Unit 3
Unit 3
Unit 3
Time of holding the An AGM has to be held within six months of An EGM can be held at any
meeting the close of the financial year. time.
Meetings of directors
Board of directors
Board meetings
As per Section 173 of the Companies Act, 2013, a company has to hold the meeting of board of directors in
the following manner:
The first board meeting has to be conducted within a span of thirty days from the date of incorporation.
In addition to the above meeting, every company has to hold a minimum of four board meetings annually,
and there shall not be a gap of more than one hundred and twenty days between consecutive two meetings.
Please note: With the issuance of Secretarial Standard 1 (SS-1), a circular by ICSI, a clarification was given
that the board shall conduct a meeting at least once every six months with a maximum gap of one hundred
and twenty days between two consecutive board meetings. Further, the SS also specified that it will be
sufficient if a company holds one meeting in every renaming calendar quarter in the year of its incorporation
in addition to the first meeting, which is to be held within thirty days from the date of incorporation.
In matters relating to Section 8 of the Companies Act, with an exemption by MCA dated 5.06.2015, it was
held that the sub clause (1) of Section 173 will be applicable only to the extent that the board of directors of
such companies hold at least one meeting in every six months.
Purpose of holding a board meeting
For issuing shares and debentures.
For making calls on shares.
For forfeiting the shares.
For transferring the shares.
For fixing the rate of dividend.
For taking loans in addition to debentures.
For making an investment in the wealth of the company.
For pondering over the difficulties of the company.
For making decisions of the policies of the company.
Notice of board meetings
As per Section 173(3) of the Companies Act, 2013-
A notice of not less than seven days must be sent to every director at the address that is registered with the
company.
Such notice can be sent either via speed post, by hand delivery, or through any electronic means.
The SS-1 (mentioned above) states that if the company sends the notice by speed post, or registered post, or
by courier, an additional two days shall be added to the notice served period.
In situations when the board meeting is called at shorter notice, it has to be conducted in the presence of at
least one independent director.
Further, if the independent director is absent, the decision occurred at must be circulated to all the directors,
and it shall be final only after ratification of decision by at least one independent director.
Moreover, in cases where a company does not have its own independent director, the decision shall be said
to be final only if it is ratified by a majority of directors, unless a majority of directors gave their approval at
the meeting itself.
Some important pointers on the requirements and procedures for convening and conducting a valid board
meeting
Directors can join the meeting-
In person,
Through video conferencing, or
Other audio visual means.
Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014, has provisions related to the
requirements and procedures, along with the procedures needed for board meetings in person for matters
relating to conveying and conducting board meetings via video conferencing.
While conducting virtual meetings, it is necessary that companies make proper arrangements to avoid any
issues at the last moment.
The chairperson and the secretary of the company have to ensure that they take necessary precautions in
matters relating to video conferencing, like proper security, recording the proceedings and preparing the
minutes of the meeting, having proper audio visual equipment, etc.
The notice for holding the meeting must be in accordance with the provisions laid under Section 173,
subsection 3 of the Act.
While beginning the meeting, the chairperson has the duty to roll call every director participating through
video conferencing or other such means to record the following:
Name of the director;
The place from where the director is participating;
An affirmation that the director can completely see, listen, and communicate with the other participants in
the meeting;
A confirmation that the director has received the agenda and all the relevant material related to the meeting;
A proclamation that no other individual other than the director is attending or has access to the proceedings
of the meeting at the palace mentioned in pointer (b).
After the roll call, the chairperson or the secretary has to inform the board about the names of the members
who are attending the meeting at the request or with the authorization of the chairman and affirm that the
required quorum is complete.
There are some matters that must not be dealt with through video conferencing or other audiovisual means,
namely:
An approval of the annual financial statements;
An approval of the report of the board;
An approval of the prospectus;
The audit committee meetings for consideration of statements related to finance, including a consolidated
financial statement, if any, that needs an approval from the board under subsection (1) of Section 134 of the
Act; and
An approval on matters related to the amalgamation, merger, demerger, acquisition, and takeover.
Agenda
The word “agenda” can be described as things to be done. In the case of company meetings, it can be said to
be a statement of the business that must be transacted at a meeting, along with the order in which the
business must be dealt with. Even though there is no explicit mention or provision in the Companies Act,
2013, for the secretary to send an agenda or include the same in the notice of the board meeting, it is
necessary by convention for the agenda to be mentioned with the notice served to conduct the meeting.
When an agenda is attached to the notice, the director is aware of the proposed business and the objects of
conducting the meeting, thus, he can come duly prepared for the discussion to be held in the meeting.
Quorum
As we know, every company needs to have a proper quorum to conduct a valid company meeting. Now, the
quorum for a board meeting under Section 174 of the Act is one third of the total strength or two directors,
whichever is higher. It must be noted that, any director participating through video conferencing or any other
audiovisual means must also be considered to determine the quorum.
