CORPORATE

GOVERNANCE
Pinki Mehta
Assistant Professor
Module 2: Corporate and Board
Management
• Board of Directors –Composition, Role, Systems and Procedures, Board Meetings
• Directors including Nominee Director, Shareholders Director & Independent Directors,
Fiduciary relationship
• Criminal liability of Directors, Mis-feasance, Mal Feasance & Non-Feasance
• Rights, Duties and Responsibilities of Directors
• Role of Directors and other Managerial Persons including Executives.
1. Who play the key-role in the management of company’s business?
2. Whether body corporates, firm can act as director of the company?
3. Whether director can be recognized as officer, agent or trustee of the company?
4. Whether Director are employees of the company?
Director
❖ “director” means a director appointed to the Board of a company.
❖ “Board of Directors” or “Board”, in relation to a company, means the collective
body of the Directors of the company;
❖ They are professionals appointed to control the management and affairs of
company.
❖ Directors have different attributes in relation to company depending upon the
facts of each case.
❖ The legal position of director is sometimes described as agents, trustee, or as
officers.
General Qualification of Director
■ Director must be Individual
■ Must have director identification number.
■ A person appointed as director shall not act as director unless he give his consent to hold
office as director and a declaration that he is not disqualified to become a director with
the registrar.
■ Any other academic or professional qualification specified by articles of association.
■ Minimum Number of Director- least three director in case of public company, to director
in case of private company, one director in case of one person company.
■ Maximum- 15 directors, a company may appoint more than 15 directors after passing a
special resolution.
■ Number of Directorship- 20, (maximum number of public companies in which a person
can be appointed as a director shall not exceed ten.)
Categories of Director
■ First Director • Small-shareholder Director
■ Women Director
• Independent Director
■ Resident Director
• Executive Director
■ Additional Director
• Non-Executive Director
■ Alternate director
■ Nominee Director • Managing Director

■ Rotational Director • Shadow Director

• Interested Director
Appointment of Additional Director,
Alternate Director, Nominee Director and
Filling up of Casual vacancy -Section 161

■ Additional Director – Section 161(1)

■ Alternate Director- Section 161(2)
■ Nominee director- Section 161(3)
■ Casual vacancy- Section 161(4)
Additional Director - 161(1)

■ Board may appoint Additional Director at any time, if articles confers powers
■ To meet urgent requirements of the management.
■ A person who fails to get appointed in a general meeting, cannot be appointed as
an additional director
■ Additional Director shall hold office till next Annual General Meeting (AGM)
or the last date on which the AGM should have been held, whichever is earlier
■ The proposed director should not be disqualified to become a director.
Alternate Director- 161(2)
■ Board may appoint Alternate Director at any time, if articles confers powers.
■ The person to be appointed as an alternate director shall not hold another
alternate directorship for any other Director in the Company or holding
directorship in the same company.
■ Alternate Director can only be appointed in case a Director leaves India for a
period of more than three months.
■ An Alternate Director to an Independent Director should also satisfy the criteria
for Independent Director.
■ Office of Alternate Director shall vacate, if and when the Director in whose
place he has been appointed, returns to India.
■ Provisions of automatic re-appointment of retiring Director shall apply to the
original Director and not to the Alternate Director.
Nominee Director- 161(3)

■ Subject to articles, Board may appoint any person as director nominated by any
institution as a Nominee Director in pursuance of any law or agreement or by
Central Government or by State Government by virtue of its shareholding in a
Government Company
■ Appointment of director by thrid-party
■ Nominee director represents the body which makes his nomination for
appointment of director in the company.
Casual Vacancy- 161(4)

■ If the office of any Director appointed by the Company in a general meeting is

vacated before his term of office expires in normal course, then such casual
vacancy may be filled by Board of Directors at Board Meeting.
■ Such appointment shall be approved by the members in the immediate next
general meeting.
■ Any person so appointed shall hold office only up to the date up to which the
Director in whose place he is appointed would have held office if it had not been
vacated
Hypothetical Situation

■ Ethos is a listed public limited company having a paid up share capital of Rs. 3,00,00,00,000.00 Two friends
‘Mr. M’ and ‘Mr. N’ were appointed as director in Ethos public limited company on January 2nd 2023. The
appointment was made in a general meeting by members of the company. Office of Mr. M was declared
vacant on December 28th 2024 because he failed to attend any meeting in the period of 12 months as he left
India due to his personal engagements. On the other hand ‘Mr. N’ unfortunately met with an accident after 2
years of his appointment died in the fateful accident.

