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Companies Act 2013 – Directors Provisions and Guidelines 2014

The new companies act 2013 makes several new provisions for Directors and also lays down several new guidelines. Below are some important highlights from the Companies Act 2013 for directors and companies. The Indian boardroom is definitely changing for the better with these new rules and recommendations.

1. Woman director under new companies act

The category of companies which need to comply with the requirement of having at least of one woman director are as follows: * [section  149(1) of 2013 Act]

(i) Every listed company,  within one year from the commencement of second proviso to sub-section  (1) of section 149.

(ii) Every other public company that has paid–up  share capital of one hundred crore rupees  or more, or  a  turnover of three hundred crore rupees or more within three years from the commencement of second proviso to sub-section  (1) of section 149.

While this new requirement will go a long way in encouraging gender  diversity, it has already created quite a stir in the manner in which companies will ensure  compliance.

2. Number of directorship

The 2013 Act increases the limit for number of directorships that can be held by an individual from 12 to 15 [section  149(1) of 2013 Act].

3. One director to be resident in India

A new requirement with respect to directors is that at least one director to have stayed in India for at least 182 days in the previous calendar year [section  149(3) of 2013 Act]. This requirement appears to be a departure from the focus given in the 2013 Act towards use of electronic mode such as use of video conferences for meetings and electronic voting.  With the increasing use of electronic media, the need, for a director to be resident in India for a minimum amount of time, becomes redundant.

directors companies act 2013

4. Independent directors

One of the significant aspects of the 2013 Act is the effort made towards incorporating some of the salient requirements mandated by the SEBI in clause 49 of the listing agreement in the 2013 Act itself. To this effect, the 2013 Act requires  every listed public company to have at least one-third of the total number of directors as independent directors. Further, the central government in the draft rules has prescribed the minimum number of independent directors in case of the following classes of public companies* [section  149(4) of 2013 Act].

(i) Public companies having paid up share capital of 100 crore INR or more; or

(ii) Public companies having turnover of 300  crore INR or  more

(iii) Public companies which have, in aggregate, outstanding loans or borrowings or debentures or deposits,  exceeding  200  crore INR

The 2013 Act also states that  companies will have a period of one year to ensure  compliance with the 2013 Act and the Rules that are framed.

4.1 Conflicting requirements

While there have been attempts to harmonise the requirements of SEBI and the 2013 Act was made, there are several aspects relating to independent directors where the requirements of the 2013 Act differ from that of clause 49 of the equity listing agreement. The requirements of the 2013 Act and the manner in which they differ from those under  the clause 49 of the equity listing agreement include the definition  itself. The other main differences are as follows:

•      Clause 49 does not require the board to exercise its judgment and opine on whether the independent director is a person of integrity  or has relevant expertise  or experience. This requirement poses difficultly in terms of the manner in which integrity  of an individual can be assessed by the board.

•      Clause 49 does not require examination of the independence of the relatives of independent directors. Extending the disqualification of the independent directors to consider the pecuniary relationship of the relatives would pose unnecessary hardship for the independent directors.

•      The qualification of the independent director has been left to be specified later.

•      The 2013 Act brings the constitution of the board in India at par with other international capital markets  i.e., by mandating at least one-third of the board to be independent directors in case of listed companies. Whereas, the SEBI requirements are where the chairman of the board is a non-executive director, at least one-third of the board should comprise of independent directors and where the non-executive chairman is a promoter of the company or is related to any promoter or person occupying management positions at the board level or at one level below the board, at least one-half of the board of the company shall consist of independent directors.

Differing compliance requirements with  respect to the appointment of independent directors, remuneration thereto, imposed by multiple regulators will lead to hardship as well increased cost of compliance for companies.

The 2013 Act limits the tenure of office of an independent director to a maximum of two tenures of five consecutive years, with a

cooling-off period of three years between the two tenures. During the cooling-off period of three years, should not be appointed in or be associated with the company in any other capacity, either directly or indirectly [proviso to section 149(11) of 2013 Act].

It is also relevant to note that the MCA had released the corporate governance voluntary guidelines in 2009, which permitted three tenures (with other conditions similar to those discussed above) for an independent director while as per the clause 49 of the equity listing agreement, an independent director cannot  serve for more than nine consecutive years.

