3 Mah LJ 700.
32
33
34
130
4.2.15.4 Company to inform the Registrar of the Number
Every company shall, within fifteen days of the receipt of intimation under
section 156, furnish the Director Identification Number of all its directors to the
Registrar or any other officer or authority as may be specified by the Central
Government with such fees as may be prescribed or with such additional fees as
may be prescribed within the time specified under section 403 and every such
intimation shall be furnished in such form and manner as may be prescribed.36 If a
company fails to furnish Director Identification Number under sub-section (1),
before the expiry of the period specified under section 403 with additional fee, the
company shall be punishable with fine which shall not be less than twenty-five
thousand rupees but which may extend to one lakh rupees and every officer of the
company who is in default shall be punishable with fine which shall not be less
than twenty-five thousand rupees but which may extend to one lakh rupees.37
4.2.15.5 Obligation to indicate Director Identification Number
Every person or company, while furnishing any return, information or
particulars as are required to be furnished under this Act, shall mention the
Director Identification Number in such return, information or particulars in case
such return, information or particulars relate to the director or contain any
reference of any director.38
If any individual or director of a company contravenes any of the
provisions of section 152, 155 and 156 he becomes punishable with imprisonment
for a term extending up to 6 months or with fine extending up to Rs. 50,000. If
default continues further fine of Rs. 500 is levied on daily basis.39
4.3 Disqualification of Directors
Section 164 lays down the minimum eligibility requirements. A person is
not appointed a director in the following cases:
(a) where he is of unsound mind, provided that the fact has been certified by a
court of competent jurisdiction and the finding is in force;
35
36
37
38
39
131
(b) where he is an un-discharged insolvent;
(c) where he has applied to be adjudicated as an insolvent and his application
is pending;
(d) where he has been sentenced to at least 6 months of or otherwise
imprisonment for an offence involving moral turpitude or otherwise, and 5
years have not elapsed from the date of expiry of the sentence. If a person
has been convicted of any offence and sentenced in respect thereof to
imprisonment for a period of seven years or more, he shall not be eligible
to be appointed as a director in any company;
(e) an order for disqualifying him for appointment as a director has been
passed by a court or Tribunal and the order is in force;
(f) he has not paid any calls in respect of any shares of the company held by
him, whether alone or jointly with others, and six months have elapsed
from the last day fixed for the payment of the call;
(g) he has been convicted of the offence dealing with related party
transactions under section 188 at any time during the last preceding five
years; or
(h) he has not complied with the requirement of Director Identification
Number.40
The disqualifications referred to in clauses (d), (e) and (g) of sub-section
(1) shall not take effect for thirty days from the date of conviction or order of
disqualification; where an appeal or petition is preferred within thirty days as
aforesaid against the conviction resulting in sentence or order, until expiry of
seven days from the date on which such appeal or petition is disposed off; or
where any further appeal or petition is preferred against order or sentence within
seven days, until such further appeal or petition is disposed off.41
4.4 Ineligibility for Reappointment
No person who is or has been a director of a company which has not filed
financial statements or annual returns for any continuous period of three financial
years; or has failed to repay the deposits accepted by it or pay interest thereon or
40
Section 152 (3) 0f Companies Act, 2013.
41
Proviso to section 164 of Companies Act, 2013.
132
to redeem any debentures on the due date or pay interest due thereon or pay any
dividend declared and such failure to pay or redeem continues for one year or
more, shall be eligible to be re-appointed as a director of that company or
appointed in other company for a period of five years from the date on which the
said company fails to do so.42
4.5 Provision for Additional Disqualifications
A private company which is not a subsidiary of a public company may add
to further disqualifications.43 In Cricket Club of India v. Madhav L Apte44 it has
been held by the Supreme Court that this is an indirect way of saying that a public
company and its subsidiary private companies cannot increase the
disqualifications or add any other qualifications, such as, for example, that the
candidate should be a graduate.
In Ketan Karkishan Marvadi v. Saurashtra-Kutch Stock Exchange Ltd.45
the restriction on providing for additional disqualification has been held to be not
applicable to a Stock Exchange Public Company. Such a company can increase
the grounds of disqualification for the membership of a governing council.
4.6 Removal of directors
4.6.1 Removal by shareholders
A company may, by ordinary resolution, remove a director before the
expiration of his period of office. The English Companies Act, after providing
same provision, adds “notwithstanding anything in its (company‟s) articles or any
agreement between it and him.” These words are not provided in the Indian
provision, but same effect would follow as any provision in the company‟s articles
or in any agreement between a director and the company by which the director is
rendered irremovable by an ordinary resolution would be void, being contrary to
the Act. This provision intended to do away with arrangements under which
directors were either irremovable or removable only by extraordinary
resolutions.46 Power to remove directors has always been bestowed on
42
43
44
(1975) 45 Comp Cas 574 (Bom).
45
(2002) 109 Comp Cas 269: (2000) 1 GLH 331: (2000) 1 Guj LR 507.
46
See, Tarlok Chand Khanna v. Raj Kumar Kapoor, (1983) 54 Comp Cas 12: ILR 1982 Del 156.
133
shareholders, as we all know that at the end of the day, directors are answerable to
shareholders. Nothing has changed in the procedural aspect under Companies Act,
2013 as well. Shareholders can remove any director before the expiry of his
tenure, except any director appointed by Tribunal for prevention of oppression and
mismanagement47 and a director appointed under principle of proportional
representation.48
Section 115, 169 and deals with the procedure of removal of director by
shareholders as follows:
I. Special Notice To Company: Only shareholder/s holding not less than
1% of total voting power or holding shares on which an aggregate sum of
not less than Rs. 5,00,000 has been paid up as on the date of notice, can
send special notice to the Company for removal of director. The same
should be signed by the concerned shareholder/s.
II. Date of meeting: Above mentioned shareholders have the right to decide
the date of meeting. However, the special notice shall be sent not earlier
than three months but at least 14 clear days before the date of the
meeting49, at which the resolution is to be moved.
III. Intimation to Director: The Company shall forthwith send a copy of the
notice to the concerned director.
IV. Reasonable Opportunity of being heard: The Director may request to
send his representations along with the notice to the members and to be
heard at the meeting. However, the rights may not be available, if on the
application either of the Company or of any other person who claims to be
aggrieved, the Tribunal is satisfied that the rights conferred by this sub-
section are being abused to secure needless publicity.
V. Intimation by Company to all shareholders: Company shall take
immediate steps to send the notice to its members, at least 7 clear days
47
48
49
See, Gopal Vyas v. Sinclair Hotels & Transportation Ltd, AIR 1990 Cal 45: (1990) 1 Comp LJ
388: (1990) 68 Comp Cas 516. ; Karnatka Bank Limited v. AB Datar, (1993) 2 KLJ 230:
(1994) 79 Comp Cas 417; Prakash Roadlines Ltd. VijayKumar Narang, (1993) 4 KLJ 561:
(1995) 83 Comp Cas 569: ILR 1994 KAR 408 and Earnakulam Financiers & Kurries (P) Ltd v.
