Corporate Governance under Companies Act 2013 and SEBI(LODR)
Composition of Board : Independent directors, Non-Executive directors, Committes - as per new companies act 2013 and SEBI
NEW COMPANIES ACT ENVISAGES GREATER EMPHASIS ON GOVERNANCE THROUGH THE BOARD AND BOARD PROCESSES
The significant changes with respect to board of directors are as follows :
- CA 2013 introduces significant changes to the composition of the boards of directors.
- Every company is required to appoint 1 (one) resident director on its board.
- Nominee directors shall no longer be treated as independent directors.
- Listed companies and specified classes of public companies are required to appoint independent directors and women directors on their boards.
- CA 2013 for the first time codifies the duties of directors
CA 1956 did not require companies to appoint an independent director on its board. Provisions related to independent directors were set out in Clause 49 of the Listing Agreement (“Listing Agreement”).
a) Number of independent directors: As per the Listing Agreement, only listed companies were required to appoint independent directors. The number of independent directors on the board of a listed company was required to be equal to (i) one third of the board, where the chairman of the board is a non-executive director; or (ii) one half of the board, where the chairman is an executive director. However, under CA 2013, the following companies are required to appoint independent directors:
(i) Public listed company: Atleast one third of the board to be comprised of independent directors; and
(ii) Certain specified companies that meet the criteria listed below are required to have atleast 2 (two) independent directors:
· Public companies which have paid up share capital of INR 100,000,000 (Rupees one hundred million only);
· Public companies which have a turnover of 1,000,000,000 (Rupees one billion only); and
· Public companies which have, in the aggregate, outstanding loans, debentures and deposits exceeding INR 500,000,000 (Rupees five hundred million only)
b) Qualification criteria:
(i) CA 2013 prescribes detailed qualifications for the appointment of an independent director on the board of a company. Some important qualifications include:
· he / she should be a person of integrity, relevant expertise and experience;
· he / she is not or was not a promoter of, or related to the promoter or director of the company or its holding, subsidiary or associate company;
· he / she has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors during the 2 (two) immediately preceding financial years or during the current financial year;
· a person, none of whose relatives have or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors amounting to 2 (two) percent or more of its gross turnover or total income or INR 5,000,000 (Rupees five million only), whichever is lower, during the 2 (two) immediately preceding financial years or during the current financial year.
(ii) CA 2013 also sets forth stringent provisions with respect to the relatives of the independent director.
Key Takeaways: It is evident from provisions of CA 2013 that much emphasis has been placed on ensuring greater independence of independent directors. The overall intent behind these provisions is to ensure that an independent director has no pecuniary relationship with, nor is he provided any incentives (other than the sitting fee for board meetings) by it in any manner, which may compromise his / her independence. In view of the additional criteria prescribed in CA 2013, many listed companies may need to revisit the criteria used in appointing their independent directors.
Observations: CA 2013 proposes to significantly escalate the independence requirements of independent directors, when compared to the Listing Agreement:
· The CA 2013 requires an independent director to be a person of integrity, relevant expertise and experience; it fails to elaborate on the requisite standards for determining whether a person meets such criteria. Companies (acting through their respective nomination and remuneration committees) would be able to exercise their own judgment in the appointment of independent directors, diluting the “independence” criteria.
· While the Listing Agreement provided that an independent director must not have any material pecuniary relationship or transaction with the company, CA 2013 states that an independent director must not have had any pecuniary relationship with the company. Further, the Listing Agreement stipulated earlier that an independent director should not have had such transactions with the company, its holding company etc., at the time of appointment as an independent director, while CA 2013 extends this restriction to the current financial year or the immediately preceding two financial years. However, this provision in the Listing Agreement has been aligned with the CA 2013 by means of the circular issued by the Securities and Exchange Board of India (“SEBI”) dated April 17, 2014 titled Corporate Governance in Listed Entities- Amendments to Clauses 35B and 49 of the Equity Listing Agreement (“SEBI Circular”)1. The SEBI Circular has brought the provisions of the Listing Agreement in line with the provisions of CA 2013, and would be applicable from October 01, 2014. Further, the disqualification arising from any pecuniary relationship in the previous 2 (two) financial years under CA 2013 may be unreasonably restrictive, as there may be situations where a pecuniary transaction of the proposed independent director may safely be considered to be of a nature which does not affect the director’s independence, for instance, a person proposed to be appointed as an independent director may be the promoter or director of a supplier (or a counter-party to an arm’s length transaction) which has in the past (either during or for a period prior to the two immediately preceding financial years) been selected by the company through an independent tender process.
