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BUSINESS
ASSIGNMENT
As a Consultant of a newly started
Petroleum Refinery advice the
Management about the Position, Powers
and Duties of Directors under the
Companies Act, 2013
Date: 22nd December, 2014
Submitted to:
Submitted by:
Mr. D G Shukla
Megha Mishra
School of Petroleum Management
Roll No: 20135036
PGP 13 GM
Contents
1. Introduction ........................................................................................................................................ 3
1.1 Who is Director? ........................................................................................................................... 3
1.2 Number of Directors ..................................................................................................................... 4
1.3 Appointment of Directors ............................................................................................................. 4
1.4 Disqualification for appointment as Director ............................................................................... 5
2. New Categories and Qualifications of Directors ................................................................................. 6
2.1 Resident Director .......................................................................................................................... 6
2.2 Woman Director ........................................................................................................................... 6
2.3 Independent Director ................................................................................................................... 6
2.4 Additional Directors ...................................................................................................................... 8
2.5 Nominee Director.......................................................................................................................... 8
2.6 Alternate Directors........................................................................................................................ 8
2.7 Maximum number of directorship ................................................................................................ 9
3. Roles of Director ............................................................................................................................... 10
3.1 Director as Agents ....................................................................................................................... 10
3.2 Director as Employees ................................................................................................................ 10
3.3 Director as Officers ..................................................................................................................... 10
3.4 Director as Trustees .................................................................................................................... 10
4. Directors Fiduciary Responsibilities ................................................................................................. 11
5. Appointment of Key Managerial Personnel ...................................................................................... 12
6. Key changes and New requirements - Review.................................................................................. 13
1. Introduction
The Companies Act, 2013 is enacted to gradually replace the old Act of 1956, with the
objective to bring more accountability and good corporate governance. The Ministry of
Corporate Affairs has notified ninety-eight sections of the Act which have come into
effect from September 12, 2013 and repealed the corresponding sections of the 1956
Act. The Act appears to place a higher degree of responsibility on the Board members
for good corporate compliance. A clear understanding of these obligations and
responsibilities will be critical for current and prospective Board members. In the
context of the Board of a company, the legislators have focused on the role of
independent directors and have codified the duties of directors, which were missing in
the old Act.
The 1956 Act prescribes minimum 2 directors for private and 3 directors for a public
company. The Act requires the Board to devise mechanisms to ensure compliance with
the applicable laws which should be effective and adequate. The Board may consist of
several categories of directors including whole-time directors, managing directors,
independent directors, nominee directors and women directors.
Under the Act, there is a mandatory requirement that one-third (1/3) of the Board
should consist of independent directors for listed companies and public companies with
a paid-up capital of INR 1,000 million (approx. $16 million) or debt of INR 2,000 million
(approx. $32 million).
One of the section also stipulates that at least one director of the company should stay in
India for 182 days or more in the previous calendar year. This will ensure that the
Board shall continue to monitor directly the management of the company on a regular
basis and shall be responsible for acts and deeds of the company. Their continued
presence will not delay statutory action steps and will be a step forward towards
meeting the timely corporate compliance requirements. This requirement was missing
in the old Act and foreign companies starting business in India typically appoint foreign
directors as the directors of the Indian subsidiary. With the implementation of this
prerequisite, foreign companies doing business in India will now have to appoint at
least one resident director or Indian national to act as director to comply with this
qualification.
shall include a statement that in the opinion of the Board, he fulfils the conditions
specified in this Act for such an appointment;
The proposed Director has to furnish his DIN (Director Identification Number)
mandatorily. DIN is allotted by the Central Government on application by a
person intending to be the Director of a company. DIN can be obtained in
pursuance of section 153 and 154;
The proposed Director has to also furnish a declaration stating that he is not
disqualified to be a director.
Furthermore, such appointment should be with his consent. Earlier such consent
was not mandatory for private companies. Consent implies that being appointed
a director and taking the charge of the office are two different things;
Consent has to be filed with the Registrar of Companies within 30 days of
appointment
who has or had no pecuniary relationship with the company, its holding,
subsidiary or associate company, or their promoters, or directors, during the 2
immediately preceding FYs or during the current FY
holds or has held the position of a KMP or is or has been employee of the
company or its holding, subsidiary or associate company in any of the 3 FYs
immediately preceding the FY in which he is proposed to be appointed;
is or has been an employee or proprietor or a partner, in any of the 3 FYs
immediately preceding the FY in which he is proposed to be appointed, of a firm of auditors or CS in practice or cost auditors of the company or its
holding, subsidiary or associate company; or
any legal or a consulting firm that has or had any transaction with the
company, its holding, subsidiary or associate company amounting to 10%
or more of the gross turnover of such firm;
holds together with his relatives 2% or more of the total voting power of the
company; or
is a Chief Executive or director, by whatever name called, of any non-profit
organization that receives 25% or more of its receipts from the company, any of
its promoters, directors or its holding, subsidiary or associate company or that
holds 2% or more of the total voting power of the company; or
Presently, clause 49 of the Listing Agreement provides for appointment of IDs by listed
companies. In order to facilitate greater independence in decision making by BOD, 2013
Act provides the following requirements for IDs:
Listed companies to have at least 1/3rd of its total number of directors as IDs
ID is not liable to retire by rotation and is not to be included in the total number
of directors liable to retire by rotation
Once the 2 consecutive terms of ID are completed, the ID will be eligible for
appointment after a cooling period of 3 years, provided he is not associated with the
company in any other capacity during this 3 years period, either directly or indirectly
IDs are not entitled to any stock option but may receive remuneration by way of
sitting fee, re-imbursement of expenses for participation in meetings, profit related
commission as approved by the members of the company.
ID and NED (not being promoter or KMP), shall be held liable, only for such acts
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
Detailed code of conduct to be followed by companies and their IDs have been
included in 2013 Act
3. Roles of Director
Figure 3.1
MD or CEO
Company Secretary
CFO
Women Director - Company should appoint at least one woman director on the
Board for such class or classes of companies as may be prescribed. A transitional
period of one year has been prescribed to companies for compliance with this
requirement.
Domicile of Director - Company should have at least one director who has
stayed in India for a total period of not less than hundred and eighty two days in
the previous calendar year.
Maximum number of Directors - Company can have a maximum of fifteen
directors on the Board and will be applicable to all companies. Any further
increase in number of directors, the company will need to pass a special
resolution at its General Meeting and no approval from the Central Government
is required.
Cap on Directorship - A person will be able to become director in only 20
companies. However, out of this, not more than 10 companies can be public
companies.
Composition - At least 1/3rd of the total number of directors will be
independent directors. If higher number has been prescribed under any other
governing law/regulation then such company shall comply with the same.
Rotation - The independent director will be appointed for a period of five years
and be eligible for reappointment subject to certain conditions for two terms.
Thereafter, the independent director shall be eligible for reappointment after a
cooling period of three years.
Qualification - Majority of the audit committee members including its
chairperson will have an ability to read and understand the financial statements.
Manner of Selection - Independent directors to be selected from a data bank
maintained by a body, institute association, as may be notified by the central
government.
Nominee Director - Nominee directors appointed to the board by financial
institutions/investors shall not be considered as independent directors.
Relationship with External Firms - A person is prohibited to be appointed as
an independent director, if the person or his/her relative is/was a partner/
executive in an external audit firm, internal audit firm, legal firm and/or
consulting firm(s), which have association with the company.
Stock Options - An independent director will not be entitled to any stock
options in the company. The Act is not clear as to how a company will deal with
stock options granted in the past and which are outstanding at the date of its
enactment.