Stock options:  As per the 2013 Act, an independent director will not be eligible to get stock options but may get payment of fees

and profit linked commission  subject to limits specified or to be specified in the rules [section  149 (9) of 2013 Act]. This again, is in contradiction with SEBI’s requirements, whereby  for the purpose of granting stock options, the term employee  includes independent directors also.

4.2 Databank of independent directors

The 2013 Act makes the appointment process of the independent directors, independent of the company’s management by constituting a panel or a data bank to be maintained by the MCA, out of which companies may choose their independent directors. The proposal has its origins in the report  of the 21st Standing Committee on finance, wherein it was acknowledged that preparation of a databank of independent directors would vest with a regulatory body that may comprise of representatives of MCA, SEBI, Reserve Bank of India, professional institutions, Chambers of Commerce and Industry  etc [section  150 of 2013 Act].

A drawback of constituting a panel of independent directors is that it may discourage people from registering with the panel and in that sense limit the options available to a company for appointment of independent directors.

4.3 Code for independent director

The 2013 Act includes Schedule  IV ‘Code for Independent Directors’ (Code) which broadly prescribes  the following for independent directors:

•      Professional  conduct

•      Role and functions

•      Duties

•      Manner of appointment

•      Reappointment

•      Resignation or removal

•      Holding separate meetings

•      Evaluation mechanism

The code appears to be mandatory which would lead to some of the following concerns:

•      The code states that an independent director shall uphold ethical standards of integrity  and probity, however what would constitute ethical behaviour is not defined and is open to interpretation.

•      The code does not give any cognisance to the need for training for the independent directors.

•      The code refers to appointment of independent directors by the board after evaluating certain attributes. The concern that remains unaddressed is the manner in which companies need to carry out an assessment of the attributes of an independent director as specified under  ‘manner of appointment’ in the code from the databank maintained by the MCA.

4.4 Liability of independent directors

The 2013 Act makes an attempt to distinguish between the liability of an independent director and non-executive director from the rest of the board and has accordingly inserted a provision to provide immunity  from any civil or criminal action against the independent directors. The intention and effort to limit liability of independent directors is demonstrated from the section 149(12) of the 2013 Act which inter-alia provides that liability for independent directors would be as under:

“Only in respect of such acts of omission or commission  by a company which had occurred with his knowledge, attributable through board processes,  with his consent or connivance or where he had not acted diligently.”

The section seeks to provide immunity  from civil or criminal action against independent directors in certain cases. Further, in accordance with the requirement of section 166 (2) of 2013 Act, whole of the board is required to 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 interest of the company,  its employees, the shareholders, the community and for the protection of the environment. By virtue of this section the duty of independent directors actually goes beyond its normal definition  and is not restricted to executive directors only.

It is amply clear that independent directors have little or no defence  and their obligations continues to remain  a debatable topic since they would still be treated equivalent to the  other directors by holding them responsible for decisions made through board processes.

5. Appointment of an additional director

It is pertinent to note that, in order to discourage inappropriate practices,  the 2013 Act states that any person who fails to get elected as a director in the general  meeting  can no longer be appointed as an additional director by the board of directors [section  161 of 2013 Act].

6. Additional compliance requirements for private companies

There are certain increased compliance requirements mandated for private companies which, till now, were mandated only for public companies and private companies which are subsidiaries of public companies. These include the following:

•      Appointment of director to be voted individually

•      Option to adopt principle of proportional representation for appointment of directors

•      Ineligibility on account  of non-compliance with section 274(1)) (g) now extended for appointment or reappointment as a director in a private limited company also.

Meetings of the board and its powers

There have been significant inroads made by the MCA in the recent past with respect to giving cognisance to use of electronic media in day-to-day  operations of corporates. The 2013 Act takes this further by allowing use of electronic mode for sending notice of meetings [section  173(3) of 2013 Act], passing of resolution by circulation [section  175 of 2013 Act] and other areas. Some of the other significant changes in relation to the board and its functioning include:

1. Audit committee

The requirements relating to audit committees was first introduced by the Companies  (Amendment) Act, 2000. Audit committees are a measure of ensuring self discipline, constituted with the object to strengthen and oversee management in public companies

and to ensure  that the board of directors discharge their functions effectively. The 2013 Act acknowledges the importance of an audit committee and entrusts it with additional roles and responsibilities [section  177 of 2013 Act].

