The Director’s Handbook – A Panoramic view of the provisions of the Companies Act, 2013

A Panoramic view of the provisions of the Companies Act, 2013

CS Milind Kasodekar | CS Shilpa Dixit Amogh Diwan HIGHLIGHTS • Detailed discussion on provisions relating to eligibility, appointment, remuneration, cessation, liability and other crucial provisions related to the management of the company.

• Checklists and important points for the directors to ensure compliance with the applicable legal provisions under the Companies Act, 2013.

• Detailed list of offences and punishments along with legal recourse for directors.

• Guidance on documentation related to directors along with standard drafts.

• Reference to the proposed amendments to the Companies Act, 2013 vide the Companies (Amendment) Bill, 2017.

Bloomsbury India Professional

The Director’s Handbook

Contents at a glance About the authors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Table of contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Table of cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxix Chapter 1

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 2

Pre-Requisites for Appointment of a Director. . . . . . . . . . . . . . . . . . . 17

Chapter 3

Surrender/Cancellation of DIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Chapter 4

Legalization of Foreign Public Documents. . . . . . . . . . . . . . . . . . . . . 51

Chapter 5

Criteria & Eligibility for Appointment . . . . . . . . . . . . . . . . . . . . . . . . 63

Chapter 6

Disqualifications of a Director & Removal of the Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Chapter 7

Appointment of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Chapter 8

Independent Director. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

Chapter 9

Appointment of Managerial Personnel and Payment of Remuneration to Directors including Managerial Personnel. . . . . . . 149

Chapter 10

Committees of the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

Chapter 11

Corporate Social Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Chapter 12

Key Managerial Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

Chapter 13

Board & Committee Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

Chapter 14

Director & Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . 331

Chapter 15

Board’ Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373

Chapter 16

Loans and Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393

Chapter 17

Roles & Responsibilities of a Director . . . . . . . . . . . . . . . . . . . . . . . 415

Chapter 18

Cessation of Office of a Director. . . . . . . . . . . . . . . . . . . . . . . . . . . . 455

Chapter 19

List of Punishments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473

Chapter 20

List of Registers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537

Chapter 21

Matters Requiring Board Resolution. . . . . . . . . . . . . . . . . . . . . . . . . 549

Chapter 22

Documents Requiring Directors’ Signature. . . . . . . . . . . . . . . . . . . . 561

Chapter 23

Miscellaneous Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567

Annexure

Secretarial Standard on Meetings of the Board of Directors. . . . . 581 xi

Table of contents About the authors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Contents at a glance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Table of cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxix Chapter 1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Types of Companies as per the their key features. . . . . . . . . . . . . . . . . . . . . 2 1.2 1.2.1 Definitions & key features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Types of Companies as per the Liability Concept. . . . . . . . . . . . . . . . . . . . . 4 1.3 Other types of Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.4 Categories of Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.5 1.6 Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.6.1 Definitions of the terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.6.2 Requirement of having a director/ a Board of Directors under the Companies Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.7 Chapter 2 Pre-Requisites for Appointment of a Director. . . . . . . . . . . . . . . . . 17 Director Identification Number (DIN). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.1 2.1.1 Requirement of DSC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.1.2 Requirement of DIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.1.2.1 Application for DIN. . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.1.2.2 Process of applying for DIN . . . . . . . . . . . . . . . . . . . 19 2.1.2.3 Particulars required for DIN & DSC Application. . . 19 2.1.2.4 Punishment for Contravention of provisions of section 152, 155 and 156. . . . . . . . . . . . . . . . . . . . 24 2.1.3 Checklist for Compliances and Procedure. . . . . . . . . . . . . . . . . 24 2.1.3.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.1.3.2 Action points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2.1.3.3 Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.1.3.4 Checklists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Annexure I: Checklist on obtaining digital signature certificate (DSC). . . . . . . . . . . . . . . . . . . . . 29 Annexure II: Checklist on DIR 3 (application for allotment of DIN number). . . . . . . . 30 xiii

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2.2

Intimation of Changes in Particulars Specified in DIN Application. . . . . . 32 2.2.1 Checklist for Compliances and Procedure. . . . . . . . . . . . . . . . . 33 2.2.1.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.2.1.2 Action points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.2.1.3 Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.2.1.4 Checklists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Annexure III: Checklist on DIR 6 (intimation of changes in particulars specified in DIN application) . 36

Chapter 3 Surrender/Cancellation of DIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Cancellation/Surrender/Deactivation of DIN . . . . . . . . . . . . . . . . . . . . . . . 41 3.1 3.1.1 Authority to apply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.1.2 Application for surrender. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.1.3 Opportunity of being heard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.1.4 Compounding of Offence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Checklist for Compliances and Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . 43 3.2 3.2.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Action points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3.2.2 3.2.3 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.2.4 Checklists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Annexure I: Checklist on DIR 5 (application for Surrender of DIN number). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Chapter 4 Legalization of Foreign Public Documents. . . . . . . . . . . . . . . . . . . 51 Legalization of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 4.1 4.1.1 Meaning of Legalization of Documents. . . . . . . . . . . . . . . . . . . 51 4.2 Hague Convention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Background of Hague Convention. . . . . . . . . . . . . . . . . . . . . . . 51 4.2.1 4.2.2 Hague Apostille Convention. . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 4.2.2.1 Meaning of the term ‘Apostille’. . . . . . . . . . . . . . . . . 52 4.2.2.2 Applicability of the Hague Apostille Convention. . . 52 4.2.2.3 Exception. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 4.2.2.4 How the Apostil Convention works?. . . . . . . . . . . . . 53 4.2.2.5 The Statute of the Apostille Convention. . . . . . . . . . 53 4.2.2.6 Member State & State Party . . . . . . . . . . . . . . . . . . . 57 4.2.2.7 Applicability in India. . . . . . . . . . . . . . . . . . . . . . . . . 58 Annexure I: List of Member States of HCCH Organisation. . . . 60 Annexure II: List of Non-Member States. . . . . . . . . . . . . . . . . . 62 Chapter 5 Criteria & Eligibility for Appointment . . . . . . . . . . . . . . . . . . . . . . 63 5.1 Criteria for appointment of various directors in the Company (Section 149). . 63 5.1.1 Eligibility to get appointed as a director. . . . . . . . . . . . . . . . . . . 65 xiv