Joseph Chandy, (1998) 93 Comp Cas 275 (CLB).
134
before the meeting. The notice has to be sent in the same manner as in case
of any other general meeting of the Company.
VI. Publication in Newspapers: If it is not practicable to give the notice as
aforementioned, then notice shall be published in English language in
English newspaper and in vernacular language in a vernacular newspaper,
both having wide circulation in the State where the registered office of the
Company is situated. At the same time, the notice shall also be posted on
the website, (if any). However, it shall be published at least 7 clear days
before the meeting.
VII. Convening of General Meeting: Members may pass remove the director
by passing ordinary resolution.
VIII. Appointment of director in place of removed director: The
shareholder/s may recommend appointment of any other director in place
of removed director through special notice. Such a director can only hold
office till the tenure of removed director.
IX. Casual Vacancy: If a new director is not appointed as aforementioned,
then Board may fill the position through casual vacancy, however the
removed director shall not be re-appointed as a director by Board.
X. Vacation of Office: When a director is removed as aforementioned, his
office vacates automatically.50
4.6.2 Removal by Company Law Tribunal51
When, on an application to the Tribunal for prevention of oppression or
mismanagement, it finds that a relief ought to be granted, it may terminate or set
aside any agreement of the company with a director or managing director or other
managerial personnel. When the appointment of a director is so terminated he
cannot, except with the leave of the Tribunal, serve any company in a managerial
capacity for a period of 5 years.52 It is necessary that the Central Government
should be notified of the intention to apply for such leave. This is to enable the
50
51
Section 242 (2) (h) of Companies Act, 2013
52
Section 243(1)(b) of Companies Act, 2013.
135
Tribunal to hear the Central Government‟s point of view on the matter of leave.
Neither can he sue the company for damages or compensation for loss of office.53
4.6.3 Resignation by Director
A director may resign from his office by giving a notice in writing to the
company. On receiving it, the board has to take notice of the same. The company
has then to intimate the Registrar in such manner, within such time and in such
form as may be prescribed. The company has to place the fact of such resignation
in the report of directors laid in the immediately following general meeting of the
company. The director has also to send a copy of his resignation with detailed
reasons to the Registrar within 30 days of the resignation in the prescribed
manner. The resignation takes effect on the date on which it is received by the
company or the date specified in the notice whichever is later.54
4.6.4 Vacation of Office by Directors55
The office of directors is vacated in the following cases:
(a) when he incurs any of the disqualifications specified in section 164;
(b) he absents himself from all the meetings of the Board of Directors held
during a period of twelve months with or without seeking leave of absence
of the Board;
(c) he acts in contravention of the provisions of section 184 relating to
entering into contracts or arrangements in which he is directly or indirectly
interested;
(d) he fails to disclose his interest in any contract or arrangement in which he
is directly or indirectly interested, in contravention of the provisions of
section 184;
(e) he becomes disqualified by an order of a court or the Tribunal;
(f) he is convicted by a court of any offence, whether involving moral
turpitude or otherwise and sentenced in respect thereof to imprisonment
for not less than six months: Provided that the office shall be vacated by
the director even if he has filed an appeal against the order of such court;
53
Section 243 (1) (a) of Companies Act, 2013; see also, Prakash Roadlines Ltd. VijayKumar
Narang, (1993) 4 KLJ 561: (1995) 83 Comp Cas 569: ILR 1994 KAR 408.
54
55
136
(g) he is removed in pursuance of the provisions of this Act;
(h) he, having been appointed a director by virtue of his holding any office or
other employment in the holding, subsidiary or associate company, ceases
to hold such office or other employment in that company.
A director is obliged at the pain of penalty to leave office when he incurs
any of the disqualifications. If a person, functions as a director even when he
knows that the office of director held by him has become vacant on account of any
of the disqualifications specified in sub- section (1), he shall be punishable with
imprisonment for a term which may extend to one year or with fine which shall
not be less than one lakh rupees but which may extend to five lakh rupees, or with
both. Where all the directors of a company vacate their offices under any of the
disqualifications specified in sub-section (1), the promoter or, in his absence, the
Central Government shall appoint the required number of directors who shall hold
office till the directors are appointed by the company in the general meeting. A
private company may, by its articles, provide any other ground for the vacation of
the office of a director in addition to those specified in sub-section (1).
4.7 Powers of Directors 56
The Board of Directors of a company shall be entitled to exercise all such
powers, and to do all such acts and things, as the company is authorised to
exercise and do provided that Board shall be subject to the provisions contained in
that behalf in this Act, or in the memorandum or articles, or in any regulations not
inconsistent therewith and duly made there under, including regulations made by
the company in general meeting. It is further provided that the Board shall not
exercise any power or do any act or thing which is directed or required, whether
under this Act or by the memorandum or articles of the company or otherwise, to
be exercised or done by the company in general meeting. The Board of Directors
of a company shall exercise the following powers on behalf of the company by
means of resolutions passed at meetings of the Board, namely:-
i. to make calls on shareholders in respect of money unpaid on their
shares;
ii. to authorise buy-back of securities under section 68;
56
137
iii. to issue securities, including debentures, whether in or outside
India;
iv. to borrow monies;
v. to invest the funds of the company;
vi. to grant loans or give guarantee or provide security in respect of
loans;
vii. to approve financial statement and the Board‟s report;
viii. to diversify the business of the company;
ix. to approve amalgamation, merger or reconstruction;
x. to take over a company or acquire a controlling or substantial stake
in another company;
xi. any other matter which may be prescribed.
Some of the powers57 are to be exercised by the board only with the
consent of the company by a special resolution namely:
i. To sell, lease or otherwise dispose of the whole or substantially the
whole of the undertaking of the company or where the company
owns more than one undertaking, of the whole or substantially the
whole of any of such undertakings.
ii. To invest otherwise in trust securities the amount of compensation
received by it as a result of any merger or amalgamation;
iii. To borrow money, where the money to be borrowed, together with
the money already borrowed by the company will exceed
aggregate of its paid-up share capital and free reserves, apart from
temporary loans obtained from the company‟s bankers in the
ordinary course of business: Provided that the acceptance by a
banking company, in the ordinary course of its business, of
deposits of money from the public, repayable on demand or
otherwise, and withdraw able by cheque, draft, order or otherwise,
shall not be deemed to be a borrowing of monies by the banking
company within the meaning of this clause.
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iv. To remit, or give time for the repayment of, any debt due from a
director.58
4.8 Duties of Directors
The duties and responsibilities of directors stipulated by the Indian
Companies Act of 2013 can broadly be classified into the following two
categories: -
i. The duties and liabilities which encourage and promote the
sincerest investment of the best efforts of directors in the efficient
and prudent corporate management, in providing elegant and swift
resolutions of various business-related issues including those which
are raised through "red flags", and in taking fully mature and wise
decisions to avert unnecessary risks to the company.
ii. Fiduciary duties which ensure and secure that the directors of
companies always keep the interests of the company and its
stakeholders, ahead and above their own personal interests.