Further, if the number of directors is reduced or there is any removal of a director or directors, the directors
who continue may act on behalf of the missing number of directors to fill the missing gap for the quorum or
for summoning a general meeting of the company; however, they shall not act for any other purpose.
Moreover, in cases where the number of directors interested surpasses or is equal to two-thirds of the total
strength of the board of directors, the number of directors who are not interested and are there to attend the
meeting, the number not being below two, shall be the quorum at such times.
It is pertinent to note that the quorum has to be present not only at the time of commencement of the meeting
but also at the time of transacting business with the company.
Committee of directors
The board of directors has the authority to form committees and delegate powers to such committees;
however, it is crucial that such a committee only consist of directors and no other members. Further, it is
mandatory for such committees to be authorised by the articles of association of the company and be in lieu
of the provisions set out in the Companies Act. The meetings of all these committees are held in the same
manner as board meetings.
In large companies, the following routine matters are looked after by the sub-committees of the board of
directors:
Allotment,
Transfer,
Finance.
Other meetings
Debenture holders meeting
A company is entitled to issue debentures, and to further implement the same, a meeting for debenture
holders can be called. This meeting is between the board of directors and the debenture holders. These
meetings are usually called to discuss the rights and responsibilities of debenture holders.
Meetings of debenture holders are conducted in accordance with the provisions laid down in the debenture
trust deed. The rules and regulations mentioned in the trust deed are related to the following:
Notice of the meeting,
Appointment of a chairman of the meeting,
Passing resolutions,
Quorum of the meeting, and
Writing and signing of minutes of the meeting.
Debenture holder meetings are generally conducted from time to time to discuss matters where the interest
of debenture holders is involved, like at the time of:
Reconstruction,
Reorganisation,
Amalgamation, or
Winding up of the company.
Creditors meeting
Meetings of creditors is a term used to describe a meeting setup by the company to conduct a meeting of the
company’s creditors. Under the Company Act, 2013, companies are not only entrusted with the power to
negotiate with creditors but also set up a procedure to do so. Such meetings are always arranged in matters
where a creditor decides to voluntarily wind up.
Moreover, Section 108 of the Companies Act, 2013, discusses the holding of meetings of creditors. It also
states that meetings be held in accordance with the provisions laid down under the following sections of the
said Act:
Section 109 that discusses demand for poll,
Section 110 that talks about postal ballot, and
Section 111 that has provisions in relation to the circulation of members’ resolutions.
In the creditors meeting, the creditors can decide to either approve, amend, or reject the repayment plan.
Further, the resolution professional must make sure that any sort of changes or modifications suggested by
the creditors of the company are approved by the directors of the company before carrying out that particular
change. Furthermore, the resolution professional also has the authority to adjourn the meeting of the
creditors for a period of not more than seven days at a time.
Notice of meetings of creditors
If a company is voluntarily winding up, a meeting of creditors must be called to propose a resolution for
voluntary winding up. Such a meeting has to be called either on the day of taking such a decision or the
subsequent day, and a general meeting must be conducted to propose the resolution.
The notice to creditors must either be sent by post along with the notices regarding the general meeting of
the company for winding up. Additionally, with the notice to the creditors, the company also has to
advertise at least once in the official gazette and once in two newspapers that are circulated in the district
where the company’s registered office or principal place of business is situated.
Procedure for conducting a company meeting
While discussing the procedure for consulting the meeting of the creditors, the following pointers are
noteworthy:
Obligation of the board of directors
While conducting a meeting, the board of directors must submit a statement on the position of the
company’s affairs along with a list of the company’s creditors and the estimated amount of their claims. The
director who is entrusted with the duty to conduct the meeting of creditors or who is in charge of the same
must attend the meeting and hold it at the same time.
Next course of winding up of the company
Based on the decision that occurred at the meeting of creditors, the company shall decide its next course of
action. The decision could be one of the following:
The company would wind up on a voluntary basis if all the parties agree to it unanimously.
In case the company is not able to repay all the debts from the assets sold in the voluntary winding up of the
company, then a resolution can be passed from winding up the company by involving the tribunal.
Passing the notice of resolution
When a notice of resolution is passed in the meeting of creditors, the same must be filed with the registrar
within 10 days of passing such a resolution. If the company does not adhere to the set provisions of company
law under the Companies Act, 2013, a penalty with a fine that will not be less than fifty thousand rupees and
extendable up to two lakh rupees shall be imposed. Further, the director of the company who errs in
following the procedure, will also be penalised with an imprisonment for a term extendable to six months or
with a fine not less than fifty thousand rupees and extendable up to two lakh rupees.
Quorum of creditors
A meeting cannot be commenced unless the creditors of the company, known as quorum attend the meeting.
The requisite quorum is as follows:
Quorum in case of creditors
In the case of creditors, at least one creditor entitled to vote must be in the quorum.
Creditors and contributors meeting
Creditor and contributor meetings are usually conducted when the company has gone into liquidation to
calculate the total amount due by the company to its creditors. The main motive of holding such meetings is
to seek the approval of the contributors to the scheme of compromise or rearrangement to save the company
from economic difficulties.