Table of contents

5.1.2

5.1.6

5.2

Disqualifications from being appointed as a director [Section 164(1)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 5.1.2.1 List of Disqualifications. . . . . . . . . . . . . . . . . . . . . . . 65 5.1.2.2 List of events in a company, on happening of which, a director in that company gets disqualified [Section 164(2)]. . . . . . . . . . . . . . . . . . . 70 Restriction on holding of Directorship. . . . . . . . . . . . . . . . . . . . 71 5.1.3 5.1.4 Declaration from a Director in form DIR 8 . . . . . . . . . . . . . . . . 71 5.1.5 Consent to act as a Director of the Company. . . . . . . . . . . . . . . 71 Checklist for Compliances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 5.1.6.1 Checkpoints for Composition of Board of Directors. . . 72 5.1.6.2 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Annexure I: Form ‘DIR-8’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Annexure II: Form No. DIR-2 . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Important points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Chapter 6 6.1 6.2

6.3 6.4

6.5

6.6

Disqualifications of a Director & Removal of the Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Definitions under the Companies Act, 2013 . . . . . . . . . . . . . . . . . . . . . . . . 79 Disqualifications applicable to a director at the time of appointment. . . . . 80 6.2.1 Disqualifications under Section 164. . . . . . . . . . . . . . . . . . . . . . 80 6.2.2 Disqualifications under Section 165. . . . . . . . . . . . . . . . . . . . . . 82 Disqualifications during the period of directorship. . . . . . . . . . . . . . . . . . . 82 Reporting And Removal of Disqualification Under Section 164 (2). . . . . . 84 6.4.1 Reporting of the disqualification. . . . . . . . . . . . . . . . . . . . . . . . . 84 6.4.1.1 By the Director. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 6.4.1.2 By the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 6.4.2 Removal of Disqualification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Checklist for Compliances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 6.5.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Action points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 6.5.2 6.5.3 Annexure Form ‘DIR-8’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Chapter 7 Appointment of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Mode of appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 7.1 First Director [Section 152]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 7.2 7.2.1 Subscriber to be a First Director. . . . . . . . . . . . . . . . . . . . . . . . . 89 7.2.2 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 7.2.2.1 In case of a Public Company. . . . . . . . . . . . . . . . . . . 90 7.2.2.2 In case of a Private Company . . . . . . . . . . . . . . . . . . 90 xv

The Director’s Handbook

7.3 7.4 7.5 7.6 7.7

7.8

7.9 7.10

7.11

7.12

7.13

7.14

xvi

Additional Director [Section 161 (1)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 7.3.1 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Alternate Director [Section 161 (2)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 7.4.1 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Nominee Director (Section 161(3)). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 7.5.1 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Appointment of a Director in Casual Vacancy [Section 161(4)]. . . . . . . . . 92 7.6.1 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Appointment of a Director in place of a director who is being removed as per the provisions of section 169. . . . . . . . . . . . . . . . . . . . . . . 94 7.7.1 Tenure of Appointment (Section 169 (6)). . . . . . . . . . . . . . . . . . 94 Appointment of a Director retiring by rotation (At the Annual General Meeting of the Company) (Section 152 (6)) . . . . . . . . . . . . . . . . . 95 7.8.1 First Annual General Meeting of a Public company. . . . . . . . . . 95 7.8.2 Subsequent Annual General Meetings . . . . . . . . . . . . . . . . . . . . 95 7.8.3 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Appointment of a Director at a General Meeting (person other than a retiring director) [Section 160]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Woman Director on the Board. (Section 149). . . . . . . . . . . . . . . . . . . . . . . 97 7.10.1 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 7.10.2 Intermittent Vacancy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Independent Director (Section 149). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 7.11.1 Applicability Criteria for Public Companies (other than Listed Company). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 7.11.2 Intermittent Vacancy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 7.11.3 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Small Shareholders’ Director (Section 151) . . . . . . . . . . . . . . . . . . . . . . . 100 7.12.1 Meaning of Small Shareholders. . . . . . . . . . . . . . . . . . . . . . . . 100 7.12.2 Notice intimating proposal to appoint the representative of Small Shareholders.. . . . . . . . . . . . . . . . . . . . 100 7.12.3 Eligibility for getting appointed as a small shareholder’s director. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 7.12.4 Small Shareholder’s director to be an Independent Director . . . 101 7.12.5 Vacation of office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 7.12.6 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Appointment of a director by promoters/ Central Government (Section 167(3) and 168(3)). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 7.13.1 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Appointment of a Director by the Tribunal (Section 242). . . . . . . . . . . . . 103 7.14.1 Tenure of Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Table of contents

7.15

Checklist for Compliances and Procedure. . . . . . . . . . . . . . . . . . . . . . . . . 105 7.15.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 7.15.2 Action points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 7.15.3 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 7.15.4 Checklists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Annexure I: Checklist on DIR 3 (Application for allotment of DIN). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Annexure II: Checklist on DIR 12 (Particulars of appointment of directors or the key managerial personnel and the changes among them) . . . . . . . . . . . . . . . . . 122

Chapter 8 Independent Director. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 8.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 8.2 Eligibility Criteria (Section 149 (6)). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 8.3 8.4 Number of Independent Directors (Section 149 read with LODR). . . . . . 131 8.4.1 Listed Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 8.4.2 Unlisted Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Qualifications of Independent Director. . . . . . . . . . . . . . . . . . . . . . . . . . . 133 8.5 Manner of Appointment of Independent Director (Section 150). . . . . . . . 134 8.6 8.6.1 Select a Person to be appointed as an Independent Director . . 134 8.6.2 Due - diligence of a person. . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 8.6.3 Procedure for Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 8.6.4 Obligation on the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 8.6.5 Other formalities after the appointment of the Independent Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 8.6.5.1 Issuing Letter of Appointment to the Appointee. . . 138 8.6.5.2 Putting details of Appointment on the website of the company. . . . . . . . . . . . . . . . . . . . . . 138 8.7 Tenure of Appointment of Independent Director. . . . . . . . . . . . . . . . . . . . 139 8.7.1 Reappointment of Independent Director. . . . . . . . . . . . . . . . . . 139 Retirement by rotation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 8.8 Intermittent Vacancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 8.9 8.9.1 Unlisted company . . . . . . . . . . . . . . . . . . . . . . . . . . 140 8.9.2 Listed entity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 Remuneration to Independent Director. . . . . . . . . . . . . . . . . . . . . . . . . . . 141 8.10 8.10.1 Entitlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 8.10.2 Non- entitlement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 8.11 Annual compliances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 8.11.1 Submission of Declaration [Section 149(7)]. . . . . . . . . . . . . . . 141 xvii