The Companies Act, 2013 has in section 166 made a statutory formulation
of director‟s duties. They are mentioned as follows:
I. Director to act in accordance with articles of the company.
II. A director of a company shall act in good faith in order to promote
the objects of the company for the benefit of its members as a
whole, and in the best interests of the company, its employees, the
shareholders, the community and for the protection of environment.
III. A director of a company shall exercise his duties with due and
reasonable care, skill and diligence and shall exercise independent
judgment.
IV. 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.
58
http://taxguru.in/company-law/roles-responsibilities-directors-companies-act-2013.html (Visited
on February 5, 2015).
139
V. A director of a company shall not achieve or attempt to achieve any
undue gain or advantage either to himself or to his relatives,
partners, or associates and if such director is found guilty of
making any undue gain, he shall be liable to pay an amount equal
to that gain to the company.
VI. A director of a company shall not assign his office and any
assignment so made shall be void.
4.9 Liabilities of Directors
The ubiquitous issue of corruption and the high risk of internal fraud raise
serious concerns about the liability of corporate directors. Director liability in
India can be divided into two principal areas: (1) liability under the Companies
Act of 1956 (the 1956 Act), which has now transitioned to the Companies Act of
2013 (the 2013 Act); and (2) liability under other Indian statutes. There has been a
seminal shift in the Indian corporate legal regime with the enactment of the 2013
Act and more recent amendments. For instance, penalties under the 1956 Act that
were seen as ineffective have been significantly amplified under the 2013 Act.
The 2013 Act also provides statutory recognition to the duties of a director, such
as exercise of due and reasonable care, skill, diligence, and independent judgment.
One of the key concepts of the Companies Act is the meaning of the term “officer
who is in default.” Under the act, liability for default by a company has been
imposed on an officer who is in default. By virtue of their positions in the
company, the managing director, the whole-time director, and the company
secretary directly fall within the scope of this term. Under the 1956 Act, certain
key employees such as the chief executive officer and chief financial officer did
not d irectly come within the ambit of the term, which raised serious concerns
because these personnel were viewed as key officials in any company. The 2013
Act corrects this anomaly and significantly expands the scope of the expression
“officer in default.” The term also includes the following:
1. Any individual who, under the superintendence, control, and
direction of the board of directors, exercises the management of the
whole, or substantially the whole, of the affairs of a company;
140
2. Any person on whose advice, directions, or instructions the board
of directors is accustomed to act, other than persons giving advice
in a professional capacity; and
3. Every director aware of wrongdoing by virtue of knowledge of or
participation in proceedings of the board without objection.
A critical failure of Indian corporate law was further highlighted during
various corporate and financial scams, such as the Harshad Mehta episode or the
Satyam fiasco. To address this issue, the 2013 Act now specifically defines
“fraud” and states that a person who is guilty of it may be punished by
imprisonment for up to 10 years, and where fraud involves the public interest, the
minimum sentence prescribed is three years. Fraud, as defined under Companies
Act, 2013, includes any act or abuse of position committed with intent to deceive,
to gain undue advantage from, or to injure the interests of a person, company,
shareholders, or creditors, whether or not there is wrongful gain or loss.59
4.9.1 Shareholder Disputes
In the context of various shareholder disputes, the increased liability under
the 2013 Act could be a useful tool to increase pressure on defaulting directors,
nominating shareholders, or promoters. In addition, while resignation may protect
a director from subsequent defaults, an erstwhile director may still continue to be
liable for any defaults that took place during his or her tenure 60, as now clarified
under the Act. The 2013 changes to the act prompted concerns about the role,
accountability, and responsibility of nonexecutive, nominee, and independent
directors, who could be caught on the wrong side of the company‟s disputes.
Under the 2013 Act, an independent director or a nonexecutive director can be
held liable under the 2013 Act only for acts of omission or commission by a
company that occurred with the director‟s knowledge attributable through board
processes and the director‟s consent or connivance or where he or she failed to act
diligently.61 This, to a certain extent, alleviates the concern surrounding
independent director liability. However, questions such as whether a director acted
59
60
Section 168(2) of the Companies Act, 2013.
61
Section 150(12) of the Companies Act, 2013.
141
diligently and whether knowledge could be attributed to a director by mere
presence at board meetings still remain unanswered. Moreover, liability faced by
independent and nominee directors under various other enactments remains a
legitimate concern. Directors may also face liability under other Indian laws. Such
liability may not always be foreseeable, and actions such as the dishonour of
checks, offenses under the Income Tax Act of 1961, violation of foreign exchange
regulations, breach of securities regulations, non-payment of provident fund
contributions, violation of the Shops and Establishments Act, or food adulteration
could result in liability that may not always be limited to the executive directors.
In addition, some statutes do not distinguish between executive and nonexecutive
directors or base liability on the role a particular director was performing on the
company‟s board. Consequently, liability may be difficult to foresee or predict.
While it is difficult to provide any particular standard that will determine an
individual‟s exposure to liability, a person will generally be held liable for
wrongdoing committed by a company if he or she falls into either of the following
categories: 1. any person who, at the time the offense was committed, was in
charge of and responsible to the company for the conduct of its business; or 2. any
director, manager, secretary, or other officer of the company: a. with whose
consent and connivance the offense was committed, or b. whose negligence
resulted in the offense. The Indian Supreme Court has, in this context, ruled that a
managing director is prima facie in charge of and responsible for the company‟s
business and can be prosecuted for misdeeds by the company. But only those
officers of the company who fall within the scope of the definition “officer who is
in default” are covered.62 A simple averment in a complaint that a director was in
charge of and responsible for the conduct of the business of the company is
sufficient to state a claim against an officer who is in default. In cases of fraud, it
may be difficult to have a clear line of demarcation as to whether the director
could have prevented the fraud if he or she had used due diligence. While the role
of nonexecutive directors may consist of providing strategic guidance, this more
limited status may not protect them from liability. Nor will being a nonparticipant
62
See Nat‟l Small Indus. Corp. Ltd. v. Harmeet Singh Paintal & Anr., (2010) 3 S.C.C. 330 (India);
K.K. Ahuja v. V.K. Vora, (2009) 10 S.C.C. 48 (India).
