ROLE OF DIRECTORS OF A COMPANY IN INDIA

WITH SPECIAL REFERENCETO INDEPENDENT

DIRECTORS - A CRITICAL ANALYSIS
Thesis Submitted to the Andhra University, Visakhapatnam
for the Award of the Degree of
Doctor of Philosophy in Law

by
G.V.P. RADHA KUMARI, LL.M.,
Assistant Professor,
Padala Rama Reddi Law College, Hyderabad.

Under the guidance of

PROF. (DR.) ANNAM SUBRAHMANYAM,
M.A., M.A., M.L., Ph.D.
Principal
Dr. B.R. Ambedkar College of Law,
Andhra University, Visakhapatnam

DR. B.R. AMBEDKAR COLLEGE OF LAW

ANDHRA UNIVERSITY, VISAKHAPATNAM
2013
1

Andhra University, Visakhapatnam

 CHAPTER - VIII
NEW INDIAN COMPANY LAW
The promulgation of the new law is a step towards globalization and is a
successful attempt to meet the changing national and international economic environment
and is progressive and futuristic duly envisaging the technological and legal
developments. The Companies Act, 2013 comes as a welcome change for investors and
other stakeholders as it promises to bring reforms in enforcement measures and mandates
increased transparency and accountability. It mainly focuses on the social welfare and
protection of the investors. It also endeavors to strengthen corporate governance and
provides for provisions to ensure ethical and vigilant activities of directors and other
professionals in the company. The Act promises to provide updated Company Law
provisions with explicit concept of Global Practices. This exhibits a sheer commitment of
the Ministry of Corporate Affairs towards introducing the fast track reforms across.
The new Companies Act will give this country a modern legislation, which will
contribute to the growth and development of the corporate sector in India. The new law
will attempt to meet the requirements of a dynamic economy and facilitate development
of a business-friendly environment in India. The new law is futuristic, sustainable and
give flexibility to corporate environment. Lot of fresh changes have been made keeping
in mind globalization, large scale corporatization of small and medium organizations.
New ideas have been incorporated into this enactment. The law prima facie is procedural
law. The new legislation will have far reaching consequences and the changes so brought
about will affect various sections including companies both listed and unlisted,
shareholders, directors, auditors and other players in the corporate milieu.743 The best
thing about the new Companies Act is that it is simple, with greater clarity of intent and
purpose. It replaces the old law with over 700 conflicting clauses with 470 clauses and all
of it in 309 pages. It will govern all listed and unlisted companies in the country.

743
IMC Conference on the Companies Act, 2013, Chief Justice of Bombay High Court, Justice Mohit
Shah on Companies Act, 2013
468

Andhra University, Visakhapatnam

 The earliest piece of legislation in India relating to companies was the Act of
1857. The next came Companies Act, 1866. After this the companies Act 1882 was
enacted and it was replaced by Indian Companies Act, 1913. Following the
recommendations of Company law committee set up in 1950, The Indian Companies Act,
1956 was enacted. The Companies Act, 1956, has been amended as many as 24 times
since 1956. The major amendment to the Companies Act, 1956, was made by enacting
the Companies Amendment Act, 1988. The next major amendment was made by the
Companies Amendment Act, 2002. Having received the assent of the President of India,
The Companies Act, 2013 which will replace the old Companies Act, 1956. The law,
though amended 25 times, is perceived to be not in sync with the new corporate world.
Hence, the new Act. As per Section 1 of the new Act, different sections of new Act will
come into force on different dates as may be decided by further notifications in the
Gazette.744
The Companies Act, 2013 contains 470 Sections and 7 Schedules. Implication of
the most of the sections is not fully clear as Rules are yet to be made effective.745 The
notable feature of the new Act is that it deleted many of the redundant provisions and
regrouped related sections at one place, strengthened existing provisions by modification,
added new definitions and brought in new concepts. The thrust of the Act was to ensure
better corporate governance, speedy disposal of amalgamations and mergers, winding up
process, prevention of frauds, provide mechanism to prevent frauds for ensuring investor
protection. It also provides about three dozen new definitions, including for terms such
as frauds, promoters, turnover, small companies. The 2013 Act delinks the procedural
aspects from the substantive law and provides greater flexibility in rule making to enable
adaptation to the changing economic and technical environment. The are several
procedural aspects that would be prescribed by the Rules to be framed by the Central
Government. The prescribed Rules are yet to be announced.
However, a modern law does not by itself become a great law, for success
depends on implementation. The object of new Companies Act is to replace the existing

744
http://www.livemint.com/Politics/9AbwwdbxYBhvyOoI8WEy5H/Companies-Bill-passed-by-Rajya-
Sabha.html
745
www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
469

Andhra University, Visakhapatnam

Companies Act, 1956 in order to achieve more transparency, accountability and promote
better Corporate Governance in the functioning of the Companies. It seems the
Government is keen to implement the new Companies Act as the earliest being
contemporary being focusing on governance, transparency, and accountability.
Some of the definitions introduced in this Act are already in usage. Now, by
defining more clarity is given. The new definitions inter alia covers, Auditing Standards,
Associate Company, Authorized Capital, Books of Accounts, Called up Capital, Charge,
Chartered Accountant, Chief Executive Officer, Chief Financial Officer, Company
Liquidator, Control, Cost Accountant, Deposit, Expert, Financial Institution, Financial
Statement, Global Depository Receipt, Independent Director, Indian Depository Receipt,
Interested Director, Issued Capital, Key Managerial Personnel, Notification, One Person
Company, Ordinary or Special Resolution, Paid up share capital, Postal Ballot, Previous
Company Law, Promoter, Public Financial Institution, Register of Companies, Related
Party, Remuneration, Serious Fraud Investigation Office, Small Company, Subscribed
Capital, Tribunal, Turnover, Unlimited Company, Voting Right, Whole Time Director.
E-governance proposed for various company processes like maintenance and
inspection of documents in electronic form, option of keeping of books of accounts in
electronic form, financial statements to be placed on company’s website, holding of
board meetings through video conferencing/other electronic mode; voting through
electronic means. For all the companies (except one person companies and small
companies) with prescribed paid up capital and turnover, whether private or public, listed
or unlisted, annual return has to be signed by a company secretary in practice.
The new Act is seen as an important step in bringing Indian company law closer
to global standards. It regulates areas ranging from incorporation to fundraising,
corporate governance, mergers, auditor rotation and investor protection. The main
highlights of the New Act are:
Absolute New Things
A new chapter has been inserted in relation to registered valuers. Valuation in
respect of any property, stock, shares, debentures, securities, goodwill, net worth or assets

470

Andhra University, Visakhapatnam

 of a company shall be valued by a person registered as a valuer.746 The concept of
"Dormant Companies" has been introduced. It is also proposed to create and maintain as
'Mediation and Conciliation Panel' for facilitating mediation and conciliation between
parties during any proceeding under the proposed Legislation before the Central
Government or Tribunal.
Financial Year
The existing Companies Act, 1956 defines the term "financial year" as "the period
in respect of which any profit and loss account of the body corporate laid before it in
AGM is made up, whether that period is a year or not." The Companies Act, 1956 also
states that the financial year of a company will normally not exceed 15 months.
However, a company can extend it to 18 months, after getting special permission from
the registrar. According to the Companies Act, 2013, the financial year of a company
will be the period ending on 31st March every year. All existing companies will need to
align their financial year with the new requirement within two years from the
commencement of the new law.
Company defined
Definition of private company has been changed. The limit on maximum number
of members increased from 50 to 200. Private company which is a subsidiary of a public
company shall be deemed to be a public company. Confusion whether such a company
can retain the provisions in the articles of private company though now a public company
removed. Associate Company is considered to be an associate company of the other, if
the other company has significant influence over such company (not being a subsidiary)
or is a joint venture company. Significant influence means control of atleast 20 per cent
of total share capital of a company or of business decisions under an agreement.
Dormant Company is a company which is formed and registered under this Act for a
future project or to hold an asset or intellectual property and has no significant accounting
transaction, such a company or an inactive company may make an application to the
Registrar for obtaining the status of a dormant company.747

746
Section 247 of the Companies Act, 2013
747
Taxmann's, Companies Act, 2013, 21st Edition, Taxmanns Publications (Pvt) Ltd.,
471

Andhra University, Visakhapatnam

 Foreign Company means any company or body corporate incorporated outside
India which, -(a) has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and (b) conducts any business activity in India in
any other manner.
Key Managerial Personnel, in relation to a company, means
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii) the Whole -time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed;

National Company Law Tribunal (NCLT)

Important change in the Companies Act, 2013(Act, 2013) for administration of
the law is introduction of National Company Law Tribunal (NCLT) and National
Company Law Appellate Tribunal (NCLAT). It is a single window for corporate justice
to remove the hurdles of multiple court jurisdictions and to speed up the adjudication of
corporate disputes. NCLT replaces the High Court, CLB. National Company Law
Tribunal is a dedicated forum to deal with company law matters including mergers,
demergers, capital reduction, etc. It will facilitate speedy disposal of cases. The
provisions relating to the NCLT and the Appellate Tribunal which have been brought into
force normally. Sections 407 to 434 seem to have obviously been brought into force to
empower the Government to recruit the President/Members of these bodies so that these
bodies can be made functional quickly. The same shall consists of Judicial and Technical
members, as Central Government may deem necessary, to exercise and discharge the
powers and functions conferred including approval of merger, corporate reorganization,
capital reduction, extension of financial year etc. Every proceeding presented before the
Tribunal shall be dealt with and disposed of within 3 months from the date of
commencement of proceeding before the tribunal.748

One Person Company

748
Section 422 of the Companies Act, 2013
472

Andhra University, Visakhapatnam

 The Companies Act, 2013 is to an extent positive for Indian start-ups. The start-
ups will be able to easily commence a business as a ‘One Person Company’ and can be
known as a private limited company which is a great move as in India most small
businesses are started by one person and run as sole proprietorship. However, the OPC is
not an Indian invention and has been in practice in some developed nations like China,
USA, and Singapore etc.749
OPC is a legitimate way to form a company with only one member. OPC can
work like proprietorship but it holds the status of company and of course enjoys the
benefits that come with it (limited liability, trust factor etc.) Some of the key aspects of a
One Person Company:
Membership and status of an OPC: According to the definition of section 2(62) of
the Act an OPC is a company which has only one person as its member. It can be said it
is a company which has only one shareholder. Section 3 further clarifies that an OPC
shall be treated as a private company for all legal purposes with only one member.
Naming of the OPC: The Companies Act, 1956 required a private limited
company to have “private limited company” (Pvt. Ltd) suffixed in the end wherever its
name appeared. Likewise the Companies Act 2013 requires that the name of the OPC
shall include ‘One Person Company’ within brackets below the name of the company
wherever the name is printed, affixed or engraved.
Nominee of the sole member: An OPC is owned and controlled by one person.750
Section 3 of the Act says, that at the time of the incorporation of an OPC the
memorandum of the OPC shall mention the name of the other person (nominee) who
shall be in-charge of the ownership and operations in case of the death or incapacity of
the original member (owner). This can only be done if prior consent is given by the other
person and such consent shall be prescribed in a written consent and shall be filled by the
registrar. There can be a possibility where the original member loses trust in the
nominated person or the nominated person is incapacitated or takes back his consent. In
such a case the nominated member may be changed by the original member. Any such
change has to be intimidated to the Registrar by the OPC within prescribed time. On the

749
http://yourstory.in/2013/08/new-company-law-starting-a-one-person-company/
750
Sec. 2 (62) of the Companies Act, 2013
473

Andhra University, Visakhapatnam

 death of the sole member, the nominee has all shares and the rights and liabilities of the
deceased person. The board of the company shall inform the nominee regarding
entitlement of such shares and rights and liabilities.
Appointment of directors: An OPC can appoint maximum 15 directors and
minimum of one director. The appointment is to be made in accordance with the articles
of the OPC. If there is no provision regarding appointment of directors then the original
member shall be deemed to the director of the company until someone else is
appointed.751
Meetings: Provisions relating to annual general meetings, general meetings, and
extraordinary general meetings are not applicable for an OPC. In an OPC the resolution
is communicated by the sole member to the company and entered into the minutes-book
and signed and dated by the member.
However, if legal compliances don’t go well, business still has the option of being
run as a sole proprietorship. At the same time, a Private Limited Company still retains its
charms.
Auditors
Appointment of first auditor in case of every company except government
company or company owned/ controlled by CG/SG/CG and SG shall be made by board
within 30 days of registration of company. If Board fails to appoint the first auditor
within given time then it shall inform to members and members shall make the
appointment of first auditor within 90 days of information at an EGM. The First Auditor
shall hold office till the conclusion of first AGM.752 No time period is mentioned for
Board to inform the members about the Non appointment of first auditor.
Appointment of first auditor shall be made by CAG within 60 days of registration
of the company. If CAG fails to appoint the first auditor within given time then Board of
such company shall appoint first auditor within 30 days. If Board fails to appoint the first
auditor within given time then it shall inform to members and members shall make the
appointment of first auditor within 60 days of information at an EGM. The First Auditor

751
Secs. 149, 152 and 173 of the Companies Act, 2013
752
Section 139(6) of the Companies Act, 2013
474

Andhra University, Visakhapatnam

 shall hold office till the conclusion of first AGM.753 No time period is mentioned for
Board to inform the members about the Non appointment of first auditor.
The amended legislation also limits the number of companies an auditor can serve
to 20 besides bringing more clarity on criminal liability of auditors. The new bill also
says the rotation of auditors will take place every five years, while an audit firm cannot
have more than two terms of five consecutive years. It also makes auditors subject to
criminal liability if they knowingly or recklessly omit certain information from their
reports. The Act contains provisions which in other jurisdictions are contained in
corporate governance codes, including the composition of the board and the formation of
audit, remuneration and nomination committees. The new framework for external
auditor appointment and rotation is contained in section 139. Listed companies are not
permitted to appoint (or reappoint) an audit firm for more than two terms of five
consecutive years.
Every Listed Company shall form Audit Committee consisting of minimum 3
directors. Whereas, Majority of directors should be independent and ability to read &
understand financial statement.754 Appointment, remuneration and term of appointment
of auditor shall be made after considering the recommendations of the Audit Committee.
Committee existing before commencement of this act shall be reconstitute within 1 year
of commencement in accordance of above mentioned provisions. LLP’s can be appointed
as auditors of company but only chartered accountant partners are authorized to act and
sign on behalf of firm.755
Duties of Auditor: The new legislation is focused on transparency and disclosure
and gives audit its due recognition. In the new Act, attempt has been made to cover each
aspect of corporate functioning under audit by prescribing various types of audits like
internal audit and secretarial audit. This not only augurs well for the stakeholders but
also throws open opportunities for professionals to utilize their skills in pursuit of their
profession.
The following are the duties of an auditor under the new Companies Act of 2013:

753
Section 139 (7) of the Act
754
Section 139(11) of the Companies Act, 2013
755
Section 141(2) of the Companies Act, 2013
475

Andhra University, Visakhapatnam

 (a) Every auditor need to comply with auditing standard.756
(b) Auditor shall report the fraud to the CG within prescribed time and manner and the
same shall not be construed as breach of duty.757
(c) If auditor fails to comply with above mentioned provisions then he shall be punishable
with fee of Rs. 100,000 Rs. 500,000.758
(d) Auditor has to attend general meeting unless exempted by the company.759
Small Company
Small company has been defined as a company other than a public company
having a paid-up share capital of which does not exceed fifty lakh rupees or such higher
amount as may be prescribed which shall not be more than Rs. 5 crore or turnover of
which does not exceed two crore rupees or such higher amount as may be prescribed not
exceeding twenty crore rupees.760
Directors
The new Companies Act will need directors to reorient themselves to vastly
enhanced governance standards. In the current turbulent times, corporate take many
difficult decisions some of which come back to haunt them and directors are the one
category of persons who while holding the greatest responsibility in guiding the affairs of
companies also have to bear the cross of being held accountable for misdeeds of
companies.
The Board
The Board shall consist of individuals. A public company shall have minimum
three directors and private company two. While newly introduced one man company
shall have minimum one director.761 All companies may have maximum fifteen directors.
However, a company may appoint more than fifteen directors after passing a special
resolution. Some prescribed class of companies shall have at least one woman director.

