Ravi Kulkarni | Khaitan & Co

Ravi Kulkarni | Khaitan & Co FICCI | New Delhi | 12 September 2013

COMPANIES ACT, 2013

Corporate GovernanceKey Changes and Takeaways

Copyright © Khaitan & Co 2013 | 2

Contents

1. Board Composition2. Independent Directors3. Powers of the Board 4. Duties of Directors 5. Liability of Directors and Officers 6. Board Committees7. Related Party Transactions


Board CompositionTYPE OF

COMPANY INDEPENDENT DIRECTOR WOMAN DIRECTOR

SMALL SHAREHOLDER

DIRECTORRESIDENT DIRECTOR

Private Company

1 Independent Director on Corporate Social Responsibility (CSR) Committee if CSR requirement is triggered

Rule 11.1Required if paid-up share capital > INR 100 crores (to be appointed within 5 years) from the commencement of the Act

Section 151 Rule 11.5Not applicable

1 director required to be resident in India for at least 182 days in a calendar yearSection 149(3)

Public Unlisted Company

1/3rd of the Board to be Independent if the Company has:• Paid-up share capital of INR

100 crores or more; or• Aggregate outstanding

loans, borrowings, debentures or deposits exceeding INR 200 crores

Required if paid-up share capital > INR 100 crores (to be appointed within 5 years) from the commencement of the Act

Not applicable

Listed Company

• All listed companies to have 1/3rd of the Board comprised of Independent Director• Requirement increases to

half of the Board if there is an executive chairman [Clause 49, Listing Agreement]

All listed companies to have a woman director (to be appointed within 1 year) from the commencement of the Act

Mandatory? Suo motu optionRequest of 1/10th the number of small shareholders or 500 small shareholders (whichever is lower)


Independent Directors

Term Restrictions [Section 149]: – 2 consecutive terms of 5 years each;– 3 year cool-off (no association with the

company) before becoming eligible again. Board’s Report [Section 134]:

– To provide statements that the Independent Director possesses the appropriate balance of skills, experience and knowledge



Impact– Investor Nominee Directors cannot be regarded

as Independent Directors [Section 149 (7)] Definition [Section 149 (6)]: A director other than a

Managing Director, Whole-Time Director or Nominee Director, who:– in the opinion of the Board, is a person of

integrity, with relevant experience and expertise;



is or was not a promoter or director of the company or any holding, subsidiary or associate company;

is not related to a promoter or director of the company, or any holding, subsidiary or associate company;

does not have and has not had any pecuniary relationship with the company and its promoters or directors, including any holding company, subsidiary or associate company (no materiality threshold, unlike Listing Agreement)



whose relatives do not have any pecuniary relationship or transaction with the company or its holding, subsidiary or associate company, or their promoters or directors amounting to 2% or more of the gross turnover of the relevant entity, or INR 50 lakhs (subject to change), whichever is lower, during the current financial year or the two preceding financial years

who neither himself nor any of his relatives:– holds or has held the position of Key

Managerial Personnel or has been an employee of the company, or its holding, subsidiary or associate company in the preceding 3 financial years;



is or has been an employee, proprietor or partner (in the preceding 3 financial years) of:– any firm of auditors, company secretaries or

cost auditors of the company or its holding, subsidiary or associate company; or

– any legal or consulting firm that has or has had any transaction with the company, or its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such company

holds, together with his relatives, 2% or more of the total voting power;



– is a Chief Executive Officer or director of any non-profit organisation that receives more than 25% of its receipts from the company, its promoters, directors or any holding, subsidiary or associate company, or holds more than 2% of the company; and

– who possesses such other qualifications as may be prescribed.



Qualifications [Rule 11.3] Independent Director must possess appropriate

balance of skills, experience, and knowledge in one or more fields of finance, law, management, sales, marketing, administration, corporate governance, technical operations or other disciplines related to the company’s business.

Board to furnish a statement in its first report after such appointment that in its opinion the Independent Director possesses the appropriate balance of skills, experience and knowledge as required.



Independent Directors may be drawn from a data-bank of persons ‘eligible and willing’, maintained by any body, institute or association as may be prescribed by the Central Government [Section 150 and Rule 11.4]

Appointment has to be approved by members in general meeting and the explanatory statement to the notice should indicate justification of such appointment



No retirement by rotation Independent Directors are eligible for sitting fees,

commission from profits and reimbursement of expenses

Independent Directors are not entitled to any stock options. This is contrary to the Listing Agreement, where the maximum limit can be fixed by shareholders resolution



The law now prescribes a code of conduct (“Code”) to be complied with by the Independent Directors (Schedule IV)

The Code provides for the following: – Guidelines of professional conduct;– Specific roles, functions and duties;– Manner of appointment, re-appointment,

resignation and removal;– Separate meetings of Independent Directors; and – Evaluation mechanisms.


Powers of the Board

Key Changes [Section 179] There has been an addition to the list of powers

which can be exercised only at a meeting of the Board of Directors:– Approval of financial statements and Board

reports;– Diversification of business;– Approval of amalgamation, merger or

reconstruction;– Approval of takeover of another company or

acquisition of a substantial stake in another company.