■ Now ‘Mr. M’ on returning to India wants to get himself elected on the Board of director of Ethos LTD. Mr. M
has approached you to seek legal advice. Discuss the modes in which Mr. M may be appointed in the board
either by BOD itself or Members in the following situations. Also specify the tenure of such appointment in
each case if applicable.
Question

■ If instead of declaration of Mr. M’s office as vacant. He had retired by rotation.

■ If in the place of ‘Mr. N’ the board of directors had appointed Mr. Y, who within
few months of becoming director died of heart attack. Now the board wishes to fill
up the vacancy by appointing ‘Mr. M’ in place of ‘Mr. Y’ in the next board meeting.
State legal position.
■ If board have approved you before removing Mr. M from his office.
Appointment of Director elected by
Small Shareholders - Section 151
■ Appointment of Director elected by small shareholder- Section 151 r/w Rule 7
of Companies (Appointment and qualification of Directors) Rules, 2014
■ Section 151- A listed company may have one director elected by such small
shareholders in such manner and with such terms and conditions as may be
prescribed.
■ Small Shareholders - means a shareholder holding shares of nominal value of
not more than twenty thousand rupees or such other sum as may be prescribed.
■ As per this provision small shareholders may place their representative on the
Board of Directors of a listed company, so their voice is listened effectively.
■ A Listed Company may have one Director elected by small shareholders, upon
notice of
– At least 1000 small shareholders or
– one-tenth of total number of such shareholders, whichever is lower
■ Company may suo motu appoint Director representing small shareholders.
■ Small shareholders shall leave a notice of their intention to propose a person as a
candidate for the post of small shareholders’ director, atleast 14 days before the
meeting under their signatures specifying the name, address, shares held and
number of the person whose name is being proposed and of the small
shareholders who are proposing such person
■ Notice as prescribed shall be accompanied by a statement signed by the
candidate for the post of small shareholders’ Director stating his DIN Number,
his consent & declaration that he is not disqualified to be appointed as director.
■ Such Director shall be considered as an independent director subject to that he
is being eligible under sub sections (6) and (7) of section 149
■ Appointment of small shareholders’ director shall be subject to the provisions of section 152
except the following:
– such Director shall not be liable to retire by rotation
– tenure shall not exceed a period of 3 consecutive years
– on the expiry of the tenure, such Director shall not be eligible for re-appointment

■ A person shall not be appointed as small shareholders’ director of a company, if the person is
not eligible for appointment in terms of section 164.

■ A person appointed as small shareholders’ Director shall vacate the office if:
– director incurs any of the disqualifications as per section 164
– office of the Director becomes vacant as per section 167
– director ceases to meet the criteria of independence
■ No person shall hold the position of small shareholders’ director in more than two
companies at the same time.
– Provided that the second company in which he has been appointed shall not be in
a business which is competing or is in conflict with the business of the first
company
■ Small shareholders’ director shall not, for a period of three years from the date on
which he ceases to hold office as a small shareholders’ director in a company, be
appointed in or be associated with such company in any other capacity, either directly
or indirectly
 Shadow Director
Executive & Non-Executive
Director
Shadow Director

■ ‘Shadow Director’ and ‘De-Facto Director’