756
Section 143(9) of the Companies Act, 2013
757
Section 143 (12 & (13) of the Companies Act 2013
758
Section 143(15) of the Companies Ac,t 2013
759
Section 146 of the Companies Act, 2013
760
Section 2 (85) of the Companies Act, 2013
761
Section 149 of the Companies Act, 2013
476

Andhra University, Visakhapatnam

 Every company shall have at least one director who has stayed in India for a total
period of not less than one hundred and eighty – two days in previous calendar year. This
means all Indian and foreign nationals may be a director in Indian company if any one of
the director among them in that particular company stayed in previous calendar year in
India for more than one hundred and eighty – two days.
Every listed company shall have at least one-third of total number of directors as
Independent directors. The central government may prescribe minimum number of
independent directors in other class or classes of public companies. The Act now
requires the boards of all companies to approve respective Directors’ Responsibility
Statements, which requires the directors to take sufficient care in not only approving
suitable accounting policies, applying them while drawing up the financial statements,
maintaining adequate accounting records, but also to take due care in ensuring that proper
systems are put in place and complied with in accordance with applicable laws and
further, in the case, of listed companies, to ensure that internal financial controls are
adequate and operate effectively.762
Governance of Board
Some sections covering the Board, like general restrictions on powers as well as a
few specific restrictions on its contributory powers have been notified. Some other
sections dealing with appointment of directors including those of additional, alternate and
nominee directors as well as the right of managing or whole time directors for
compensation in the event of loss of office are covered under the notification. However
core matters concerning directors that cover their qualification/disqualification, duties,
vacation of office, and removal are not in force yet. The sections pertaining to the
appointment and remuneration of managerial personal are also yet to be enforced.

Directorships
Maximum number of directors has been increased from twelve (12) to fifteen (15)
directors. Further no Central Government approval is required to increase the maximum

762
Section 134 (5) of the Companies Act, 2013
477

Andhra University, Visakhapatnam

 no. of directors beyond fifteen (15). Shareholders of companies may do so by passing a
special resolution. A person can hold directorship of up to 20 companies, of which not
more than 10 can be public companies.763 If a person accepts an appointment as a director
in contravention, he shall be punishable with fine which shall not be less than five
thousand rupees but which may extend to twenty-five thousand rupees for every day after
the first during which the contravention continues.
Appointment of Directors
If different person are not named as first director in articles of the company,
individual subscribers shall be deemed to be first directors. Every director shall be
appointed in general meeting as a general rule. Director identification number (DIN)
shall be a precondition for appointment as director. Every director after appointment
shall furnish a declaration that he is not disqualified to become a director under this
Act.764
A person appointed as director shall not act as director unless he gives his consent
to hold office of director and such consent has been filed with the registrar within thirty
days of his appointment. This means appointment as director and his taking charge of
office of director shall now be a different thing. Director shall take charge into office only
after giving his consent and filing his consent with registrar. It means an appointed
director will take charge after filing his consent with registrar. This will effectively also
bar a director from receiving salary from date of appointment. His salary should logically
be effective from the date of his taking charge into office of director. Separate motion
should move for the appointment of each director as per section 162. A motion for
approving a person for appointment or for nomination a person for appointment shall also
be treated as motion for appointment.

Retirement by rotation
Articles of a company may provide that all directors of the company shall be
retiring by rotation. Even where articles of a company do not provide this, not less than

763
Section 165 of the Companies Act, 2013
764
Section 152 of the Companies Act, 2013
478

Andhra University, Visakhapatnam

 two – thirds of total number of directors of a public company shall be liable to be retired
by rotation and be appointed by company in general meeting.765
This sub – section put a condition in an earlier statement of this section made in
sub – section (2) where a general rule was enacted that every director shall be appointed
in general meeting. Here, this sub – section effectively clarify that in public company
some directors, whose number shall not be more than one – thirds of total number of
directors may be appointed otherwise that appointment in general meeting. However,
clause (b) of this sub – section further clarifies that number and manner of appointment
of these directors shall be prescribed in Articles of the company. This number of two –
thirds shall be a number nearest to two – thirds, where it is a fraction of a number.
The directors to retire by rotation at every annual general meeting shall be those
who have been longest in office since their last appointment, but as between persons who
became directors on the same day, those who are to retire shall, in default of and subject
to any agreement among themselves, be determined by lot. For the purpose of this sub –
section, total number of directors shall not include independent directors.
Right of Persons to Stand for Directorship
A person other than retiring director is eligible for appointment to the office of a
director at any general meeting, if he himself or some member intending to propose him
as a director has not less than fourteen days before the annual general meeting left a
notice in writing under his signature proposing his candidature as director with a deposit
of Rs one lakh.766 This deposit shall be refunded to him or the member if he gets elected
as director or gets more than twenty five percent of total valid votes cast either on show
of hand or on poll on such resolution. The company shall inform its members of such
candidature in prescribed manner.
Option to adopt principle of proportionate representation
The articles of a company may provide for the appointment of not less than two-
thirds of the total number of the directors of a company in accordance with the principle
of proportional representation, whether by the single transferable vote or by a system of
cumulative voting or otherwise and such appointments may be made once in every three

765
Sub Section 6 of Section 152
766
Section 160 of the Companies Act, 2013
479

Andhra University, Visakhapatnam

 years and casual vacancies of such directors shall be filled as provided in sub-section (4)
of section 161.767
Disqualification of Directors
Section 164 of the new Act bracketed disqualification in three different classes;
primary disqualifications, disqualification due to corporate in actions, and additional
disqualifications.
Primary disqualifications:768 A person shall not be eligible for appointment as a
director of a company, if —
(a) he is of unsound mind and stands so declared by a competent court;
(b) he is an un-discharged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a court of any offence, whether involving moral
turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than
six months and a period of five years has not elapsed from the date of expiry of the
sentence. If a person has been convicted of any offence and sentenced in respect thereof
to imprisonment for a period of seven years or more, he shall not be eligible to be
appointed as a director in any company;
(e) an order disqualifying him for appointment as a director has been passed by a
court or Tribunal and the order is in force;
(f) he has not paid any calls in respect of any shares of the company held by him,
whether alone or jointly with others, and six months have elapsed from the last day fixed
for the payment of the call;
(g) he has been convicted of the offence dealing with related party transactions
under section 188 at any time during the last preceding five years; or
(h) he has not been allotted a director identification number.
The disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall not
take effect—
(i) for thirty days from the date of conviction or order of disqualification;

767
Section 163 of the Companies Act, 2013
768
Section 164(2) of the Companies Act, 2013
480

Andhra University, Visakhapatnam

 (ii) where an appeal or petition is preferred within thirty days as aforesaid against
the conviction resulting in sentence or order, until expiry of seven days from the date on
which such appeal or petition is disposed off; or
(iii) where any further appeal or petition is preferred against order or sentence
within seven days, until such further appeal or petition is disposed off.
Disqualification due to corporate inaction :769 No person who is or has been a
director of a company which—
(a) has not filed financial statements or annual returns for any continuous period
of three financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or to
redeem any debentures on the due date or pay interest due thereon or pay any dividend
declared and such failure to pay or redeem continues for one year or more, shall be
eligible to be re-appointed as a director of that company or appointed in other company
for a period of five years from the date on which the said company fails to do so.
A private company has power to provide any additional disqualification.

Duties of Directors
The New Act has codified the duties of directors, including, the duty to act in
good faith, avoid any direct or indirect conflict of interests with the company and to
exercise due diligence and reasonable care in decision-making. While directors being in
a fiduciary role vis-à-vis their companies and being required to act with due care and
diligence is well recognised in India, the Act breaks new ground as Section 166 now
provides for specific duties for every director. These include requirements for every
director to act in good faith, with due care and diligence and with independent judgment
in discharge of his duties. The following are the duties of Directors under the Companies
Act, 2013:770
• A director of a company shall act in accordance with the articles of the company.

769
Section 164(2) of the Companies Act, 2013
770
Section 166 of the Companies Act, 2013
481

Andhra University, Visakhapatnam

• A director of a company shall act in good faith to promote the objects of the company for
the benefit of its members as a whole, and in the best interests of the company, its
employees, the shareholders, the community and for the protection of environment.
• A director of a company shall exercise his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment.
• A director of a company shall not involve in a situation in which he may have a direct or
indirect interest that conflicts, or possibly may conflict, with the interest of the company.
• A director of a company shall not make or attempt to make any undue gain or advantage
either to himself or to his relatives, partners, or associates and if such director is found
guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to
the company.
• A director of a company shall not assign his office and any assignment so made shall be
void.

If a director of the company contravenes the provisions of this section such

director shall be punishable with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees.771

Powers of Board
In addition to existing powers under 1956 Act, following powers are added:
• to approve financial statement and the BOD's report;
• to diversify the business of the company;
• to approve amalgamation, merger or reconstruction;
• to take over a company or acquire a controlling or substantial stake in another
company;
• to approve related party transactions
• to fill-up the casual vacancy of KMP
• any other matter which may be prescribed.

771
Section 166 of the Companies Act, 2013
482

Andhra University, Visakhapatnam

 Restriction on Board of Directors to exercise specified powers with shareholders
approval at general meeting is extended to private companies. Shareholders' approval is
to be obtained by passing special resolution. The list of powers to be exercised at board
meeting is widened.
Vacation of office of director
The office of a director shall become vacant in case—
(a) he incurs any of the disqualifications specified in section 164;
(b) he absents himself from all the meetings of the Board of Directors held during
a period of twelve months with or without seeking leave of absence of the Board;
(c) he acts in contravention of the provisions of section 184 on entering into
contracts or arrangements in which he is directly or indirectly interested;
(d) he fails to disclose his interest in any contract or arrangement in which he is
directly or indirectly interested, in contravention of the provisions of section 184;
(e) he becomes disqualified by an order of a court or the Tribunal;
(f) he is convicted by a court of any offence, whether involving moral turpitude or
otherwise and sentenced in respect thereof to imprisonment for not less than six months.
The office shall be vacated by the director even if he has filed an appeal against the
order of such court;
(g) he is removed in pursuance of the provisions of this Act;
(h) he, having been appointed a director by virtue of his holding any office or
other employment in the holding, subsidiary or associate company, ceases to hold such
office or other employment in that company.772
Earlier, a director may be removed when he absent from three consecutive
meetings without leave of absence. The leave of absence is a matter of routine, whether
asked or not. Now, routine leave of absence is no relation with continuation of
directorship. Every meeting attained by director starts a new period of twelve month
under this provision. If a person, functions as a director even when he knows that the
office of director held by him has become vacant on account of any of the
disqualifications specified in subsection (1), he shall be punishable with imprisonment for

772
Section 167 of the Companies Act, 2013
483

Andhra University, Visakhapatnam

 a term which may extend to one year or with fine which shall not be less than one lakh
rupees but which may extend to five lakh rupees, or with both.
It may be presumed that where a director “do not know his vacation”, he may
function as a director without attracting any punishment until it “come to know” to him.
Where all the directors of a company vacate their offices under any of the
disqualifications specified in sub-section (1), the promoter or, in his absence, the Central
Government shall appoint the required number of directors who shall hold office till the
directors are appointed by the company in the general meeting. Here, promoters have
power to appoint a director in certain circumstances. However, this is unusual for Indian
companies where promoter is not director.
A private company may, by its articles, give any other ground for the vacation of
the office of a director in addition to those specified in sub-section (1).
Resignation of Director
A director may resign from his office by giving a notice in writing to the company
and the Board shall on receipt of such notice take note of the same and the company shall
intimate the Registrar in such manner, within such time and in such form as may be
prescribed and shall also place the fact of such resignation in the report of directors laid
in the immediately following general meeting by the company. A director shall also send
a copy of his resignation along with detailed reasons for the resignation to the Registrar
within thirty days of resignation in such manner as may be prescribed. There is no need
for the acceptance by the board but it will take note of resignation.773 The
resignation of a director shall take effect from the date on which the notice is received by
the company or the date, if any, specified by the director in the notice, whichever is later
the director who has resigned shall be liable even after his resignation for the offences
which occurred during his tenure.
Where all the directors of a company resign from their offices, or vacate their
offices under section 167, the promoter or, in his absence, the Central Government shall
appoint the required number of directors who shall hold office till the directors are
appointed by the company in general meeting.