At times, even a court can pass an order to conduct such a meeting. It should be noted that the term
“contributory” encompasses every individual who is accountable for making contributions to the assets of
the company at the time of winding up.
Quorum in case of contributors
In the case of a meeting of contributors, at least one creditor is entitled to vote, or all the contributors if their
number does not exceed two.
Requisites of a valid company meeting
If the business carried on in a company is valid and legally binding, it is necessary that the meeting called to
conduct such business also be held in a valid manner. To understand the same, there are some pointers one
must understand to consider a meeting valid. The following are the requisites for conducting a valid
company meeting:
The meeting is convened by proper authority.
The announcement of holding the meeting is served through a proper notice. The same has been discussed
under Section 101 and 102 of the Companies Act, 2013.
Summary
Annual general meeting (AGM)
An AGM is conducted to transact the ordinary business of the company. Ordinary business includes the
following:
Consideration of financial statements and reports from the directors and auditors.
Making declarations on dividends.
Appointing a replacement of directors in place of those who have retired.
Appointing and setting up the amount of remuneration for auditors of the company.
It also includes annual accounts, crucial reports, audits.
Extraordinary general meeting (EGM)
An EGM is conducted to discuss special businesses, usually those that do not fall under the category of
ordinary businesses, which are discussed at AGMs. These meetings are generally called only in cases of
urgent matters or for those matters that are not discussed at AGMs.
Class meetings
Class meetings are conducted for shareholders belonging to a particular class. These meetings are held to
gain approval via a special resolution of all such members belonging to the particular class to seek their
approval on important matters or amends in any field related to their interests.
Board of directors meeting
A board of directors is held for several purposes, namely, for making calls on shares, issuing shares and
debentures, forfeiting the shares, for discussing the difficulties of the company, etc.
Committee of directors meeting
A committee of directors meeting can be held for issues relating to the allotment or transfer of any share or
asset of the company, or even for any issues relating to the finances of the company.
Debenture holders meeting
Debenture holders meetings are conducted to decide upon matters relating to the reconstruction,
reorganisation, amalgamation, or winding up of the company.
Creditors meeting
Creditors meetings are usually conducted for the creditors to either approve, change, or deny the repayment
plans of a company when it decides to wind up voluntarily.
Creditors and contributors meeting
Similar to the aforementioned meeting, a contributors meeting is conducted for the calculation of the total
amount due by the company to repay creditors or contributors when the company has gone into liquidation.
What happens if there is a breach in conducting company law meetings
As discussed under each heading (wherever relevant), in case a company errs in conducting a meeting, a
penalty in the form of fine, is imposed by the tribunal. The penalty is either imposed on the company or its
members, or both. The penalty keeps recurring up to a certain amount in case of continuation of the blunder.
BOARD COMMITTES
Committees are a sub-set of the board, deriving their authority from the powers delegated to them by the
board.
Under Section 177 of Companies Act, 2013, Board of Directors may delegate certain matters to the
committees set up for the purpose. Committees are formed as a means to improve board effectiveness and
efficiency in areas where more focused, specialised and technically oriented discussions is required.
Following are some of the important committees to be constituted by the Board:
1. Audit Committee:
Applicability: Every Listed Public Companies and Public Companies having a Paid-up share capital of 10
crore rupees or more, and a turnover of Rs. 100 Crore or more. Additionally All Public Companies which
have in aggregate outstanding loans, debentures and deposits exceeding 50 crore rupees are required to
constitute an Audit Committee.
Composition of Audit Committee as per Companies Act, 2013:
Minimum 3 directors with majority of Independent Director.
Members including the Chairman of Audit Committee should be able to read and understand
financial statement.
Composition of Audit Committee as per clause 49 of Listing Agreement:
Minimum of 3 Director of which 2/3rd are independent Directors.
All members should be financially literate and at least 1 member shall have accounting or related
financial management expertise.
Vigil Mechanism: Vigil Mechanism provides adequate safeguard against victimisation of persons. It is
established for directors and employees to report their grievances and concerns.
Rule 7 of Companies (Meetings of Board and its Powers) Rules, 2014 describes about establishment of Vigil
Mechanism for every Listed Company and companies prescribed below:
Companies which accepts deposits from public.
Companies which have borrowed money from bank and public financial institutions in excess of Rs.50
Crores.
The Board of Directors shall nominate a director to play role of Audit Committee for the purpose of Vigil
Mechanism for reporting purpose. The aggrieved person will have direct access with the
Chairperson/Nominated Director of the Audit Committee.
The details of establishment of such mechanism shall be disclosed on the company’s website, and in the
Board ‘report.
Penalty for the Violation of Audit Committee Provisions: The Company shall be punishable with a fine of
Rs. 1 lakh to Rs. 5lakh and every officer of the company who is in default shall be punishable with
imprisonment upto 1 year or with Rs. 25,000 to Rs. 1 lakh or with both.