However, the fact that the 2013 Act is not entirely in harmony with the requirements of clause 49 of the equity listing agreement, cannot  be ignored.  While most of the requirements including  establishment of a ‘vigil mechanism’ for directors and employees  to report  genuine concerns,  that are similar to the requirements of clause49  of the equity listing agreement have been incorporated in the 2013 Act, the differences are as follows:

•      As per the 2013 Act, the audit committee should have majority of independent directors.

•      Chairman of the audit committee need not be an independent director.

•      A majority of the members of the audit committee should be financially literate, i,e. should have the ability to read and understand the financial statements.

•      Every listed company and the following class (es) of companies as prescribed in the draft rules should establish  a vigil mechanism for directors and employees  to report  genuine concerns such as :*

–      Companies  which accept deposits from the public

–      Companies  which have borrowed money from banks and public financial institutions in excess of fifty crore rupees

2. Nomination and remuneration committee and stakeholders relationship committee

The 2013 Act includes this new section requiring constituting the nomination and remuneration committee by every listed company and the following classes of companies as prescribed in the draft rules:*

(A)  Every listed company

(B)  Every other public company that has  a paid-up capital of 100 crore INR or more  or which has, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding  200 crore INR.

The Nomination and Remuneration Committee is required to formulate and recommend to the Board of Directors, the company’s policies, relating to the remuneration for the directors, key managerial personnel and other employees, criteria for determining qualifications, positive attributes and independence of a director [section  178(1) of 2013 Act].

Further, a board of a company that has  more than 1000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year is required to constitute a Stakeholders Relationship Committee [section  178(5) of 2013

Act].

3. Contributions to charitable funds and political parties

As per the 2013 Act the power of making contribution to ‘bona fide’ charitable and other funds is proposed to be available to the board subject to certain limits [section 181 of 2013 Act].As per the existing requirement of section 293 of the 1956 Act, such power could only be exercised in the general meeting in case of public companies and subsidiaries of public companies as per the 1956 Act.

Further, the limits of contribution to political parties is proposed to be increased to 7.5% of the average net profits during the three immediately preceding financial years  [section 182 of 2013 Act] from the existing limit of 5% under the 1956 Act.

4. Disclosure of interest by director

The 2013 Act prescribes similar requirements with  respect to the  disclosure of interest by the director as contained in the existing section

299 of the 1956 Act. The only change that could be identified is where a contract or arrangement entered into by the company without disclosure of interest by director or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company [section 184 of 2013 Act].

5. Loans and investments by a company

The 2013 Act states that companies can make investments only through two layers of investment companies subject to exceptions which includes company incorporated outside India [section 186 of 2013 Act]. There are no such restrictions which are currently imposed under the 1956 Act.

Further, the exemption available from the provisions of section 372A of the 1956 Act to private companies as well as loans or investment given or made by a holding company to its subsidiary company are no longer available under the 2013 Act.

6. Related party transactions

Most of the provisions under Section 188 of 2013 Act are quite similar to the requirements under sections 297 and 314 of the 1956 Act. Some of key changes envisaged in the 2013 Act include the following:

•      Need for central government approval has been done away with.

•      The 2013 Act has widened the ambit of transactions such as leasing of property of any kind, appointment of any agent for purchase and sale of goods, material, services or property.

•      Cash at prevailing market price has now been substituted with ‘arm’s length transaction’ which has been defined in the section.

•      Transactions entered into with related parties now to be included in the board’s report along with justification for entering into such contracts and  arrangements.

•      Penalty for contravention of the provisions of section 297 was covered in general provisions in the 1956 Act. However, this is now covered specifically in the section itself which now extends to imprisonment.

•      Central government may prescribe additional conditions.

Appointment and remuneration of managerial personnel

The 2013 Act brings significant changes to the existing requirement of the 1956 Act with  respect to appointment and remuneration of managerial personnel. One of the major changes that could be identified is in respect of the applicability of these provisions. The provisions for appointment of managing director, whole time director or manager are no longer restricted to the public companies and the private companies which are subsidiaries of public companies and now applicable to all companies. The overall ceiling in respect of payment of managerial remuneration by a public company remains at 11% of the profit for the financial year computed in the manner laid down in the 2013 Act.

1. Appointment of managing director, whole time director or manager [section 196 of 2013 Act].

•      The re-appointment of a managerial person cannot be made earlier than one year before the expiry of the term instead of two years as per the  existing provision of section 317 of the 1956 Act, however, the term for which managerial personnel can be appointed remains as five years.