Powers of the Board

Key Changes – Restrictions [Section 180] Powers which can only be exercised subject to a

special (not ordinary) resolution of the shareholders:– Sell or otherwise dispose off whole or

substantially the whole of an undertaking;

– Invest proceeds of a merger or amalgamation;

– Borrow money in excess of the paid-up share capital and free reserves (other than temporary loans) and the limit of such borrowing should be specified in the special resolution;


Powers of the Board

Temporary loans must be: (a) from the company’s bankers; (b) in the ordinary course of business; and (c) repayable within 6 months.

Special resolutions may include conditions. This section has been extended to private

companies. Definition of the term “Undertaking” and

“substantially the whole undertaking” has been introduced


Powers of the Board

‘Undertaking’ means:– An undertaking in which the company’s

investment exceeds 20% of its net worth as per the last audited balance sheet

– An undertaking which generates 20% or more of the company’s total income in the previous year

‘Substantially the whole undertaking’ means 20% or more of the value of the undertaking as per the last audited balance sheet


Powers of the Board

Political contribution limits enhanced to 7.5% of average net profits of the company for the immediately 3 preceding financial years

Charitable contribution, permission required where contribution exceeds the limit of 5% of the average net profits for the immediately preceding 3 financial years. The limits of monetary value have been dispensed with


Duties of Directors[Section 166]

To act in accordance with the articles of association of the company;

To act in good faith to promote the objects of the company for the best interests of the company and for the benefit of the members as a whole and in the best interests of the employees, shareholders, the community and the environment;

To exercise his duties with due and reasonable care, skill, diligence and independent judgment;

To avoid situations where he may have a direct or indirect interest which conflicts or may conflict with the interests of the company;

To avoid any undue gain to himself or his relatives, partners, or associates (if found guilty of this, the director may be required to pay an amount equal to such gain to the company);

Not to assign his office, such assignment being void.


Liability of Directors and Officers

Key Changes Liability of Directors under Section 166 relating to

duties; Liability under Section 172 of the company and any

officer in default for any contravention; Independent and non-executive Directors only face

liability for an act or omission where they have knowledge (attributable through the Board process) or if there is consent, connivance or a lack of diligence.


Board Committees: Applicability

TYPE OF COMPANY AUDIT COMMITTEE

NOMINATION & REMUNERATION

COMMITTEECSR COMMITTEE

STAKEHOLDER RELATIONSHIP COMMITTEE

Private Company Not applicable Not applicable

Independent Director required on CSR Committee if:• Net worth ≥ INR 500 Crores• Turnover ≥ INR 1000 Crores• Net profit ≥ INR 5 crores

Not applicable

Public Unlisted Company

Both committees required if the company has:• Paid-up share capital of INR 100 crores or more; or• Aggregate outstanding loans, borrowings, debentures or deposits exceeding INR 200 crores

Applies if the company has 1000 or more shareholders

Public Listed Company

ApplicableApplies if the company has 1000 or more shareholders


Board Committees: Composition, etc.TYPE OF COMMITTEE COMPOSITION OTHER REQUIREMENTS

Audit Committee [Section 177]

•3 Directors•Majority Independent Directors

•Roles stipulated•Decisions no longer binding on the Board•Whistle-blower policy required, providing direct access to the chairman of the Audit Committee

Nomination & Remuneration Committee [Section 135]

•3 Directors•Majority Independent Directors

CSR Committee [Section 178]

•3 Directors•1 Independent Director

Stakeholder Relationship Committee [Section 178]

•Strength and composition determined by the Board•Chairman to be non-executive

• Purpose – to solve the grievances of security holders


Related Party Transactions RELATED PARTY - DEFINITION

Director, key managerial personnel or relative of such person

Firm in which a director, manager or relative is a partner

Private company in which a director or manager is a member or director

A public company in which a director or manager is (a) a director; or (b) along with relatives holds more than 2%

Any body corporate whose Board, Managing Director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager

Any person on whose advice, directions or instructions a director or manager is accustomed to act

Anya holding, subsidiary or an associate company of such company

a subsidiary of a holding company to which it is also a subsidiary


Related Party Transactions Prior consent of the Board and no Central Government permission

Interested Director not to remain present at the Board meeting

A related party transaction can be entered into only if it is approved by a special resolution at the general meeting:

– where the company has paid-up share capital, which is not less than INR 1 crore;

– Transactions amount (individually or taken together with previous transactions during a financial year)exceeds 5% of the annual turnover or 20% of the net worth of the company as per last audited financial statements, whichever is higher;

– Transaction relating to appointment to any office or place of profit in the company, its subsidiary or associate company at a monthly remuneration exceeding INR 1 lakh; or

– Is for a remuneration for underwriting the subscription of any securities or derivatives exceeding INR 10 lakhs.

No member of the company who is a related party can vote on the special resolution


The scope of existing provisions has been widened to include selling, buying and leasing

An arms length transaction entered into in the ordinary course of business of the company is an exception to the related party transaction rule

Related party transactions including the reasons for entering into the relevant transactions are to be included in the Board’s report to the shareholders

Shareholder’s approval for non-cash transactions with Directors of the company, its holding, its associated company, or a person connected with him would be required

Company should not acquire assets from such directors

Related Party Transactions

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Ravi Kulkarni | Khaitan & Co