■ a person “in accordance with whose instructions the Board is accustomed to act”
can be considered as a shadow director.
■ A Shadow director or a ‘de facto' director is not ordinarily a director under the
2013 act unless expressly stated.
 Parameters
■ The process of acting in accordance with one’s advice or instructions must be a behavioural
pattern; the Board should not be exercising any of its discretion and purely act in furtherance
of whatever is communicated by the shadow directors. (A casual advice will not make him a
shadow director)
■ When the validly appointed directors rely on these persons for their decision making
■ The existence of ultimate power to regulate the affairs of a company makes him a shadow
director.
■ The role of the person must not be in an advisory capacity. A person can be called a shadow
director only if he is assigned a decision making role. Advice tendered by a person in a
professional appointed by the company for that purpose shall be excluded.
■ Whether Companies can act as shadow director for another company?
Companies cannot be directors of another company, but they can be considered as shadow
directors. Shadow directors advise the company without being appointed to the board of
directors.
Executive and Non-Executive Director
■ Board of directors may comprise of both executive and non-executive directors.
■ Executive Director- responsible for managing different business operations undertaken by the
company. (Whole-time director and Managing Director are covered under this category)- -----
Management responsibilities.
■ Non- Executive Director- such directors participate in board meetings in discussion relating to
framing of policies for the efficient management of the company.(Professional directors are
covered under this category).----Guardian- safeguard the company's interest.
■ Non-executive directors are not as active as executive directors of the company.
■ Executive Directors- These directors are actively involved in the daily operations and
management of the company.
■ Non-executive Directors- is a member of a company's board of directors who does not engage in
the day-to-day management of the company. Instead, they provide independent oversight,
strategic guidance, and governance support.
Appointment of Director- Section 152

First Director
Rotational and Non-rotational director
First Director- 152(1)

■ Unless the articles provide, subscribers of the memorandum, who are individuals, shall
be deemed to be the first Directors of the Company until the Directors are duly
appointed.
■ In case of a One Person Company, an individual being member shall be deemed to be
its first Director until the Director(s) are duly appointed by the member
Subsequent Directors & other requirements of
appointment
■ Every Director shall be appointed by the Company in the General meeting
■ Every proposed Director shall have DIN.
■ Every proposed Director shall furnish DIN and a declaration that he is not disqualified to
become a Director
■ Proposed Director shall give his consent to hold the office as director and such consent be
filed with the Registrar within 30 days of his appointment
■ In the case of appointment of an independent director, an explanatory statement shall
include a statement that in the opinion of the Board, he fulfils the conditions specified in
this Act for such an appointment
 Retirement of Director by Rotation- Rotational
Director
■ Rotational Director- automatically retires and then seek re-election. Non-Rotational
Directors may have fixed term or may be permanent.
■ Unless the articles otherwise provide, atleast two-third of total number of Directors of a
Public Company shall be persons whose period of office shall be liable to determination
by retirement of Directors by rotation and shall be appointed in general meeting
■ Subject to the articles of the Company, remaining Directors shall also be appointed by
Company in general meeting
■ At first AGM of a Public Company held next after the date of general meeting at which
the first directors are appointed and at every subsequent AGM, atleast one-third of such
directors (whose office is liable for retirement by rotation) shall retire from office
■ Retiring Directors shall be those who have been longest in the office since their last
appointment but as between persons who became directors on the same day, be
determined by lot subject to any agreement among themselves
 Re-appointment of Rotational Director
■ At Annual General Meeting, the Company may fill up the vacancy by appointing the retiring
directors or some other person
■ If vacancy of retiring Directors is not filled-up and meeting has not expressly resolved, then
meeting shall adjourned till same day (which is not a public holiday) in next week and at same
time and place and in case of national holiday, till the next succeeding day which is not a holiday,
at the same time and place.
■ If vacancy is not filled up in adjourned meeting also, then retiring director shall be deemed to
have been re-appointed, unless in following cases:
➢ If at that meeting or at the previous meeting, resolution for re-appointment has been put to the
meeting and lost
➢ If retiring director expressed his unwillingness to be so re-appointed by way of written notice
➢ If he is disqualified for appointment
➢ If resolution is required for his re-appointment by virtue of any provision of this Act
➢ If section 162 is applicable to the case
Board of Director – Section 149
■ A team of directors collectively known as the board of directors is the highest
controlling and decision-making authority in the company
■ The board has fudiciary relationship with the company, which is essentially a
position of trust.
■ The prime duty of the board is to oversee the governance of company and ensure that
management serves and protect the long-term interest of all stakeholders.
■ The composition of board has a significant bearing on corporate governance.
■ Every company is required to constitute a board of director. Which shall consist of
individuals only.
– Any other person like firm, body, corporate, or an association cannot be
appointed to the board.
Board of Directors – Section 149
Minimum Maximum-15
May appoint more
Number Of after passing special
Directors resolution.