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8.13 8.14

8.11.2 Conducting a Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 8.11.3 Secretarial Standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Duties & Responsibilities (Sch. IV). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 8.12.1 Code of Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 8.12.2 Role and functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 8.12.3 Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Exemptions for Government Company. . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

Chapter 9 9.1

9.2

xviii

Appointment of Managerial Personnel and Payment of Remuneration to Directors including Managerial Personnel . . . 149 Appointment of Managerial Personnel (Section 196 & Schedule V Part I) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 9.1.1 Managerial Personnel - Definition . . . . . . . . . . . . . . . . . . . . . . 149 9.1.1.1 Schedule V Part I of the Companies Act. . . . . . . . . 149 9.1.1.2 Related Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 150 9.1.2 Eligibility Criteria for appointment of the Managerial personnel (Section 196 read with Schedule V). . . . . . . . . . . . . 151 9.1.3 Tenure of Appointment (or reappointment) [Section 196(1 & 2)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 9.1.4 Reappointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 9.1.5 Number of Manager in a Company and Managing Directors in a company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 Remuneration (Section 197, 198 & Schedule V Part II). . . . . . . . . . . . . . 156 9.2.1 Overall Payment of remuneration to the Directors including Managerial Personnel. . . . . . . . . . . . . . . . . . . . . . . . 156 9.2.1.1 Remuneration in any other capacity . . . . . . . . . . . . 157 9.2.2 Limits on Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 9.2.2.1 Definition of Remuneration. . . . . . . . . . . . . . . . . . . 157 9.2.2.2 Total remuneration to all directors (In case of Profits) [Section 197]. . . . . . . . . . . . . . . . . . . . . 160 9.2.2.3 Remuneration to Directors who are not appointed as the Managerial Personnel [Second Proviso to Section 197(1)]. . . . . . . . . . . . . 161 9.2.2.4 Payment of remuneration with the approval of the general meeting. . . . . . . . . . . . . . . . . . . . . . . 162 9.2.2.5 Remuneration to any one of the Managerial Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 9.2.3 Payment of remuneration where Approval of Central Government is not required . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 9.2.3.1 Effective capital of a newly incorporated company. 166

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9.2.3.2 9.2.3.3

9.2.4

9.2.5 9.2.6 9.2.7 9.2.8

9.2.9 9.2.10

9.2.11

9.2.12

Calculation of Effective capital. . . . . . . . . . . . . . . . 166 Conditions for payment of remuneration in case of loss or inadequacy of profits to a managerial person operating in professional capacity. . . . . . . . . . . 167 9.2.3.4 Disclosures in the Board’s Report. . . . . . . . . . . . . . 170 Payment of remuneration with the Approval of Central Government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 9.2.4.1 Exemption to certain companies. . . . . . . . . . . . . . . 171 Special Circumstances not Requiring Central Government Approval. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Payment of Remuneration to a managerial person in two companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 Mode of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 Calculation of Net Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 Refund of excess remuneration & Waiver (Section 197 (9) & (10)). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 9.2.8.1 Refund of excess remuneration. . . . . . . . . . . . . . . . 174 9.2.8.2 Waiver of Excess remuneration. . . . . . . . . . . . . . . . 174 Chart showing compliances for appointment of MD & Payment of Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 Impact of Changes proposed as per the Companies (Amendment) Bill, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 9.2.10.1 Impact of amended provisions. . . . . . . . . . . . . . . . . 179 Checklist for Compliances and Procedure. . . . . . . . . . . . . . . . 180 9.2.11.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 9.2.11.2 Action points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 9.2.11.3 Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 9.2.12.1 Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 9.2.12.2 Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

Chapter 10 Committees of the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Types of committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 10.1 Applicable Provisions for the Companies for constitution of 10.2 various committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Audit Committee (Section 177). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 10.3 10.3.1 Requirement of having a committee. . . . . . . . . . . . . . . . . . . . . 193 10.3.2 Constitution of the Committees . . . . . . . . . . . . . . . . . . . . . . . . 194 10.3.2.1 Provisions as per the Companies Act. . . . . . . . . . . . 194 10.3.2.2 Provisions of LODR (Clause 18). . . . . . . . . . . . . . . 194 10.3.3 Who can attend the meeting?. . . . . . . . . . . . . . . . . . . . . . . . . . 195 xix

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10.4

10.5

10.6 10.7

10.8

xx

10.3.4 Functions of the Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . 195 10.3.5 Omnibus Approval of the related party transactions. . . . . . . . . 196 10.3.6 Meetings of the Audit Committee. . . . . . . . . . . . . . . . . . . . . . . 198 10.3.7 Role of the Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . 199 10.3.8 Vigil Mechanism (Regulation 22 of LODR) . . . . . . . . . . . . . . 202 10.3.9 Disclosures in the Board Report (Section 177). . . . . . . . . . . . . 202 10.3.10 Disclosures under the Corporate Governance report . . . . . . . . 203 10.3.11 Secretarial Standards (SS1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 10.3.12 Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Nomination and Remuneration Committee and Stakeholders Relationship Committee (Section 178). . . . . . . . . . . . . . . . . . . . . . . . . . . 203 10.4.1 Requirement of having a committee. . . . . . . . . . . . . . . . . . . . . 203 10.4.2 Constitution of the Committee. . . . . . . . . . . . . . . . . . . . . . . . . 204 10.4.3 Functions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 10.4.4 Role of the nomination and remuneration committee shall be as specified as in Part D of the Schedule II. (Regulation 19(4). . 205 10.4.5 Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 10.4.5.1 In the Board’s report . . . . . . . . . . . . . . . . . . . . . . . . 206 10.4.5.2 In the Corporate Governance Report. . . . . . . . . . . . 206 10.4.5.3 Placing on the website of the Company. . . . . . . . . . 206 Stakeholders Relationship Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 10.5.1 Constitution & Chairperson . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 10.5.2 Functions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 10.5.3 Role of the Stakeholders Relationship Committee shall be as specified as in Part D of the Schedule II (Reg. 20(4) of LODR). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 10.5.4 Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 Risk Management Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 10.6.1 Requirement of having a committee. . . . . . . . . . . . . . . . . . . . . 208 CSR Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 10.7.1 Requirement of having a committee (Section 135) . . . . . . . . . 208 10.7.2 Constitution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 10.7.3 Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 10.7.4 Functions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 10.7.5 Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 10.7.6 Committee Meetings – Provisions of the Secretarial Standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 10.7.6.1 Conduct the Committee Meeting. . . . . . . . . . . . . . . 209 10.7.6.2 Quorum for Meetings of Committees . . . . . . . . . . . 210 Checklist for Compliances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 10.8.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