c) Duties of independent directors: Neither the Listing Agreement nor the CA 1956 prescribed the scope of duties of independent directors. CA 2013 includes a guide to professional conduct for independent directors, which crystallizes the role of independent directors by prescribing facilitative roles, such as offering independent judgment on issues of strategy, performance and key appointments, and taking an objective view on performance evaluation of the board. Independent directors are additionally required to satisfy themselves on the integrity of financial information, to balance the conflicting interests of all stakeholders and, in particular, to protect the rights of the minority shareholders. The SEBI Circular however, states that the board is required to lay down a code of conduct which would incorporate the duties of independent directors as set out in CA 2013.
Key Takeaways: CA 2013 imposes significantly onerous duties on independent directors, with a view to ensuring enhanced management and administration. While a list of specific duties has been introduced under CA 2013, it should by no means be considered to be exhaustive. Independent directors are unlikely to be exempt from liability merely because they have fulfilled the duties specified in CA 2013, and should be prudent and carry out all duties required for effective functioning of the company.
d) Liability of independent directors
Under CA 1956, independent directors were not considered to be “officers in default” and consequently were not liable for the actions of the board. CA 2013 however, provides that the liability of independent directors would be limited to acts of omission or commission by a company which occurred with their knowledge, attributable through board processes, and with their consent and connivance or where they have not acted diligently.
Key Takeaways: CA 2013 proposes to empower independent directors with a view to increase accountability and transparency. Further, it seeks to hold independent directors liable for acts or omissions or commission by a company that occurred with their knowledge and attributable through board processes. While CA 2013 introduces these provisions with a view of increase accountability in the board this may discourage a lot of persons who could potentially have been appointed as independent directors from accepting such a position as they would be exposed to greater liabilities while having very limited control over the board.
e) Position of Nominee Directors
· While the Listing Agreement stated that the nominee directors appointed by an institution that has invested in or lent to the company are deemed to be independent directors, CA 2013 states that a nominee director cannot be an independent director. However, the SEBI Circular in line with the provisions of CA 2013 has excluded nominee directors from being considered as independent directors.
· CA 2013 defines nominee director as a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by the Government or any other person to represent its interests.
Key Takeaways: The concept of independent director was introduced as part of the CA 2013 with a view to bring in independent judgement on the board. A director, once appointed, has to serve the interest of the shareholders as a whole. Directors appointed by private equity investors shall also be covered under the definition of nominee directors, and would no longer be eligible for appointment as independent directors.
COMMITTEES OF THE BOARD
CA 2013 envisages 4 (four) types of committees to be constituted by the board:
a) AUDIT COMMITTEE: Under CA 1956, public companies with a paid up capital in excess of INR 50,000,000 (Rupees fifty million only) were required to set up an audit committee comprising of not less than 3 (three) directors. Atleast one third had to be comprised of directors other than Managing Directors or Whole Time Directors. CA 2013 however, requires the board of every listed company and certain other public companies to constitute the audit committee consisting of a minimum of 3 (three) directors, with the independent directors forming a majority. It prescribes that a majority of members, including its Chairman, have to be persons with the ability to read and understand financial statements. The audit committee has been entrusted with the task of providing recommendations for appointment and remuneration of auditors, review of independence of auditors, providing approval of related party transactions and scrutiny over other financial mechanisms of the company.
b) NOMINATION AND REMUNERATION COMMITTEE: While CA 1956 did not require companies to set up nomination and remuneration committee, the Listing Agreement provided companies with theoption to constitute a remuneration committee. However, CA 2013 requires the board of every listed company to constitute the Nomination and Remuneration Committee consisting of 3 (three) or more non-executive directors out of which not less than one half are required to be independent directors. The committee has the task of identifying persons who are qualified to become directors and provide recommendations to the board regarding their appointment and removal, as well as carry out their performance evaluation.
c) STAKEHOLDERS RELATIONSHIP COMMITTEE: CA 1956 did not require a company to set up a stakeholder’s relationship committee. The Listing Agreement required listed companies to set up a shareholders / investors grievance committee to examine complaints and issues of shareholders. CA 2013 requires every company having more than 1000 (one thousand) shareholders, debenture holders, deposit holders and any other security holders at any time during a financial year to constitute a stakeholders relationship committee to resolve the grievances of security holders of the company.
d) CORPORATE SOCIAL RESPONSIBILITY COMMITTEE (“CSR Committee”): CA 1956 did not impose any requirement on companies relating to corporate social responsibility (“CSR”). CA 2013 however, requires certain companies to constitute a CSR Committee, which would be responsible to devise, recommend and monitor CSR initiatives of the company. The committee is also required to prepare a report detailing the CSR activities undertaken and if not, the reasons for failure to comply.
