Companies Act 2013 - Directors, Independent Directors and Meetings

BOARD OF DIRECTORS, INDEPENDENT DIRECTORS, AND MEETINGS

BY CA ABHISHEK MURALI

Independent Directors

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

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

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-executive directors

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

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

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”).

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

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

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.

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

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

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

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

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

Appointment, Remuneration and Role

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

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

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

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

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

Directors

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 transition time

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)

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

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

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

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

Meetings of the Board

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 company

which has >1000 shareholders/security holders

Meetings of the Board Quorum shall be 1/3rd of total strength or

2 directors, whichever is higher – Sec 174

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)

Managerial Personnel

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 limitNegative or <5 crores 30 lakhs5 crores but <100 crores 42 lakhs100 crores but <250 crores 60 lakhs>250 crores 60 lakhs plus 0.01% of the effective

capital beyond 250 crores

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