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Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216

Chapter 11 Corporate Social Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . 219 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 11.1 Requirement of CSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 11.2 Constitution of the CSR Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 11.3 Functions of CSR Commitee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 11.4 CSR Activities covered under Schedule VII. . . . . . . . . . . . . . . . . . . . . . . 223 11.5 Implementation of CSR Activities (Rule 4). . . . . . . . . . . . . . . . . . . . . . . . 224 11.6 CSR Policy (Rule 6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 11.7 CSR Expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 11.8 Responsibility of Board under CSR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 11.9 Disclosures & Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 11.10 11.10.1 Display of CSR Activities on its Website (Rule 9). . . . . . . . . . 227 11.11 Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 FAQ’s on CSR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 11.12 Illustrations on CSR activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 11.13 Checklist for Compliances and Procedure. . . . . . . . . . . . . . . . . . . . . . . . . 235 11.14 11.14.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 11.14.2 Action Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 11.14.3 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 11.14.4 Checklists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 Annexure I: Format of Annual Report along with Checklist. . 244 Annexure II: Checklist for annual report on CSR activities to be included in board’s report. . . . . . . . . . . . . . . . . 245 11.15 Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 Chapter 12 Key Managerial Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 Definition of KMP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 12.1 Requirement of appointment of the Key Managerial Personnel.

12.2 (Section 203). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 Categories of KMP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 12.3 12.4 Conditions for appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 Vacation of office of KMP and resulting vacancy. . . . . . . . . . . . . . . . . . . 251 12.5 12.6 Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251 Chairperson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251 12.7 Categories of the KMP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 12.8 12.8.1 Definitions under the Companies Act. . . . . . . . . . . . . . . . . . . . 252 12.8.2 Qualifications or qualities for Key Managerial Person. . . . . . . 252 12.9 Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 xxi

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Chapter 13 Board & Committee Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 13.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 13.1.1 Secretarial Standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 13.1.2 Number of Board Meetings to be held in a Year (Frequency of Meetings). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 13.1.2.1 First Board Meeting after the Incorporation . . . . . . 256 13.1.2.2 Subsequent Meetings. . . . . . . . . . . . . . . . . . . . . . . . 256 13.1.2.3 Frequency of Meetings (SS1-2). . . . . . . . . . . . . . . . 257 13.1.3 Authority to call meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 13.1.4 Mode of holding Board Meetings. . . . . . . . . . . . . . . . . . . . . . . 258 13.1.5 Time, Place, Mode and Serial Number of Meeting . . . . . . . . . 258 13.1.6 Notice of the Board Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . 259 13.1.7 Agenda for the meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 13.1.7.1 Powers of the Board. . . . . . . . . . . . . . . . . . . . . . . . . 262 13.1.8 Quorum for the Board Meetings. . . . . . . . . . . . . . . . . . . . . . . . 271 13.1.8.1 Quorum in case of the Related Party Transactions . 272 13.1.8.2 Quorum in case of a vacancy caused on the Board and the number of Directors falling below the minimum quorum. . . . . . . . . . . . . . . . . . 274 13.1.8.3 Quorum in case of the meeting held through video conferencing. . . . . . . . . . . . . . . . . . . . . . . . . . 274 13.1.9 Attendance at Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 13.1.9.1 Chairman/Chairperson. . . . . . . . . . . . . . . . . . . . . . . 278 13.1.10 Minutes of the Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 Passing of a Circular Resolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 13.2 Custody of Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292 13.3 13.4 Holding of a meeting through video conferencing . . . . . . . . . . . . . . . . . . 292 13.4.1 Meaning of the term - “video conferencing or other audio visual means” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292 13.4.2 Compliances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292 13.4.2.1 Compliances before the Board meeting. . . . . . . . . . 292 13.4.2.2 Compliances at the time of the meeting. . . . . . . . . . 294 13.4.3 Duties of Chairperson. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 13.4.4 Duties of the Directors Participating through video conferencing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 13.4.5 Signing of an attendance register in case of a meeting held through video conferencing . . . . . . . . . . . . . . . . . . . . . . . 296 Adjourned meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 13.5 13.5.1 Adjournment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 13.5.2 Minutes of the Adjourned Meeting. . . . . . . . . . . . . . . . . . . . . . 297 13.6 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 xxii

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13.7 13.8

13.9

Committee Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 Checklist for Compliances and Procedure. . . . . . . . . . . . . . . . . . . . . . . . . 298 13.8.1 Powers exercisable by Board at the meeting of the Board of Directors by passing a board resolution. . . . . . . . . . . 298 13.8.2 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302 Action points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 13.8.3 13.8.4 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329