142
at board meetings. The law now requires directors to adopt an inquisitive
approach and question the company‟s background information, how it was
obtained, and the decisions that are taken based on such information. With
increasing global interest in Indian companies and a changing legal landscape,
new players will continue to enter the domain unaware of the possible
consequences. Consequently, director indemnification clauses in shareholder and
director agreements should be cautiously and thoroughly negotiated. Directors‟
and officers‟ liability insurance is also a tool that is becoming increasingly popular
in India. Such insurance and indemnification should sufficiently cover the director
even after resignation. The Indian economy presents myriad and growing
opportunities, but would be corporate directors and their lawyers should tread
carefully. Rapidly modernizing laws on director and officer liability require their
full attention.63
4.9.2 Liabilities of a Director:
4.9.2.1 Financial statement
Financial statements to give a true and fair view of the state of affairs of
the company, complying with the accounting standards notified under section 133
and shall be in the form or forms as may be provided for different class or classes
of companies in Schedule III. Provided that the items contained in such financial
statements shall be in accordance with the accounting standards.64 If a company
contravenes the provisions of this section, the managing director, the whole-time
director in charge of finance, the Chief Financial Officer or any other person
charged by the Board with the duty of complying with the requirements of this
section and in the absence of any of the officers mentioned above, all the directors
shall be punishable with imprisonment for a term which may extend to one year or
with fine which shall not be less than fifty thousand rupees but which may extend
to five lakh rupees, or with both.65
63
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/Director_and_Of
ficer_Liability_in_India.pdf (Visited on September 15, 2015).
64
65
Section 129 (7) of the Companies Act, 2013.
143
Failure to attach to balance sheet a report of the Board of directors and
statement on declaration given by independent directors.66 If the company
contravenes the provisions of the Act, the company shall be punishable with fine
which shall not be less than fifty thousand rupees but which may extend to
twenty-five lakh rupees and every officer of the company who is in default shall
be punishable with imprisonment for a term which may extend to three years or
with fine which shall not be less than fifty thousand rupees but which may extend
to five lakh rupees, or with both.67
4.9.2.2 Register of directors and key managerial personnel and their shareholding
Every company shall keep at its registered office a register containing such
particulars of its directors and key managerial personnel as may be prescribed,
which shall include the details of securities held by each of them in the company
or its holding, subsidiary, subsidiary of company‟s holding company or associate
companies. A return containing such particulars and documents as may be
prescribed, of the directors and the key managerial personnel shall be filed with
the Registrar within thirty days from the appointment of every director and key
managerial personnel, as the case may be, and within thirty days of any change
taking place.68 If a company contravenes the provisions, the company and every
officer of the company who is in default shall be punishable with fine which shall
not be less than fifty thousand rupees but which may extend to five lakh rupees.69
4.9.2.3 Failure to disclose interest in a contract or arrangement70
Any director or any other employee of a company, who had entered into or
authorisedthe contract or arrangement in violation of the provisions of this section
shall be punishable with fine which shall not be less than twenty-five thousand
rupees but which may extend to five lakh rupees.
4.9.2.4 False declaration of company's solvency71
Any director of a company making a declaration under this section without
having reasonable grounds for the opinion that the company will be able to pay its
66
67
68
69
70
71
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debts in full from the proceeds of assets sold in voluntary winding up shall be
punishable with imprisonment for a term which shall not be less than three years
but which may extend to five years or with fine which shall not be less than fifty
thousand rupees but which may extend to three lakh rupees, or with both.72
4.9.3 Liability of non-executive / Independent Directors
An independent director and a non-executive director not being promoter
or key managerial personnel, shall be held liable, only in respect of such acts of
omission or commission by a company which had occurred with his knowledge,
attributable through Board processes, and with his consent or connivance or
where he had not acted diligently.
4.9.3.1 Reduction of Capital
If any officer of the company-
(a) knowingly conceals the name of any creditor entitled to object to the
reduction;
(b) knowingly misrepresents the nature or amount of the debt or claim of
any creditor; or
(c) abets or is privy to any such concealment or misrepresentation as
aforesaid, he shall be liable under section 447.73
4.9.3.2 Proxies
If for the purpose of any meeting of a company, invitations to appoint as
proxy a person or one of a number of persons specified in the invitations are
issued at the company‟s expense to any member entitled to have a notice of the
meeting sent to him and to vote thereat by proxy, every officer of the company
who knowingly issues the invitations as aforesaid or wilfully authorises or permits
their issue shall be punishable with fine which may extend to one lakh rupees.
Provided that an officer shall not be punishable under this sub-section by reason
only of the issue to a member at his request in writing of a form of appointment
naming the proxy, or of a list of persons willing to act as proxies, if the form or
72
http://investments.ifmr.co.in/wp-content/uploads/2014/06/Fintelligence-15-Induction-Duties-
Powers Liabilities-of-Directors.pdf (Visited on July 3, 2015).
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list is available on request in writing to every member entitled to vote at the
meeting by proxy.74
4.9.3.3 Meetings of Board
Every officer of the company whose duty is to give notice under this
section and who fails to do so shall be liable to a penalty of twenty-five thousand
rupees.75
4.9.3.4 Secretarial Audit
If a company or any officer of the company or the company secretary in
practice, contravenes the provisions of this section, the company, every officer of
the company or the company secretary in practice, who is in default, shall be
punishable with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees.76
4.9.3.5 Conduct of Inspection and Enquiry
If any director or officer of the company disobeys the direction issued by
the Registrar or the inspector under this section, the director or the officer shall be
punishable with imprisonment which may extend to one year and with fine which
shall not be less than twenty-five thousand rupees but which may extend to one
lakh rupees.
If a director or an officer of the company has been convicted of an offence
under this section, the director or the officer shall, on and from the date on which
he is so convicted, be deemed to have vacated his office as such and on such
vacation of office, shall be disqualified from holding an office in any company.77
4.9.3.6 Inspection by Serious Fraud Investigation Officer
On receipt of the investigation report, the Central Government may, after
examination of the report (and after taking such legal advice, as it may think fit),
direct the Serious Fraud Investigation Office to initiate prosecution against the
company and its officers or employees, who are or have been in employment of
the company or any other person directly or indirectly connected with the affairs.
74
75
76
77
146
Notwithstanding anything contained in this Act or in any other law for the time
being in force, the investigation report filed with the Special Court for framing of
charges shall be deemed to be a report filed by a police officer under section 173
of the Code of Criminal Procedure, 1973 of the company.78
4.9.3.7 Directions for filing statement of Affairs – Winding Up by Tribunal
If any director or officer of the company contravenes the provisions of this
section, the director or the officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to six months or with
fine which shall not be less than twenty-five thousand rupees but which may
extend to five lakh rupees, or with both.79
4.9.3.8 Liability as “Officer in Default”
I. Directors are liable as officers in default under all sections where specific
penalty is provided for each officer in default.
II. Where no specific penalty is provided under the Act, they are liable under
Section 450.
4.9.3.9 Liability for Fraud
“Fraud” in relation to affairs of a company or any body corporate, includes
any act, omission, concealment of any fact or abuse of position committed by any
person or any other person with the connivance in any manner, with intent to
deceive, to gain undue advantage from, or to injure the interests of, the company
or its shareholders or its creditors or any other person, whether or not there is any
wrongful gain or wrongful loss;
Any person who is found to be guilty of fraud, shall be punishable
with imprisonment for a term which shall not be less than six months but which
may extend to ten years and shall also be liable to fine which shall not be less than
the amount involved in the fraud, but which may extend to three times the amount
involved in the fraud.