Public Private One Person

Company Company Company

Three Two One

 Resident Director

■ Every company shall at least one Director who has stayed in India for 182 days
during the financial year.
 Women Director
At least 1 woman Director, Rule 3 –
Companies (Appointment and
Qualification of Directors) Rule, 2014
• Listed Company
• Every Public Company
• Paid-up share capital of one
hundred crore rupees or more
• Turnover of Three Hundred Crore
Rupees or More
■ Any intermittent vacancy shall be filled by the Board at the earliest but not later than
immediate next Board meeting or 3 months from the date of such vacancy, whichever
is later.
■ The paid up share capital or turnover as on the last date of latest audited financial
statements shall be taken into account
■ Independent Director- Public company are required to appoint independent director on
their board to boost level of corporate governance.
■ Independent director- means an independent director referred to in sub-section (6) of
section 149
Independent Director
WHO IS INDEPENDENT
DIRECTOR?
 ■ Independent director
– Every listed company should have at least one-third (1/3) of its total directors
as independent director.
– Non-listed companies should have at least two (2) independent directors if:

Paid-up capital 10 crore or more

Annual turnover 100 crore or more

Aggregate outstanding debt 50 crore or more

✓ In case a company covered under this rule is required to appoint a higher number of independent directors due to
composition of its audit committee, such higher number of independent directors shall be applicable to it.
✓ The paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as
existing on the last date of latest audited financial statements shall be taken into account
✓ Where a public company ceases to fulfill any of three above conditions for three consecutive years, it shall not be
required to comply with these provisions until such time as it meets any of such conditions
 Eligibility of Independent Director Section 149(6)
Director other than Managing Director, Nominee Director, Whole-time Director:
1. Person of integrity or possessing relevant expertise and experience
2. Who is not - a promoter -related to the promoter or director in the company
3. who has or had no pecuniary relationship, other than remuneration as such director or having
transaction not exceeding 10% of his total income or such amount as may be prescribed, with the
company, during the two immediately preceding and current financial years.
4. None of whose relatives during two immediately preceding financial years or during the current
financial year with the company, its holding, subsidiary or associate company or Promoter/ Director
of the company:
– Is holding any Security/ Interest, Exceeding 50 lakh Rs/ 2% of the paid-up capital
– Is Indebted to the company.
– Has given a guarantee or provided any security in connection with indebtedness of any third
person.
– Any other pecuniary relationship of Transaction amounting to 2% or more of its gross Turnover
or total income
 Conti..
5. Who neither himself nor his relative
- during three immediately preceding financial years, is or has not been holding the position of KMP or
been an employee
- is or has not been an employee or proprietor or a partner, in any of the three immediately preceding
financial years, is proposed to be appointed, of
* Auditor’s firm
* Company secretaries in practice
* Cost Auditors of the company
* Legal or a consulting firm that has or had any transaction amounting to 10% or more of
the gross turnover of such firm
- Who or his relative does not hold together 2% or more of the total voting power of the company
- is not a Chief Executive or director of any Non- Profit Organization that:
* receives 25% or more of its receipts from the company, any of its promoters, directors or its
its holding, subsidiary or associate company or
* holds at least two percent of total voting power of the company
6. Who possess skills, experience and knowledge in one or more fields of finance, law, management, sales ,
marketing, administration, research, corporate governance, technical operations or other disciplines related
to the company’s business- Rule 5
Conti…
■ Declaration: Every Independent Director shall, at the first Board Meeting in which he participates as a Director and
thereafter at the first meeting of the Board in every financial year or whenever there is any change in the
circumstances, give a declaration that he meets the criteria of independence
■ Term: An Independent Director shall hold office for five consecutive years and shall be eligible for re-appointment on
passing of a special resolution and disclosure of such appointment in Board’s report
■ An Independent Director may hold office for just two consecutive terms at a time and thereafter after a time span of
three years, he may resume the position as Independent Director. During said period of three years, an Independent
Director shall not be appointed in or be associated with the Company in any other capacity, either directly or
indirectly
■ Remuneration: An Independent Director shall not be entitled to any stock option and may receive remuneration by
way of fee, reimbursement of expenses for participation in the Board and profit related commission, as may be
approved by members.
■ Liability: An Independent Director and a non-executive Director (not being promoter or KMP) shall be held liable
only of such acts by a company which had occurred with his knowledge and consent or connivance or where he had
not acted diligently
■ Retirement by Rotation: Provisions related to retirement of directors by rotation shall not be applicable to
appointment of Independent Director
■ Code of Conduct: The Company and the Independent Director shall abide by the provisions of Schedule IV.
 Manner of selection of Independent Directors and
maintenance of databank of Independent Directors:
Section 150, Rule 6
▪ Selection of independent director may be made out of data bank maintained by any body, institute
or association, as may by notified by the Central Government. Any person who desires to get his
name in data bank of independent directors shall make application to the agency.
▪ Data bank contains the names, addresses and qualification of persons who are eligible and willing
to act as independent director.
▪ Responsibility of exercising due diligence before selecting a person from the data as an
independent director shall lie with the company. Appointment shall be approved by company in
general meeting and the explanatory statement annexed to the notice shall indicate the
justification for choosing the appointee as independent director
▪ Data bank shall be placed on website of Ministry of Corporate Affairs
DUTIES OF DIRECTOR – SECTION 166
 Other Duties:

Attend Attend Board Meetings and Participate in discussions and decision-making.

Disclose Disclose interests in contracts/ arrangements with the company.

Maintain Maintain Confidentiality of company information

Prevent Prevent insider trading and fraud.

File Various Document with registrar

Functions of the Board: Power and
Responsibility
Fiduciary Responsibilities

■ The Board and its members (i.e., Directors) are expected to act in good faith and best
interest of company and ensure that the decisions enhance stakeholders value.
General Powers of the Board
■ The Board of Directors is entrusted with various powers and responsibilities under Section 179(3)
of the Act. Some key functions include:
•⁠ ⁠Making calls on shareholders for unpaid share money;
•⁠ ⁠Authorizing buy-back of securities;
•⁠ ⁠Issuing securities, including debentures;
•⁠ ⁠Borrowing money;
•⁠ ⁠Investing company funds;
•⁠ ⁠Granting loans or giving guarantees;
•⁠ ⁠Approving financial statements and the Board's report;
•⁠ ⁠Diversifying the business;
•⁠ ⁠Approving amalgamation, merger, or recon-struction;
•⁠ ⁠Taking over a company or acquiring a substantial stake in another company;
•⁠ ⁠Any other matter as may be prescribed;
Statutory Duties
■ Prepare financial statements - The board must prepare the company's annual financial
statements and include a director's report on the company's performance.
■ Duty of Directors - As mentioned above.
■ Other Duties -
– Ensure compliance with the Companies Act and other applicable laws.
– Ensure proper financial reporting and maintenance of accounts.
– Appoint key managerial personnel.
– Constitute mandatory committees like Audit Committee, Nomination &
Remuneration Committee etc. as applicable.
– Develop and implement risk management policies.
– Evaluate performance of the board, its committees and individual directors.
Board Committees & Functions
■ The Board appoints various committees to assist it in discharging its
responsibilities.
■ The Board may constitute new committees or dissolve any existing
committee as it deems necessary for the discharge of its responsibilities.
Committees are usually formed as a means of improving board effectiveness
and efficiency, in areas where more focused, specialised and technical
discussions are required. However, the Board of Directors are ultimately
responsible for the acts of the committee.
■ Committees can be categorised into: Statutory and Non-statutory
Committees.
■ Committees are sub-set of BOD as derive their authority from the power
delegated by the board.
■ Functions of Board Committee: Governance, Coordination, research &
recommendation.
Board Committees

■ Mandatory
– Audit Committee
– Nomination and Remuneration Committee
– Stakeholder Relationship Committee
– CSR Committee
■ Non-Mandatory
– Corporate Governance Committee
– Regulatory, Compliance & Government Affairs Committee
– Safety, Health
Audit Committee
Applicability Every listed company and those public companies meeting the
requirements prescribed by the Rules.

