mr ravi kulkarni

8/12/2019 Mr Ravi Kulkarni

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Ravi Kulkarni | Khaitan & Co

FICCI | New Delhi | 12 September 2013

COMPANIES ACT, 2013

Corporate Governance

Key Changes and Takeaways


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Copyright Khaitan & Co 2013 | 2

Contents

1. Board Composition

2. Independent Directors

3. Powers of the Board

4. Duties of Directors

5. Liability of Directors and Officers

6. Board Committees

7. Related Party Transactions


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Board CompositionTYPE OF

COMPANY

INDEPENDENT DIRECTORWOMAN

DIRECTOR

SMALLSHAREHOLDER

DIRECTOR

RESIDENT

DIRECTOR

Private

Company

1 Independent Director on

Corporate Social Responsibility

(CSR) Committee if CSR

requirement is triggered

Rule 11.1

Required if paid-up

share capital > INR

100 crores (to be

appointed within 5

years) from the

commencement of

the Act

Section 151

Rule 11.5

Not applicable

1 directorrequired to be

resident in India

for at least 182

days in a

calendar year

Section 149(3)

Public

Unlisted

Company

1/3rdof 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 halfof 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

motuoption

Request of 1/10ththe

number of smallshareholders or 500

small shareholders

(whichever is lower)


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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.

BoardsReport [Section 134]:

To provide statements that the Independent Director

possesses the appropriate balance of skills, experience

and knowledge


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Impact

Investor Nominee Directors cannot be regarded as

Independent Directors [Section 149 (7)]

Definition [Section 149 (6)]: A director other than aManaging Director, Whole-Time Director or Nominee

Director, who:

in the opinion of the Board, is a person of integrity,

with relevant experience and expertise;


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is or was not a promoter or directorof the company or

any holding, subsidiary or associate company;

is not related to a promoter or directorof 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)


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whose relatives do not have any pecuniary relationshipor 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 thetwo preceding financial years

who neither himself nor any of his relatives:

holds or has held the position of Key Managerial

Personnelor has been an employeeof the company,or its holding, subsidiary or associate company in the

preceding 3 financial years;


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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 firmthat has or has had any

transaction with the company, or its holding,

subsidiary or associate company amounting to 10%

or more of the gross turnoverof such company

holds, together with his relatives, 2% or more of the

total voting power;


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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.


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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 companysbusiness.

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, experienceand knowledge as required.


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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


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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


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The law now prescribes a code of conduct (Code) to becomplied 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.


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Powers of the Board

Key Changes [Section 179]

There has been an addition to the list of powers whichcan be exercised only at a meeting of the Board ofDirectors:

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 anothercompany.


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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 disposeoff whole or substantially

the whole of an undertaking;

Investproceeds 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 bespecified in the special resolution;


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Powers of the Board

Undertakingmeans:

An undertaking in which the companys investment

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

balance sheet An undertaking which generates 20% or more of the

companystotal income in the previous year

Substantially the whole undertaking means 20% or

more of the value of the undertaking as per the last auditedbalance sheet


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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 wherecontribution 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


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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.


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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.


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BoardCommittees: Applicability

TYPE OFCOMPANY AUDIT COMMITTEE

NOMINATION &

REMUNERATIONCOMMITTEE

CSR COMMITTEE

STAKEHOLDER

RELATIONSHIPCOMMITTEE

Private

CompanyNot applicable Not applicable

Independent Director

required on CSRCommittee 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

CompanyApplicable

Applies if the company

has 1000 or more

shareholders


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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 compositiondetermined by the Board

Chairman to be non-executive

Purposeto solve the

grievances of security

holders


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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 relativesholds more than 2%

Any body corporate whose Board, Managing Director or manager is accustomed to act inaccordance 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


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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


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