4.9.3.10 Personal Liability
I. Directors can be made personally liable if
78
79
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a) When the directors enter into contract in their own name.
b) When they enter into contracts on behalf of company but fail to use
“LTD. Or PVT LTD.”
c) When directors exceeds their powers
d) The Board of Directors should act an agent of company, not of a single
director. Therefore a single director cannot enter into a contract on
behalf of company unless the Board of Directors authorises.
II. Civil Liability for misstatement in prospectus
Where it is proved that a prospectus has been issued with intent to defraud
the applicants for the securities of a company or any other person or for
any fraudulent purpose, every person concerned shall be personally
responsible, without any limitation of liability, for all or any of the losses
or damages that may have been incurred by any person who subscribed to
the securities on the basis of such prospectus.80
III. Damages for Fraud
Where a company fails to repay the deposit or part thereof or any interest
thereon referred to in section 74 within the time specified in sub-section
(1) of that section or such further time as may be allowed by the Tribunal
under sub-section (2) of that section, and it is proved that the deposits had
been accepted with intent to defraud the depositors or for any fraudulent
purpose, every officer of the company who was responsible for the
acceptance of such deposit shall, without prejudice to the provisions
contained in subsection (3) of that section and liability under section
447, be personally responsible, without any limitation of liability, for all or
any of the losses or damages that may have been incurred by the
depositors.81
IV. Liability for fraudulent conduct of business
If in the course of the winding up of a company, it appears that any
business of the company has been carried on with intent to defraud
80
81
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creditors of the company or any other persons or for any fraudulent
purpose, the Tribunal, on the application of the Official Liquidator, or the
Company Liquidator or any creditor or contributory of the company, may,
if it thinks it proper so to do, declare that any person, who is or has been a
director, manager, or officer of the company or any persons who were
knowingly parties to the carrying on of the business in the manner
aforesaid shall be personally responsible, without any limitation of
liability, for all or any of the debts or other liabilities of the company as the
Tribunal may direct.82
4.10 Committees to be constituted under Act
With an eye on improving corporate governance the new Companies Act,
2013 mandates a number of board committees for specified companies for audit,
nomination and remuneration, corporate social responsibility and stakeholder‟s
relationship. According to this Act the following committees are to be formed by a
company-
4.10.1 Audit Committee 83
The Companies Act provides for the formation of Audit Committee. This
is not the new concept. This has been available in the erstwhile Companies Act,
1956. An Audit Committee was required for every public company whose paid up
capital was Rs. 5 crore or more.84 The Companies Act provides that the Board of
Directors of every listed company and such other class or classes of company, as
may be prescribed, shall constitute an Audit Committee. Every Audit Committee
of a company existing immediately before the commencement of this Act shall,
within one year of such commencement, be reconstituted in accordance with this
Act. The majority of members of Audit Committee including its Chairperson shall
be persons with ability to read and understand the financial statement. The
act provides that the Audit Committee shall consist of a minimum of three
directors with independent directors forming a majority.85
4.10.1.1 Functions
82
83
Section 177 of the Companies Act 2013.
84
Section 292 A of the Companies Act, 1956.
85
Section 177 (2) of the Companies Act 2013.
149
Every Audit Committee shall act in accordance with the terms of reference
specified in writing by the Board which shall include-
I. The recommendation for appointment, remuneration and terms of
appointment of auditors of the company;
II. Review and monitor of the auditor‟s independence and performance and
effectiveness of audit process;
III. Examination of the financial statement and the auditors‟ report thereon;
IV. Approval of any subsequent modification of transaction of the company
with related parties;
V. Scrutiny of inter-corporate loans and investments;
VI. Valuation of undertakings or assets of the company, wherever it is
necessary;
VII. Evaluation of internal financial controls and risk management systems;
VIII. Monitoring the end use of funds raised through public offers and related
matters.86
4.10.1.2 Powers
The Audit Committee may call for the comments of the auditors about
internal control systems, the scope of audit, including the observations of the
auditors and review of financial statement before their submission to the Board
and may also discuss any related issues with internal and statutory auditors and
the management of the company.87 The Audit Committee shall have authority to
investigate into any matter in relation to the functions or referred to it by the
Board and for this purpose shall have powers to obtain professional advice from
external sources and have full access to information contained in the records of
the company.88
4.10.1.3 Rights of Auditors
The Auditors of a company and the key managerial personnel shall have a
right to be heard in the meetings of the Audit Committee when it considers the
Auditor‟s report but shall not have the right to vote.89
86
87
88
89
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4.10.1.4 Disclosure in Board‟s report
The Board‟s report shall disclose the composition of an Audit Committee
and where the Board had not accepted any recommendation of the Audit
Committee, the same shall be disclosed in such report along with the reasons
therefore.90
4.10.1.5 Contravention
In case of any contravention of the provisions of section 177 and this
section, the company shall be punishable with fine which shall not be less than
one lakh rupees but which may extend to five lakh rupees and every officer of the
company who is in default shall be punishable with imprisonment for a term
which may extend to one year or with fine which shall not be less than twenty-five
thousand rupees but which may extend to one lakh rupees, or with both. 91
4.10.2 Nomination and Remuneration Committee
The Companies Act provides for the constitution of nomination and
remuneration committee. According to the provisions of the act the Board of
Directors of every listed company; and such other class or classes of companies as
may be prescribed shall constitute the Nomination and Remuneration Committee
consisting of 3 or more non executive directors out of which of which not less
than one half shall be independent directors. The Chair person of the company,
whether executive or non executive, may be appointed as a member of the said
committee but shall not chair such Committee.92
4.10.2.1 Functions
I. The Committee shall identify persons who are qualified to become
directors and who may be appointed in senior management in accordance
with the criteria laid down, recommend to the Board their appointment and
removal and shall carry out evaluation of every director‟s performance.93
II. The Committee shall formulate the criteria for determining qualifications,
positive attributes and independence of a director and recommend to the
90
91
92
93
151
Board a policy, relating to remuneration for the directors, key managerial
personnel and other employees;94
III. The Committee shall, while formulating the policy shall ensure that-
a. The level and composition of remuneration is reasonable and
sufficient to attract, retain and motivate directors of the quality
required to run the company successfully;
b. Relationship of remuneration to performance is clear and meets
appropriate performance benchmarks; and
c. Remuneration to directors, key managerial personnel and senior
management involves a balance between fixed and incentive pay
reflecting short and long term performance objectives appropriate
to the working of the company and its goals.95
Such policy shall be disclosed in the Board‟s report. The term „senior
management‟ means personnel of the company who are members of its core
management team excluding Board of Directors comprising all members of
management one level below the executive directors, including the functional
heads. The Chairperson of this committee or in his absence, any other member of
the committee authorized by him in this behalf shall attend the general meetings
of the company.