Chapter 14 Director & Related Party Transactions. . . . . . . . . . . . . . . . . . . . . 331 Meaning - Related Party Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 14.1 14.2 Meaning - Disclosure of Interest by a Director. . . . . . . . . . . . . . . . . . . . . 334 14.2.1 When to disclose? [Section 184(1)]. . . . . . . . . . . . . . . . . . . . . 335 14.2.2 What to disclose? [Section 184]. . . . . . . . . . . . . . . . . . . . . . . . 336 14.2.3 How to disclose?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 Authority approving the Related Party Transactions. . . . . . . . . . . . . . . . . 338 14.3 14.3.1 Conditions with respect to the Board Approval. . . . . . . . . . . . 341 14.3.2 Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 Recording of Disclosure and Transactions . . . . . . . . . . . . . . . . . . . . . . . . 349 14.4 14.4.1 Consequences of non-compliance of Section 184 read with Section 188. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 Compliances and Procedure on Disclosure of Interest by a Director . . . . 352 14.5 14.5.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 Action Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 14.5.2 14.5.3 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 14.5.4 Checklists on Form MBP 1 (Disclosure of interest). . . . . . . . . . . 355 14.5.5 Annexure I: Form MBP1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 Compliances and Procedure of related party transactions. . . . . . . . . . . . . 358 14.6 14.6.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 Action Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 14.6.2 14.6.3 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368 Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369 14.7 Chapter 15 Board’ Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373 Contents of Board’s report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373 15.1 Signing of the Board’s report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 15.2 15.3 Circulation of the Board’s report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386 Punishment for Contravention of Section 134. . . . . . . . . . . . . . . . . . . . . . 386 15.4 15.5 Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 15.6 Annexure - Form No. AOC-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391 15.7 xxiii

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Chapter 16 Loans and Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 Loans to Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 16.1 16.1.1 Prohibition on advancing Loan/Giving Guarantee/ Providing Security (Section 185). . . . . . . . . . . . . . . . . . . . . . . 393 16.1.2 Exceptions to Section 185. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 16.1.3 Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 Punishment for contravention. . . . . . . . . . . . . . . . . . . . . . . . . . 397 16.1.4 Loans from Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 16.2 16.2.1 Preview of Sections 73, 74, 76, 179 and 180. . . . . . . . . . . . . . 398 16.2.2 Limits on Loans from directors. . . . . . . . . . . . . . . . . . . . . . . . . 400 16.3 Changes proposed as per the Companies (Amendment) Bill, 2017 . . . . . 401 16.3.1 Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402 16.3.2 Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404 Checklist for Compliances and Procedure for Loan to Directors . . . . . . . 405 16.4 16.4.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405 16.4.2 Action points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408 16.4.3 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408 16.4.4 Checklist on Form MGT 14 (Filing of Resolutions and Agreements to the Registrar) . . . . . . . . . . . . . . . . . . . . . . . . . . 409 16.4.5 Annexure: Format of declaration . . . . . . . . . . . . . . . . . . . . . . . 411 16.5 Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 16.5.1 Loans to Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 16.5.2 Loans from Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412 Chapter 17 Roles & Responsibilities of a Director. . . . . . . . . . . . . . . . . . . . . . 415 Role of a Director in the running Company. . . . . . . . . . . . . . . . . . . . . . . . 415 17.1 Definitions under the Companies Act, 2013 . . . . . . . . . . . . . . . . . . . . . . . 416 17.2 Position of Directors with reference to the affairs of the Company . . . . . 418 17.3 17.3.1 Directors as trustees and agents . . . . . . . . . . . . . . . . . . . . . . . . 418 17.3.1.1 Directors are not agents or trustees for strangers. . . 418 17.3.2 Fiduciary duties with reference to assets of the company . . . . 419 17.3.3 Fiduciary duties with reference to issue and transfer of shares. . . 419 De jure & de facto directors, shadow directors. . . . . . . . . . . . . . . . . . . . . 421 17.4 Duties of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 17.5 17.5.1 Codification of common law principles. . . . . . . . . . . . . . . . . . 424 17.5.2 Holder of duties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425 17.5.3 Enforcement of duties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 17.5.4 Claim of oppression and mismanagement . . . . . . . . . . . . . . . . 427 17.5.5 Duty to exercise independent judgment. . . . . . . . . . . . . . . . . . 428 17.5.6 Duties where there is conflict of interest. . . . . . . . . . . . . . . . . . 430 Duty of loyalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431 17.5.7 xxiv

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17.6 17.7 17.8

Responsibilities as per the LODR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433 Classification of Directors, their statutory rights and liabilities . . . . . . . . 435 Rights and liabilities of the directors under various provisions. . . . . . . . . 436 17.8.1 Right to continue as a director . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437 17.8.2 Duration of the duties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 Defenses available. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441 17.9 Reliance on skills and judgment of another person . . . . . . . . . 441 17.9.1 17.9.2 Ratification by shareholders and its effect . . . . . . . . . . . . . . . . 442 17.9.3 Absolving from the liability by the courts . . . . . . . . . . . . . . . . 442 17.10 Role of a Director – Company under Liquidation. . . . . . . . . . . . . . . . . . . 444 17.11 Annexures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446 Annexure I: (UK) Companies Act 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 446 Annexure II: (Pakistan) Companies Act 2017. . . . . . . . . . . . . . . . . . . . . . 450 Annexure III: Regulation 26 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. . . 451 Chapter 18 Cessation of Office of a Director. . . . . . . . . . . . . . . . . . . . . . . . . . . 455 18.1 Cessation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 18.1.1 Cessation as per the provisions of the Companies Act, 2013, on happening of certain events. . . . . . . . . . . . . . . . . . . . 455 18.1.2 On expiry of his term/tenure, which was fixed at the time of appointment and his reappointment has not been made. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457 18.1.3 Cessation due to any event on the happening of which the director automatically vacates his office (Section 167) . . . 458 18.1.4 Cessation by tendering resignation from the post of the directorship (Section 168). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463 18.1.4.1 Effective Date of resignation. . . . . . . . . . . . . . . . . . 463 18.1.4.2 Intimation of Resignation to Registrar of Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464 18.1.4.3 Cessation due to death. . . . . . . . . . . . . . . . . . . . . . . 465 18.2 Removal of person from the post of the directorship . . . . . . . . . . . . . . . . 465 Checklist for Compliances and Procedure. . . . . . . . . . . . . . . . . . . . . . . . . 467 18.3 18.3.1 Checkpoints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 Action points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 18.3.2 18.3.3 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468 18.3.4 Checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471 Annexure I: Checklist of DIR 12 (Particulars of appointment of directors or the key managerial personnel and the changes amongst them). . . . . . . . . . . . . . . . 471 Important Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472 18.4 xxv