III. BOARD MEETINGS AND PROCESSES
The key changes introduced by CA 2013 with respect to board meetings and processes are as under:
· First board meeting of a company to be held within 30 (thirty) days of incorporation;
· Notice of minimum 7 (seven) days must be given for each board meeting. Notice for board meetings may be given by electronic means. However, board meetings may be called at shorter notice to transact “urgent business” provided such meetings are either attended by at least 1 (one) independent director or decisions taken at such meetings on subsequent circulation are ratified by at least 1 (one) independent director.
· CA 2013 has permitted directors to participate in board meetings through video conferencing or other audio visual means which are capable of recording and recognising the participation of directors. Participation of directors by audio visual means would also be counted towards quorum.
· Requirement for holding board meeting every quarter has been discontinued. Now at least 4 (four) meetings have to be held each year, with a gap of not more than 120 (one hundred and twenty) days between 2 (two) board meetings.
· Certain new actions have been identified, that require approval by directors in a board meeting. These include issuance of securities, grant of loans, guarantee or security, approval of financial statement and board’s report, diversification of business etc.
· Approval of circular resolution will be by a majority of directors or members who are entitled to vote on the resolution, irrespective of whether they are present in India or otherwise.
CA 2013 has introduced significant changes regarding the board composition and has a renewed focus on board processes. Whilst certain of these changes may seem overly prescriptive, a closer analysis leads to a compelling conclusion that the emphasis is on board processes, which over a period of time would institutionalize good corporate governance and not make governance over-dependent on the presence of certain individuals on the board.
● In terms of structure and composition of boards and its committees, Indian corporate governance regulations have evolved towards international best practices, although there have been some departures.
● The minimum percentage of independent directors required on the Board varies across
countries, with India’s Clause 49 requirements comparing quite favourably with international
● India’s regulations, however, fall short of international best practices in two important areas:
• Firstly, while it is an international best practice to have separate nomination and
remuneration committees, Indian regulations require a combined committee.
• Secondly, as per international best practices, executive directors are not allowed to be a
part of the Audit Committee and the Remuneration Committee, because of the
possibility of self-review by management and obvious conflict of interest. In India,
however, executive directors are allowed in both these committees.
1 Professor, Indira Gandhi Institute of Development Research
It is well known that the structure and composition of the corporate board and its committees, particularly with respect to the presence of independent directors, have a significant bearing on the board’s effectiveness. In this respect, since the
notification of the now famous Clause 49 (CL49) Regulations on February 21, 2000, corporate governance regulations in India have rapidly evolved. As part of the evolution of CL49, two important revisions were made on October 29, 2004
and April 8, 2008, respectively. Finally, following the enactment of the Companies Act, 2013, the updated version of CL49 was notified on April 17, 2014. Based on the industry response, some provisions in CL49 were amended and the
SEBI (Listing Obligations & Disclosure Requirements) Regulations were notified on September 2, 2015.
The revisions that were made to governance regulations in India represent an effort towards moving towards international
best practices. This Quarterly Briefing studies the evolution of the CL49 regulations and compares and contrasts the
current provisions with governance regulations existing in mature economies of US, UK and Australia, and in the
emerging economies of South Africa and Singapore.
II. The Board of Directors
Although the original version of CL49 in India had a detailed prescription regarding the composition of the Board of
Directors, it defined independent directors perhaps ambiguously. Independent directors were defined as “…. Directors who, apart from receiving director’s remuneration, do not have any other material pecuniary relationship or transactions
with the company, its promoters, its management or its subsidiaries, which in the judgment of the board (emphasis added), may affect the independent judgment of the director (SEBI 2000).”
The 2004 version of CL49 saw a significant change, with the definition of independent directors moving towards international best practice by itemizing an objective checklist of conditions that a director has to satisfy to be deemed
independent. These conditions made it very similar to the “bright line” tests2 for independence of directors under the NYSE listing standards. These tests are now widely used by many countries in their definition of independent director.
Further, the 2008 revision of CL49 brought companies having a promoter (or a person related to the promoter) as Chairman, even if non-executive, under a stricter requirement entailing presence of a larger number of independent
directors on the Board. This seemed sensible, given the institutional setup in India, where promoter-controlled companies dominate the corporate landscape, and thereby tilt the balance of power in the board towards the management.