773
Section 168 of the Companies Act, 2013
484

Andhra University, Visakhapatnam

 Removal of Director
A company may, by ordinary resolution, remove a director, not being a director
appointed by the Tribunal under section 242, before the expiry of the period of his office
after giving him a reasonable opportunity of being heard. The provision relating to
removal shall not apply where the company has availed itself of the option to appoint not
less than two – thirds of the total number of directors according to the principle of
proportional representation.774
A special notice shall be required of any resolution, to remove a director, or to
appoint somebody in place of a director so removed. On receipt of notice of a resolution
to remove a director, the company shall immediately send a copy thereof to the director
concerned, and the director, whether or not he is a member of the company, shall be
entitled to be heard on the resolution at the meeting.
The director concerned may make representation in writing to the company and
requests its notification to members of the company. The company shall, if the time
permits it to do so,— (a) in any notice of the resolution given to members of the
company, state the fact of the representation having been made; and (b) send a copy of
the representation to every member of the company to whom notice of the meeting is
sent. If, a copy of the representation is not sent as aforesaid due to insufficient time or for
the company’s default, the director may without prejudice to his right to be heard orally
require that the representation shall be read out at the meeting.
The copy of the representation need not be sent out and the representation need
not be read out at the meeting if, on the application either of the company or of any other
person who claims to be aggrieved, the Tribunal is satisfied that the rights conferred by
this sub-section are being abused to secure needless publicity for defamatory matter; and
the Tribunal may order the company’s costs on the application to be paid in whole or in
part by the director inspite of that he is not a party to it.
A vacancy created by the removal of a director under this section may, if he had
been appointed by the company in general meeting or by the Board, be filled by the
appointment of another director in his place at the meeting at which he is removed,

774
Section 169 of the Companies Act, 2013
485

Andhra University, Visakhapatnam

 provided special notice of the intended appointment has been given. A director so
appointed shall hold office till the date up to which his predecessor would have held
office if he had not been removed. If the vacancy is not filled, it may be filled as a casual
vacancy. The director who was removed from office shall not be re-appointed as a
director by the Board of Directors.
Good directors are keys for success of any business (doing business responsibly –
CSR) and good governance. Governance issue is in focus.
Meeting of Board and its Powers
A notice of not less than 7 days in writing is required to call a board meeting. The
notice of meeting to be given to all directors, whether he is in India or outside India by
hand delivery post or electronic means. Certain powers which earlier can be exercised by
the Board with the approval of general meeting by way of ordinary resolution under
section 293 of the Companies Act 1956, shall now to be passed by special resolution.
Every Listed Company and such other company as may be prescribed shall have an Audit
Committee. The central government permission under section 295 and section 372A of
Companies Act, 1956 is dispensed with. Following committees of the Board made
mandatory for listed and prescribed classes of companies like Audit committee,
Stakeholder relationship committee, Nomination and Remuneration committee and
Corporate Social Responsibility committee.
Notice of Board Meeting
At least seven days' notice is required to be given for a Board meeting. The
notice may be sent by electronic means to every director at his address registered with the
company.775 A Board meeting may be called at shorter notice subject to the condition
that at least one independent director, if any, shall be present at the meeting. However, in
the absence of any independent director from such a meeting, the decisions taken at such
meeting shall be final only on ratification thereof by at least one independent director.776
Participation in Board Meetings

775
Section 173(3) of the Companies Act, 2013
776
Section 173(3) of the Companies Act, 2013
486

Andhra University, Visakhapatnam

 Directors are permitted to participate both in person or through video
777
conferencing and other audio-visual modes. Meetings are to be recorded and stored.
The meeting of the Board may be called at shorter notice to transact urgent business
where at least one independent director, if any, shall be present. Directors participating
through Video-conferencing/audio-visual means to be counted for quorum.778
Women Directors
The new Act stipulates at least one woman director’s appointment on the Board of
a company. This is a step in the right direction. The world over, many women
professionals have succeeded in eliminating the invisible glass ceiling — and Indian
women are not far behind. Women constitute 24 per cent of the Indian workforce. The
1980s and 90s witnessed increasing number of women enrolling in engineering and
management institutions in India. Many of these graduates find employment in software,
banking, consulting, telecom, hospitality, even entertainment. In some B-schools, women
outnumber men in class strength.
Today, we have women CEOs in banking, IT, media and hospitality industries —
and yet this is more the exception than the rule. The number of women reaching top
management positions is still low. Women constitute only 14 per cent of senior
management positions in India, against the global average of 24 per cent. This number
falls to a paltry 5 per cent when it comes to top management or board positions.779
Research studies indicate a more representative Board enhances governance, ethical
behaviour and shareholder value. There are valid arguments for and against quotas for
women. “I don’t like quotas, but I like what quotas do,” remarked Viviane Reding, the
European Union’s justice commissioner in an interview to The Economist on quotas for
women in the European boards.
Though not a member of the EU, Norway is one of the first countries to have a
quota for women directors; now, women occupy a third of the Board positions. Italy and
Belgium mandate a minimum of one-third representation. France has a law which
reserves 20 per cent of the board seats by 2014 and 40 per cent by 2017. Compared to

777
Section 173 of the Act
778
Section 174 of the Indian Companies Act, 2013
779
http://www.thehindubusinessline.com/opinion/companies-bill-sets-global-benchmarks/article5049312.ece
487

Andhra University, Visakhapatnam

 the stiff quotas in the Europe, the norm proposed in India is a modest, yet important,
beginning.
As we witness declining governance standards across various strata of the society,
these new provisions of the Act are an extremely welcome development for enhancing
corporate governance. It leads one to conclude that going forward directors need to
reorient themselves to the vastly enhanced governance standards being introduced
through the Act, be well informed and conduct themselves with care and diligence, as
they could well be required to demonstrate that they acted in a bonafide manner and in
the interest of the company. Where a director’s conduct does not measure up to the new
order, the Act has several penal provisions (including enhanced fines) to address such
deviant conduct. Hopefully these should provide more bite through effective
implementation of the new Act.
Resident Director
One of the directors in a company shall be a person who has stayed in India for 182 days
or more in the previous calender year.
Small Shareholder’s Director
A listed company may appoint one director elected by small shareholders. By
way of an explanation, it is clarified that members with a holding shares having a
nominal value of nor more than Rs. 20,000 or such sum as may be prescribed. The
selection procedure will be prescribed.780 Rules recently released clarify that a listed
company may suo motu or on the application of 500 small shareholders or 1/10 of total
number of shareholder whichever is lower, may appoint a small shareholders director.
The procedure for election of small shareholders director i.e. notice, declaration, and
consent of director are dealt with. The notable feature is that he shall be considered as an
independent director with a tenure of 3 years. While disqualifications are spelt out, it is
also stipulated that he cannot hold the directorship representing more than 2 companies.
Corporate Social Responsibility
The Companies Act, 2013 requires companies of a certain size to spend at least
two percent of their average net profits in the last three years towards Corporate Social

780
Sec. 151 of the new Companies Act, 2013
488

Andhra University, Visakhapatnam

 Responsibility (CSR) activities in pursuit of their corporate social responsibility
policy.781 This has been described as a mandatory requirement. However, section 135
provides that if the required amount is not spent then the directors are required to disclose
their reasons for not doing so. Otherwise, they would face action, including penalty. The
new law would require companies that meet certain set of criteria, to spend at least two
percent of their average profits The Bill allows companies the freedom to choose areas of
work for CSR and the mandate of a rotation in auditors every 5 years gives the process
added credibility.
CSR programmes by a company may also focus on integrating business models
with social and environmental priorities. For instance, a company that has set up a
vocational training centre can sell the products made by such centre. "It may be possible
to utilize manufacturing by-products for making items such as soaps," illustrates a CSR
consultant. The only caveat in this case is that the profits if any, will not be part of the
business profits of the company.782
Several companies have set up foundations that engage in CSR activities. When
the Companies Act came into being, there was apprehension that activities of the
foundation would not count towards CSR spend. Companies can now, via the foundations
set up by them engage in CSR activities. A monitoring mechanism will need to be in
place. The draft rules specify that the tax treatment of CSR spend will be in accordance
with the IT Act, and as may be notified by the CBDT. The list of activities eligible for
CSR was specified in the Schedule to the Companies Act. These include eradicating
hunger and poverty, promotion of education, women empowerment, reducing child
mortality and improving maternal health, environmental sustainability, employment
enhancing vocational skills or contributions to central or state government set up funds,
including the PM National Relief Fund.
Company Secretary
The new Act elevates the role of the company secretary to management level. In
many organisations, a company secretary is viewed as a mere record keeper who

781
Sec 135 of the Companies Act, 2013
782
http://timesofindia.indiatimes.com/business/india-business/CSR-wont-count-employee-
benefits/articleshow/22449003.cms
489

Andhra University, Visakhapatnam

mechanically interfaces with external stakeholders such as the stock exchange, Registrar
of Companies, among others. Organizational power is wielded by chartered accountants,
lawyers, cost accountants, etc. The new Bill will lead to many aspiring students taking
up company secretary ship as a career choice.
Independent Directors
An Independent Director who is sometimes known as a outside director or non-
executive director is a director of a board of directors who does not have a material or
pecuniary relationship with company or related persons, except sitting fees. Independent
directors do not own shares in the company. The subject of corporate governance leapt to
global business limelight from relative obscurity after a string of collapses of high profile
companies like Enron, WorldCom, Parmalat in Italy, Satyam in India, the multinational
newspaper group Hollinger Inc., New York Stock Exchange etc. Although there have
been a number of reforms related to corporate governance, perhaps the single most
important for the growth of independent directors was the promulgation of Clause 49 of
the Stock Exchange Listing Agreement in 2000 by SEBI. In India as of 2004, a majority
of the minimum seven directors of public companies having share capital in excess of Rs.
5 crore should be independent.
In the old Act, there is no definition of Independent Director. However one
finds parameters mentioned in Clause 49 of the listing agreement to recognise a director
as an independent director. There after the DCA (now MCA) has made many changes
under the Companies Act, 1956 like under section 292A, Section 299, Section 309,
Schedule VI and Schedule XIII in which it discussed about the requirement of
Independent Director. Now, the primary role of corporate governance is always to ensure
the independence of the board of directors (BOD) in a company. Independent directors on
the board predominantly enhance the monitoring and supervising of the management and
the promoters of a company. Thus is turning immensely helps in protecting and
safeguarding the interests of the public shareholders. The new Companies Act, 2013 on
one hand bestows independent directors with greater say in corporate governance & on
the other hand places greater demand from them. Now, the relevant provisions
concerning IDs in the new act are Section 149, 150 and Schedule IV. There are some

490

Andhra University, Visakhapatnam

 provisions under new Companies Act, 2013 which deal with the terms "independent
director".
Both the company and independent directors have to comply with the provisions
specified in Schedule IV. The essence of guidelines is that professional conduct is
expected from independent directors and they should use their skill and independence in
implementing the best corporate governance in the interests of shareholders. They are
also duty bound to evaluate the performance of non-independent directors and Board as a
whole. Similarly company is also to exercise care in selection or appointment of
independent directors and issue appointment letter, evolve a system for evaluation of
performance of independent directors. Appointment letter should spell out term,
remuneration, duties expected of the independent director. The terms and conditions
should be made available for inspection at the registered office of the company and also
be displayed on the company's website.
An independent director shall be held liable only in respect of such acts of
omission or commission by a company which had occurred with his knowledge or
connivance or for failure to exercise due diligence in such acts.783 The power to hold
separate meetings without the presence of other directors to assess the performance of
Board gives supremacy to independent directors to voice their concerns or sound alarm, if
there is any mismanagement or things go wrong. The primary features concerning
Independent directors (IDs) in the new Companies Act, 2013 are as follows-
Number of Independent Directors
The new Companies Act, 2013 requires all the listed companies to have at least
1/3rd independent directors on their board. But this provision of the Act is a slight
departure from clause 49 of the listing agreement. Clause 49 of the Listing agreement
issued by SEBI requires that at least 50% of the Board of Directors (BOD) must comprise
of Independent Directors in case the chairperson is in an executive capacity or a promoter
or related to a promoter. Now, one thing which must be noted is that the listed companies
will be required to comply with the more onerous of the two requirements, while others
can merely comply with the company law. The consequences of violation may also be

783
Section 149 (12) of the Companies Act, 2013
491

Andhra University, Visakhapatnam

different under company law and securities regulation i.e. under clause 49 of the listing
agreement.
Definition of Independence
The definition of an Independent Director has been amply broadened and
tightened. For example, if a director is a chief executive of an NGO that receives funding
from the company to a certain extent, the person would not qualify as an independent
director. Also, the new Act has added some positive attributes of independence i.e. the
candidate must be “a person of integrity and possess the relevant expertise and
experience” in the opinion of the board. This definition of independent director was
missing in Clause 49 of the listing agreement. Further, the Central Government is also
vested with the power to prescribe qualifications for Independent Directors. Also, every
Independent Director is also required to declare that he or she meets the criteria of
independence - Independence from management, Independence from Promoter Group, no
substantial shareholding and other significant relationship which may cause a conflict of
interest.
Section 2(47) deal with the definition of Independent Director. Independent
director means an independent director referred in Section 149(5) of Companies Act,
2013. Sub section 6 of 149 describes the attributes of independent director with clarity.
New Act now makes it mandatory for every listed public company to appoint at least
one-third of the total strength as independent directors. Central Government may, in case
of any class or classes of public companies prescribe the minimum number of
independent directors to be appointed. Since it will be difficult to meet this requirement,
one year time has been given to the existing companies from the effective date to fall in
line with the requirement. An Independent director in relation to a company means a
director other than a Managing director or a Whole- time director or a nominee director.
Independent directors may be selected from a data bank of eligible and willing persons
maintained by any Institute or Association as may be prescribed by Central Government.
Appointment
One of the most predominant and major criticism pertaining to the current
appointment of Independent directors in the board is that they are appointed like any

492

Andhra University, Visakhapatnam

other director. This in turn gives promoters wide influence and clout in determining the
identity of the independent directors. Even Clause 49 of the listing agreement does not
put any onerous requirement in the appointment of independent directors on the board of
listed companies. Now, the new Companies Act, 2013 has sought to remedy this. The
new act mandates the formation of ‘nomination and remuneration committee’. The
concerned committee is required to consider candidates for appointment as independent
directors and to recommend to the board. This would bring in greater fairness and
objectivity in the appointment of I.D. (Independent Director). However, the act does not
provide for greater participation of minority shareholders in the appointment of I.D.
through methods such as cumulative voting or proportionate representation. Thus, this is
only an optional method and the new act does not make it mandatory for the companies
to allow the participation of minority shareholders in the I.D. appointment. Furthermore,
the Act also contemplates the establishment of a data bank of IDs, from which persons
may be chosen by companies.
Appointment of independent directors has to be approved by members in a
General meeting and the explanatory statement annexed to the notice must indicate
justification for such appointment.784 Independent director can hold office for a term of 5
consecutive years and such term can be extended by another 5 years, if a special
resolution is passed by shareholders and disclosure to that effect is made in Directors
Report. Another relaxation given is that the same person can be considered for re-
appointment after a lapse of 3 years period from the date of cessation of directorship. An
Independent director has to compulsorily give a declaration that he meets the criteria of
independence as specified in Section 149(6) at the first board meeting held after his
appointment and subsequently at every first meeting of the financial year. If any
circumstance arises due to which he looses his independence, he must disclose to the
Board about his inability to continue.785
Tenure
In order to ensure that IDs maintain their independence and do not become too
familiar with the management and promoters, minimum tenure requirements have been

784
Section 150(1) of the Indian Companies Act, 2013
785
Schedule IV - Code for Independent Directors, in the Companies Act, 2013
493

Andhra University, Visakhapatnam

prescribed. The initial term shall be 5 years, following which further appointment of the
director would require a special resolution of the shareholders. However, the total tenure
shall not exceed 2 consecutive terms.
Remuneration
Under the new Act, independent directors are entitled only to fees for attending
the meetings of the board. They are being expressly disallowed from obtaining any stock
options in the company. Further, IDs are also entitled for fees pertaining to
reimbursement of expenses for participation in the Board & other meetings and profit
related commission as may be approved by the members of the company. But, owing to
these onerous requirements, the present provisions provide little room for companies to
attract required talent by remunerating directors for the services they provide.
An independent director is not entitled to any stock option. But he may receive
sitting fees, reimbursement of expenses incurred for attending board or other committee
meetings and commission linked to profits. The reason for denying monthly/yearly
remuneration is to preserve his independency.
Duties of Independent Directors
The following are the duties of independent directors under Companies Act, 2013:
1) undertake appropriate induction and regularly update and refresh their skills,
knowledge and familiarity with the company;
2) seek appropriate clarification or amplification of information and, where
necessary, take and follow appropriate professional advice and opinion of outside experts
at the expense of the company;
3) strive to attend all meetings of the Board of Directors and of the Board
committees of which he is a member;
4) participate constructively and actively in the committees of the Board in which
they are chairpersons or members;
5) strive to attend the general meetings of the company;
6) where they have concerns about the running of the company or a proposed
action, ensure that these are addressed by the Board and, to the extent that they are not
resolved, insist that their concerns are recorded in the minutes of the Board meeting;