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Chapter 19 List of Punishments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473 List of offences in which Directors are held responsible, 19.1 punishment and compoundability thereof. . . . . . . . . . . . . . . . . . . . . . . . . 473 Meaning of ‘officer’ and ‘officer in default’. . . . . . . . . . . . . . . . . . . . . . . 532 19.2 Offences Liable for fraud. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533 19.3 Compounding of offences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534 19.4 19.5 Adjudication of penalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 535 Chapter 20 List of Registers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537 List of Registers related to Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537 20.1 List of Registers to be authenticated by Directors. . . . . . . . . . . . . . . . . . . 539 20.2 Chapter 21 Matters Requiring Board Resolution. . . . . . . . . . . . . . . . . . . . . . . 549 Matters which require board resolution under the Companies Act, 2013 . . 549 21.1 Matters which Require Bard Resolutions as per Secretarial Standards. . . 555 21.2 Matters in which Board Resolution is as per SEBI (Listing 21.3 Obligations and Disclosure Requirements) Regulations, 2015. . . . . . . . . 556 Chapter 22 Documents Requiring Directors’ Signature. . . . . . . . . . . . . . . . . . 561 List of documents required to be signed by Director under 22.1 Companies Act, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561 Chapter 23 Miscellaneous Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567 Payment to Director for Loss of Office, etc. in Connection With 23.1 Transfer of Undertaking, Property or Shares. . . . . . . . . . . . . . . . . . . . . . . 567 Recovery of Remuneration in Certain Cases. . . . . . . . . . . . . . . . . . . . . . . 569 23.2 23.3 Fixation of limit on Managerial remuneration by Central Government . . 569 Compensation for Loss of Office of Managing or Whole-time 23.4 Director or Manager. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 Annual General Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572 23.5 23.5.1 Day, date, time and place for holding AGM. . . . . . . . . . . . . . . 572 23.5.2 Extension for holding of an AGM . . . . . . . . . . . . . . . . . . . . . . 573 23.5.3 Notice calling AGM and explanatory statement to be attached thereto (sec. 102) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573 Annual Return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 574 23.6 23.6.1 Signing of annual return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575 23.6.2 Filing of Annual Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575 Place of Keeping and Inspection of Registers, Returns, etc.. . . . . . . . . . . 575 23.7 23.7.1 Keeping the registers etc. at any other place other than the registered office of the company. . . . . . . . . . . . . . . . . . . . . 576

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23.7.2 Preservation of Register of Members etc. and Annual Return. 576 23.7.3 Inspection of registers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 577 Application of provisions of the Information Technology Act, 2000 . . . . 578

Annexure

Secretarial Standard on Meetings of the Board of Directors . . . 581

xxvii

Table of cases Alamin Seatrans Ltd. v Owners and Party Interested In Vessel In M.V. ‘Loyal Bird’, MANU/WB/0028/1995 : (1995) 1 CAL LT 98 (HC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417 Albert Judah Judah v Rampada Gupta and Anr., AIR 1959 Cal 715 : MANU/WB/0200/1959. . . . . . . . . . . . . . . . . . . . . . . 418, 419, 422, 423 Alcon Electronics Pvt. Ltd. v Celem S.A., MANU/ MH/1549/2014 : 2015 (4) BomCR 107. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417 Allahabad Bank v Deepak Kumar Bhola, 1997 (4) SCC 1. . . . . . . . . . . . . . . . . . . 66 Anita Malhotra v Apparel Export Promotion Council and Anr., AIR 2012 SC 31 : MANU/SC/1323/2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 CIT, Gujarat v Distributors (Baroda) (P) Ltd., (1972) 4 SCC 353. . . . . . . . . . . . 396 City Equitable Fire Insurance Co. Ltd., In re [1925] 1 Ch.D. 407. . . . . . . . . . . . 441 Dale & Carrington Invt. P. Ltd. and Anr. v P.K. Prathapan and Ors MANU/SC/0748/2004 : (2005)1 SC C212. . . . . . . . . . . . . . . . . . . . . . . . . . . . 420 DCIT v Venkateswar Investment & Finance P Ltd., (2005) 93 ITD 177 (Kol) (SB). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 DCM Financial Services Limited v J.N. Sareen and Anr., MANU/ SC/7699/2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 Dovey v Cory [1901] AC 477. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441 Duomatic Ltd, In re [1969] 1 All ER 161. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 East India Hotels Ltd, In re MANU/WB/0144/1978. . . . . . . . . . . . . . . . . . . . . . 443 Ferguson v Wilson (1866) 2 Ch. A. 77 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 Fidaali Moiz Mithiborwala and Ors. v Aceros Fortune Industries (P.) Ltd. and Ors., [2017] 200 CompCas 554 . . . . . . . . . . . . . . . . . . . . . . . . . . 393 Filmistan, In re MANU/MH/0075/1959 : AIR 1959 Bom 245 . . . . . . . . . . . . . . 443 Forest of Dean, Coal Mining Co., In re (1878) 10 Ch. D. 450. . . . . . . . . . . . . . . 419 Fulham Football Club Ltd v Cabra Estates plc, [1994] 1 BCLC 363 (Court of Appeal). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 Great Eastern Railway Company v Turner (1872) 8 Ch. A. 149. . . . . . . . . . . . . 418 Hillcrest Realty Sdn. Bhd. v Hotel Queen Road Pvt. Ltd., 2006 71 SCL 41 CLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Hogg v Cramphorn Ltd, [1967] Ch 254 (Chancery Division). . . . . . . . . . . . . . . 428 Hydrodam (Corby) Ltd, In re [1994] 2 BCLC 180. . . . . . . . . . . . . . . . . . . . . . . . 422