4.10.3 Stakeholders Relationship Committee
The provisions of the Act provides that the Board of Directors of a
company, which consists of more than 1000 shareholders, debenture holders,
deposit holders and any other security holders at any time during a financial year
shall constitute a Stakeholders Relationship Committee. The said committee
shall consist of a chairperson who shall be a non executive director and such other
members as may be decided by the Board96.
The Committee shall consider and resolve the grievances of security
holders of the company.97 The Chairperson of this committee or in his absence,
94
95
96
97
152
any other member of the committee authorized by him in this behalf shall attend
the general meetings of the company.98
Non-consideration of resolution of any grievance by the Stakeholders
Relationship Committee in good faith shall not constitute a contravention of this
section.
4.10.4 Corporate and Social Responsibility Committee99
The Companies Act provides for the constitution of Corporate and Social
Responsibility Committee. According to this Act, every company having net
worth of Rs.500 crores or more, or turnover of Rs.1000 crores or more or a net
profit of Rs.5 crores or more during any financial year shall constitute a Corporate
Social Responsibility Committee of the Board consisting of three or more
directors, out of which at least one director shall be an independent director.100
The Board‟s report shall disclose the composition of the Corporate Social
Responsibility Committee.101
4.10.4.1 Functions
The Corporate Social Responsibility Committee shall formulate and
recommend to the Board, a Corporate Social Responsibility Policy which shall
indicate the activities to be undertaken by the company as specified in Schedule
VII, as detailed below:
I. Activities relating to-
a) Eradicating extreme hunger and poverty;
b) Promotion of education;
c) Promoting gender equality and empowering women;
d) Reducing child mortality and improving maternal health;
e) Combating human immune deficiency virus, acquired immuno
deficiency syndrome, malaria and other diseases;
f) Ensuring environmental sustainability;
g) Employment enhancing vocational skills;
98
99
Section 135 of the Companies Act 2013.
100
101
Section 135(2) of the Companies Act 2013.
153
h) Social business projects;
i) Contributions to Prime Minister‟s National Relief Fund or any
other fund set up by the Central Government of the State
Government for socio-economic development and relief and funds
for the welfare of the Scheduled Castes, the Scheduled Tribes,
other backward classes, minorities and women; and
j) Such other matters as may be prescribed.
II. Recommend the amount of expenditure to be incurred on the activities for
above; and
III. Monitor the Corporate Social Responsibility Policy of the company from
time to time.
4.10.4.2 Obligations of the Board
The Board of every company shall after taking into account the
recommendations of the Committee approve the Corporate Social Responsibility
Policy for the company and disclose contents of such policy in its report and also
place it on the company‟s website, if any, in such manner, as may be prescribed
and ensure that the activities as are included in the Policy of the company are
undertaken by the company.102
The Board shall ensure that the company spends, in every financial year, at
least 2% of the average net profits of the company made during the three
immediately preceding financial years, in pursuance of its policy. The company
shall give preference to the local area and areas around it where it operates, for
spending the amount earmarked for Corporate Social Responsibility activities. If
the company fails to spend such amount, the Board shall, in its report specify the
reasons for not spending the amount.103
4.10.5 Appointment of Committees
Section 315 provides for the appointment of committee. According to this
section where there are no creditors of a company, such company in its general
meeting and, where a meeting of creditors is held under section 306, such
102
103
154
creditors, as the case may be, may appoint such committees as considered
appropriate to supervise the voluntary liquidation and assist the Company
Liquidator in discharging his or its functions.104
4.11 Meetings of the Board
The way we run board meetings says a lot about how we run the company.
Successful companies use board meetings to create and improve key business
strategies. The board of directors of a company is primarily an oversight board. It
oversees the management of the company to ensure that the interest of non-
controlling shareholders is protected. It also functions as advisory board.
Independent directors bring diverse knowledge and expertise in the board room
and the CEO uses the knowledge pool in addressing issues being faced by the
company. The most important function of a monitoring board is to provide
direction to the company. Another very important function of a monitoring board
is to set the „tone at the top‟. It is expected to create the right culture within the
company.
Every company shall hold the first meeting of the Board of Directors
within thirty days of the date of its incorporation and thereafter hold a minimum
number of four meetings of its Board of Directors every year in such a manner
that not more than one hundred and twenty days shall intervene between two
consecutive meetings of the Board, Provided that the Central Government may, by
notification, direct that the provisions of this sub-section shall not apply in relation
to any class or description of companies or shall apply subject to such exceptions,
modifications or conditions as may be specified in the notification.105
The participation of directors in a meeting of the Board may be either in
person or through video conferencing or other audio visual means, as may be
prescribed, which are capable of recording and recognising the participation of the
directors and of recording and storing the proceedings of such meetings along
with date and time, Provided that the Central Government may, by notification,
104
https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=5383 (Visited on
March 15, 2015).
105
Section 173(1) of the Companies Act 2013.
155
specify such matters which shall not be dealt with in a meeting through video
conferencing or other audio visual means.106
A meeting of the Board shall be called by giving not less than seven days‟
notice in writing to every director at his address registered with the company and
such notice shall be sent by hand delivery or by post or by electronic means,
Provided that a meeting of the Board may be called at shorter notice to transact
urgent business subject to the condition that at least one independent director, if
any, shall be present at the meeting, Provided further that in case of absence of
independent directors from such a meeting of the Board, decisions taken at such a
meeting shall be circulated to all the directors and shall be final only on
ratification thereof by at least one independent director, if any. 107Every officer of
the company whose duty is to give notice under this section and who fails to do so
shall be liable to a penalty of twenty-five thousand rupees.108
A One Person Company, small company and dormant company shall be
deemed to have complied with the provisions of this section if at least one meeting
of the Board of Directors has been conducted in each half of a calendar year and
the gap between the two meetings is not less than ninety days, Provided that
nothing contained in this sub-section and in section 174 shall apply to One Person
Company in which there is only one director on its Board of Directors.109
4.11.1 Quorum Required For Board Meetings
The quorum for a meeting of the Board of Directors of a company is one-
third of its total strength or two directors, whichever is higher, and the
participation of the directors by video conferencing or by other audio visual means
shall also be counted for the purposes of quorum.110The continuing directors may
act notwithstanding any vacancy in the Board; but, if and so long as their number
is reduced below the quorum fixed by the Act for a meeting of the Board, the
continuing directors or director may act for the purpose of increasing the number
of directors to that fixed for the quorum, or of summoning a general meeting of
106
107
108
109
110
156
the company and for no other purpose.111 But where this quorum cannot be
formed, because of the interested directors, then the number of directors who are
not interested, being not less than two, shall be the quorum. If a meeting cannot be
held for want of quorum, it stands adjourned till the same day in the next week. 112
In North Eastern Insurance Co. Ltd., Re113 the Calcutta High Court held that the
directors can fix a time for reassembling and no further notice is necessary. In the
case allotment of debentures of two directors, being resolved upon with the help
of an interesting director was held void.
In Hood Sialmakers Ltd. v. Axford114 this case it was held that quorum
requirement does not become dispensed with because one out of two directors is
abroad. A meeting attended by only one director was held not to be valid.