Function of Audit Committee:
To recommend appointment, remuneration and terms of appointment of the Auditor of the Company.
To establish a Vigil Mechanism Policy.
To call for remarks of the auditors about the internal control system.
At the Annual General Meeting, the chairman of the Committee should be present to answer the
shareholder’s inquiry.
To discuss any issues related to internal and statutory auditors and the management of the Company.
2. Nomination and Remuneration Committee:
Applicability:
Every Listed Public Companies and Public Companies having a Paid-up share capital of 10 crore
rupees or more, and a turnover of Rs. 100 Crore or more.
Additionally All Public Companies which have in aggregate outstanding loans, debentures and
deposits exceeding 50 crore rupees are required to constitute an Audit Committee.
Composition of Nomination and Remuneration Committee as per Companies Act,2013:
Minimum of 3 Non-Executive Directors out of which two shall be Independent Directors.
Chairperson shall be an Independent director.
Functions of Nomination and Remuneration Committee:
Recommendation of success plans for the directors.
To review the elements of the remuneration package, structure of remuneration package.
To review the changes to remuneration package, terms of appointment, severance fee, requirement
and termination policies and procedures.
To recommend the shortlisted candidates who are qualified to be director and who can be
appointment in senior management.
The committee is authorised to seek information about any employee and the management is directed
to co-operate.
The Committee can be present at the General Meeting to answer the shareholder’s queries.
3. Stakeholders Relationship Committee: Section 178 of Companies Act,2013 states that a company
which holds 1000 numbers of shareholders, debenture holders, deposit holders and any other security
holders at any time during a financial year.
Composition of Stakeholders Relationship Committee: As per the SEBI Listing regulations the Committee
should consist of
least three directors, with at least one being an Independent director, shall be members of the
committee and
in case of a listed entity having outstanding SR equity shares, at least two-thirds of the committee
shall comprise of independent directors.
The chairperson of the Committee shall be a non-executive director and such other members as may
be decided by the Board.
As per regulation the Committee shall meet at least once in a year. The chairperson or, in his absence any
other member of the committee authorized by him in this behalf shall attend the general meetings of the
Company.
Functions of Corporate Stakeholders Relationship Committee:
The Committee shall resolve complaints related to transfer/transmission of shares, non-receipt of
annual report and non-receipt of declared dividends, general meetings, approve issue of new/
duplicate certificates and new certificate on split/consolidation/ renewal etc. approve
transfer/transmission, dematerialization.
Corporate Social Responsibility Committee:
Section 135 of Companies Act,2013 , with Companies(CSR Policy) Rules,2014 states that every company
having :
net worth of not less than Rs.500 crores or more
or turnover of not less than Rs. 1000 crores or more
Or Net Profit of Rs.5crore or more shall constitute a Corporate Social Responsibility Committee.
Composition of CSR Committee as per Companies Act, 2013 :
In case of Listed Company at least 3 Directors out of which 1 should be an Independent Director.
Functions of Corporate Social Responsibility Committee:
To suggest and devise a CSR Policy according to the Schedule VII of Companies Act, 2013 to the
board.
To recommend the amount of expenditure of the devised policy above.
To monitor the CSR Policy of company from time to time and prepare a transparent monitoring
mechanism.
Institution of a transparent monitoring mechanism for implementation of the CSR projects or
programs or activities undertaken by the company.
With the rapid pace of globalization many companies have been forced to tap international financial markets
and subsequently to face greater competition than before. Both policymakers and business managers have
become increasingly aware of the importance of improved standards of Corporate Governance.
India has one of the best corporate governance laws but poor implementation together with socialistic
policies of the perform era has affected corporate governance. Concentrated ownership of shares,
pyramiding and tunneling of funds among group companies mark the Indian corporate landscape.
Express or implied contracts between the stakeholders and the company for the distribution of rights, duties,
reward and responsibility, etc. among different sharers in the corporation.
Procedure for proper control and supervision of information flow in the company, proper operation of
checks-and- balances.
Procedures for resolving and conforming the clashing interests and opinions of different participators in the
corporation.
This operation ensures responsibility of the Board of Directors to all stakeholders of the corporation i.e.
managers, shareholders, suppliers, creditors, auditors, controllers, workers, guests and society in general; for
giving the company a fair, clear and efficacious administration. So it isn't just mere company administration
but a corporate administration system. It's a code of conduct that must be followed for running and proper
functioning of a corporate entity.
The system of corporate governance is to achieve the specific goals to fulfilling long- term strategic
pretensions of owners. To taking care of the interests of employees. To consideration for the atmosphere and
regional community to maintaining excellent relations with guests and suppliers. To fulfil all the applicable
legal and regulatory conditions.
By using corporate governance procedures wisely and participating results, an organization can motivate all
stakeholders to figure toward the corporation's goals by demonstrating the advantages to stakeholders, of the
pot's success. Good governance is good business. To conclude, by and large attempt of the Board should be
to take the organisation forward and to maximize future value and shareholders wealth.