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Item Software (UK) Ltd v. Kouroush Fassihi, [2004] EWCA Civ 1244 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432 ITO Ward 12 (3), Kolkata v Snowtex Investment Ltd., 2015 SCC Online ITAT 12524 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 LIC v Escorts Limited, AIR 1986 SC 1370 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465 London & Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd [1891] WN 165. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430 Madoff Securities International Ltd. v Raven, [2011] EWHC 3102 (QBD Commercial Court) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442 Naina D. Kamani v Janson Engineering and Trading (Private) Limited, [2011] 167 Comp Cas 89 (Bom). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Nanalal Zaver v Bombay Life Assurance Co. Ltd., MANU/ SC/0003/1950 : AIR 1950 SC 172. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418, 420 National Textile Workers v P.R. Ramkrishnan and Others 1983 SCR (1) 9. . . . . . 219 Needle Industries (India) Ltd. v Needle Industries Newey (India) Holding Ltd., AIR 1981 SC 1298 : MANU/SC/0050/1981. . . . . . . . . . . . . . . 427 Om Parkash Khaitan v Shree Keshariya Investment Ltd. [1978] 48 Comp Cas 85. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444 Paramount Bio-Tech Industries v Union of India, 2004 120 CompCas 18 All. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Partha Ghosh and Ors. v Pragati 47 Development Limited and Ors. MANU/CL/0149/2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Percival v Wright L.R. (1902) 2 Ch. 421. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 Plus Group Ltd v Pyke [2002] EWCA Civ 370. . . . . . . . . . . . . . . . . . . . . . . . . . 430 Punt v Symons & Co. Ltd. [1903] 2 Ch 506. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 Rajeev Saumitra v Neetu Singh and Ors., MANU/DE/0201/2016 : [2016] 134 CLA 450 (Delhi). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425, 427, 424 Raj Shekhar Agrawal and Ors. v Pragati 47 Development Limited and Ors. MANU/CL/0151/2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Raj Shekhar Agrawal and Ors.v Union of India and Ors. MANU/ DE/2817/2015 : [2016] 194 CompCas 511 (Delhi). . . . . . . . . . . . . . . . . . . . . 102 Revenue and Customs Comrs v Holland, (SC(E)) [2010] 1WLR 2793. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422, 423 Sangramsinh P. Gaekwad v Shantadevi P. Gaekwad, MANU/ SC/0052/2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420, 428 Sathy M.P. v Sarasa, MANU/KE/0863/2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

xxx

Table of cases

Secretary of State for Trade and Industry v Deverell, [2000] 2WLR 907. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 Sona Bala Bora v Jyotirindra Bhatacharjee, MANU/SC/0274/2005. . . . . . . . . . . 65 Supreme Bank of India Ltd, In re [1973] 43 Comp Cas 382. . . . . . . . . . . . . . . . 441 Thorby v Goldberg (1964) 112 CLR 597. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 Towers v Premier Waste Management Ltd., [2012] BCC 72. . . . . . . . . . . . 425, 431 Tri-sure India Ltd. v. Registrar of Companies, Maharashtra, In re [1983] 54 CompCas 197 (Bom) : MANU/MH/0006/1981. . . . . . . . 441, 443, 444 Tri-sure India Ltd. v Registrar of Companies, Maharashtra, In re [1983] 54 CompCas 197 (Bom) : MANU/MH/0006/1981. . . . . . . . . . . . 441, 443 Vikram Ahuja v Greenstone Investments Pvt. Ltd., CA 47/2016 in CP 68/2010, Order dated 22.11.2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Vodafone International Holdings B.V. v Union of India (UOI) and Anr., MANU/SC/0051/2012 : [2012] 170 CompCas 369 (SC). . . . . . . . . . . . . 429 Wasava Tyres v The Printers (Mysore) Ltd., MANU/ KA/8543/2006 : [2007] 139 CompCas 446 (Kar). . . . . . . . . . . . . . . . . . . . . . . 417 York and North Midland Ry. Co. v Hudson (1845) 16 Beav 485. . . . . . . . . . . . . 418 Aes Opgc Holding (Mauritius) v Orissa Power Generation Corporation, 2005 125 CompCas 299 CLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431

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Chapter 1

Introduction 1.1

INTRODUCTION

In India, the Companies are incorporated and governed under the provisions of the Companies Act. The type of a company depends as per its definition provided under the Companies Act and various provisions provided under allied rules of the Companies Act, 2013, governing these companies.

It is necessary to understand the structuring of various types of companies, their classification and their categorization under the Companies Act, 2013 (hereinafter referred to as the Act), as the positioning of directors varies on the basis of the same.

A Company has been defined in the Companies Act, 2013 under sec 2(20) as “company” means a company incorporated under this Act or under any previous company law1.

1 Section 2(67): “previous company law” means any of the laws specified below:— (i) Acts relating to companies in force before the Indian Companies Act, 1866 (10 of 1866); (ii) the Indian Companies Act, 1866 (10 of 1866); (iii) the Indian Companies Act, 1882 (6 of 1882); (iv) the Indian Companies Act, 1913 (7 of 1913); (v) the Registration of Transferred Companies Ordinance, 1942 (Ord. 54 of 1942);{} (vi) the Companies Act, 1956 (1 of 1956); and (vii) any law corresponding to any of the aforesaid Acts or the Ordinances and in force— a. in the merged territories or in a Part B State (other than the State of Jammu and Kashmir), or any part thereof, before the extension thereto of the Indian Companies Act, 1913 (7 of 1913); or b. in the State of Jammu and Kashmir, or any part thereof, before the commencement of the Jammu and Kashmir (Extension of Laws) Act, 1956 (62 of 1956), in so far as banking, insurance and financial corporations are concerned, and before the commencement of the Central Laws (Extension to Jammu and Kashmir) Act, 1968 (25 of 1968), in so far as other corporations are concerned; (viii) the Portuguese Commercial Code, in so far as it relates to sociedades anonimas; and (ix) the Registration of Companies (Sikkim) Act, 1961 (Sikkim Act 8 of 1961); (this clause is not yet enforced) 1

Chapter 1

1.2

The Director’s Handbook

TYPES OF COMPANIES AS PER THE THEIR KEY FEATURES

A company can be incorporated in any one of the following form; i.e. a)

An One person company,

b)

A Private limited company or

c)

A Public limited company

1.2.1

Definitions & key features Definitions Section 2(62)

One Person Company

Section 2(68)

Private Limited Company Public Limited Company

means a company which “private company” means a 2 having a has only one person as a [company minimum paid-up share member; capital as may be prescribed, and which by its articles],— (i) restricts the right to transfer its shares; (ii) except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

2 3

2

Section 2(71)

public company” means a company which— (a) is not a private company; (b) has a minimum paidup share capital , as may be prescribed: Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act3 even where such subsidiary company continues to be a private company in its articles;

In case of Section 8 Company, in clause (68) of section 2 the requirement of having minimum paid-up share capital shall not apply. – Vide MCA Notification dated 5th June, 2015.