494

Andhra University, Visakhapatnam

 7) keep themselves well informed about the company and the external
environment in which it operates;
8) not to unfairly obstruct the functioning of an otherwise proper Board or
committee of the Board;
9) pay sufficient attention and ensure that adequate deliberations are held before
approving related party transactions and assure themselves that the same are in the
interest of the company;
10) ascertain and ensure that the company has an adequate and functional vigil
mechanism and to ensure that the interests of a person who uses such mechanism are not
prejudicially affected on account of such use;
11) report concerns about unethical behaviour, actual or suspected fraud or
violation of the company’s code of conduct or ethics policy;
(12) acting within his authority, assist in protecting the legitimate interests of the
company, shareholders and its employees;
13) not disclose confidential information, including commercial secrets,
technologies, advertising and sales promotion plans, unpublished price sensitive
information, unless such disclosure is expressly approved by the Board or required by
law.
Roles and Functions
The role of an independent director is broadly set out in the Schedule IV of the
Companies Act, 2013. The concerned schedule contains a code that sets out the role,
functions and duties of IDs and incidental provisions relating to their appointment,
resignation and evaluation. The code lays down certain broad guidelines like upholding
ethical standards of integrity, acting objectively and most importantly devoting sufficient
time and attention for informed and balanced decision making.786 There are certain
critical functions entrusted to them – to scrutinise the performance of management and to
satisfy themselves on the integrity of financial information and robustness of financial
controls and risk management. The role of audit committee has been enhanced thereby
placing greater responsibilities on independent directors. The audit committee will now

786
Schedule IV of the Companies Act, 2013
495

Andhra University, Visakhapatnam

 have to ‘examine’ financials (currently ‘review’) and approve related party transactions
(currently they are ‘reviewed’).787
The new provisions mandate that the independent director has the duty to
scrutinize the performance of the management and ensure at all times the integrity of
financial information. Further, the independent directors have been entrusted with the
all-important responsibility of safeguarding the interests all stakeholders in the company,
especially the minority stakeholders.
The independent directors shall:
(1) help in bringing an independent judgment to bear on the Board’s deliberations
especially on issues of strategy, performance, risk management, resources, key
appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and
management;
(3) scrutinise the performance of management in meeting agreed goals and
objectives and monitor the reporting of performance;
(4) satisfy themselves on the integrity of financial information; financial controls
and the systems of risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority
shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key
managerial personnel and senior management and have a prime role in appointing and
where necessary recommend removal of executive directors, key managerial personnel
and senior management;
(8) moderate and arbitrate in the interest of the company as a whole, in situations
of conflict between management and shareholder’s interest.
Thus, by defining responsibilities and duties in a mandatory code of conduct, onus
has been placed on independent directors thereby reducing their chance of getting the
‘benefit of doubt’ in case of non compliances. This predominantly casts an important

787
Available at http://indiacorplaw.blogspot.sg/2011/12/companies-bill-2011-independent.html, last visited
18/09/2013 at 2:42 AM
496

Andhra University, Visakhapatnam

 fiduciary responsibility on Independent Directors towards investor community and other
stakeholders concerned. Discharging this responsibility, would require orientation,
knowledge and involvement. The downside of these onerous requirements is that many
potential IDs would be hesitant in taking up the new role.
Companies Act, 2013 also requires atleast one independent director in CSR
Committees and this is applicable to companies with a net profit of more than 5 crores or
net worth of more than 500 crores or turnover of more than 1000 crores. Majority of
directors in audit committees are required to be independent directors. This provision is
applicable to listed companies and those companies which are prescribed by Central
Government. One half of directors in Nomination and Remuneration Committee are
required to be independent directors . This is applicable to Listed Companies only. 788
Liability
The new ‘Act’ has sought to balance the wide nature of the obligations, functions
and duties imposed on IDs.789 The new act only seeks to restrict and limit the liability of
IDs to matters which are directly relatable to them. Section 149 (12) limits the liability of
an ID “only in respect of acts of omission or commission 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”.790 Nominee directors, despite not
being considered as ‘independent’ under the new definition, would nevertheless be
eligible for immunity, as long as they are non-executive.791
The Act, also makes a clear carve-out in respect of liability for directors who are
not actually 'hands-on', i.e. independent directors or other non-executive directors who
are not linked to the management, and thereby seeks to strengthen the role of independent
and non-executive directors.792 In such cases, the Act provides that the independent
director/non-executive director would be liable only in respect of acts of the company
which have been done with his knowledge (either through board interaction or

788
http://www.assocham.org/events/recent/event_917/Gautam-Saha.
789
Independent Directors
790
Taxmann's Companies Act, 2013, 21st Edition
791
http://thefirm.moneycontrol.com/story_page.php?more_category=by_invitation&autono=947523, last
visited on 18/9/2013 at 2:56 AM
792
Section 149 (12) of the Act
497

Andhra University, Visakhapatnam

otherwise), or where such directors acted without diligence. Understandably, there can be
no such saving for other directors who are directly involved on a day-to-day basis with
the affairs of the company. This provision would enable boards to get the benefit of truly
‘independent’ thoughts on important matters.
Independent Meetings
The concept of independent meetings of Independent Directors (IDs) has been put
in the new Companies Act, 2013. The act now requires all the IDs to meet at-least once in
a year. The meeting must be convened without the presence of the non-independent
directors and members of the management. IDs would also evaluate the performance of
the chairperson of the company. Also, the act requires the IDs to review the performance
of the non-independent directors and the Board as a whole of the company. These
measures would immensely aid in ensuring the smooth and proper functioning of the
Board of Directors (BOD) of a company. Further, the concept of independent board
meeting of IDs is already prevalent in US and UK.
All listed companies in the name of good corporate governance have been
mandated to comply with provisions relating to composition of board, audit committee,
remuneration committees, and manner of holding meetings, duties and disclosures of
remuneration to non executive directors, related party transactions with directors etc were
to be reported in the Corporate Governance report. Now many of these requirements are
made part of the New Act itself.
The Companies Act, 2013 lays down detailed "Code for Independent directors"
containing detailed guidelines for professional conduct, roles and responsibilities. The
company and independent directors are required to comply with the same. Some key
examples of guidelines are: Uphold ethical standards of integrity and probity, Act
objectively and constructively while exercising his duties, Exercise responsibilities in a
bonafide manner in the interest of the company etc,.
Establishment of vigil mechanism
Company law finally has a whistleblower protection mechanism or something like
that. Every listed company and the companies belonging to the following class or classes

498

Andhra University, Visakhapatnam

 shall establish a vigil mechanism for their directors and employees to report genuine
concerns:793
(1) Companies which accept deposits from the public; and
(2) Companies which have borrowed money from banks and public financial
institutions in excess of fifty crore rupees;
(3) Companies which are required to constitute an audit committee shall operate
the vigil mechanism through the audit committee.
If any of the members of the audit committee are conflicted in a given case, they
should recluse themselves and the others on the committee would deal with the matter on
hand. In case of other companies, the Board of directors shall nominate a director to play
the role of audit committee for the purpose of vigil mechanism to whom other directors
and employees may report their concerns. This mechanism shall provide for adequate
safeguards against victimization of employees and directors who avail of the mechanism
and also provide for direct access to the chairperson of the Audit committee or the
director nominated to play the role of audit committee, as the case may be, in exceptional
cases. Once established, the existence of the mechanism may be appropriately
communicated within the organization. In case of repeated frivolous complaints being
filed by a director or an employee, the audit committee or the director nominated to play
the role of audit committee may take suitable action against the concerned director or
employee including reprimand.
Also, auditors may need to directly report to the government, within 30 days, if
they are satisfied that material fraud is happening in the company. Further, India Inc will
also have to put the income from ongoing CSR activities into its corporate social
responsibility (CSR) fund in addition to the 2% of net profits of the preceeding three
years.
Class Action Suits
The Act provides for class action suit, which is key weapon for individual
shareholders to take collective action against errant companies. Better disclosure
requirements in financial statements and disclosure of interests of directors etc. It has also

793
sub-section (9) of section 177 of the Companies Act, 2013
499

Andhra University, Visakhapatnam

streamlined procedures relating to disclosure of transactions with parties related to
directors, promoters etc.
Perhaps the best new provision in the Companies Act is the enabling of tort action
and class action suits. If this provision had been on the statute book in 2008, Satyam’s
Indian shareholders could have filed a class action suit against the Rajus, or even the
Mahindra-run company that took over Satyam’s assets. Mahindra Satyam settled lawsuits
in the US and UK since these countries enable class action suits, but in India shareholders
were left twiddling their thumbs while foreign shareholders were paid off. This can’t
happen in future, but the moot point is whether shareholders of government-owned
companies can sue the government for squashing minority interests. It is worth recalling
the Coal India has been sued by a minority shareholder (The Children’s Investment Fund)
for following the government’s diktat to lower coal prices in 2012. There is ample scope
for class action suits against ONGC, Oil India and GAIL, which are subsidising losses in
the oil marketing companies. Class action suits have to be filed before the National
Company Law Tribunal first, but banking companies are excluded from such action.
Members, Depositors or any class of them may file an application before the tribunal for
seeking all or any of the following order:
(a) to restrain the company from committing an act which is ultra vires the articles or
memorandum of the company;
(b) to restrain the company from committing breach of any provision of the
company’s memorandum or articles;
(c) to declare a resolution altering the memorandum or articles of the company as
void if the resolution was passed by suppression of material facts or obtained by
mis-statement to the members or depositors;
(d) to restrain the company and its directors from acting on such resolution;
(e) to restrain the company from doing an act which is contrary to the provisions of
this Act or any other law for the time being in force;
(f) to restrain the company from taking action contrary to any resolution passed by
the members;

500

Andhra University, Visakhapatnam

 (g) to claim damages or compensation or demand any other suitable action from or
against the company or its directors for any fraudulent, unlawful or wrongful act
or omission or conduct or any likely act or omission or conduct on its or their
part. The auditor including audit firm of the company for any improper or
misleading statement of particulars made in his audit report or for any
fraudulent, unlawful or wrongful act or conduct or any expert or advisor or
consultant or any other person for any incorrect or misleading statement made to
the company or for any fraudulent, unlawful or wrongful act or conduct or any
likely act or conduct on his part.

(h) to seek any other remedy as the Tribunal may deem fit.
Emphasis on Investor Protection
The Act makes related party transactions a significant focus area. All related
party transactions that are not at an arms-length or not in the ordinary course of business
require approval of the Board. Further, most companies would need to get such
transactions approved by their shareholders through a special resolution where ‘related
party’ shareholders are ineligible to vote. While requiring the Board and Audit
Committee to approve related party transactions is a step in the right direction, this
requirement is likely to throw up significant challenges to determine whether transactions
are at an arms-length. Further, the requirement to exclude all ‘related party’ shareholders
from voting on the transactions may have unintended consequences since a particular
related party may not be a party to the transaction and hence would like to exercise their
corporate right to vote on such transactions. The Act also significantly expands the scope
and coverage of what constitutes a related party transaction. Similarly, provisions around
restriction on loans to directors or parties where the directors are interested have been
enhanced. Some of these restrictions, particularly those impacting loans to subsidiaries,
may have unintended adverse consequences.
Regulatory Bodies
New Regulatory Bodies under the Companies Act, 2013 are National Company
Law Tribunal, National Financial Reporting Authority and Serious Fraud Investigation
Authority.
501

Andhra University, Visakhapatnam

 Corporate Governance
Interestingly, despite the structure of Indian businesses differing significantly
from those in the UK, the foundations of the new Indian corporate governance model are
drawn from the Anglo-Saxon governance model. The investor base in the Indian
corporate market, for instance, largely consists of the company founders, their respective
family members and the government. In contrast, shareholders in UK companies are less
concentrated towards a certain group of people, are geographically dispersed and largely
held by professional investors. However, despite significant differences in the corporate
structure in the two markets, the corporate governance proposals recently published in
India are similar to those adopted in the UK. The question therefore arises as to whether
it is appropriate for a closed market to base its corporate governance model on practices
developed for and in a market fundamentally different from its own.
The Indian market regulator, the Securities and Exchange Board of India (SEBI),
recently issued a consultative paper on the "Review of Corporate Governance"
encouraging a wider debate on governance.794 The paper calls for, inter alia, the splitting
of the roles of chairman and chief executive, disclosure of the reasons for an independent
director's resignation from office, a limit on the term of appointment of independent
directors and greater involvement of institutional investors. SEBI goes on to propose
making radical changes which seek to ensure that these corporate governance proposals
are implemented in a market which is generally viewed as weak in the implementation of
rules and regulations. These changes include:
(a) the appointment of independent directors by minority shareholders,
(b) independent directors to receive compulsory training and pass examinations;
and
(c) the adoption of a principle-based approach for certain principles.
Although it is clear that the proposals stem from the Anglo-Saxon corporate
model, in some instances they go further and introduce new initiatives which recognise
the need for certain obligatory requirements and the need for training in a market that has
for centuries been based on a closed board structure and investor base.

794
http://www.mondaq.com/india/x/246876/Corporate+Governance/Corporate+Governance+In+India
502

Andhra University, Visakhapatnam

 There has been a clear move in India to develop the corporate market to attract
foreign investment. Foreign investment is slowly increasing shareholder diversity in
some companies. This in turn pushes the agenda for the introduction of a regulated and
universal corporate governance model. It appears from the recent SEBI proposals that the
adoption of a corporate governance model based on the Anglo-Saxon model will be a
useful starting point but the adoption of certain UK-based concepts such as 'comply or
explain' should be adopted cautiously given the radical nature of certain proposals and
significant effects they will have on the structure of Indian businesses. New regulatory
institutions may need to be created, existing institutions strengthened and hybrid
approaches adopted but, on the whole, the Anglo-Saxon model may well be a useful
foundation.
Loopholes in the Implementation of the New Legislation
The existing Act was self-contained and almost all processes, timelines, etc., were
specified under the existing Act itself. In contrast, the New Act does not contain
provisions dealing with processes, time lines, etc., but provide that the same will be
prescribed. It is expected that the Ministry of Corporate Affairs (MCA) will issue draft
rules (the Rules) for public consultation soon. MCA is targeting to complete the
consultation process and implement the New Act by 1st April 2014.
Another major concern is an absence of transitional provisions. A Scheme of
Restructuring typically takes a time of 3 to 6 months to complete. Therefore, any new
enactment needs to provide for transitional provisions to deal with Restructuring initiated
prior to the enactment, but which will continue and be completed post enactment. The
New Act does not provide for any transitional provisions to govern Restructuring in
progress at the time of the replacement of the existing Act with the New Act. Therefore
there is no clarity whether such process will be continued and completed under the
provisions of the existing Act or under the provisions of the New Act, and if the
restructuring is to be continued under the New Act, then how to deal with any non-
conformity, of the portion of the process completed under the existing Act, with the
provisions of the New Act.