In Pradeep Kumar Banerjee v. Union of India115 this case it was held that
if articles of a company provides for a total number of 15 directors but at the
material time only 6 directors were in office, the quorum meant 1/3 of the 6
directors and therefore, a meeting attended by 2 directors only was valid.
4.11.2 Passing of resolution
No resolution shall be deemed to have been duly passed by the Board or
by a committee thereof by circulation, unless the resolution has been circulated in
draft, together with the necessary papers, if any, to all the directors, or members of
the committee, as the case may be, at their addresses registered with the company
in India by hand delivery or by post or by courier, or through such electronic
means as may be prescribed and has been approved by a majority of the directors
or members, who are entitled to vote on the resolution, Provided that, where not
less than one-third of the total number of directors of the company for the time
being require that any resolution under circulation must be decided at a meeting,
the chairperson shall put the resolution to be decided at a meeting of the Board.116
111
Section 174 (2) of the Companies Act, 2013
112
Section 174(4) of the Companies Act, 2013
113
(1919) 1 Ch 198: 120 LT 223. See also, Pramod Kumar Mittle v. Southern Steel Ltd, (1980) 50
Comp Cas 555 (Cal).
114
(1997) 1 BCLC 721 (QBD).
115
(2002) 108 Comp Cas 692 (Cal).
116
157
4.11.3 Defects in appointment of directors not to invalidate actions taken
No act done by a person as a director shall be deemed to be invalid,
notwithstanding that it was subsequently noticed that his appointment was invalid
by reason of any defect or disqualification or had terminated by virtue of any
provision contained in this Act or in the articles of the company, Provided that
nothing in this section shall be deemed to give validity to any act done by the
director after his appointment has been noticed by the company to be invalid or to
have terminated.117
4.12 Overall Managerial Remuneration
Regulation and control over director‟s remuneration becomes necessary
for several reasons prominent among them being prevention of diversion of
corporate funds for personal use and the impact which an unduly high executive
reward has upon the rest of the society. The total managerial remuneration
payable by a public company, to its directors, including managing director and
whole-time director, and its manager in respect of any financial year shall not
exceed 11% of the net profits of that company for that financial year computed in
the manner laid down in section 198 except that the remuneration of the directors
shall not be deducted from the gross profits. Provided that the company in general
meeting may, with the approval of the Central Government, authorise the payment
of remuneration exceeding 11 % of the net profits of the company, subject to the
provisions of Schedule V. Provided further that, except with the approval of the
company in general meeting, the remuneration payable to any one managing
director; or whole-time director or manager shall not exceed 5% of the net profits
of the company and if there is more than one such director remuneration shall not
exceed 10% of the net profits to all such directors and manager taken together.
The remuneration payable to directors who are neither managing directors nor
whole-time directors shall not exceed 1% of the net profits of the company, if
there is a managing or whole-time director or manager, 3% of the net profits in
117
158
any other case.118 The percentages aforesaid shall be exclusive of any fees payable
to directors under sub-section (5).119
if, in any financial year, a company has no profits or its profits are
inadequate, the company shall not pay to its directors, including any managing or
whole- time director or manager, by way of remuneration any sum exclusive of
any fees payable to directors under sub-section (5) hereunder except in accordance
with the provisions of Schedule V and if it is not able to comply with such
provisions, with the previous approval of the Central Government.120
The remuneration payable to the directors of a company, including any
managing or whole-time director or manager, shall be determined, in accordance
with and subject to the provisions of this section, either by the articles of the
company, or by a resolution or, if the articles so require, by a special resolution,
passed by the company in general meeting and the remuneration payable to a
director determined aforesaid shall be inclusive of the remuneration payable to
him for the services rendered by him in any other capacity: Provided that any
remuneration for services rendered by any such director in other capacity shall not
be so included if the services rendered are of a professional nature and in the
opinion of the Nomination and Remuneration Committee, if the company is
covered under sub-section (1) of section 178, or the Board of Directors in other
cases, the director possesses the requisite qualification for the practice of the
profession.121 A director may receive remuneration by way of fee for attending
meetings of the Board or Committee thereof or for any other purpose whatsoever
as may be decided by the Board: Provided that the amount of such fees shall not
exceed the amount as may be prescribed: Provided further that different fees for
different classes of companies and fees in respect of independent director may be
such as may be prescribed.122 A director or manager may be paid remuneration
either by way of a monthly payment or at a specified percentage of the net profits
118
119
120
121
122
159
of the company or partly by one way and partly by the other. 123 Notwithstanding
anything contained in any other provision of this Act but subject to the provisions
of this section, an independent director shall not be entitled to any stock option
and may receive remuneration by way of fees provided under sub-section (5),
reimbursement of expenses for participation in the Board and other meetings and
profit related commission as may be approved by the members.124 If any director
draws or receives, directly or indirectly, by way of remuneration any such sums in
excess of the limit prescribed by this section or without the prior sanction of the
Central Government, where it is required, he shall refund such sums to the
company and until such sum is refunded, hold it in trust for the company. 125 Every
listed company shall disclose in the Board‟s report, the ratio of the remuneration
of each director to the median employee‟s remuneration and such other details as
may be prescribed.126 Subject to the provisions of this section, any director who is
in receipt of any commission from the company and who is a managing or whole-
time director of the company shall not be disqualified from receiving any
remuneration or commission from any holding company or subsidiary company of
such company subject to its disclosure by the company in the Board‟s report.127
4.12.1 Penalty
If any person contravenes the provisions of this section, he shall be
punishable with fine which shall not be less than Rs 1,00,000 but extending up to
Rs 5,00,000.128
4.12.2 Recovery of Remuneration in Certain Cases
Without prejudice to any liability incurred under the provisions of this Act
or any other law for the time being in force, where a company is required to re-
state its financial statements due to fraud or non-compliance with any requirement
under this Act and the rules made thereunder, the company shall recover from any
past or present managing director or whole-time director or manager or Chief
Executive Officer (by whatever name called) who, during the period for which the
123
124
125
126
127
128
160
financial statements are required to be re-stated, received the remuneration
(including stock option) in excess of what would have been payable to him as per
restatement of financial statements.129
4.12.3 Central Government or Company to fix limit with regard to
Remuneration
Irrespective of the provisions of the Act, the Central Government or the
company, while granting approval under section 196 or to any appointment or
remuneration under section 197 in the context of a company with no or inadequate
profits, while fixing the remuneration regard has be had to the financial position
of the company, the remuneration or commission drawn by the individual
concerned in any other capacity, the remuneration or commission drawn by him
from any other company, professional qualifications and experience of the
individual concerned and such other matters as may be prescribed.130
4.13 Appointment of Key Managerial Personnel
