Directors: Duties, responsibilities, remuneration

THE COMPANIES ACT, 2013

AN OVERVIEW OF IMPORTANT PROVISIONS RELATING TO DIRECTORS

Disclaimer : This is for information purpose only. Readers are advised to seek professional help in respect of any issues they have and should not rely solely on this presentation. Copyright with the author.

CS Kalidas Vanjpe Practising Company Secretary

FEATURES

Duties of Directors defined for the first time. Independent directors role, powers and

responsibilities defined. More accountability in the form of disclosures. Objective of the Act: to bring flexibility and

adoption of internationally accepted practices, self regulation with more disclosures, stringent punishment for violation etc.


OFFICER IN DEFAULT

Newly defined Key Managerial Personnel (i.e. CEO, MD, WTD (also mentioned separately), CS, CFO or other)

Where no KMP, then such director or directors as specified by the Board or where not specified, all directors.

Any person (under immediate authority of Board or KMP) charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises or actively participates in or knowingly permits or fails to take steps to prevent default.


OFFICER IN DEFAULT (Contd.) Every person in accordance with whose advice,

directions or instructions the BOD is accustomed to act (excl. professionals)

Every director who has not objected to any contravention when aware or where given his consent or connivance for such contravention.

Registrar, Share transfer agent, merchant bankers in respect of matters related to issue or transfer of shares. (Not relevant for pvt/unlisted co)


PENALTIES- EXAMPLES For contravention of provisions relating to

charges, minimum fine Rs. 1 lakh extendable up to Rs. 10 lakh and OID punishable with imprisonment upto six months or fine or both.

For failure to file Annual return, minimum fine Rs. 50,000 extendable up to Rs. 5 lakh and OID punishable with imprisonment upto six months or fine or both.


COMPOSITION Public company minimum 3, Private

minimum 2, OPC 1 Maximum 15, can be more with Special

resolution Listed companies minimum one third –

independent directors (However, Listing agreement provisions will apply)

Listed Cos and public cos having puc of 100 cr or more or turnover of 300 cr or more should appoint one woman director


APPOINTMENT Now directors of private cos also to file

consent. Other provisions as to retirement by

rotation, additional director etc are same. Independent Director to be appointed by

general meeting. Alternate director in his place should have same qualifications under the Act as applicable to ID

Alternate Director can be alternate to only one director.


INDEPENDENT DIRECTOR (ID) First time mentioned in the Act. Earlier only in listing agrmt For qualifying as ID, absence of any pecuniary relationship

is a must. Elaborate definition with restrictions on pecuniary relationship.

Non promoter, non-relative, person of integrity and having relevant experience and expertise

He should not have held or holding position of KMP or as an employee, proprietor or partner of auditor, PCS or Cost accountant or legal consulting firm, should not be holding voting power of 2% or more along with relatives, should not be CEO or Director of non profit organisation which receives 25% or more of its receipts from the co. etc. OR

Who possesses such other qualifications as prescribed (?) drafting error?


APPLICABILITY Listed co-one third of total number

directors. Other companies minimum 2. Public cos having puc of 10 cr or more or Public cos having turnover of 100 cr or

more Public cos- aggregate outstanding loans,

debentures deposits exceeding 50 cr No of IDs can be more if required due to

audit committee composition


ID (contd.) Complete code for IDs in the form of Schedule IV guidelines for professional conduct include that

he should uphold ethical standards of integrity and probity, he should act objectively and constructively, exercise his responsibilities in the interest of the company, devote sufficient time and attention to his professional obligations and balanced decision making, assist the company to implement best corporate governance practices.


ID (contd.) guidelines for professional conduct include

that he should uphold ethical standards of integrity and probity, he should act objectively and constructively, exercise his responsibilities in the interest of the company, devote sufficient time and attention to his professional obligations and balanced decision making, assist the company to implement best corporate governance practices etc.


DUTIES OF ID Long list of duties. Some of them are: Undertake appropriate induction and regularly

update and refresh their skills, knowledge and familiarity with the company.

Seek appropriate clarification or amplification of information and seek professional advice and opinion of outside experts at the expense of the company.