The latest version of CL49, notified on April 17, 2014, and further amended on 15 September 2014, preserved the Board composition as was specified in the 2008 version, but introduced the provision of having at least one woman director on
the Board. This is one aspect in which India’s regulation differs from other nations.
The current version of India’s CL49 regulations stands out among other nations by having separate specifications with respect to non-executive directors and independent directors (Table 1). However, on the issue of whether the Board
Chairman should be an independent or non-executive director, the CL49 regulations refrain from taking a definitive
view (as in UK and Australia). Instead, it requires presence of a higher number of independent directors in the board in
case the company has an executive Chairman than if it has a non-executive Chairman (similar to Singapore). Further,
a comparison of Board composition across countries shows that India’s CL49 regulations compare very well with
international best practices.
Companies Act 2013 (India)
Composition: At least one third of total directors must be independent; at least one
woman director must be present
Chairman: Separation of offices of CEO and Chairman required unless articles of the
company permit otherwise or the company does not have multiple businesses
SEBI Clause 49, 2014 (India)
Composition: Not less than 50% non-executive; at least one third independent
when Chairman is non-executive and at least half when Chairman is executive or
promoter; at least one women director must be present
Chairman: Separation of offices of CEO and Chairman advised.
III. Committees of the Board
III.1 The Audit Committee
The original CL49 regulations (SEBI, 2000) required the audit committee to have a minimum of three members consisting of only non-executive directors, with independent directors forming a majority and the Chairman an independent
director. The first amended CL49 (SEBI, 2004) removed the non-executive director requirement and instead specified that the audit committee should have a minimum of three members with two-thirds of them being independent.
Thus,with this revision, executive directors were allowed to be present in Audit Committee. It may be noted however that the increase in the requirement of independent directors from majority to two-thirds did not make any material difference in audit committees which had three members.
October 2015 | No. 11
A comparison of the composition of audit committee across countries shows that allof them require the audit committee to consist entirely of non-executive directors with many countries making an even stricter requirement of only independent
directors (Table 2). India’s CL49 regulations stand out in sharp contrast to this. Hence, this is one area in which India seems to lag behind international best practices in corporate governance.
III.2 The Remuneration Committee
The original CL49 regulations of February 21, 2000 did not require companies to have a mandatory remuneration committee. Instead the requirement was non-mandatory in nature. The Companies Bill of 2009 turned this non-mandatory
provision into a mandatory requirement and specified that every listed company shall constitute a remuneration committee consisting of only non-executive directors, out of which at least one should be an independent director (Clause 158).
It, however, did not explicitly require the Chairman of the remuneration committee to be an independent director.
The Companies Act, 2013 modified the provisions of the Companies Bill of 2009 with two important changes. First, it changed the committee name to the Nomination and Remuneration Committee, thereby expanding the functions of the
committee, and second, the requirement of independent directors was increased from at least one to at least half (Section
178). The SEBI notification of April 2014 made an addition to the provisions of the Companies Act, 2013 by further
requiring the Chairman of the Nomination and Remuneration Committee to be an independent director.
A cross country comparison of regulations relating to size and composition of remuneration committee shows that the CL49 regulations are near the best practices. However, one rider was added in the Companies Act, 2013, which
was also carried forward in the SEBI 2014 regulation which led to deviation from international best practices. This rider allowed the chairperson of the company (whether executive or non-executive) to be appointed as a member of the
Nomination and Remuneration Committee, but could not chair the committee. This departs sharply from the regulations under the NYSE Code, the UK Code, and the code in Singapore.
III.3 The Nomination Committee
In the original CL49 regulations, there was no mention of constitution of a Nomination Committee even as a nonmandatory
requirement. The Standing Committee on Finance5 was the first to mention the requirement of a Nomination
Committee in its Report of August 31, 2010. However, instead of requiring a separate nomination committee, it
recommended the creation of a Nomination and Remuneration Committee; this recommendation was finally enacted
into law under the Companies Act, 2013, as outlined earlier.
Cross country comparison shows that all countries have a separate Remuneration Committee and a Nomination
Committee. India’s CL49 regulation stands out as the only one to have a combined one.
In light of the above observations, are majority of the corporate governance regulations in India at par with international best practices? The answer is clearly ‘no’. Are we moving towards best practices? Here, the answer is decidedly mixed.