503

Andhra University, Visakhapatnam

 The New Act proposes constitution of a National Company Law Tribunal to
replace the Company Law Board and also assume the jurisdiction of the High Court, inter
alia, as the sanctioning authority in relation to Restructuring. The proposal for this
change was already inserted in the existing Act, but this proposal never became
operational. Further, even under the New Act there is no clarity as to how long it will
take the NCLT to be constituted and become operational. This is another factor which
creates a lot of uncertainties, especially regarding Restructuring.
Another major issue arises from the 'Repeals and Savings' provisions. It is
provided that, once the New Act becomes operational, the existing Act will be repealed,
meaning that the existing Act will no longer apply. However, it is also clarified that in
spite of this repeal, until the time when the NCLT becomes operational, the provisions of
the existing Act regarding the jurisdiction, powers, authority and functions of the CLB
and the Court shall continued to operate. This raises the issue of whether the provisions
of the existing Act are to be applied only for providing jurisdiction, power etc., to the
court or whether the entire Restructuring will be governed by the provisions of the
existing Act. To be precise, until the NCLT becomes operational, the issue is whether, in
relation to Restructuring, an application to the Court should be filed under Section 391 of
the existing Act or under Section 230 of the New Act, both of which deal with
Restructuring.
The duties of directors are set out in section 166, which states that "director of a
company shall act in good faith in order to promote the objects of the company for the
benefit of its members as a whole, and in the best interests of the company, its
employees, the shareholders, the community and for the protection of environment." The
way in which this duty is expressed raises several questions. Is this a single duty or
several? Most directors always act in the best interests of the identified stakeholders? Is
this feasible where, for example, a decision may be in the best interests of the
shareholders but not the employees.
The new legislation promises to bring easy and efficient way of doing business in
India, better governance, improves levels of transparency, enhance accountability,
inculcating self compliance and making Corporate socially responsible.

504

Andhra University, Visakhapatnam

 Lastly, the Companies Act, 2013 has bestowed greater empowerment upon the
IDs to ensure that the management & affairs of a company is being run fairly and
smoothly. But, at the same time, greater accountability has also been placed upon them.
The new act empowers the IDs to actually have a definite ‘say’ in the management of a
company, which would thereby immensely strengthen the corporate governance. Now, it
is time that India put in all efforts to land worthy IDs on their board. Finally, it is
anticipated that these new provisions regarding Independent Directors would thwart any
'Satyam and Reebok akin corporate scandal, recently witnessed by the corporate world.
There is a lot to note in the new Companies Act as it brings in sweeping changes
in the way the corporate are governed in India. The 2013 Act enhances significantly the
role and responsibilities of the Board of directors by making them more accountable for
their actions while protecting shareholder interest. Also, by mandating a woman director
on the board, the intent of the 2013 Act is to improve gender diversity and increase
transparency. The 2013 Act clearly sets an example in corporate governance for other
economies to emulate.
The New Act contains some significant changes to the current company law
regime and its objective of providing greater transparency and better investor protection
are praiseworthy. The New Act, along with other recent reforms in foreign direct
investment and the recent pro-arbitration stance of the Indian judiciary, are steps in the
right direction to renew investor confidence in India. However, the devil still remains in
the detail, and the government has a lot to do in terms of framing effective rules and
regulations under the New Act. Pending enactment of such rules, it is too early to predict
the success of the New Act. It can be concluded that it’s a fantastic beginning, but, as
always, the proof of the pudding is in the eating. There is a need of effective
implementation for the success.

* * *

505

Andhra University, Visakhapatnam

 CHAPTER - IX
CONCLUSION AND SUGGESTIONS

CONCLUSION
A strong management is the backbone of any successful company. It is
management that ultimately makes the strategic decisions. We can think of management
as the captain of a ship. While not physically driving the boat, he or she directs others to
look after all the factors that ensure a safe trip. An entrepreneur with good managerial
skills can convert the disorganised resources of men, money, material and machinery into
a productive business enterprise. In a modern business, different types of skills are
required in order to effectively manage an organisation in a dynamic environment.
Managing is a dynamic and an on-going process which continues to operate so long as
there is an organised action for the achievement of group goals.795 Management is to
have the business smarts to run a company in the interest of the owners. Of course, it is
unrealistic to believe that management only thinks about the shareholders.
Most investors realize that it is important for a company to have a good
management team. The problem is that evaluating management is difficult. There are so
many aspects of the job which are intangible. It's clear that investors can't always be sure
of a company by only poring over financial statements. Fallouts such as Enron,
Worldcom and Imclone have demonstrated the importance of emphasizing the qualitative
aspects of a company. There is no magic formula for evaluating management, but there
are factors to which we should pay attention like strategy and goals, compensation, length
of tenure etc.796
In broad terms, corporate boards are guided by the bylaws set in place to oversee
and approve annual budgets, make sure there are adequate resources to run operations,
elect the chief executives and provide general oversight on behalf of shareholders and
any entity with a stake in the company. The board is also responsible for verifying the
availability of future capital-raising sources and reviewing the business practices of their
most senior leaders. The board's most important duty is keeping tabs of the company in

795
http://business.gov.in/manage_business/index.php
796
http://www.thebull.com.au/articles/a/9936-evaluating-a-company's-management.html
506

Andhra University, Visakhapatnam

all matters including performance, relative and absolute delivery of direction and the
decision to fire CEOs when needed. The board of directors is at the core of governance
in an organization. It is the body that will shape and mold the other governance
structures and practices, evaluating results and controlling effectiveness. It is the foum
where the most important and strategic questions are debated and decided on.
Company Law is very complicated and interesting. If we look at all the corporate
regulations or law, it is very clear that it focuses mainly on the interests of the
shareholders. The liability of the members is limited in limited companies and as such the
shareholders will be clueless often when their investment in the Company is not properly
managed. Basically, a company is a complicated and well regulated set-up with ultimate
motive of business expansions and the interests of shareholders.797
The provisions of Companies Act, 1956 itself dealt with the rights of the
shareholders, the responsibilities of Board, the books to be maintained by the Company,
the reports to be filed with the statutory authorities like Registrar of Companies, the
financial statements, the clear bifurcation of powers with sound logic and a mechanism
for the protection of the interests of the shareholders and frauds inside. We have a
mechanism for the enforcement of the provisions of Companies Act, 1956, but, a need
was felt for further stringent regulations and specialist enforcement agencies in view of
the market participations and the stakes involved. This is the logic behind establishment
of SEBI and various connected regulations governing listed companies including listing
agreements to be entered into with the Stock Exchanges.
The long awaited new Companies Act, 2013, after a lot of expectations and
speculations, was finally notified in the Gazette of India on August 30, 2013. The new
law, which is more comprehensive than its predecessor with 470 sections spread over 29
chapters and 7 schedules, replaces the six decade old Companies Act, 1956. The 2013
Act intends to promote self-regulation and introduces novel concepts including one-
person company, small company and dormant company. It also promotes investor
protection and transparency by including concepts of insider trading, class action suits,
creation of a National Financial Reporting Authority and establishment of Serious Fraud

797
http://indiancorporatelaws.blogspot.in/2010/01/understanding-corporate-governance.html
507

Andhra University, Visakhapatnam

Investigation Office for investigation of fraud. Further, a mammoth section 2 containing
94 definitions has been added for better clarity. There are 37 new definitions in the new
Act when compared to the 1956 legislation.798
In the first phase of implementation, Government has notified 98 sections on
September 12, 2013. There appears to be little coherency in selection of the notified
sections i.e. the basis of picking them versus others. The sections were notified in a haste
and it was unclear if these provisions will operate in addition to the corresponding
provisions of the 1956 Act. On September 18, 2013, Ministry of Corporate Affairs,
through its General circular No.16/2013 has clarified that the sections of the old Act that
correspond to the 98 provisions notified on September 12, will cease to have effect. But it
is worth noting that the Ministry has left it to the companies and their advisors to identify
these corresponding provisions, as it is not specified in the notification.
While the implementation of the Act is likely to pose significant challenges in
certain cases, all stakeholders (management, Board, independent directors, auditors,
regulators) need to use this as an opportunity to raise the level of governance within
Corporate India. Further, the regulators need to consider the genuine grievances that have
been highlighted by various stakeholders in their comments on the draft rules and ensure
that the Act, once finalized, is fair and does not result in undue hardship for genuine
business transactions.
The Company is managed by professionals called directors and they are entrusted
with certain powers to conduct the day-to-day affairs of the Company. The definition of
Director under the Act is an inclusive definition. It is not the name by which a person is
called but position he occupies and the functions and duties which he discharge that
determine whether in fact he is a Director or not. A director, by whatever title, is one
who is in practice responsible for the management of company affairs. There is no
comprehensive definition of a director in statute. The definition is not a satisfactory
definition. It only gives guidance that the term director includes any person occupying
the position of director, by whatever name called. For example, in some companies

798

http://www.mondaq.com/india/x/269316/Corporate+Commercial+Law/New+Companies+Act+2013+The+
Cat
508

Andhra University, Visakhapatnam

management may be entrusted to some other members who are not directors. As per this
definition he should be termed as director, but in fact he is not a director. The word
director includes a de facto director also. De facto director is one who acts as a director
without having been appointed. The Act is unhelpful to anyone seeking a definition of a
director. The courts will therefore look at the facts and circumstances of each situation
and not at a person's title. The definition under Section 2 (34) of the new Companies
Act, 2013 could not define a director satisfactorily because it only lays that director
means a director appointed to the Board of a company.
The Act makes no distinction between executive and non-executive directors.
The principles of good faith and honesty and duties of care and skill were developed by
the courts largely in relation to non-executive directors, since an executive director's is
subject to obligations that go beyond his basic duties as a director. Though non-
executive director is not involved in the day to day management of the company there is
no change in his duties and responsibilities. But more should be expected from the
executive directors because they have greater knowledge of the management of the
company and its affairs.
It is not easy to explain the position that a director holds in a corporate enterprise.
Companies act, 1956 is silent about legal position of directors. Various corporate law
experts have defined legal position of directors in their own words. Some of corporate
law experts define directors as agents and trustee of the company and shareholders.799 A
director is not a servant of any master. He is the controller of the company's affairs.
Director of a company is neither an employee nor a servant to the company. They are
professional people who were hired by the company to direct its affairs. However, there
is no restriction under the Act, that a director cannot be an employee to the company. A
Director is an agent of the Company for the conduct of the business of the company.
Directors of a company have fiduciary relationship with the company as well as the
shareholders when he acts as an agent or officers of a company. The director as the
Companies Act indicates, holds an extremely important position in the administration
and management of a Company. It must be noted that the director actually works in

799
http://www.indiastudychannel.com/resources/153913-Role-responsibility-functions-board-directors-
company.aspx
509

Andhra University, Visakhapatnam

different capacities at different times to ensure that the company is run in a legal and an
efficient manner. The Act places immense responsibility on the shoulders of the directors.
Directors are bound to use their fair and reasonable diligence while discharging their
duties and they shall act honestly, and with such care as may be reasonably expected
from, having regard to their knowledge and experience. The Companies Act has also
seeks to introduce an element of objectivity in the office of a director, for this purpose the
act also introduced the office of independent directors. Therefore, it can only be
concluded that the new Companies Act should take care of built checks and balances that
the office of a director does not become an absolute, which practically is the case.
Position of directors is quite strong in law because they are also responsible to ensure
good corporate governance and prevent various corporate frauds and scams.
The members (shareholders) of the company decide who are to be the directors. It
is often the case in new/small companies that the directors are the shareholders. This is
not a legal requirement but occasionally a company may have it written into the
Memorandum and Articles of Association that they should be. Appointing directors is
normally done in a general meeting though a company can make decisions by written
resolution signed by all members entitled to vote. The person so appointed as director
can be a director of a maximum of 20 Companies simultaneously in India including not
more than 10 public companies. Generally it is up to the members (shareholders) to
appoint the people they believe will run the company well on their behalf. Except for
occasional restrictions imposed by the government on the activities of certain foreign
nationals, a director can be of any nationality and can live anywhere in the world.
Foreign National can become director in Indian Company. RBI has clarified that under
the Foreign Exchange Management Act, 1999, appointment of a foreign national as a
director on the board of directors of an Indian company does not require the Reserve
Bank’s approval.800 To become director in Indian company the directors should have
Directors Identification Number and Digital Signature Certificate.

India, comparatively, has significantly a very low percentage of women

representation on boards. No one doubts the importance of diversity in boardrooms,
800
rbidocs.rbi.org.in/rdocs/Bulletin/DOCs/66740.doc
510

Andhra University, Visakhapatnam

especially in improving corporate governance. Women lay a lot of emphasis on detail,
integrity, their priorities are multi-dimensional, and their focus is not restricted to merely
the growth of the company's bottom line as an end in itself. Consequently, their presence
in the boardroom would lead to more effective overall performance. Companies Act,
2013 has made a provision for employing women directors on the boards of certain class
of companies and this a welcome move. Thrust given by the New Act, 2013 is certainly
going to help in improving the representation of women directors on the board.801

"With the changing demographics of the global workforce and the fact that
women will control 75% of discretionary spending by 2028, globally companies cannot
underestimate the importance of improving the gender balance on their boards," adds
Brooke. Study of BSE 30 Companies: A study by The Times Insight Group shows that
close to 57% of the BSE-30 companies (17 companies in all) have at least one woman
director on the board. The gender diversity ratio is best computed not by looking at the
absolute number of women directors on board, but by computing their percentage in the
total board. Here, Coal India led the pack with a high ratio of 23.5% (4 women in board
strength of 17). Following it was ICICI Bank, with a ratio of 16.7%. ONCG and Bharti
Airtel held joint third place with a gender diversity ratio of 12.5%.802

A company's board of directors provides the company with direction and advice.
It is their responsibility to ensure that the company fulfills its mission statement and in
doing so, it will frequently set the company's overall policy objectives. For these reasons,
a good board of directors must include knowledgeable and experienced business people.

The powers of management are vested in directors and they alone can exercise
these powers. The only way in which the General Body of a company can overrule the
Board of Directors is altering the Articles and refusing to re-elect the directors, whose
actions they disapprove. The shareholders cannot themselves usurp the powers, which by
Articles are vested in the directors. Thus the relationship of Board of Directors with the

801
http://www.icsi.edu/WebModules/LinksOfWeeks/SEP2013.pdf
802
http://timesofindia.indiatimes.com/business/india-business/Time-for-more-women-directors-on-
companies- boards/articleshow/16035069.cms
511

Andhra University, Visakhapatnam

shareholders is more of a federation than that one of subordinate and superior. Unless the
Act or the articles otherwise provide, the decisions of the Board are required to be the
majority decisions only. Individual directors do not have any general powers. They shall
have only such powers as are vested in them by the Memorandum and Articles.

It is well settled that directors, while exercising their powers, do not act as agents
for the majority or even all the members and so the members cannot by a resolution
passed by a majority of even unanimously, supersede the directors’ power and instruct
them how they shall exercise their power. The powers of management are vested in
directors and they and they alone can exercise these powers. The only way in which the
General Body of a company can overrule the Board of Directors is altering the Articles
and refusing to re-elect the directors, whose actions they disapprove. The shareholders
cannot themselves usurp the powers, which by Articles are vested in the directors. Thus
the relationship of Board of Directors with the shareholders is more of a federation than
that one of subordinate and superior.