Why corporate governance is important?
Changing ownership and business structure:
In recent years, the ownership structure of companies has changed a lot. Now Public financial institutions,
mutual funds, etc. are the single largest shareholders in most of the large companies. They have effective
control on the management of the companies.
They force the management to become more efficient, transparent, accountable, etc. They also ask the
management to make consumer-friendly policies, to protect all social groups and to protect the environment.
That is how the changing ownership structure has resulted in corporate governance.
Scale of business activities has grown in manifolds. For obtain the economies of growth many takeovers and
mergers takes place in the business world. And corporate governance is required to protect the interest of all
the parties during that takeovers and mergers.
Increased importance of corporate social responsibility:
In current scenario corporate social responsibility is given a lot of importance. As businesses gain everything
from society so society also has some expectation from businesses. And responsibility for fulfilling these
expectation by corporate is called corporate social responsibility. Social responsibility requires from the
board to protect the rights of the every related party i.e. customers, employees, shareholders, suppliers, local
communities, etc. For fulfilling all these liabilities they need corporate governance.
Increased corrupt practices in business:
In recent years, many scams, frauds, and corrupt practices have come to light. Misuse and misappropriation
of public funds are happening in the stock market, banks, financial institutions, companies, and government
offices at large scale. For the purpose to avoid these financial irregularities, many companies have started
corporate governance.
Inactiveness of shareholders:
shareholders only attend the Annual general meeting of their companies. They are generally inactive in the
management. Shareholders' associations are also not strong. Directors generally make a profit of this
situation and misuse their power. So, there is an imperative need for corporate governance to protect all the
stakeholders of the company.
Globalized era:
As now Indian economy had become globalized, most big companies are selling their goods in the global
market. For maintaining and growing they have to attract foreign investors and foreign customers and they
also have to follow foreign rules and regulations. All this requires corporate governance. Without Corporate
governance, it is impossible to enter, survive in the global market.
Legal bindings:
Practice of corporate governance is also required by the law. In India SEBI and Indian companies, the Act
defines the scope and process of corporate governance.
Development of Corporate Governance in India
The notion of good governance is really old in India dating back to third century B.C. Where Chanakya
(Vazir of Parliputra) developed fourfold duties of a king Raksha, Vriddhi, Palana and Yogakshema.
Substituting the king of the State with the Company CEO or Board of Directors the principles of Corporate
Governance refers to securing shareholders wealth (Raksha), enhancing the wealth by proper use of Assets
(Vriddhi), maintenance of wealth through profitable ventures (Palana), and above all protecting the interests
of the shareholders (Yogakshema or safeguard).
Corporate Governance wasn't in the agenda of Indian Companies until the early 1990s and no one would
find an important reference to this subject in the book of law till then. In India, weaknesses in the system
such as undesirable stock market practices, boards of directors without satisfactory fiduciary liabilities, poor
disclosure practices, lack of transparency, and chronic capitalism were all crying for reforms and upgraded
governance.
Issues and Challenges in Corporate Governance
Selection procedure and term of Board:
The selection procedure adopted in Indian corporations is the biggest challenge for good corporate
governance. Law requires a healthy mix of executive and non-executive directors, independent directors,
and woman directors. Most companies in India tend to only comply on paper; board appointments are still
by way of word of mouth or fellow board member recommendations. It is common for friends and family of
promoters and management to be appointed as board members.
Life-term board members can pose many problems to business say fixed beliefs, power gaining etc. so no
business prefers to appoint board members for life-term. And if the board is very short then they will not
take long term decisions with full of their efficiency because in long run they will be changed or relieved
from their duties. So the term of board must be fixed with due attention. Typically in a board of directors,
directors sit for a brief term say 2 to 5 years and it is good practice to switch some of directors at a fixed
time interval instead of changing whole board at a single time.
Performance Evaluation of Directors:
SEBI, India's capital markets regulator, has released a 'Guidance Note on Board Evaluation' in January 2017.
Which cover all major aspects of Board Evaluation including the Subject & Process of Evaluation, Feedback
to the persons being evaluated, Action Plan based on the results of the evaluation process, Disclosure to
stakeholders, Frequency & Responsibility of Board Evaluation. But for achieving the desired objectives
from performance evaluation, they need to make the evaluation result public and these disclosures may put
the corporate in big trouble.
Missing Independence of Directors:
Independent directors' appointment was supposed to be the biggest corporate governance reform by kumar
mangalam committee on corporate governance in 1999. However in reality independent directors have
hardly been able to make the desired impact. Till now the appointment of directors in most of companies is
made at the discretion of promoters, so it is still questionable. For providing the true success it is necessary
to limit the promoter's powers in matters relating to independent directors.
Corporate governance is about ethical conduct in business. Ethics is concerned with the law of values and
principles that enables a person to choose between right and wrong. Further, ethical dilemmas arise from
clashing interests of the parties involved.