Measures such as tightening the definition of independent directors, requiring greater presence of independent directors in promoter-chairman companies and mandating the presence of woman director on the Board are certainly moves towards international best practices. However, allowing executive directors to be present in the Audit Committee and creating a combined Nomination and Remuneration Committee(NRC), where executive directors are allowed, are deviations from international best practices and need to be eschewed. Allowing executive members in NRCs, for example, basically
means that executive directors can have a say in deciding their own compensation!
The departure from best practices is unfortunate for at least two reasons. First, the requirement of a combined
Nomination and Remuneration Committee, where executive directors are allowed, was enacted in 2013 - several years
after international best practices had already been established where in these two committees were mandated to be
kept separate. Second, the discussion on the removal of the provision allowing executive directors to be part of the
audit committee had begun in 2009 following the report of the CII task force on corporate governance chaired by
Naresh Chandra, but nothing in this respect has happened yet. This inaction is happening at a time when the case for
an independent Audit, for which the audit committee is critical, has been firmly established and recognized worldwide.
Of course, adopting international best practices does not mean that governance regulations must mimic the regulations
of other countries. Best practices can be modified to suit the institutional conditions of a specific country as is advocated
under the notion of “functional convergence.” However, some of the deviations in India do not seem to be based on
arguments of functional efficiency, but rather reflect the pulls and pressures that could possibly have their roots in the
dominance of promoter-owned companies with concentrated ownership structures.
This in turn raises a difficult governance dilemma in India. Promoters of Indian companies having majority ownership
may insist that final decision making power in important committees ought not to rest overtly with outside directors. This
perhaps explains the rather frequent use of the “at least half” or “at least fifty percent” rule in several clauses relating
to presence of non-executive or independent director while most other countries uniformly use the word “majority” in
their specification. This slight difference in specification can potentially make a huge difference in governance of those
companies that have even-sized boards headed by an executive Chairman, who may have a decisive say in case of
voting ties. However, regulations that reduce effective say of independent directors in promoter controlled companies
goes against the very grain of good governance. Besides, this may lead to the market discounting those companies
because of their heightened governance risk, thereby resulting in higher cost of capital and slow down of growth of
V. Way Forward
Creating the most ideal governance setup is a difficult task. Nevertheless, the preceding discussion suggests that it is possible to further strengthen the evolving governance framework in India. Hopefully with some appropriate modifications in line with the earlier discussion, especially that of constituting the audit and the remuneration committee with only non-executive directors and consistently using the word “majority” in place of “at least half” or “at least fifty percent,” the Indian governance regulations can become a model code for other countries to follow.
Duties and Liabilities of Director specified under new companies act 2013
Companies Act 2013 provides for the following duties:
- To act in accordance with co.’s AoA;
- Act in good faith;
- Exercise his duties with due care and diligence.
- A director shall not involve in any conflicting interest with the company
- Achieve or attempt to achieve any undue advantage;
New companies Act 2013: Duties of Directors defined
The new law has defined the duties of directors more precisely vide Section 166 which were earlier implied duties arising out of general law requirements of trusteeship and agency .
‘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’ and ‘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’;
DUTIES/LIABILITY OF DIRECTORS, AND INDEMNIFICATION BY COMPANIES, UNDER THE CA1956
2.1. The CA1956 has not codified the law relating to duties of directors but in all cases all directors must ensure compliance with the provisions of the CA1956 and other applicable laws. Further, under the CA1956 the directors of Indian companies are subject to common law duties. Thus, a director has fiduciary duty towards the company.
2.2. As per s.5 of the CA1956, for violation of the provisions of the CA1956 the managing director/ whole time director (director who is in whole time employment of the company) / manager (who is so appointment in accordance with the provisions of the CA1956) and the company secretary, if any, are responsible in first instance. In the absence of aforesaid categories of officers, prosecutions should be against all other directors of the company unless the directors have authorised any other person to make compliance with that provisions of the CA1956 and such person has accepted any such authorisation. The Master Circular No. 1/2011 dated 29 July 2011 of the Ministry of Corporate Affairs, Government of India ("MCA") consolidating the provisions relating to prosecution of directors under the CA1956 has clarified that Registrar of Companies should take extra care in examining the cases where following directors are also identified as 'officer who is in default' under s.5 of the CA1956:
a. For listed companies (companies of which shares are listed at Indian stock exchange), Securities and Exchange Board of India requires nomination of certain Directors designated as Independent Directors.
b. For public sector undertakings, respective Government nominates directors on behalf of the respective Government.
c. Various public sector financial institutions, financial institutions and banks having participation in equity of a company also nominate directors to the board of such companies.
d. Directors nominated by the Government under s.408 of the CA1956.
