Companies Act 2013 - Directors, Independent Directors and Meetings

1. BOARD OF
DIRECTORS,
INDEPENDENT
DIRECTORS, AND
MEETINGS
BY CA ABHISHEK
MURALI

2. Independent Directors

3. Background of Corporate
Governance
 Ideal corporate governance is characterized
by a firm commitment to ethical practices by
the entire organisation in all of its dealings with
a wide group of stakeholders encompassing
employees, customers, vendors, regulators
and all shareholders
 Corporate governance rests on four pillars
 Transparency
 Full disclosure
 Independent Monitoring
 Fairness to all stakeholders

4. Independent Directors –
Evolution
 Independent Directors is a concept
which has been in existence for a few
decades now
 Gained prominence in 1993 when the
Cadbury Report was published by the
committee set up by the London
Stock Exchange

5. Independent Directors – Evolution
– Cadbury Report (1993)
 Cadbury Report‟s recommendations:
Majority of non-executive directors
should be independent of
management
Specified terms for non-exec
directors
Executive remuneration should be
subject to a remuneration
committee
Audit committee with 3 non-

6. Independent Directors – Evolution
– Greenbury Report (1995)
 Greenbury Report then followed this
in 1995 and it addressed the growing
concern of Director Remuneration
 It was suggested that the role of
Independent Directors be enhanced
to tackle the issues relating to
Executive Remuneration

7. Independent Directors – Evolution
– Higgs Review (2003)
 Headed by Sir Alan Higgs in England,
Higgs advocated more stringent
criteria for board composition and
evaluation of Independent Directors
Proper balance of skills and experience
of both executive and non executive
directors
Independent directors should meet
once a year without chairman or
executive directors present

8. Independent Directors – Evolution
– Kumarmangalam Birla
Report(1999)
 SEBI had constituted a Committee on
May 7, 1999 under the chairmanship of
Shri Kumarmangalam Birla, then
Member of the SEBI Board “to promote
and raise the standards of corporate
governance”. Based on the
recommendations of this Committee, a
new clause 49 was incorporated in the
Stock Exchange Listing Agreements
(“Listing Agreements”).

9. Independent Directors – Evolution
– Narayana Murthy Report(2003)
 The Committee was constituted by SEBI
under the Chairmanship of Narayana
Murthy
 The committee was constituted to review
the performance of Corporate
Governance in India country as well as
to determine the role of companies in
responding to rumour and other price
sensitive information
 This was with the objective to enhance
transparency

10. Independent Directors – Evolution
– Narayana Murthy Report(2003)
 Some important recommendations of
the committee include:
Giving greater importance to the Audit
Committee and the non-executive directors
on the board
All audit committee members should be
“financially literate” and at least one
member should have accounting or related
financial management expertise

11. Role of an Independent Director
 Independent directors bring in an outside
perspective while evaluating the board and
management decisions thus creating a
balance in the interest of the shareholders
 Including executive remuneration,
succession planning, changes in corporate
control, takeovers and acquisitions and the
audit
 Today independent directors are a core
resource in delivering the good governance
processes that shareholders expect.

12. Role of an Independent Director
 Independent directors primarily
provide inputs to all key decisions
such as strategies, performance
evaluation and risk evaluation
affecting the company
 Independent Directors are also part
of Committees and are often
Chairmen of Committees, thereby
empowering their judgements and
decisions

13. Responsibilities of an Independent
Director
 Thorough preparation for the meeting
 Free and frank expression of
opinions.
 Being the conscience of the Board
 Up-to-date information on laws and
regulations governing the company
 Last but not the least, responsibility to
act in the larger interest of true
growth and development of the
company

14. What Clause 49 of the Listing
Agreement says
 Not less than 50% of the board
should comprise of non-executive
directors
 Executive or non-executive director
as chairman:Chairman of the board
Non-Executive Executive
Atleast 1/3rd of the board
should have independent
directors
Atleast 1/2 of the board
should have independent
directors

15. What the New Companies Act
says
 Every listed company will have atleast one-
third of total number of directors as
independent directors, with any fraction to be
rounded off as one – Sec 149(4)
 Nothing regarding 50% of independent
directors if Executive Director is chairman
 Now the Central Government has the power to
prescribe minimum number of independent
directors in other class of public companies

16. Definition of Independent
Director
 The New Companies Act also defines the term
„Independent Director‟. Some significant additional
criteria as per the new act are:
 Should be a person of integrity and possess relevant
expertise and experience
 Should not have pecuniary relationship/transactions
with the company, its promoters, its directors. This
should not have existed in the current FY or preceding
2 FYs.
 Central Government may prescribe additional
qualifications for appointment of independent director
 Nominee Director is not considered an Independent
Director

17. Appointment, Remuneration and
Role

18. Independent Directors -
Appointment
 The Independent Directors appointed should give
a declaration of independence annexed to the
Financial Statement laid before a company in a
General Meeting –149(6)
 Term of Independent Directors is now 5 years and
can be reappointed for another term of 5 years,
but no more than 2 consecutive terms – Sec
149(10)
 Eligible for reappointment after 3 years of expiry
of last term – Sec 149(11)
 Retirement provisions not applicable to
Independent Directors

19. Independent Directors -
Selection
 A company notified by the Central Government
will maintain a database containing the names,
addresses and qualifications of the persons
eligible and willing to act as Independent
Directors – Sec 150

