the company, its promoters, directors

Report
COMPANIES ACT, 2013
Corporate Governance
Key Changes and Takeaways
Ravi
FICCI
Kulkarni | Khaitan & Co
| New Delhi
|
12 September 2013
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
Copyright © Khaitan & Co
|
2
2013
Board Composition
TYPE OF
COMPANY
INDEPENDENT DIRECTOR
WOMAN DIRECTOR
SMALL
SHAREHOLDER
DIRECTOR
RESIDENT
DIRECTOR
Rule 11.1
Private
Company
1 Independent Director
on Corporate Social
Responsibility (CSR)
Committee if CSR
requirement is
triggered
1/3rd of the Board to be
Independent if the
Company has:
Public
Unlisted
Company
• Paid-up share capital
of INR 100 crores or
more; or
• Aggregate outstanding
loans, borrowings,
debentures or deposits
exceeding INR 200
crores
• All listed companies
to have 1/3rd of the
Board comprised of
Independent Director
Listed
Company
|
3
• Requirement increases
to half of the Board
if there is an
executive chairman
Required if
paid-up share
capital > INR
100 crores (to
be appointed
within 5
years) from
the
commencement
of the Act
Required if
paid-up share
capital > INR
100 crores (to
be appointed
within 5
years) from
the
commencement
of the Act
All listed
companies to
have a woman
director (to
be appointed
within 1 year)
from the
commencement
Section 151
Rule 11.5
Not applicable
Not applicable
1 director
required to
be resident
in India for
at least 182
days in a
calendar
year
Section
149(3)
Mandatory? Suo
motu option
Request of
1/10th the
number of small
shareholders or
500 small
Copyright © Khaitan & Co
shareholders
2013
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
Copyright © Khaitan & Co
|
4
2013
Independent Directors

Impact
–

Investor Nominee Directors
regarded
as
Independent
[Section 149 (7)]
cannot be
Directors
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;
Copyright © Khaitan & Co
|
5
2013
Independent Directors

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)
Copyright © Khaitan & Co
|
6
2013
Independent Directors

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
relatives:
–
|
7
himself
nor
any
of
his
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
Copyright © Khaitan & Co 2013
preceding 3 financial years;
Independent Directors

is or has been an employee, proprietor or
partner (in the preceding 3 financial
years) of:

|
8
–
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
Copyright © Khaitan & Co 2013
more of the total voting power;
Independent Directors
–
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.
Copyright © Khaitan & Co
|
9
2013
Independent Directors
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.
Copyright © Khaitan & Co
|
10
2013
Independent Directors

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
Copyright © Khaitan & Co
|
11
2013
Independent Directors

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
Copyright © Khaitan & Co
|
12
2013
Independent Directors

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
Directors; and
–
Evaluation mechanisms.
of
Independent
Copyright © Khaitan & Co
|
13
2013
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.
Copyright © Khaitan & Co
|
14
2013
Powers of the Board
Key Changes – Restrictions [Section 180]

|
Powers
which
can
only
be
subject to a special (not
resolution of the shareholders:
15
exercised
ordinary)
–
Sell or otherwise dispose off whole or
substantially
the
whole
of
an
undertaking;
–
Invest
proceeds
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;
Copyright © Khaitan & Co 2013
of
a
merger
or
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
conditions.

This section has been extended to private
companies.

Definition of the term “Undertaking” and
“substantially the whole undertaking” has
been introduced
may
include
Copyright © Khaitan & Co
|
16
2013
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
Copyright © Khaitan & Co
|
17
2013
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
Copyright © Khaitan & Co
|
18
2013
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);

Copyright © Khaitan & Co
19
Not to assign his office, such assignment being void.
2013
Liability of Directors and
Officers
Key Changes

Liability of Directors
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.
under
Section
166
Copyright © Khaitan & Co
|
20
2013
Board Committees: Applicability
TYPE OF
COMPANY
Private
Company
Public
Unlisted
Company
AUDIT COMMITTEE
NOMINATION &
REMUNERATION
COMMITTEE
Not applicable
Not applicable
CSR COMMITTEE
Not applicable
Both committees required if the company
has:
Independent
Director required
on CSR Committee
if:
• Paid-up share capital of INR 100 crores
or more; or
• Net worth ≥ INR
500 Crores
• Aggregate outstanding loans,
borrowings, debentures or deposits
exceeding INR 200 crores
• Turnover ≥ INR
1000 Crores
Public
Listed
Company
Applicable
STAKEHOLDER
RELATIONSHIP
COMMITTEE
Applies if the
company has 1000
or more
shareholders
• Net profit ≥ INR
5 crores
Applies if the
company has 1000
or more
shareholders
Copyright © Khaitan & Co
|
21
2013
Board Committees: Composition,
etc.
TYPE OF COMMITTEE
COMPOSITION
OTHER REQUIREMENTS
• Roles stipulated
Audit Committee
[Section 177]
• 3 Directors
• Majority Independent
Directors
Nomination &
Remuneration
Committee [Section
135]
• 3 Directors
CSR Committee
[Section 178]
• 3 Directors
Stakeholder
Relationship
Committee [Section
178]
• Decisions no longer
binding on the Board
• Whistle-blower policy
required, providing
direct access to the
chairman of the Audit
Committee
• Majority Independent
Directors
• 1 Independent Director
• Strength and
composition determined
by the Board
• Chairman to be nonexecutive
• Purpose – to solve
the grievances of
security holders
Copyright © Khaitan & Co
|
22
2013
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
a holding, subsidiary or an associate company of such company
Any
a subsidiary of a holding company to which it is also
a subsidiary
Copyright
© Khaitan &
|
23
Co
2013
Related Party Transactions
|

Prior consent
permission

Interested
meeting

A related party transaction can be entered into only if it
is approved by a special resolution at the general
meeting:
24
of
the
Board
Director not
and
no
Central
Government
to remain present at the Board
–
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
subscription
remuneration
for
underwriting
the
Copyright © Khaitan & Co 2013
of any securities or derivatives
Related Party Transactions

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
Copyright © Khaitan & Co 2013
|
25
www.khaitanco.com

similar documents