The MCA has also directed the Registrar of Companies that none of the above directors shall be held liable for any act of omission or commission by the company or by any officer of the company which constitute a breach or violation of any provision of the CA1956 which occurred without his knowledge attributable through board process and without his consent or connivance or where he has acted diligently in the board process. The MCA did however not say that such directors should not be prosecuted at all and rightly so. Consequently, all the directors of a company may be liable for any violation of CA1956 unless they prove that they acted diligently and violation took place without their consent / knowledge / connivance.
2.3. It is pertinent to note that s.201 of the CA1956 restricts a company to indemnify its directors. According to s.201 of the CA1956 a company can indemnify its directors of any liability incurred by him in defending civil or criminal proceedings only if he is acquitted or discharged. Except as aforesaid, s.201 of the CA1956 renders void all the provisions in the company's constitution or in any agreement indemnifying a director against any liability that would attach to him in respect of any breach of duty or trust or negligence. It is noted that if premium of D&O policy to protect the directors is paid by a company, then also directors will be covered by s.201 of the CA1956 and may not be entitled to benefit of D&O policy.
3. DUTIES/LIABILITY OF DIRECTORS, AND INDEMNIFICATION BY COMPANIES, UNDER THE CA2013
3.1. The CA2013 has like other modern laws codified the duties of the director of Indian companies. The proposed s.166 of the CA2013 mention the duties of the director as under:
a. A director shall act in accordance its constitution document, i.e., articles of association.
b. A director 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.
c. A director shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
d. A director 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.
e. A director 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.
3.2. The CA2013 has widened the definition of the 'officer who is in default' to include key managerial personnel (chief executive officer and chief financial officer) and shadow directors. Interestingly, the CA2013 has proposed that every Indian company must have at least one director who stayed in India for a total period of not less than 182 days in the previous calendar year. Notably, the CA1956 has no such provision and this proposed change will require the resident Indian director to be more careful as he will be first one to be caught in case of violation by an Indian company.
3.3. The CA2013 has no provision corresponding to s.201 of the CA1956 meaning thereby that there is no restriction on the companies to indemnity its directors under the CA2013. The only reference to the provisions of indemnity to directors is given in s.197 of the CA2013 stating that the premium paid on insurance policy shall be treated as part of the remuneration of the officers only if such officer is found guilty.
4. COMPARISON BETWEEN OLD AND NEW LAW RELATING TO DIRECTORS
4.1. It is noted that the CA2013 has deleted the phrase "or any other Act" existing in first proviso to s.291 of the CA1956 dealing with the powers of the board in corresponding new s.179 of the CA2013. According to a ruling of the Indian apex court, the existence of the aforesaid phrase in the CA1956 required the board of director to comply with other applicable laws while they exercise any power on behalf of the company. Though it is unclear whether the board of directors is liable to comply with other applicable laws but the deletion of above phrase makes it clear that the directors cannot be prosecuted under the CA20012 for non-compliance with the provisions of any law other than the CA2013. It would be an irony that the company law that gives the board authority to exercise the power on behalf of a company does not requires the board to comply with the provisions of other applicable laws while they exercise such a power on behalf of a company.
4.2. Though the CA2013 has however widened the definition of the 'officer who is in default' to include key managerial personnel (chief executive officer and chief financial officer) and shadow directors, but unlike old definition in the CA1956 that includes 'all the following officers', the new definition says 'any of the following officers' and thus apparently absolving the liability of other officers of the Company.
4.3. It is noted that despite increasing instances of frauds and violation by the companies, the CA2013 has radically changed the provisions of indemnity to directors by the companies as now there is no restriction on companies to indemnify its directors. This change will perhaps make the CA2013 the only law in the world not restricting the company to indemnify its directors.
5. LIABILITY OF DIRECTORS OF PRIVATE COMPANIES UNDER THE INCOME TAX ACT, 1961
While discussing the liabilities of the directors under Indian laws, the provisions of s.179 of the Income Tax Act, 1961 ("ITA1961") are also noticeable. S.179 of the ITA1961 is applicable only to private companies. The liability of the directors of a private company for the payment of tax due from the company is made joint and several if tax cannot be recovered from the company. This section however enables a director to establish that the non-recovery of tax is not attributable to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of a company to avoid such a liability. The burden to establish this rests on the director concerned and only if the burden is discharged that director can be exempted from the tax liability of a company imposed on him by s.179 of the ITA1961.