The companies Act, 2013, provide that certain specified companies, as
may be prescribed by rules, shall have following whole-time key managerial
personnel131:-
I. MD, CEO, Manager or Whole-Time Director
II. Company Secretary
III. CFO
Every listed company and every other company, whether public or private,
having paid up share capital of Rs.5 cr. more should have whole-time Key
Management Personnel. It is also provided in that, unless the articles of the
Company provide otherwise, or the company does not carry on multiple
businesses an individual shall not be the Chairperson as well as MD or CEO at the
same time. Further, it is provided that every whole-time Key Management
Personnel shall be appointed by a resolution of the Board containing terms and
conditions of appointment and remuneration. Such Key Management Personnel
shall not hold office in more than one Company, except in its subsidiary at the
129
130
131
161
same time. However, he can be a director in any company with the permission of
the Board. If any Key Management Personnel is holding such position in more
than one company at the time of commencement of the New Act, he will have to
select one of the Companies within 6 months of such commencement. The
company may appointment a Managing Director who is already Managing
Director or Manager of one or more companies. Such appointment will have to be
approved by the Board by a resolution to be passed at its meeting and should be
approved by all the Directors present at the meeting. Specific notice giving details
of such proposal should be given for such Board Meeting.132 If office of such Key
Management Personnel is vacated, it should be filled up by the Board within 6
months.133
In the event of contravention of this section the following penal action can
be taken. The company will be punishable with minimum fine of Rs. one lakh
which may extend to Rs.5 lakhs. Every defaulting director or Key Management
Personnel will be punishable with fine up to Rs.50000. In the event of continuing
default, further fine upto Rs.1000/- for every day during which the contravention
continues can be levied.134
4.13.1 Secretarial Audit:
Every listed company and a company belonging to other class of
companies as may be prescribed shall annex with its Board‟s report made in terms
of sub-section (3) of section 134, a secretarial audit report, given by a company
secretary in practice, in such form as may be prescribed. If there are any
qualifications, observation and other remarks in the above report, the Board will
have to give explanation about the same in the Board report as provided in section
134(3). If the company, any officer or Company Secretary in practice contravenes
this section the defaulting person shall be liable to punishment by way of
minimum fine of Rs.1 lakh which may extend to Rs.5 lakhs. Section 204 shall
apply to a listed company and every public company having paid up share capital
of Rs.100 crore or more.135
132
133
134
135
162
4.13.2 Functions of Company Secretary136
The functions of the Company Secretary are as under:
I. To report to the Board about compliance with the provisions of the Act,
the Rules and other applicable Laws.
II. To ensure that the company complies with the applicable Secretarial
standards issued by the Institute of Company Secretaries of India.
III. To discharge such other duties as may be prescribed. (Refer Draft Rule
13.8 for list of duties to be performed by a Company Secretary).
For the purpose of this section, the expression “secretarial standards”
means secretarial standards issued by the Institute of Company Secretaries of
India constituted under section 3 of the Company Secretaries Act, 1980 and
approved by the Central Government. The provisions contained in section 204 and
section 205 shall not affect the duties and functions of the Board of Directors,
chairperson of the company, managing director or whole-time director under this
Act, or any other law for the time being in force.137
4.14 Stock Exchange Board of India Initiatives
In September 2009 the SEBI Committee on Disclosure and Accounting
Standards issued a discussion paper that considered proposals for:
a) Appointment of the chief financial officer (CFO) by the audit committee
after assessing the qualifications, experience and background of the
candidate;
b) Rotation of audit partners every five years;
c) Voluntary adoption of International Financial Reporting Standards (IFRS);
d) Interim disclosure of balance sheets (audited figures of major heads) on a
half-yearly basis; and
e) Streamlining of timelines for submission of various financial statements by
listed entities as required under the Listing Agreement.138
136
137
138
SEBI Committee on Disclosures and Accounting Standards, Discussion Paper on Proposals
Relating to Amendments to the Listing Agreement (Sep. 2009), available at
www.sebi.gov.in/commreport/ amendproposal.pdf. (Visited on September 10, 2015).
163
In early 2010, SEBI amended the Listing Agreement to add provisions
related to the appointment of the CFO by the audit committee and other matters
related to financial disclosures.139 However, other proposals such as rotation of
audit partners were not included in the amendment of the Listing Agreement.140
4.15 Ministry of Corporate Affairs Initiatives
Inspired by industry recommendations, including the influential CII
recommendations, in late 2009 the MCA released a set of voluntary guidelines for
corporate governance.141 The Voluntary Guidelines address a myriad of corporate
governance matters including:
I. Independence of the boards of directors;
II. Responsibilities of the board, the audit committee, auditors, secretarial
audits; and
III. Mechanisms to encourage and protect whistle blowing.142
Important provisions include:
a) Issuance of a formal appointment letter to directors.
b) Separation of the office of chairman and the CEO.
c) Institution of a nomination committee for selection of directors.
d) Limiting the number of companies in which an individual can
become a director.
e) Tenure and remuneration of directors.
f) Training of directors.
g) Performance evaluation of directors.
h) Additional provisions for statutory auditors.
In sum, the new Companies Act, 2013 is not only efficient and innovative
but seeks to make the corporate management and governance in India fully
139
These measures have been introduced through an amendment to the Listing Agreement. See
Securities and Exchange Board of India, Circular No. CIR/CFD/DIL/1/2010 (Apr. 5, 2010),
available at www. sebi.gov.in/circulars/2010/cfddilcir01.pdf. (Visited on October 20, 2015).
140
See Securities and Exchange Board of India, Circular No. CIR/ CFD/DIL/1/2010 (Apr. 5,
2010), available at http://www.sebi.gov. in/circulars/2010/cfddilcir01.pdf.; see also Umakanth
Varottil, India‟s Corporate Governance Voluntary Guidelines 2009: Rhetoric or Reality? 13
(2010), available at http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1634821. (Visited on
November 11, 2015).
141
For detailed evaluation of the substance of the voluntary guidelines and whether a voluntary
approach is the correct approach, see Varottil, Rhetoric or Reality.
142
See MCA Voluntary Guidelines, 2009.
164
accountable, thereby, beneficial to all stakeholders and related professionals. Also,
both broad categories of directors one having pecuniary relationship and others
who are independent are naturally considered under the landmark Act. For number
of matters, the Central Government has to prescribe by rules the limits for
payment or procedure to be followed. Some stringent and minimum and
maximum fines will be levied for contravention of these provisions. Punishment
in the form of imprisonment of defaulting directors and Officers can also be
awarded for such contravention of these provisions. Such provisions indicate that
those in management are required to be vigilant about the compliance with
provisions of the law and about Corporate Governance. It appears that in enacting
such stringent provisions the Government has taken care of some of the
deficiencies of the existing Act and tried to remove the same. Further, an attempt
is made to address the issues which have arisen in some cases of corporate failures
and Corporate Scams which have so far come to light. It is hoped that the
Companies Act, 2013, if properly implemented and administered brings more
discipline in the matter of Corporate Governance in the future.
165

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CHAPTER- IV

ROLE OF DIRECTORS IN CORPORATE GOVERNANCE

The new Companies Act, 2013 makes a laudable contribution towards

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