Strive to attend all meetings of the Board and the committees and general meetings.


DUTIES OF ID (contd.) Ensure proper deliberations about related party

transactions and to protect interests of the company

To ascertain and ensure that the company has adequate and functional vigil mechanism

In case of concerns to insist that the Board should address their concerns if not then to insist on recording them in the minutes

Maintain confidentiality.


APPOINTMENT OF ID Appointment at general meeting. The explanatory statement shall include a

statement that in the opinion of the Board, the ID proposed to be appointed fulfils the conditions specified in the Act and rules and he is independent of management.

ID to give a declaration every year that he fulfils the conditions.

Appointment for a period up to five years, not liable to retire by rotation.


LETTER OF APPOINTMENT After appointment, a letter of appointment needs to

be issued inter alia mentioning therein the terms of appointment, the expectations of the Board from the appointed director, the Board level committees in which he is expected to serve and its tasks, the fiduciary duties along with accompanying liabilities, provision for Directors and Officers insurance if any, code of business ethics, list of don’ts i.e. actions which he should not do, remuneration with break up like periodic fees, reimbursement of expenses and profit related commission, if any. The independent directors shall not be entitled to sock option.


MEETING The independent directors of the Company should

hold at least one meeting in a year whereat all independent directors should strive to be present.

Such meeting should review the performance of non-independent directors and the Board as a whole, review the performance of chairperson after taking into account the views of executive directors and non-executive directors and assess the quality, quantity and timeliness of flow of information between the Company management and the board that is necessary for the Board to effectively and reasonably perform their duties.


OTHER POINTS: ID The performance evaluation of independent director-

by the entire Board of Directors excluding the director. Based on such evaluation the Board may determine whether to extend or continue the term of appointment of independent director.

Protection: An independent director or a non-executive director, not being promoter or KMP, shall be held liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes and with his consent or connivance or where he had not acted diligently.


NO. OF DIRECTORSHIPS Earlier maximum 15 excluding directorship in Pvt

cos, sec 25 cos, alternate directorships, directorships in unlimited cos.

Now maximum 20 out of which no. of public cos should not be more than 10. Pvt cos which are holding/sub of public co will be included in counting of public cos. No other exemption.

A lot of prominent professionals will step down.


LOANS TO DIRECTORS Exemption to Private companies, banking companies

and holding subsidiary transactions gone. Virtually such loans banned with limited exemptions. Exemptions: a) Loan to MD/WTD as a part of

conditions of service to all employees or b) pursuant to any scheme approved by members by

a special resolution Loan, guarantee or security for repayment of loan in

the ORDINARY course of business and charging interest at prevailing bank rate.


RELATED PARTY Defined first time in the Act which is broader than

the Accounting standard. Related party with reference to a company

means:a) A Director or his relativeb) A KMP or his relativec) A firm in which a director, manager or his

relative is a partnerd) A private company in which a director or

manager is a member or director


RELATED PARTY (Contd.)e) A public co. in which d or m is a d and holds

along with relatives more than 2% of pucf) Any body corporate whose BOD/MD/M is

accustomed to act in accordance with the advice, directions or instructions of a d or m.(excl professional capacity)

g) Any person under whose advice etc a d or m is accustomed to act (excl Pro capacity)

h) Any co. which is a holding, subsidiary or asso co or a subsi of a holding co to which it is a subsi

i) Such other person as may be prescribed.


DUTIES OF DIRECTORS Introduced for the first time in law. A director shall act in good faith in order to

promote the objects of the co He shall exercise his duties with due and

reasonable care, skill and diligence, exercise independent judgment

Shall not involve in a situation of conflict of interest

Shall not achieve or attempt to achieve undue gain or advantage. If found, liable to pay equal amount to co.


RESPONSIBILITY OF DIRECTORS Not to participate in the meeting, if interested.