6. CONCLUDING REMARK: The CA2013 though discussed for more than four years appears to be a part of reform agenda of the Indian Government. A number of measures to protect the investors' interest have been incorporated in the CA2013 but the Indian government has offered more to the directors and companies as a number of provisions favourable to the companies and its directors are being incorporated in the CA2013 by diluting the existing legal provisions. It might also be possible that though the CA2013 has been passed by the lower house of Indian Parliament, it is amended by the upper house of the Indian Parliament and then sent back to the lower house of the Indian Parliament's approval again.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
http://www.mondaq.com/Last Updated: 22 January 2013
COMPANIES ACT 2013 : EVALUATION OF THE BOARD
Under Section 134(3)(p) of the 2013 Act, the Board of every listed company and other public companies with paid-up capital of Rs 25 crore or more shall report the annual performance evaluation of individual directors, the Board and its committees.
This concept is not new, as many developed countries have successfully implemented it through rules such as ‘comply or explain’.
Individual and collective assessment of the Board is integral to the overall success of an organisation, as it assists the directors and the Board in fulfilling their responsibilities towards maximising stakeholders’ wealth. However, the 2013 Act and the draft rules released until now did not provide any guidance for such performance evaluation.
Thus, one might infer that rather than being prescriptive, the Ministry perhaps wants to offer Board members the flexibility to design the evaluation process.
In view of the large number of companies that are likely to be covered by this provision, it is strongly felt that risk profile and other relevant characteristics should have driven the applicability.
An effective performance evaluation involves significant ongoing effort and cost to drive the Board towards excellence, and many believe the cost may outweigh the benefits for many small companies.
Companies Act 2013 is undoubtedly a bold move on the Government’s part. However, the concerns are manifold, including increased cost of compliances and low utility of the outcome.
Directors Responsibility Statement as per Companies Act 2013
Format of Directors responsibility statement under the companies act 2013 :
In pursuance of section 134 (5) of the Companies Act, 2013, the Directors hereby confirm that:
(a) Accounting standards :in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
(b) Policies, Judgements and Estimates :the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the FINANCIAL year and of the profit and loss of the company for that period;
(c) Records :the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
(d) the directors had prepared the annual accounts on a going concern basis; and
(e) Internal Controls :the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
Explanation.—For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;
(f) Legal Compliance :the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.
1. Earlier provisions for Directors' Responsibility Statement were prescribed under sub-section (2AA) of Section 217 of the Companies Act, 1956
2. Point (f) is a new addition for applicable for all types of companies
3. The point (e) is also new addition applicable to listed company only, other companies may strike out that point.
proposals to discharge directors of liabilities that routinely appear on shareholder meetings’ agendas in many European markets
Shareholders' decision to discharge directors from liabilities will be void if it is made in breach of the
law or the company's articles of association;
Directors may be held liable for wilful misconduct, fraud or any criminal offences, notwithstanding
any 'discharge of liabilities' granted by shareholders. (This statement does not fully apply to Sweden,
where directors may be discharged of wilful misconduct; and Switzerland, where it only applies to the
directors to the extent that they may become liable for such actions only vis-à-vis third parties under
other bodies of law)
The granted discharge of liabilities is only valid if there have been no relevant omissions or
misstatements in the annual report and accounts and other documents provided to shareholders.
Discharge of liabilities granted by shareholders can release directors from liability to the company,
but does not release directors from liabilities towards third parties (including shareholders).
Markets where approval of the discharge of liabilities proposal is not binding and cannot shield
directors from claims for damages: Austria, Germany, France and Spain
Markets where discharge from liabilities is binding and can hinder legal claims against directors:
Belgium, Denmark, Finland, Greece, Luxembourg, the Netherlands, Portugal, Sweden and Switzerland.
In Austria and Germany, discharge of liabilities resolutions are routinely proposed to general meetings of public
companies; however, a granted discharge does not preclude shareholders from bringing a claim for damages
against directors; thus, 'a discharge vote' only constitutes an expression of trust and does not appear to have
In France and Spain, directors cannot be exonerated from liability by the decision of the general meeting
either, which means that any discharge granted by shareholders has no impact on the company's ability to
bring claims against directors. Nevertheless, many companies continue to seek discharge of liabilities for their
directors at general meetings.
The constituents of the second group can be further divided into the following sub-groups:
• Markets where discharge of liabilities approved by the general meeting is binding for all shareholders
in the company: Finland, Greece, Luxembourg, the Netherlands and Portugal;
• Markets where discharge from liabilities granted by the general meeting is only binding for those
shareholders, who voted in favour of the proposal: Belgium and Switzerland; and
• Markets where the binding nature of the discharge depends on the level of opposition to the
proposal, even if the resolution was passed by the majority vote: Denmark and Sweden.