•      The eligibility criteria for the age limit has been revised to 21 years as against the existing requirement of 25 years. Further, the 2013

Act lifts the upper bar for age limit and thus an individual above the age of 70 years can be appointed as key managerial personnel by passing a special resolution.

•      Provisions in respect of appointment of the managerial personnel has been specified in section 196 and Schedule V to the 2013 Act.

2. Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits [section 197 of 2013 Act].

•      As against the existing requirement of section 198 of the 1956 Act, which specifically provides that the provisions of managerial remuneration would be applicable to both public companies and private companies which are subsidiaries of public companies; the

2013 Act states that such provisions would be applicable only to public limited companies.

•      Listed companies have been mandated to disclose in their board report, the ratio of remuneration of each director to median employee’s remuneration and such other details which are quite extensive as proposed in the draft rules*.

•      The existing 1956 Act under section 309 provides that a managing director or a whole time director of a subsidiary company who is in receipt of commission from the holding company cannot receive any commission or remuneration from the subsidiary company. The said restriction has been removed by the 2013 Act, however, such receipt has to be disclosed in the Board’s report [section 197(14) of

2013 Act].

•      The provisions of existing Schedule XIII of the 1956 Act have been incorporated in Schedule V of the 2013 Act and the requirements have been structured around the same rules, with revised remuneration limits and certain additional requirements, for example, the managerial personnel should not have been convicted of an offence under the Prevention of Money Laundering Act, 2002.

•      The 2013 Act has liberalised the administrative procedures by relaxing the requirement of obtaining the central government approval provided the company complies with certain requirements including seeking approval by way of special resolution for payment of managerial remuneration. Similar relaxation norms as envisaged in the 2013 Act had been incorporated in Schedule XIII of the 1956 Act by virtue of the recent circulars issued by MCA.

•      Definition of remuneration has undergone few changes in the 2013 Act. The 2013 Act in section 2(78), defines remuneration as any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the income- tax Act, 1961. The remuneration thus defined includes reimbursement of any direct taxes to managerial personnel. The 1956 Act defined remuneration under section 198 by way of an explanation and provided for the certain specific inclusions that would be construed as remuneration. Section 200 of the 1956 Act specifically prohibited tax free payments. The 2013 Act has indirectly incorporated the same requirement by clarifying that the term remuneration includes any reimbursement of direct taxes.

•      The 2013 Act clarifies that premium paid by a company for any insurance taken by a company on behalf of its managing director, whole time director, manager, chief executive officer, chief financial officer or company secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company would not be treated as part of remuneration except for the cases where person is proved to be guilty. The provisions cited above are similar to that of the existing provisions of section 201 of the 1956 Act.

3. Calculation of profits [section 198 of 2013 Act]

The 2013 Act sets out in detail about the allowances and deductions that a company should include while computing the profits for the purpose of determining the managerial remuneration. To illustrate, the 2013 Act states that while computing its profits, credit should not be given for any change in the carrying amount of an asset or of a liability recognised in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.

4. Recovery of remuneration in certain cases [section 199 of 2013 Act]

The 2013 Act contains stringent provisions in case the company is required to restate its financial statements pursuant to fraud or non- compliance with any requirement under the 2013 Act and the Rules made there under. As against the existing requirement of section 309 of the 1956 Act which only refers to the fact that excess remuneration paid to managerial personnel cannot be waived except with the previous approval of the central government, the 2013 Act moves a step forward and enables the company to recover the excess remuneration paid (including stock options) from any past or present managing director or whole time director or manager or chief executive officer who, during the period for which the financial statements have been restated, has acted in such capacity.

5. Appointment of key managerial personnel [section 203]

The 2013 Act provides for mandatory appointment of following whole time key managerial personnel for every listed company and every other company having a paid-up share capital of five crore INR or more*:

(i)      Managing director, or chief executive officer or manager and in their absence, a whole-time director

(ii)     Company secretary  (iii)    Chief financial officer Further, the 2013 Act also states that an individual cannot be appointed or reappointed as the chairperson of the company, as well as the

managing director or chief executive officer of the company at the same time except where the articles of such a company provide otherwise or the company does not carry multiple businesses.

Disclaimer : This PDF/PPT Research report above is an extract from the full report by prepared by the Pric Waters Cooperhouse (PwC). PwC has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. PwC is not responsible for any errors or omissions in analysis / inferences / views or for results obtained from the use of information contained in this report and especially states that PwC (including all divisions) has no financial liability whatsoever to the user of this report.

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