It's enough possible that in the effort at arriving the best possible financial results or business results there
could be attempts at doing things which are verging on the illegal or indeed illegal. There's also the
possibility of grey areas where an act isn't illegal but considered unethical. These raise moral issues.
The quick migration of four elements across national borders. These are:
Strong corporate governance is essential to flexible and vibrant capital markets and is an important
instrument of investor protection.
Companies raise capital from market and investors suffered due to unscrupulous guidance that performed
much worse than past reported figures. Numerous corporates didn't pay heed to investors grievances.
The board of directors and the elderly position administration of an enterprise- walking their talk. It's by
walking their talk that the top administration can earn credibility. This also has a direct bearing on the
morale of an organization.
When it comes to the hardware aspect of corporate governance, we go into the issue of a law, which
becomes a reference point for actions. But the sad fact in our country is that even though there's a lot of talk
about corporate governance, when it comes to reality, nothing big happens.
In the Indian context lack of clarity that leads to corrupt or illegal actions.
Maybe the most important challenge we face towards better corporate governance is the mindset of the
people and the organizational culture. This change will have to come from within.
Another important aspect is to realise that eventually the spirit of corporate governance is more important
than the form. Substance is more important than style. Values are the substance of commercial governance
and these will have to be definitely articulated and systems and procedures devised, so that these values are
practiced.
We then come to a common moral problem in running enterprises. One can have practices which are legal
but which are unethical. In fact, numerous a time, tax planning exercises may border on the fine razor's edge
between the rigorously legal and the patently unethical.
Conclusion
The concept of corporate governance hinges on total transparency, integrity and responsibility of the
administration and the board of directors. Be it finance, taxation, banking or legal structure each and every
place requires good corporate governance. Corporate Governance is a means not an end, Corporate
Excellence should be the end. Once, the good Corporate Governance is achieved and the Indian Commercial
Body will shine to outshine the whole world.
In the Indian context, the need for corporate governance has been pointed because of the frauds occurring
constantly since the emergence of the concept of liberalisation from 1991. We had the Harshad Mehta fraud,
Ketan Parikh Scam, UTI fraud, Vansishing Company Scam, Bhansali Scam and so on. In the Indian
corporate scene, there's a need to induct global standards so that at least while the scope for frauds may still
exist, it can be at least reduced to the minimum.
Corporate governance and ethical actions have a number of advantages. Primarily, they help to make good
brand image for the company. Once there's a brand image, there's greater faithfulness, once there's greater
loyalty, there's greater commitment to the employees, and when there's a commitment to workers, the
workers will turn more creative.
In the current competitive atmosphere, creativity is vital to get a competitive edge. Corporate Governance in
the Public Sector cannot be avoided and for this reason it must be embraced. But Corporate Governance
should be embraced because it has much to offer to the Public Sector. Good Corporate Governance, Good
Government and Good Business go hand in hand.
Independent Directors- Applicability, Roles And Duties
The Board of Directors manage the operations of a company. The Board of Directors consists of
individual directors of a company. As per the Companies Act, 2013 ('Act'), certain companies must have
independent directors on their Board of Directors.
The Companies Act, 1956 did not provide a specific definition of an Independent Director. But Independent
Directors are in the limelight as per the Companies Act, 2013. The term “Independent Director” has been
defined in the Act, along with several new requirements relating to their appointment, duties, role, and
responsibilities.
Independent Director
An independent director is a non-executive director of a company who helps the company in improving
corporate credibility and governance standards. The independent director should not be a managing director,
a whole-time director or a nominee director.
He or she does not have any kind of relationship with the company that may affect the independence of
his/her judgment. The provisions relating to the appointment of Independent directors are contained in
Section 149 of the Companies Act, 2013 should be read along with Rule 4 and Rule 5 of the Companies
(Appointment and Qualification of Directors) Rules, 2014
Applicability On Appointing An Independent Director
Listed Public Company
Every listed public company must have at least one-third of a total number of directors as independent
directors. Any fraction contained in that one-third shall be rounded off as one.
Unlisted Public Company
As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following
classes of companies must have at least 2 directors as independent directors:
Public companies with paid-up share capital of Rs.10 crore or more.
Public companies with a turnover of Rs.100 crore or more.
Public companies with aggregate outstanding loans, debentures, and deposits, exceeding Rs.50 crore.
Points to remember :
1. The amount existing on the last date of latest audited financial statements shall be taken into account for
calculating the paid-up share capital or turnover or outstanding loans, debentures and deposits.
2. The company must appoint a higher number of directors if a higher number of independent directors ir
required to compose audit committee.
3. These unlisted public companies - joint venture, wholly owned subsidiary and dormat company are not
required to appoint an independent director even if they meet the criteria.
Every independent director should give a declaration that he/she meets the criteria of independence at the
first meeting of the board in which he participates as a director and thereafter at the first meeting of the
Board in every financial year or when a situation arises which affects his status of independence. The terms
and conditions of appointment of independent directors should also be posted on the company’s website.