Directors of the companies, especially of the listed companies, have access to

inside knowledge, such as, financial position of the company, dividend rates, annual
accounts etc. Directors are expected to exercise the powers for the purposes for which
they are conferred. Sometimes they may misuse their powers for their personal gain and
make false representations to the public for unlawful gain. SEBI as regulator can control
this tendency of the Directors. SEBI Act has imposed a responsibility on the directors of
listed companies to lay their annual accounts, the balance sheet and financial statements
before the company Annual General Meeting and should file the same before the
Registrar of Companies as well as before SEBI.803 SEBI Act read with Regulations of
the Companies Act would indicate that the obligations of the Directors in listed
companies are particularly onerous especially when the Board of Directors makes itself
accountable for the performance of the company to shareholders and also for the
production of its accounts and financial statements especially when the company is a
listed company.

803
www.icai.org/resource_file/19328sm_finalnew_cp3.pdf
512

Andhra University, Visakhapatnam

 In reality, directors play a very big role in the functioning and success of any
company and the shareholders may not concentrate much on the business issues and the
day-to-day affairs of the Company. It is true in case of largely held Public Limited
Companies. In view of the powers conferred on directors and realities of functioning of
any Company, shareholding groups or the shareholders always tries to ensure that their
people are elected or appointed as directors in the Company. When the trust among
directors or the shareholding groups is lost, then, the disputes in the Company will
normally get exposed through appointment or removal of directors. Ultimate control
over the directors rests with the shareholders and shareholders can remove a director in
the General Body Meeting in accordance with the regulations in the Articles and the
provisions of the Act.

The role of a Director in a company is a question of fact depending on the

peculiar facts in each case. There is no universal rule that a Director of a company is in
charge of its everyday affairs. We have discussed about the position of a Director in a
company in order to illustrate the point that there is no magic as such in a particular word,
be it Director, Manager or Secretary. It all depends upon respective roles assigned to the
offices in a company. Board of Directors role is to supervise the management actions and
functioning and any lapse in compliance with legal or constitutional responsibilities
should be checked by the board of directors. If they fail to do so they also become
accountable for the lapse. The Primary responsibility of the board is often perceived to
be that of trustees to the shareholders. The shareholders have invested their hard earned
money in the company and made the Board of Directors responsible for ensuring that the
resources are utilized in a manner to yield maximum return to shareholders investment so
their primary objective and their loyalty must lie with the investors.

The Company Board of Directors must abide by ethical standards of conducting

business. For this at times short term gains may have to be sacrificed but again we may
stress that long term stability can be achieved by running a business in a ethical way.
Wal-Mart is company No. 1 in the world. It has the most revenue over any other
company ($421 Billion). But its riches equal its controversies. This story is probably the

513

Andhra University, Visakhapatnam

most apt at describing the unethical treatment of its workers, because of the sheer
senselessness of it.804 Another story is with regard to Union Carbide, though, is directly
responsible for the deaths of around 8,000 Indian people in December 1984,805 and the
birth defects that followed. The Bhopal disaster occurred when a pesticide factory in
Bhopal, India, owned and operated by Union Carbide Corporation, leaked large and
deadly amounts of Methyl isocyanate, a highly poisonous gas. So many people were
affected because the workers at the plant were so poor that their families set up homes
outside the factory gates.806

In India Infosys or Larsen and Toubro or Wipro or Tisco are known Indian
companies who run in keeping with ethical norms.807 An ideal role for the modern
company Board is to create a self driven, self assessed and self regulated organization.
Ideal role of non-executive directors is that they can increase the element of
independence and objectivity in board decision making. They take a detached look at
companies functioning and its medium-run and long-term policies. They should provide
independent supervision of the company's management.

Director’s duties largely govern the relationship between directors and the
company of which they are directors. Accordingly, these duties are generally owed to the
company as a whole. In times of financial difficulty, directors may also find themselves
in a fiduciary position vis-a-vis the company's creditors. In addition, there are a limited
number of circumstances under which directors have duties to individual shareholders.
All the powers entrusted to the Directors are only exercisable by them in their fiduciary's
capacity. Directors must act honestly, without negligence and in good faith in the bona
fide best interests of the company. While applying this rule, Directors are not expected to
act purely for the economic advantages.

804
http://listverse.com/2011/09/13/top-10-unethical-business-actions/
805
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1142333/
806
http://listverse.com/2011/09/13/top-10-unethical-business-actions/
807
S.L. Gupta, B.S. Hothi & Abhishek Gupta, Board of Directors: An Empirical Study of Navratna
Companies
514

Andhra University, Visakhapatnam

 It is indeed, impossible to describe the duties of directors in general terms,
whether by way of analogy or otherwise. However, in discharging the duties of his
position a director must act honestly. As long as a director acts honestly he cannot be
made responsible for damages unless guilty of gross or culpable negligence in business is
proved. The directors have been provided with a remarkable amount of freedom to run
their companies competently. Thereby, the duty of care and skill that the directors have is
usually low on their list of priorities. There is a need to impose upon directors more
rigorous duties, however there is no consensus in this regard and a broad view on this
matter has yet to develop. Considering the fact that a huge amount of responsibility rests
on their shoulders it is important that there be a certain amount of control and also
regulation of their activities.

Directors need to be aware that they are personally subject to statutory duties in
their capacity as directors of a company. Under English Law the Companies Act, 2006
codified certain common law and equitable duties of directors for the first time.808 The
statutory duties that replace the fiduciary or equitable duty are interpreted in accordance
with the previous case law which remains relevant. The philosophy behind director’s
duties is to promote good governance and to protect the company and its stakeholders.809
Furthermore, in the important area of directors' duties the law should aim to educate and
inform directors, and not merely impose liabilities on them. With regard to the duty of
care, it was found that raising the standard of care for directors would be in line with
developments taking place already in listed companies, which are moving towards more
systematic inter audit procedures.

The concepts such as "good faith in the interests of the company" and "conflict of
interest" with regard to directors duties are easily understood. But the difficulty which
often arises is the application of such concepts to particular facts. The codification of the
directors duties specifies the circumstances in which the duties arise, any loss of
flexibility may not be significant. While the meaning of the concept is easily understood,

808
http://www.ffw.com/PDF/Directors-duties.pdf
809
http://www.oecd.org/daf/ca/corporategovernanceprinciples/43654277.pdf
515

Andhra University, Visakhapatnam

the content of a duty may vary in different circumstances and be developed by the
judiciary over time. The more abstract the rule, the less useful it is to the director or legal
adviser who seeks to apply it to the facts of a particular case. The research revealed
widespread support for the use of a statement of directors duties. Particularly in the case
of smaller companies who often have no regular access to legal advice, a statement of
directors' duties would be an important source of information and clarification of the law.
This codification of the directors duties might make the law more consistent, certain,
accessible and comprehensible. The law governing directors' duties is dynamic. It
continues to develop. It can be expected that the law will need to continue to evolve
incrementally as circumstances require. The commercial context is constantly changing.
It is important that the law retains the capacity to develop. To state the settled duties in
statutory form might increase the accessibility of the law. The Companies Act, 2013 has
for the first time defined duties of directors.

At the outset, it is necessary to note that this is only a partial codification of

directors’ duties. It is not possible to prescribe rules for every situation in which
directors’ actions can be judged. That necessarily has to be left for a principles-based
determination, usually by judges in specific cases, and hence the role of courts in
implementing these duties cannot be taken away. While the statutory provisions do give
some guidance, much would depend on the manner in which courts interpret these duties,
on which previous jurisprudence is scant. Moreover, with issues surrounding delays and
costs in the court system, it is not clear if a body of judge-made law in terms of principles
is likely to emerge to guide the actions of directors. Hence, it is not clear if the
codification of the duties will necessarily result in a tangible enhancement when it comes
to enforcing the duties.

The performance of the board has to be constantly evaluated in any company.

Evaluation of performance is a process, which is concerned with measuring. Board of
Directors enables the company to know as to how the Board of Directors as a collective
entity is performing and what contribution it is making towards fulfillment of the
objectives of the organization. Only when performance is evaluated properly can action

516

Andhra University, Visakhapatnam

be taken for its improvement. The objective of evaluation is to identify component
strategies and policies that cause strategies, methods adopted for implementation of
policy, the role of various individuals involved and other related incidental aspects. Thus
evaluation is not an audit procedure which is primarily concerned with financial
accounting and control. A board is team of knowledge workers, and to do its job, the
board needs the same resources and capabilities that any other successful team of
knowledge workers needs to do their jobs effectively.

It is the duty of the boards of companies to impress upon the management that
corporate governance processes and practices not be confined merely to compliance with
various laws, there are many other critical aspects which are involved. Position of
directors is quite strong in law because they are also responsible to ensure good corporate
governance and prevent various corporate frauds and scams. Some time back the scam of
Satyam is a burning example of involvement of board of directors in anti corporate
governance practices. To prevent these kinds of scams the focus has been shifted to
introduce the concept of independent directors. An attempt has been made by SEBI and
Ministry of corporate affairs to strengthen the provisions related to corporate governance
and independent directors to ensure proper code of conduct and transparency in the
business activity of the company.810

The concept of "Independent Director" was first introduced in the Indian

corporate arena through the Kumar Manglam Birla Committee, formulated by SEBI, to
start up reforms in the area of Corporate Governance. It soon found entry into corporate
books, after Clause 49 was incorporated in Listing Agreement by SEBI in 2001. The
present CG framework encompassing the ID is through Clause 49 based on the Murthy
Report. It has been decided in Central Government v Sterling Holiday Resorts (India)
Ltd. and ors. that "the Board of directors should be strengthened by appointing
independent directors."811 The logic behind the further conditions on the listed

810
www.sebi.gov.in/commreport/corpgov.html
811
http://www.legalservicesindia.com/article/print.php?art_id=992
517

Andhra University, Visakhapatnam

companies under clause 49 of the listing agreement is just a further effort to eliminate the
loopholes and for the protection of investors/shareholders.

The institution of independent directors is the creation of regulatory requirements

that are laid down by SEBI only. "Cases like Satyam and certain others, wherein the
independent directors are facing criminal liability for acts of misfeasance by the board
have raised considerable disquiet and nervousness in the independent directors’
community." Though, the Companies Act, 1956 prescribes civil and criminal liability for
directors it does not make any distinction for independent directors and on careful
analysis, it can be observed that IDs are included in the definition of “Officer in
default”.812 The IDs are highly liable for both financial and criminal penalties, as being
“officer in default” for any misdeed.813 However, the accused ID can be granted relief by
court, if they can satisfactorily prove that they have performed their functions honestly
and exercised it with due diligence, care and caution. In most of cases, however, the
director has to face the trial and has to prove in front of court that he has performed his
care and diligence and he is not involved in the given accusation. The relief to
prosecution is not automatically granted to ID under the present framework.

The Independent Directors have a fiduciary responsibility towards the company

and by law the Independent directors may face civil and criminal liability for their acts
and omissions. The role of Independent Directors on the Board of a company came under
scrutiny once again after the Satyam fiasco where the Serious Fraud Investigation Office
(SFIO) had filed seven cases against eleven ex-directors including IDs of Satyam.814 The
arrest by the AP government of the Independent Director of Nagarjuna Finance in the
alleged involvement of repayment of public deposits worsened the situation. Independent
Directors are expected to contribute to shareholder value creation. So, any remuneration
mechanism that delinks their remuneration from value creation would discourage them
from performing the larger role of contributing to shareholder value creation.

812
Sec. 5 of the Companies Act, 1956
813
Sec. 292A of the Companies Act, 1956 on audit committees
814
www.lawteacher.net › Company Law › Essays
518

Andhra University, Visakhapatnam

 The Satyam fiasco has raised questions over the responsibilities and liabilities of
the IDs. Moreover in the Bhopal gas tragedy verdict the court held Keshub Mahindra, ex-
chairman, Union Carbide India, guilty and sentenced him to two years of
imprisonment.815 All this created a fear psychosis in the mind of ID. Following these
events, nearly 340 IDs have resigned from their post. Many people are now not advent to
accept the post of ID and tarnish their reputation. The Director cannot confine himself
to lending his name to the Company. The role of Director in affairs of the Company is
important. Directors have the fiduciary relation with the Company, but in case of Non
Executive Director, there is uncertainty in determining his duties. The Non-Executive or
Independent Director is not involved in day to day affairs of the Company.

Accountability is the most important aspect in any business, because until and
unless the person is been made accountable to his/her act he may do the act in pursuance
of his own interest. So there should be some mechanism for evaluating the performance
of the directors. The extent of liability of a director would depend on the nature of his
directorship.

The liability of the director arises from being in charge of and responsible for
conduct of business of the company at the relevant time when the offence was committed
and not on the basis of merely holding a designation or office in a company. Conversely,
a person not holding any office or designation in a Company may be liable if he satisfies
the main requirement of being in charge of and responsible for conduct of business of a
Company at the relevant time. Liability depends on the role one plays in the affairs of a
Company and not on designation or status. The legislature is aware that it is a case of
criminal liability which means serious consequences so far as the person sought to be
made liable is concerned. Therefore, only persons who can be said to be connected with
the commission of a crime at the relevant time have been subjected to action.

815
http://cbi.nic.in/dop/judgements/bhopalgas_judgement.pdf
519

Andhra University, Visakhapatnam

 The liability of a director arising under the any laws can be mitigated by
delegating the responsibility to some other officer of the company, provided however the
director could be held liable if his knowledge, consent or attribution to the offence is
established. The company in respect of the negligence, default, breach of duty,
misfeasance or breach of trust may indemnify director, if he has acted honestly and
reasonably in discharge of his duties. In principle, the company is bound to indemnify
the director against the consequences of all lawful acts done by him in exercise of the
authority conferred upon him. As it was held aptly by the Supreme Court816 that the
director can be made liable for the act only if he was he was in charge of the act and if he
knew about it and this is also supported by principles of equity wherein no person can be
made liable until and unless he’s a party to the commission of offence or he’s aware of.

Market abuse has now become a common practice in the India security market
and, if not properly curbed, the same would result in defeating the very object and
purpose of SEBI Act which is intended to protect the interests of investors in securities
and to promote the development of securities market. Capital market, as already stated,
has witnessed tremendous growth in recent times, characterized particularly by the
increasing participation of the public. Investor's confidence in capital market can be
sustained largely by ensuring investor's protection. This is possible only through market
regulator.

India started developing regulatory institutions with the introduction of reforms in

1991. Regulatory bodies exercise a regulatory function, that is imposing requirements,
restrictions and conditions, setting standards in relation to any activity, and securing
compliance, or enforcement. But the regulatory environment which has developed over a
period of time does not seen homogeneous across sectors.817 India still ranks very low in
terms of the enabling nature of its business environment and unnecessary regulatory
burdens are imposed upon business and investors. The current requirement for regulators
to submit annual reports to the legislature is not sufficient to make them accountable in

816
Supreme Court narrows down Director’s liability in Cheque Bouncing cases, TNN, Feb 16, 2010,
02.58am IST
817
www.oecd.org/gov/regulatory-policy/44925943.pdf
520

Andhra University, Visakhapatnam

an effective manner. Having appropriate provisions on an ex-ante basis is also important.
In India, continuous changes are taking place in the business and economic environment
of the country. Changes are also continually being made in the economic governance
system. These include changes in government policies and measures. Amendments of
existing legislations or enactment of new ones such as the new competition law,
establishment of sector regulatory bodies in unitary sector such as electricity, petroleum
and natural gas yield desired results.