According to Companies (Meeting of Board and its Powers) Rules, 2014,

the provisions of section 177 are applicable to public companies having as
per last audited balance sheet:
(i) a paid-up capital of 10 Crores or more;
(i) turnover of 100 Crores or more; or
(ii) Aggregate Outstanding loan or borrowing or debenture or deposit
exceeding 50 crore or more

Composition • Minimum three Directors with Independent Directors forming a majority.

• Exemption - For a section 8 company, Audit Committee shall not be
required to have majority of the members in the committee to be
independent Directors.
• Members of the Audit Committee should have basic knowledge of
finance and accounts.
Terms of The Board of Directors shall specify terms of reference in writing for the Audit Committee.
reference/Function These may include:
s
1. Issues related to statutory auditor and his work such as—
• recommendations for his appointment, remuneration and his independence
• to examine financial statements and auditor's report

2. Related party transactions

• approval and modification, if any, of related party trans-actions.

3. Internal controls
• evaluation of internal financial controls and risk management systems.

4. Important financial issues

• scrutinizing inter-corporate loans and investments
• undertaking valuation of undertakings or assets of the company, if necessary
• monitoring the end use of funds raised through public offers.
Powers The Audit Committee shall have powers, which may include the following:
• To investigate any matter within its terms of reference.
• To call upon the auditors for their comments about issues such as internal control
system and scope of audit.
• To obtain outside legal advice.
• Right of access to information contained in records of the company.

Number of Fixed by the board at the time of creation of the committee or it may be decided by the
Meeting committee
Nomination & Remuneration Committee
Applicability Every listed company and those public companies meeting the
requirements prescribed by the Rules.

Exemption – Section 8 Companies are not covered under

section 178
Composition • Three or more Non-Executive Directors (NED), out of which
at least half shall be independent Directors.
• The Chairperson of the company can only be its member
and cannot chair the committee.

functions Functions may include:

• To identify persons who are qualified to become Directors
and key managerial personnel.
• To recommend their appointment/removal to the Board.
• To evaluate the performance of every director.
• To recommend to the Board remuneration policy for
Directors and key managerial personnel.
Powers The Committee shall have powers, which may include the following:
• To investigate any matter within its terms of reference.
• Right of access to information contained in records of the
company.

Number of Fixed by the board at the time of creation of the committee or it may
Meeting be decided by the committee
Stakeholder Relationship Committee
Applicability Every company may have more than one thousand
shareholders, debenture-holders, deposit-holders and any
other security holders at any time during a financial year.

Exemption - Section 8 companies are not covered under

section 178.
Composition
Composition • The Chairperson of the Committee shall be a non-executive
director.
• The Board may decide on other members.

functions To consider and resolve the grievances of security holders of

the Company.

Meetings Fixed by the Board at the time of creation of the Committee or

it may be decided by the Committee.
CSR Committee
Applicability The formation of a CSR Committee is mandatory for
companies that meet any of the following financial thresholds
in the preceding financial year:

• Net worth of 500 crore or more, or

• Turnover of 1,000 crore or more, or
• Net profit of 5 crore or more.

Such companies are required to:

• Formulate a CSR policy,
• Spend at least 2% of their average net profit from the past
three financial years on CSR activities,
• Establish a CSR Committee to oversee CR activities and
ensure compliance with legal obligations.
Composition • Listed Companies: At least three Directors, with a minimum
of one independent director.

• Unlisted Public Companies: At least three Directors, with a

minimum of one independent director.

• Private Companies: At least two Directors (no independent

director required)

• Foreign companies: At least two persons - one as specified

under section 380(1)(d) of the Act, and another nominated
by the foreign company
Terms of Reference/ The key functions of the CSR Committee include:
Functions • Formulating and recommending the CSR policy to the Board
• To develop a long-term strategy for CSR activities that aligns
with the company's values and objective
• Recommending the amount of CSR expenditure
• Monitoring the company's CSR policy
• To evaluate the effectiveness of the projects, measure their
social impact, and provide reports to the Board
• To decide on partnerships with external agencies, including
NGOs, to execute the projects
• Formulating and recommending an annual action plan for
CSR activities.
Meetings Not specified in Act. Must meet as often as necessary to
ensure effective discharge of duties.
May depend on CSR policy and projects being implemented
Risk Management Committee
THANK YOU