Qualifications of an Independent Director
The person should possess appropriate experience, skills and knowledge in one or more fields of law,
finance, management, marketing, sales, research, administration, technical operations, corporate governance,
or other disciplines related to the company’s business.
The relatives of an independent director should not -
be indebted to the company, its subsidiary, holding or associate company or their director or promoters.
have given a guarantee or security in connection with the indebtedness of a third person to the company, its
subsidiary, holding or associate company or their directors or promoters of such holding company, for an
amount of Rs.50 lakhs, at any time during the two immediately preceding financial years or during the
current financial year.
The person is not:
A promoter of the company or its subsidiary, holding or associate companies.
Related to the directors or promoters in the company, or any of its subsidiary, holding or associate
companies.
The person should not have any financial relationship (other than remuneration as a director or having
transaction not exceeding 10% of the total income) with company or any of its subsidiary, holding or
associate companies or their directors or promoters, during the current financial year or the last two
immediately preceding financial years.
The person or his/her relatives should not:
Held or holds the position of Key Managerial Personnel (KMP) or has been the employee of the company or
any of its subsidiary, holding or associate companies in any of three financial years immediately preceding
the financial year in which such person is proposed to be appointed.
Be or has been and employee, proprietor or a partner in any three financial years immediately preceding the
financial year in which such person is proposed to be appointed – as an auditor firm, cost auditor, legal
consultant or company secretary of the company or any of its subsidiary, holding or associate companies.
Holds together with relatives a total voting power exceeding 2% in the company.
Be a Chief Executive or director of any non-profit organisation that receives 25% or more of its receipts
from the company, any of its promoters or directors or its subsidiary, holding or associate companies or that
holds 2% or more of the total voting power of the company.
Role of an Independent Director
Independent Director acts as a guide, coach, and mentor to the company. The role includes improving
corporate credibility and governance standards by working as a watchdog and help in managing risk.
Independent directors are responsible for ensuring better governance by actively involving in various
committees set up by the company. The independent directors are required because they perform the
following important roles:
Facilitate withstanding and countering pressures from owners.
Fulfil a useful role in succession planning.
On issues such as strategy, performance, risk management, resources, key appointments and standards of
conduct he or she must support in gaining independent judgment to bear the board’s deliberations.
While evaluating the performance of the board and management of the company, he or she needs to bring an
objective view.
Scrutinising, monitoring and reporting management’s performance regarding goals and objectives agreed in
the board meetings.
Safeguard the interests of all stakeholders, particularly the minority shareholders.
Balance the conflicting interest of the stakeholders.
Check on the integrity of financial information and ensure financial controls and systems of risk
management are in operation.
In situations of conflict between management and shareholder’s interest, aim towards the solutions which
are in the best interest of the company.
Establishing suitable levels of remuneration of executive directors, key managerial personnel, and senior
management.
Conduct of an Independent Director
The independent directors must adhere to the code of conduct and fulfil their responsibilities in a
professional and faithful manner. Such conduct in discharging their duties and fulfilling responsibilities will
promote confidence in the investment community, especially minority shareholders and regulators. The Act
provides the following guidelines for professional conduct for independent directors:
Uphold ethical standards of probity and integrity.
Act constructively and objectively while exercising duties.
Exercise powers in a bona fide manner in the interest of the company.
Devote sufficient attention and time towards professional obligations for balanced and informed decision
making.
Not allow any extraneous considerations to interfere in exercising objective, independent judgment in the
company's best interest while concurring in or dissenting from the collective judgment of the Board in its
decision-making.
Not take advantage of the position to the detriment of the company and its shareholders or to gain direct or
indirect personal advantage or advantage for an associated person.
Refrain from an action that would lead to loss of independent decision-making.
Where circumstances make an independent director lose his independence, the independent director must
immediately inform the Board.
Assist the company in implementing the best corporate governance practices.
Duties of an Independent Director
Undertake appropriate induction and regularly update and refresh their skills, knowledge, and familiarity
with the company.
Attempt to attend company’s general meetings.
Attempt to attend Board of Director's meetings and board committees meeting being a member.
Have adequate knowledge about the company and the external environment in which it operates.
Report matters concerning unethical behaviour, actual or suspected fraud or violation of the company’s code
of conduct or ethics policy.
Acting within his/her authority, assist in protecting the legitimate interests of the company, shareholders and
its employees.
Not to unfairly obstruct the functioning of the company or committee of the Board.
Participate in the Board’s committee being chairpersons or members of that committee.
Not to disclose confidential information, including commercial secrets, technologies, advertising and sales
promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by
the Board or required by law.
Ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that
the interests of a person who uses such mechanism are not prejudicially affected on account of such use.
Other Provisions Related to Independent Directors Under Companies Act, 2013:
Certain companies are required to form a Corporate Social Responsibility (CSR) Committee to formulate
and monitor the CSR policy. The CSR committee should consist of at least three directors, including at least
one independent director.