SEBI, the market regulator, has to deal sternly with companies and their Directors
indulging in manipulative and deceptive devices, insider trading etc. or else they will be
failing in their duty to promote orderly and healthy growth of the Securities market.
Economic offence, people of this country should know, is a serious crime which, if not
properly dealt with, as it should be will affect not only country's economic growth, but
also slow the inflow of foreign investment by genuine investors and also casts a slur on
India's securities market. Market abuse should not be tolerated as we are governed by
"Rule of Law".818 SEBI as a regulator should ensure that fraud, deceit, artificiality have
no place in the securities market of this country and prove that market security is out
motto. SEBI has, therefore, a duty to protect investors, individual and collective, against
opportunistic behaviour of Directors and Insiders of the listed companies so as to
safeguard market's integrity. It is the duty of SEBI to protect ordinary genuine investors
and it is empowered to do so under the SEBI Act so as to make security market a secure
and safe place to carry on the business in securities.

Globalization has been accepted as new economic mantra for the world economic
progress. Globalization not only heightens the business risks, but also compels the
organization to adopt norms of transparency & good governance. The concept of
Corporate Governance and Corporate Social Responsibility have been emerging as a
response to corporate failure and also as response to lack of due diligence and care in

818
http://articles.economictimes.indiatimes.com/2013-04-27/news/38862171_1_market-sebi-chit-fund-
companies
521

Andhra University, Visakhapatnam

supervising executives & offices. The focus of corporate governance is to impose
disclosures and compliance and integrate Indian business with global markets.

Corporate governance is no longer luxury but a necessity. It is true that though

corporate governance has accepted several responses from the various countries of world,
there is no unique structure of corporate governance. Various countries have been facing
Corporate scams e.g. in U.S. A. Worldcom, Enron, Tyco, Marcone etc have faced scams.
In India, Scandal of Harshad Mehta, Keton Parekh, UTI, Ril, Satyam Computer Service
Limited, have created a crisis of investor’s confidence. India is facing challenges to
regulate norms of corporate governance these are family controlled business in a majority
of companies being prevalent in India, lacking of due diligence in executive function,
non-transparency in corporate governance norms. All these pose a serious problem for
share holders & for public and mostly for economic growth of the countries.819

The concept of Independent director has been originated to drive the companies
towards inculcating the concept of corporate governance in their management.
Successful corporate governance depends upon successful management of the company,
as management has the primary responsibility for creating a culture of performance with
integrity and ethical behaviour. Independent non-executive directors should have high
ethical standards, with the ability to act objectively to ensure that minority shareholders’
rights are not expropriated. The independent directors contribute to the board by
constructively challenging the development of policy decisions and company strategies.
They also scrutinize the performance of the management and hold them accountable for
their actions. In the long run, independent directors bring with themselves a more
balance perspective.

It can be said that considering the role, responsibility and powers of directors in
the present corporate form of business, directors are an inevitable part of a company. The
Non-Executive Director is the best kept secret of most successful companies. Whether a
temporary appointment or a full time fixture, the non-executive director contributes a

819
http://www.lawyersincyprus.com/el/article/needs-of-corporate-governance
522

Andhra University, Visakhapatnam

wealth of knowledge, experience and contacts to the business. The objectives of
corporate governance cannot, perhaps, be as effectively met without the inclusion of
independent directors in the larger scheme of things.

In the context of Satyam fiasco, the role and responsibility of Independent

Directors has come in for critical review. While the concept is good, the observance of
governance norms expected of an Independent director requires to be strengthened.820
One of the aspects relate to the manner of appointment of Independent Directors. They
are picked up by the promoters, back up their appointment in the general meeting and get
them elected by virtue of their shareholding strength. Hence the Independent Directors
are dependent on the patronage of the promoters and this will not allow them to act
independently. This is a tricky situation and the partial solution seems to lie in
nominating a least one Independent Director by SEBI or alternatively place a panel of
independent directors before the shareholders for election by postal ballot, excluding
promoter shareholder.821

The role of government in corporate governance is undoubtedly not any single

role, but different roles that of policymaker, enforcer, and overseer in different situations.
Accordingly, there is still another fundamental role for government to undertake the role
of the analyst, seeking to identify the conditions under which to deploy different
configurations of regulatory institutions, standards, and enforcement practices.822 Given
the range of policy issues raised by corporate governance, and the variety of industries
and firms involved, government decision makers will need to understand thoroughly the
effects that different regulatory actions can have in terms of a range of policy criteria.
Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance are
some of the global giants which have their flag of success flying high in the sky due to
good corporate governance.

820
http://www.wirc-icai.org
821
Ramaiya A. and other, Guide To Companies Act, IVth Edition 1998, Wadhwa & co. Nagpur.
822
http://www.hks.harvard.edu/var/ezp_site/storage/fckeditor/file/pdfs/centers-
programs/centers/mrcbg/programs/rpp/reports/RPPRE
523

Andhra University, Visakhapatnam

 We have seen tremendous corporate growth in the recent past and with the
technological revolution and its adoption in governance like MCA scheme, the
incorporation and management of Companies have become so easy though there are
complications in the Course. We need to provide an effective and speedy redressel to the
Corporate and they cannot be waiting for months and years for a redressel. Handling a
Company dispute is a complicated thing and requires lot of care, concentration and
specialization. It is to be seen as to how the proposed National Company Law Tribunal
and the National Company Law Appellate Tribunal functions in future.823 Constitution
of National Company Law Tribunal and its effective functioning is very important for the
corporate world. It is not an easy thing for the Ministry of Corporate Affairs to ensure
proper functioning of National Company Law Tribunal in view of our experience with
Company Law Board. The judgment of the Madras High Court and the Supreme Court in
the Appeal on constitution of National Company Law Tribunal is really laudable as
otherwise, there would have been an irreparable damage to the corporate world.

Over the last 25 years, Parliament has systematically taken away important
judicial functions of the High Courts and the civil courts and vested them in quasi-
judicial tribunals. The stature of our High Courts has been reduced and, if this trend
continues, vitally important cases will come to be decided by tribunals that are wholly
controlled by the executive. The tribunalization of our judicial system will lead to
consequences that our country will bitterly regret. Despite the fact that the functioning of
most tribunals is in a pathetic state, the zeal to create more tribunals has not abated. Very
few have realized that the real solution lies in strengthening the existing courts and
confining tribunals to a few specialized areas. It is equally important to ensure that
specialized tribunals are not manned by generalist civil servants or judges.

Judiciary in India is truly the only defensive armour of the country and its
constitution and laws. If this armour were to be stripped of its onerous functions it would
mean, "the door is wide open for nullification, anarchy and convulsion".824 The rule of

823
http://indiancorporatelaws.blogspot.in/2009/12/company-law-in-india-brief.html
824
Justice Y.K. Sabharwal, Chief Justice of India, on Role of Judiciary in Good Governance
524

Andhra University, Visakhapatnam

law, one of the most significant characteristics of good governance prevails because India
has an independent judiciary that has been sustained, amongst others, because of support
and assistance from an independent bar which has been fearless in advocating the cause
of the underprivileged. There is no area where the judgments of Supreme Court have not
played a significant contribution in the governance. Impartiality is the soul of judiciary.

Parliament approved a long-awaited overhaul of the legislation that governs

India’s companies that’s aimed at easing the process of doing business in the country and
improving governance by making firms more accountable. The new Companies Act,
2013 will simplify the existing Companies Act, which was mired in complexities and in
which several provisions had been repealed. The New Act has introduced many new
concepts as compared to the existing Act and made material changes to the provisions
under the existing Act before adopting the same. The New Act does not provide for any
transitional provisions to govern Restructuring in progress at the time of the replacement
of the existing Act with the New Act. It is not clear whether such process will be
continued and completed under the provisions of the existing Act or under the provisions
of the New Act. If the restructuring is to be continued under the New Act, than how to
deal with any non-conformity, of the portion of the process completed under the existing
Act, with the provisions of the New Act.

Some of the provisions of the Companies Act, 2013 that did not require any
additional rules or regulations for their implementation were brought into force on 12th
September 2013, following a notification by the Ministry of Corporate Affairs. However,
these provisions only represented 98 out of the 470 sections of the Companies Act and it
has caused confusion because businesses still have to look at both the old companies Act
and the new Companies Act to interpret the current law. Technically, this means both the
acts are currently in operation. The whole of the Companies Act should have been
brought into force at one time. In essence, it was premature to implement the sections
without the relevant exemption notifications and therefore, notification is surely
premature and may be redundant in some sense. Caution has to be immediately exercised

http://supremecourtofindia.nic.in/speeches/speeches_2006/good%20governance.pdf
525

Andhra University, Visakhapatnam

both by the department and the companies. Even before the final rules are issued by
Ministry of Corporate Affairs, government has taken steps to notify 98 Sections. In 470
Sections the word "as may be prescribed" has been used at around 336 places. This
clearly shows that government was in a hurry has been taken in notifying the 98 sections
without the applicable rules.

Some of the potential areas of conflict between the Listing Agreement and the
2013 Act are that while the Listing Agreement states that an independent director must
not “have any material pecuniary relationship” or transaction with the company, the 2013
Act states that an independent director “must not have had any pecuniary relationship.”
The proposed disqualification arising from any pecuniary relationship in the previous two
financial years under the 2013 Act may be unreasonably restrictive. There may be
situations where a pecuniary transaction of the proposed independent director does not
affect the director’s independence. This necessitates the requirement of suitable changes
to be effected in the Listing Agreement, to ensure that it continues to apply along with the
2013 Act.

The new Companies Act, 2013 will also bring in a new provision regarding
limitation of liability of independent directors. Liability under the 1956 Act was
attributable only to “officers in default”, wherein independent directors were not covered
within its ambit and hence did not impose any liability on them for the actions of the
board. The 2013 Act, on the other hand, expands the scope of “officers in default” and
provides for liability of independent directors. However, such liability is limited to acts of
omission or commission by a company which had occurred with his knowledge. The
2013 Act, is a positive step towards setting higher standards of integrity and
independence for independent directors. However when examined critically, it seems
that while expanding their roles and defining their liabilities, the 2013 Act fails to
recognise that independent directors have a very limited ability to affect the functioning
of a board.

Testing of Hypotheses

526

Andhra University, Visakhapatnam

 ‘The Companies Act, 1956, which is a comprehensive piece of legislation, lacks
precision and clarity in the matter of clarification in respect of important concepts like
definitions of Company, Director, independent director etc’ is the first hypothesis. Both
the acts have attempted to lay down the definitions of certain terms. But these definitions
cannot be considered to be satisfactory. Companies Act, 1956 'Director includes any
person occupying the position of director, by whatever name called'.Under the
Companies Act, 2013 director means a 'director appointed to the Board of a company'.
Neither of the acts have attempted to define who is a director in terms of their role they
perform, and the functions they discharge. The new Act has not prescribed any
qualification for a person to be appointed as a director in any positive terms but has
defined the qualifications negatively. The Companies Act, 2013, does not define "non-
executive directors," but the rules define an executive director as a whole-time director.
"Non-executive director" is understood to be a director who is not involved in the day-to-
day affairs of the company, and receives his remuneration by way of sitting fees and/or
commission. Further clarity will be required as the provisions of the Companies Act
come into force. There is no definition in the new Act for the term Corporate Social
Responsibility though the areas in which the money could be spent have been specified in
Schedule VII. Broadly, CSR relates to the companies manning their business in such a
way as produces over all positive impact on the society. The CSR concept in the Act has
not been universally welcomed. Until clarity is provided on the above issues, the
implementation of restructuring will entail significant practical difficulties, possibly
leading to unnecessary litigation. Hence, the first hypothesis is proved.
‘Both the Companies Act, 1956 as well as the Companies Act, 2013 lack in
defining the role of Directors and Independent Directors’ is the second hypothesis. The
role of the independent directors is not laid in the Companies Act, 1956. The new
Companies Act, 2013 has laid down statutory provisions relating to independent directors
but there is no provision dealing with the exact role of Independent Directors. The
Independent Directors on the board must be able to justify their two roles i.e., to advise
and supervise the executive management. They should see themselves as having a special
duty of acting on behalf of outside shareholders and other stakeholders particularly where

527

Andhra University, Visakhapatnam

executive directors may face a conflict of interest over issues such as takeovers,
remuneration, accounting policies and board succession. Independent directors need to
bring value to the company in terms of their ability to provide inputs on strategy,
business, marketing, legal, compliance or other relevant aspects and also carry out
monitoring functions in order to protect the interests of shareholders in general and
minority shareholders in particular. Independent directors cannot at a time exercise both
the roles. Therefore, board could be comprised of independent directors with different
capabilities so that the board as a whole may be in a position to performance both these
functions effectively. The sole purpose of appointing the Independent Directors on board
is to act as watchdog on company’s operations and preserve the ultimate objective of
good corporate governance i.e. protection of interest of investors and shareholders. The
regulators in India need to fine-tune items of regulation that required the mandate of the
law and other matters that need to be developed as good practices. Both the roles that is
Advisory role and also monitory role are essential to engender a workable institution of
independent directors in the insider systems. Hence, the second hypothesis stands
proved.

‘Even though the Act prescribes for the statutory appointment of Independent
Directors in every listed company, it lacks in defining the powers of directors to protect
the interests of the investors’ is the third hypothesis.’ Appointment of Independent
Directors in every listed company is now mandatory and they are responsible to protect
the interests of the investors. The monitoring aspects can be carried out by independent
directors only if they are conferred specific powers. Even the new Companies Act, 2013
has not conferred powers on the independent directors. Under Companies Act, 2013,
Section 149(12) states that non-executive directors or independent directors shall be held
liable, only in respect of such acts of omission or commission 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, provided he is not a promoter or key
management personnel. Therefore, a non-executive director cannot escape penalty.
When powers have not been conferred on him he cannot be made liable as he is not a
person who is not involved in the day to day affairs of the company. Therefore, the new

528

Andhra University, Visakhapatnam

act is lacking in laying down the powers of independent directors. Hence, the third
hypothesis is proved.

‘Independent Directors serve a vital role known as a creative contributor to the

board of directors by giving objective criticism and advice in assuring effective corporate
governance’ is the fourth hypothesis. The independent directors contribute to the board
by constructively challenging the development of policy decisions and company
strategies. Inclusion of independent directors is a check on the management of
companies as an oversight mechanism. They also scrutinize the performance of the
management and hold them accountable for their actions. Their independence, on account
of lack of affiliation which is likely to prejudice their decisions, allows them to fulfill
these tasks more efficiently. Even when they stand in opposition to the other directors,
the tension created within the board is nothing but positive tension. The ability to
contribute to the board's deliberations is an added bonus to voice the minority interests.
Hence, in the long run, independent directors bring with themselves a more balanced
perspective and can also assure effective corporate governance by giving objective
criticism and advice. Hence, this hypothesis is proved.