In Finland, Greece, Luxembourg, the Netherlands and Portugal, a valid discharge granted by the general
meeting would shield directors from claims for damages from the company. In Portugal, a waiver of the
company's right to claim for damages requires the support of 90% of shareholders attending the meeting.
In Belgium, if a discharge has been approved by the general meeting, only those shareholders who have not
voted in favour of the discharge may claim damages from directors. In Switzerland, a discharge approved by
the general meeting is effective not only vis-à-vis the company and those shareholders who consented to the
resolution, but also those shareholders who acquired shares subsequently with knowledge of the resolution.
Switzerland differs from other markets insofar as a valid discharge granted by shareholders shelters directors
from liability claims arising from both intentional and negligent violation of their duties. It can hinder claims
against directors notwithstanding the fact that such claims are based on wilful misconduct, fraud or any
criminal offences (although directors may still become liable for such actions vis-à-vis third parties under other
bodies of law). This is mitigated by the fact that voting privileges do not apply in the context of a discharge
resolution. In addition, persons who participated in the management of the company (this may also apply to de
facto directors) are excluded from voting their shares, which also applies to the extent that such a person acts
as a proxy for another shareholder. Consequently, given the shareholding structure of Swiss companies,
directors can often be discharged from liabilities by minority shareholders only.
In Denmark and Sweden, a valid discharge shields directors from claims for damages from the company;
however, a claim may be brought, notwithstanding the discharge, if holders of at least 10% of the company's
issued share capital vote against the resolution. In Denmark, any shareholder may bring such a claim, whereas
in Sweden 10% shareholding is required. 'Discharge resolutions' are not mandatory under Danish company law.
A unique feature of the discharge mechanism in Sweden is the requirement for the auditor's report to contain
recommendation on whether the directors should be granted discharge from liability vis-à-vis the company.
Where the auditor becomes aware of any acts or omissions by directors, which may give rise to liability, such
facts must be noted in the auditor's report. This also applies where the auditor, in the course of the audit,
finds that a director has otherwise acted in contravention of the Companies Act, the applicable annual report
legislation or the articles of association.
In all the markets covered above, a failure to grant a discharge from liability does not have an
immediate effect on the liability of directors, but merely leaves the possibility open for the company to initiate an action for liability.
Corporate social responsibility (CSR) Vs Corporate Governance
Corporate social responsibility
New Companies Act 2013 brought into rule book with effect from 1st April 2014
The government has notified the rules for corporate social responsibility (CSR) spending under the new companies law, putting in place the much-debated plan aimed at encouraging companies to spend a portion of their profits on projects that benefit society. Under the plan, companies above a certain threshold have to spend 2% of average profit of the previous three years on CSR activities specified by the government, which does not include political funding. Companies that are unable to do so have to give reasons for falling short.
The government has amended Schedule VII of the Act to include more activities under CSR than what had been defined earlier, but has withdrawn the discretion promised to boards earlier. "CSR will include all the programmes and activities undertaken by the board of directors... subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act," said the notification by the ministry on Thursday.
Areas that have been defined by the government in the CSR policy include eradicating hunger, poverty and malnutrition; promoting preventive healthcare and sanitation; and the Prime Minister Relief 's Fund, among others.
The policy will also consider measures for the benefit of armed forces veterans, war widows and their dependents, homes and hostels for women and orphans, oldage homes, day-care centres and other such facilities for senior citizens as coming under CSR.
"Including new items under CSR is a welcome move as it would help divert corporate spending to areas which are otherwise neglected," senior company law expert Vinod Kothari said.
"The CSR policy will now be different from conventional policy statements as the rule stipulates the requirement of listing the projects/programmes and also the monitoring process for such programmes," said Santhosh Jayaram, technical director, sustainability, KPMG India.
Companies having a net worth of at least Rs 500 crore or a minimum turnover of Rs 1,000 crore or those with a net profit of at least Rs 5 crore are covered by this policy.
India Inc. doesn't seem to be too enthused about the latest rules. "Precluding the corporate boards from determining what would constitute CSR goes against the very premise of the Act, which is built on self-governance and enhanced disclosures," said Chandrajit Banerjee, director general of the Confederation of Indian Industry lobby group.
Corporate Governance is a different concept from CSR.
It is defined as system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community.