20. Independent Directors -
Remuneration
 An independent director will NOT be entitled to
any stock option(ESOP) and may receive
remuneration by way of fee
 reimbursement of expenses for participation in
the Board and other meetings and profit
related commission as may be approved by
the members

21. Role in Committees and
Evaluation
 The Audit Committee should consist of a minimum
of three directors with independent directors
forming a majority
 Nomination and Remuneration Committee
consisting of three or more non-executive
directors out of which not less than one-half
should be independent directors
 Annual evaluation of all directors should be
undertaken by the Board to evaluate its
performance
 Independent Directors will evaluate the
performance of other directors in their roles

22. Liability
 Shall be liabile only in respect of such acts of
omission and commission by the company
which had occurred with his knowledge,
attributable through Board processes and with
his consent on connivance or where he had
not acted diligently

23. Directors

24. Directors - Appointment and
Qualification
 Chapter XI, and XII cover Directors & Meetings;
Chapter XIII covers Managerial Personnel
 All cos. minimum one director who stayed in India
for at least 182 days in the previous calendar
year – Sec 149(3)
 Prescribed class of companies - at least one
woman director on the board – Sec 149(1)
 Any public company with Share capital > Rs.5
crores or 1000 or more shareholders; may have a
director elected by small shareholders. Did not
exist before – Sec 151Prescribed class of companies:
i) All listed companies – 1 year transition time
ii) Other public cos paid up capital > Rs.100
crores; or turnover > Rs.300 crores – 3 years

25. Directors - Appointment and
Qualification
 Public co. or subsidiary of public co. can now
have upto 15 directors on the board. Previously it
was 12. An extension beyond this will require a
special resolution at the general meeting
 Directors can now hold Directorships in upto 20
cos.; increased from the cap of 15 cos. However,
not more than 10 public cos (including
subsidary/holding of a public co.)
 Every person appointed as a Director should
furnish his DIN and a declaration that he is not
disqualified from acting as a Director – Sec 152(4)

26. Directors - Appointment and
Qualification
 Not less than 2/3rd of total number of directors
shall be persons whose office is liable to
determination by either rotation or retirement;
and appointed in a general meeting
 The BoD may appoint a person to act as an
alternate director for a director who is absent
from India for not less than 3 months. He will
vacate the position after the director returns

27. Directors – Resignation and
Removal
 Resignation: A director may resign from his office
by giving notice, in writing, to the company. BoD
and Co. shall intimate the same to the registrar –
Sec 168
 A Director should also communicate his reason for
resignation to the registrar in 30 days – Sec 168
 A company may, by ordinary resolution, remove a
director before the expiry of term; after giving him
a reasonable opportunity of being heard
 A special notice will be required of any resolution,
to remove a director or to appoint somebody in
place of a director so removed

28. Directors – Disqualification – Sec
164
 Not eligible for appointment if:
 he is of unsound mind and stands so declared by a competent
court;
 he is an undischarged insolvent;
 he has applied to be adjudicated as an insolvent and his
application is pending;
 he has been convicted by a court of any offence
 an order disqualifying him for appointment as a director has been
passed by a court or Tribunal and the order is in force;
 he has not paid any calls in respect of any shares of the
company held by him
 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
 he has not been allotted the Director Identification Number

29. Can the Companies Act prescribe
the duties of Directors? – Sec 166
A director will :
 Act in accordance with the articles of the
company
 Act in good faith to promote the objects of the
company
 Exercise duty with care, skill and diligence
 Not enter into situations with conflict of interest
 Not achieve or attempt to achieve undue gain
or advantage for him or
relatives/partners/associates
 Not assign his office

30. Meetings of the Board

31. Meetings of the Board
 First Board meeting in 30 days from Incorp – Sec
173(1)
 Minimum 4 Board meetings every year
 Not more than 120 days gap between 2 Board
Meetings
 A notice of not less than 7 days to call a Board
meeting(either by hand/electronic means) – Sec
173(3)
 Listed Companies and prescribed companies shall
form Audit Committee
 Listed Companies and prescribed companies shall
constitute a Nomination and Remuneration Committee
 Shareholders Relationship Committee for every

32. Meetings of the Board
 Quorum shall be 1/3rd of total strength or 2
directors, whichever is higher – Sec 174

33. Other Sections
 Political contribution limit has been raised from
5% to 7.5% of average net profits for the
preceding 3 financial years
 Defects in appointment of directors will not
invalidate the actions taken by him as a
director
 Restrictions on loans to Directors – Now
applicable to both Private and Public
Companies (Unless company gives loans in
ordinary course or business and is as per rate
declared by the RBI)

34. Managerial Personnel

35. Managerial Personnel
 Maximum limit of 11% of net profits
 Where inadequate profits – remuneration shall be as
per schedule V as follows – Higher of (A) or (B)
(A)
 (B) 2.5% of current relevant profit
 However, above limits can be doubled if a special
resolution is passed
Where effective capital is Remuneration limit
Negative or <5 crores 30 lakhs
5 crores but <100 crores 42 lakhs
100 crores but <250 crores 60 lakhs
>250 crores 60 lakhs plus 0.01% of the effective
capital beyond 250 crores

36. Managerial Personnel
 Independent directors do not get stock options
but may get payment of fee and profit linked
commission, as may be prescribed – Sec
197(7)
 Every company(of the prescribed class) shall
have a Managing Director, CEO or Manager;
and in their absence a Whole Time Director
and a Company Secretary – Section 203