(Now appl to private cos) A few additional disclosures in Directors’ report: Directors’ report to include extract of annual

return To include explanation or comment on every

qualification, reservation or adverse remark or disclaimer made by auditor

Particulars of loans, investments, guarantees Particulars of related party transactions Risk management policy statement


RESPONSIBILITY OF DIRECTORS (Contd.) Directors’ Responsibility statement shall include the

following additional clause:The Directors had devised proper systems to ensure

compliance with the provisions of all applicable laws and that such systems were adequate and operating efficiently.

Further for listed co: the Directors have laid down internal fin controls and they are adequate and operating effectively.

If a director absents himself from attending all meetings in 12 months, he will vacate his office. He should attend at least one Board meeting in a fin year.

A director of a private company has to file his consent unlike in the past.

At least one director should have stayed in India for at least 182 days in previous calendar year.


RESTRICTIONS ON POWERS OF BOARD Consent of a company by a special resolution is

necessary for following matters: A) to sell, lease or otherwise dispose of the whole

….. Undertaking Undertaking means an undertaking in which

investment exceeds 20% of net worth of the co or which generates 20% of total income during previous fin year

Substantially the whole means 20% or more of the value of the undertaking as per b/s of preceding fin year


RESTRICTIONS ON POWERS OF BOARD (Contd.) B) To invest otherwise in trust securities

the amount of compensation recd on merger or amalgamation

C) To borrow money (where all borrowings exceed aggregate of puc and free reserves)

D) to remit or give time for repayment of any debt due from a director

Earlier section 293 was not applicable to private cos but now sec 180 is applicable.


MANAGERIAL REMUNERATION Overall limit retained at 11% In case no profit or inadequacy of profit

Sch V will apply. Two types of criteria under schedule V:

effective capital or percentage of current relevant profit.


LIMIT Effective capital Negative or less than 5

cr 5 cr to less than 100 cr 100 cr to less than 250

cr 250 cr and above

Double if special reso.

Annual Limit 30 lakh

42 lakh 60 lakh

60 lakhs + 0.01% of eff cap above 250


ALTERNATE LIMIT If a managerial person was not a security

holder holding securities of nominal value of 5 lakh or more or employee or director or not related to director or promoter during two years prior to his appointment – 2.5% of current relevant profit.

If special resolution is passed then double.


SPECIAL CIRCUMSTANCES A) Where the remuneration in excess of the limits

is paid by other co and such other co is either a foreign co or has got the approval from shareholders and treats this as managerial remuneration and the total amount is within permissible limit of sec 197.

B) Two times of amount permissible under Sec II in following cases:

New co- for a period of 7 yrs from inc Sick co- 5 yrs from date of sanction of scheme C) Where remuneration is fixed by BIFR or NCLT


CONDITIONS FOR SPECIAL CIRCUMSTANCES Conditions under sec II Except in A above person not receiving remu from any

other co Auditor or CS or PCS certifies that all secured creditors

and term lenders have stated in writing that they have no objection for appt and remu of the person and such certificate is filed with the return.

Addl certificate by them that there is no default on payments to any creditors and all dues to depositholders are being settled on time.

D) Cos in SEZ – upto Rs. 2.40 cr if no default in repayment of debts, debentures or interest


Current relevant profit means profit calculated under sec 198 but without deducting the excess of exp over income referred to in sub sec 4(1) in respect of those years during which the person was not an employee, director or shareholder of the co or its holding of subsidiary co.

PF, gratuity and encashment of leave not treated as perquisites.

Children edu allowance for two children at the maxi rate of 12000 pa per child, holiday passage for children or family staying abroad once I a year by eco class or once in 2 yrs by first class, LTC not included in

ceiling on remu. CS Kalidas Vanjpe

Practising Company Secretary

OTHER POINTS Enhancement in penalty, appointment of prosecutors

for courts and adjudicating officers for trying offences. This means enforcement of the provisions would be done seriously.

Hence, a change in mindset necessary. “Chalta Hai” attitude needs to be abandoned. Directors need to understand their duties and responsibilities and discharge the same properly.

Likely effects: a) cost of compliance b) increase in business of insurance co. c) increase in litigation, cash flow problems for private

cos.CS Kalidas Vanjpe

Practising Company Secretary

THANK YOU.


Law

Directors: Duties, responsibilities, remuneration