There exists a significant gap in Indian corporate governance regulatory

framework that warrants utmost safeguards to minority shareholder rights. Policy makers
possibly can do this by creating a conducive environment and promulgating laws for
protection of minority shareholders rights. Unless the legal regime confers sufficient
powers, independent directors will be left immobilized. But, those powers are required to
be exercised in the overall interest of the company. Ultimately, in the end analysis, all
directors including independent have to strive to create value to the shareholders having
regard to the interests of the other stakeholders as well. The basic objective cannot be
compromised.

Testing of hypotheses revealed that identification of clear roles and functions by

regulatory authorities will not only introduce certainty in the minds of the independent
directors as to their tasks on corporate boards, but it will also manage the expectations of

529

Andhra University, Visakhapatnam

shareholders and other stakeholders as to the level of monitoring they can expect from
independent directors. Regulators too will be in a position to structure other corporate
governance protections around the clearly defined role of independent directors. Lack of
a clear role for independent directors is a key shortcoming of the corporate governance
norms in India.

SUGGESTIONS
The challenge lies in getting the appropriate balance right. Each company faces
different issues, and will require a unique combination of skills to meet those challenges.
The board has a collective responsibility for the organization. The directors are usually
seen as ‘stewards’ of the company, mainly responsible to the shareholders. After all it is
the shareholders who effectively elect the directors to manage the business on their
behalf. The ‘traditional view’ is that the responsibility of the board is to maintain the
share value for the owners. This is changing somewhat with other stakeholders such as
creditors, employees and the community demanding more of companies. That is, it is no
longer acceptable to just be concerned about shareholder wealth. Although board
members have different roles, what counts is the way those roles are combined in the
board team. This is why board selection is so fundamental. Directors should only be
appointed for the value they can add to their boards. The following are the few
suggestions given by the researcher relating to the present thesis:
1) Review of the Company Law: In the current national and international context,
it is suggested that there is a requirement for simplifying corporate laws so that they are
amenable to clear interpretations and provide a framework that would facilitate faster
economic growth. It is also increasingly being recognized that the framework for
regulation of corporate entities has to be in tune with the emerging economic scenario,
encourage good corporate governance practices and enable protection of the interests of
the investors and other stakeholders. There is a need to bring about transparency through
better disclosures and greater responsibility on the part of corporate owners and
managements for improved compliance. The objective of this exercise is to address the
changes taking place in the national and international scenario, enable adoption of
internationally accepted best practices as well as provide adequate flexibility for timely
530

Andhra University, Visakhapatnam

evolution of new arrangements in response to the requirements of ever-changing,
dynamic business models. Passing of Companies Act, 2013 is a welcome attempt to
provide India with a forward looking Company Law to meet the requirements of a
competitive economy. The objective of the Act is to enhanced self-regulations coupled
with investor protection and corporate accountability. Several provisions in the
Companies Act, 2013 were fuzzy and need clarification. One of the most important
challenges of the new law will be to clarify the rules governing the conduct of directors
and enforcement of the rules. Reform and updating of the basic legal framework for
corporate entities is essential to enable sustainable economic reform.

2) Definining the Role of Independent Directors: There have been long standing
demands for greater transparency in the functioning of Indian companies which are now
being met with through various proposals, amongst which a greater role for independent
directors has been a welcome change. A lot of hopes have been put on the role of
independent director on the board of directors in recent time. Just as there is no
difference at law in the roles to be performed by an independent director, there is also no
legislative or regulatory rule providing that there is a different degree of duties owed by
executive and non-executive or independent directors. The need of the hour is for the
legislature to draw a line between Independent Directors and Executive Directors by
defining their roles and responsibilities, and demarcating their liabilities. Discretion lies
with the enforcement authority to determine the extent of the liability that the IDs may
incur. What the legislators need to realize is that the corporate world is fast changing and
therefore corporate governance cannot depend on statutes that are outdated. Provisions
relating to corporate governance need to be constantly updated.

3) Independent directors must be the trustees of good corporate governance:

Independent directors are strong pillars of corporate governance which is vital to attract
investment and bolster the economy. Independent directors broadly fit into the overall
structure of corporate governance. The evolution of the institution of independent
directors has somewhere some link or something to do with the concept of corporate
social responsibility. An independent director can counter-balance management

531

Andhra University, Visakhapatnam

weaknesses in a company, and ensure legal and ethical behaviour at and by the company.
It is widely recognised that the board of directors is the most significant instrument of
compliance with corporate governance. An active and involved board consisting of
professional and truly independent directors plays an important role in creating trust
between a company and its investors, and is the best guarantor of good corporate
governance. Since Independent directors have emerged as the cornerstone of the
worldwide corporate governance movement their increased presence in the boardroom
proves to be an effective deterrent to fraud and mismanagement, inefficient use of
resources, inequality and unaccountability of decisions. They are trustees of corporate
governance may strike the right balance between individual, economic and social
interests.

4) Independence of Independent Directors: Independent directors will only be

able to enhance board efficiency provided they are truly independent. Without
independence, the existing conflicts of interests between management and shareholders
would affect the objectiveness and fairness of their judgment. A director is considered to
be independent when he is free from any business, family or other relationship with the
company, its controlling shareholder, promoters or the management of the company.
Because if this independence is lacking it may create a conflict of interest such as to
jeopardise exercise of his judgment. The board’s independence and critical thinking is
necessary for effective corporate governance and preventing large-scale fraud within
organizations.

5) Role of SEBI in recruiting independent directors in companies: By giving

management the prerogative of choosing the independent director the impact has been
hollowed. More often the independent director chosen by management is chosen because
of his proximity to the controlling management and is beholden to management for
selecting him to the board of the company. This raises serious conflicts of interest in
impartial discharge of duties. They should be chosen from a pool of qualified
professionals who are known for their expertise and integrity. Therefore, a solution to
eliminate, the cosy relationship between independent directors and their companies can

532

Andhra University, Visakhapatnam

be found by creating an independent body under SEBI. It is this organisation which will
be charged with the role of screening and recruiting independent directors and placing
them with listed companies. The independent Directors have a very larger role to play in
companies under Companies Act, 2013 i.e., they are expected to bring an element of
objectivity and transparency. So it is a difficult task to find suitable independent
directors. The issue is not of lending a brand but having someone with an independent
state of mind. In an economy fired by innovation, our biggest threat is obsolescence.
Periodic training of directors is a must. Unfortunately there are few courses designed
primarily for directors. The scam of Satyam was really an eye opener for the
Government of India. If the concept of Independent Director is to be succeeded, the
Government must move forward to break the nexus between the Independent Director
and Promoters for that rules would be made and the Independent Director should be
appointed by the Central Government or SEBI.

6) Qualifications of Non-executive Directors: Non-executive directors to play an

effective role, should have the right background and sufficient time for the job. In
addition they should meet appropriate independence criteria. Though corporate
governance codes insist on the need to have qualified individuals on the board, it should
be recognised that the definition of what constitutes proper qualifications should be left to
the company itself, because such qualifications will depend, inter alia, on its activities,
size and environment and because they should be met by the board as a whole. There is
nevertheless one issue which usually raises particular concern, i.e. the need for particular
competence in the audit committee where some specific knowledge is deemed to be
indispensable.

In addition, it is necessary for policy-makers to explore the possibility of creating

a cadre for independent directors through a certification process. In this proposal, a
regulatory authority or peer body would register individuals as independent directors
upon satisfaction of certain conditions, including qualifications, experience, competence
levels, training, and so on. Such a certification would not only ensure uniform standards
in independent directors, but would also make such directors accountable to their peers.

533

Andhra University, Visakhapatnam

This is similar to certification of lawyers, chartered accountants, architects and other
professionals. It may be premature at this stage in the evolution of corporate governance
in India to insist on certification as a mandatory requirement, but it is an aspect which
should be attained eventually and policy-making efforts ought to clearly bear that in
mind. Effective board room performance of directors is directly related to the time that
they can devote. A person, who is too stretched, doing many things at one time, will not
be able to concentrate on promoting shareholders interest. Non executive director must
accept appointment only where they have sufficient time to devote to the role and they
have to dedicate as much time as necessary to develop and refresh their skills and
knowledge and to be informed about the company, its sector and its markets

7) Board Evaluation: Board evaluation, if conducted properly, can contribute

significantly to performance improvements on three levels-the organizational, board and
individual director level. Boards who commit to a regular evaluation process find
benefits across these levels in terms of improved leadership, greater clarity of roles and
responsibilities, improved teamwork, greater accountability, better decision making,
improved communication and more efficient board operations. The board should
undertake a formal and rigorous annual evaluation of its own performance and that of its
committees and individual directors. Individual evaluation should aim to show whether
each director continues to contribute effectively and to demonstrate commitment to the
role (including commitment of time for board and committee meetings and any other
duties). The Board of Directors is ultimately accountable to the owners of the company.
The shareholders therefore need to evaluate the performance of the Board to the extent
that they are able to. By exercising their rights to appoint and remove the directors of the
company, the shareholders effectively control the Board. The way to make the boards
effective is providing clarity to their role, responsibilities and legal liabilities by creating
self evaluation procedures.

8) Legal Immunity to Independent Directors: There is a need for legal immunity

to IDs. It however does look unreasonable to make non-executive directors liable for the
actions and decisions of the company they may not be aware of. In case they are, we will

534

Andhra University, Visakhapatnam

only see a further exodus of IDs, at least of the value directors. However, the IDs need to
be accountable for decisions that they were a party to, with negligence being also being
treated as connivance.825 Liability of independent directors should be distinguished from
the executive directors and non independent directors. No criminal liability should be
attached to independent director for the acts of the company or other executive directors
unless the independent director has personally committed a willful criminal act. This
obviates the situation where independent directors cannot be arrested unless personally
and willfully involved in a criminal act. Increasing the liability imposed on Independent
Directors' may increase the costs associated with their positions and , as result, shrink the
supply of independent directors.

9) Challengeto the Executive Directors: The best practical advice that can be
given to the non-executive directors is to challenge constructively and continuously ask
questions of the executives. By doing this, they can create positive tension in the board
room. They should ensure that they have suitable access to the company’s auditors and
bankers, and should be able to seek independent legal advice if they believe it to be
necessary. An informed director is the first step to becoming a useful director, one who
can exercise business judgment and common sense. Raising the appropriate red flags at
the right time would help them in avoiding the occurrence of unwanted situations and
their consequences to a great extent.

10) Separating the Roles of Chairman and Chief Executive Officer: The
separation of role of chairman and chief executive officer increases the effectiveness of a
company's board. It is the board's and chairman's job to monitor and evaluate a
company's performance. A CEO on the other hand, represents the management team. If
the two roles are performed by the same person, then it's an individual evaluating
himself. When the roles are separate, a CEO is far more accountable. The chairman can
focus on shareholders' interest, while the CEO manages the company. A separate
chairman can provide the CEO with guidance and feedback on his or her performance.

825
Data Source:www.directorsdatabase.com, which profiles the directors on boards of 2,244 out of a total
of 2,689
companies (83%) listed at BSE, as on 3 March 2009
535

Andhra University, Visakhapatnam

 11) Reasons for Resignation of Independent Directors: As per clause 49 of
Listing Agreement, an independent director who resigns or is removed from the Board of
the company shall be replaced by a new independent director within a period of not more
than 180 days from the day of such resignation or removal, as the case may be. However,
there is no provision to disclose the reason of their resignation. Often directors resign
from the board, without quoting any reasons. Resignation of non-executive directors
might be due to their disagreement with the management in certain matters. It has been
suggested that the reason for the resignation of the Independent director should be
submitted to the Board of the company which in turn should circulate the same to the
shareholders and inform the stock exchange in this regard.

12) Periodic Review of Corporate Governance Norms: It is true that the law
alone cannot bring changes and transformation. A judicious mix of regulations and
voluntary compliance will play an important role in developing a system of good
corporate governance. Corporate Governance norms are dynamic in nature and need to
evolve regularly in order to keep pace with the ever-changing corporate world. The
institution of Independent directors is absolutely indispensable to the corporate
governance regime. It would not be wrong to say that Independent Directors are in a way,
insurers of good corporate Governance practices. Just like corporate governance
practices need to be periodically reformed, in the same flow, the institution of
Independent Directors also needs a rhythmic evolution. Ministry of Corporate Affairs
should focus on providing a structure for corporate governance. Applying similar
provisions as developed countries is useful, however if similar support structure is
unavailable, the provisions become ineffective. Procedures for corporate governance
should be implemented across the group uniformly. SEBI should delve deeper into
appointments of independent directors to ensure that public shareholdings interests are
protected.

The objectives of corporate governance cannot, perhaps, be as effectively met

without the inclusion of independent directors in the larger scheme of things.
Independent Directors need to embrace the principles of good practices. At the same

536

Andhra University, Visakhapatnam

time, investors must also be pro-active in their demands and expectations of the highest
level of governance by exercising their rights. In India, quantum of penalities for non-
compliance with provisions is quite low. Stringent penalties and even rigorous
imprisonment are required in case of non-compliance that seriously affect minority
shareholder rights. Finally, directors whether independent, executive, non-executive must
seek to balance their roles as strategic advisors and setting good governance practices.
While the listing standards mandated the listed companies board to include independent
directors, neither the Listing Agreement nor the 1956 Act precisely defined the duties,
roles and liabilities of an independent director. The Companies Act, 2013 on the other
hand, attempts to crystallise the role of independent directors, aimed at ensuring higher
standards of independence.

Finally, it is necessary to reiterate that the independent director institution is only

one of the mechanisms that would enhance corporate governance in India. That
institution, as we have seen, cannot work by itself. It requires to support, and be
supported by, a whole host of other attributes such as a stringent accounting and financial
disclosure regime, whistle blowing mechanisms, a code of ethics, and even perhaps an
open market for corporate control, just to name a few. The role of independent directors
should also be supported by other gatekeeper functionaries such as accountants,
investment bankers, corporate and securities lawyers, securities analysts, rating agencies
and even the business press. The effectiveness of the independent directors also depends
on other systemic factors. For example, it even requires courts in India to be in a position
to rule efficaciously on corporate and securities law aspects, set precedents for lower
courts to follow and create a set of principles that imbue certainty in the functioning of
independent directors as emissaries of enhanced corporate governance. Lastly,
independence is not something that can entirely be ordained by the law. It is a matter
involving ethics and integrity whereby independent directors have to put before
themselves the interests of those that they are to protect. That is a characteristic that
should permeate into the corporate ecosystem in India if enhanced corporate governance
is to be achieved.

537

Andhra University, Visakhapatnam

 While law does play an important role in creating the conditions for institutions
like independent directors to carry out their functions, the success of that institution also
depends to a large extent on the individuals that occupy that position and the cultures and
practices that are prevalent in India.

To conclude, Board of Directors is a critical institution by which shareholders

influence management. This institution has undergone significant transformation over
the last decade. Most board reforms are driven by activist institutions and other
concerned with the reform of corporate governance, and much of their efforts have
focused on establishing boards of directors who are independent in a technical sense.

* * *

538

Andhra University, Visakhapatnam