Where a company is not required to appoint an independent director, it shall have in its CSR Committee two
or more directors.
The Independent director’s appointment process must be independent of the company’s management. An
independent director can be selected from a data bank containing names, qualifications and addresses of
persons who are eligible and willing to act as independent directors, maintained by an institute, body or
association notified by the Central Government.
The appointment of the independent director must be approved by the company in a general meeting, and
the explanatory statement annexed to the general meeting notice should indicate the justification for
choosing the proposed person for appointment as independent director.
Every independent director shall give a declaration that he meets the criteria of independence when :
He or she attends the first board meeting as a director.
In every financial year, at the first meeting of the board of directors.
When a situation arises which affects his or her status of independence being an independent director.
The independent director shall be appointed for a maximum term of 5 years. The term shall not be more than
2 consecutive terms. He or she shall be re-appointed only by special resolution by the company.
Any vacancy in the office of independent director shall be filled in the very next Board Meeting or within 3
months of such vacancy, whichever is later.
A person must be an independent director in not more than seven listed companies at a time.
An independent director shall not retire by rotation and shall not be included in the ‘total number of
directors’ for the purpose of computation of rotational directors.
A small shareholder director shall be considered as an independent director, if:
He or she is eligible for appointment as independent director u/s 149 (6).
He or she gives a declaration that he or she meets the criteria of Independence as specified u/s 149(7).
If the Board meeting is called at shorter notice so as to transact some urgent business, then the presence of at
least 1 independent director is mandatory. In absence of any independent director, a decision shall be
circulated to all the directors and later approved by at least 1 independent director.
Women Directors
Women empowerment is not something where a woman can merely play a simple role in a corporate but
should be a part the higher level of decision making process. As per the available data, European countries
lead in appointing Women as Director on a Company’s Board. Among them, Norway stands top with 45%
wheres India holds only 4.7%. However, the percentage of women Directors appointed in Indian companies
is expected to increase. In this article, we look at the role and requirement for appointment of Women
Directors in Company as per Companies Act, 2013.
Woman Director – Companies Act 2013
As per the Companies Act, 2013, it is mandatory to appoint at least one woman director as a board member
in certain types of companies. The penalty for non-compliance of provision extends to a fine of Rs.10,000
with a further fine of Rs.1000 per day if the contravention continues.
Criteria
A company, whether a public company or a private concern, will be required to mandatorily appoint at least
one woman director if it fulfils any of the following criteria:
It is a listed company whose securities are listed on any stock exchange.
It is a company having paid-up capital of Rupees one hundred crore or more, and a turnover of Rupees three
hundred crores or more.
Procedure for Appointment of Woman Director
A Woman Director can be appointed during the time of company registration or after incorporation by the
Board Members and the Shareholders.
Director Identification Number
Any person who wishes to hold the position of Director in an Indian company must first obtain Director
Identification Number (DIN) which is a unique identification number for each director. A Woman Director
must first obtain DIN to become Director of a Company. In case a Woman Director is being appointed
during the company incorporation process itself, DIN will be generated along with the incorporation
certificate. No person can hold or acquire more than one DIN.
Consent to Act as Director
In case of appointment of Woman Director in existing company, consent in Form DIR-2 given by the
Woman Director is to be filed with the Registrar of Companies within 30 days of her appointment.
Know more about procedure for adding or removing Director.
Roles of Women Directors
Women director has to play the role like any other director. Women can take up a role of Nominee Director
who will be nominated by a party in the company to take care of its interest. Also, Women can take up a role
of Independent Director who is not liable to retire by rotation.
Women Directosr can hold a maximum of twenty directorships that includes the sub-limit of ten public
companies. Any contravention on this part shall be subjected to a fine ranging between Rs.5000-Rs.25000.
Know more about the Duties & Responsibilities of Directors.
Vacancy in the Position of a Women Director
A Woman Director may leave the company on any reasons such as resignation, removal, automatic vacation
or retirement by rotation before the expiry of her term as a Director. The Board of Directors must fulfill this
vacancy known as intermittent vacancy within a period of three months.
A company can also have more than one woman director and the vacancy caused by one of them will not be
considered as an intermittent vacancy, as the company still satisfied the Companies Act of 2013 with respect
to Women Directors.
Alternative Director
In case of absence of a Woman Director for a period of not less than three months, the board must appoint an
alternative director to ensure the smooth functioning of the company. The alternative director shall leave the
firm after the return of the woman Director. In case of more than one woman director, it is optional for the
company to appoint an alternative director.
Term of Women Director
A woman director can hold the position of Director until her next Annual General Meeting from the date of
appointment. She is also entitled to seek for reappointment at the general meeting. The tenure of women
director is liable to retirement by rotation similar to other directors. Like any other director, a Woman
Director can also tender her resignation any time before the expiry of her term by giving a notice to the
company.