Such company shall be treated as a public company both for rights and obligations arising under the Act. This company shall be treated as a private company only for 3 conditions specified in the definition of the private company regarding restriction on right to transfer, limitation on the maximum number of members and prohibition on invitation to public for subscription to securities. This interpretation was adopted by the Company Law Board in the case of Hillcrest Realty Sdn. Bhd. v Hotel Queen Road Pvt. Ltd., 2006 71 SCL 41 CLB for similar definition in the Companies Act, 1956.

Introduction

Chapter 1

Definitions Section 2(62)

Section 2(68)

One Person Company

Section 2(71)

Private Limited Company Public Limited Company Provided further that— (A) persons who are in the employment of the company; and (B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and (iii) prohibits any invitation to the public to subscribe for any securities of the company; KEY- FEATURES

Minimum number members - 1 (one)

of Minimum number members - 2

of Minimum number members - 7

of

There can be only 1(One) Maximum number of There is no restriction on members - 200 members the maximum number of Member subject to the provisions of members sec 2(68) Minimum number Directors - 1 (one)

of Minimum number Directors - 2 (Two)

Shares cannot be transferred, except by way of appointment of a Nominee. However, in case of transfer of ownership of OPC, the entire shareholding may be transferred.

of Minimum number Directors – 3

Shares are not freely Shares are transferable.

There are transferable restrictions on the transferability through the Articles.

of

freely

3

Chapter 1

The Director’s Handbook

Definitions Section 2(62) One Person Company Number of Board Meetings Holding of Board meetings depends upon the number of directors.

Section 2(68)

Private Limited Company Public Limited Company Number of Board Meetings Holding of Board meetings depends upon whether the company falls under the category of a ‘small company’ as defined under the Companies Act. Minimum 2 Board meetings.

Quorum for Board Quorum for Meetings Not applicable, Meetings - 2 if there is a single Director (Applicable if the number of directors are more than One) Holding of Annual general meeting is not required

1.3

Section 2(71)

Number of Board Meetings Minimum 4 board Meetings would be conducted with the gap of not less than 120 days in between two meetings

Board Quorum for Meetings - 3

Board

Annual General meeting is Annual General meeting is required to be held required to be held

TYPES OF COMPANIES AS PER THE LIABILITY CONCEPT

Based on the liability concept, a Company can be incorporated as: (a) a Company limited by Shares, (b) a Company Limited by Guarantee, or (c)

an Unlimited Company.

Following definitions explain the above three concepts: Definitions Section 2(22)

Section 2(21)

Section 2(92)

“company limited by shares”

“company limited by guarantee”

“unlimited company”

means a company having means a company having means a company not the liability of its members the liability of its members having any limit on the 4

Introduction

Chapter 1

Definitions Section 2(22)

Section 2(21)

Section 2(92)

“company limited by shares”

“company limited by guarantee”

“unlimited company”

limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them;

limited by the liability of its members; memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up;

The liability of the members is limited and determined solely on the basis of unpaid amount on shares.

The liability of members is The liability of members is limited and determined unlimited. solely on the basis of amount of guarantee given by them.

The personal assets of the shareholders are accountable only to the extent of unpaid amount on shares. However, this liability is enforced by the company and not by the creditors themselves.

The personal assets of the shareholders are accountable only to the extent of guarantee.

However, this liability is enforced by the company and not by the creditors themselves.

The personal assets of the shareholders are accountable to the extent of unpaid liabilities in the company. However, this liability is enforced by the company and not by the creditors themselves.

Funds may be raised by Funds may be raised by Funds may be raised by issue of shares and other issue of shares and other issue of shares and other permissible means. permissible means. permissible means.

Membership is transferred The interest of members The interest of members may be transferred. may be transferred. by transfer of shares.

However, guarantee is required to be executed afresh by the new member.

1.4

OTHER TYPES OF COMPANIES

There are certain other types of companies as well. Few of which are further defined under sec 2 of the Companies Act, 2013. It is important to understand these categories as many compliances in relation to the companies depend upon the category under which the company is getting covered.

5

Chapter 1

The Director’s Handbook

Following chart explains and provides various categories of such companies and their definitions under the Act, as well as under the allied rules, if any.

1.5

CATEGORIES OF COMPANIES

The Private and the Public limited companies incorporated under the Companies Act may acquire different status and can be further categorized as under: S Company No. Category

Section Reference

1.

Company 8(1) incorporated with the charitable Objects (Sec 8) Company

2.

Producer Company

4

6

Definitions under the Companies Act Where it is proved to the satisfaction of the Central Government that a person or an association of persons proposed to be registered under this Act as a limited company— (a) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; (b) intends to apply its profits, if any, or other income in promoting its objects; and (c) intends to prohibit the payment of any dividend to its members, the Central Government may, by license issued in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of persons to be registered as a limited company under this section without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited” , and thereupon the Registrar shall, on application, in the prescribed form, register such person or association of persons as a company under this section.

465 4read with (l) “Producer Company” means a body Part IXA of the corporate having objects or activities

The provisions of Part IX A of the Companies Act, 1956 shall be applicable mutatis mutandis to a Producer Company in a manner as if the Companies Act, 1956 has not been repealed until a special Act is enacted for Producer Companies.

Introduction

S Company No. Category

Chapter 1

Section Reference

Definitions under the Companies Act

Companies Act, specified in section 581B and registered 1956 (sec 581A) as Producer Company under this Act (under the Companies Act, 1956) ; 3.

Small Company 2(85)

“small company” means a company, other than a public company,— (i) 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 five crore rupees; and (ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees: Provided that nothing in this clause shall apply to— (A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act; The Companies (Amendment) Bill, 2017 proposes to increase the criterion of maximum paid up capital to INR 10 Crores and maximum turnover to INR 100 Crores. For calculation of turnover, the profit and loss account of immediately preceding financial year is required to be taken into account.

4.

Government Company

“Government company” means any company in which not less than fifty-one per cent of the paid-up share capital5 is held

5

2(45)

Defined under sec 2(64) as follows: ‘“paid-up share capital” or “share capital paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called.’ Hence, both equity and preference capital is required to be included here.

7

Chapter 1

S Company No. Category

The Director’s Handbook

Section Reference

Definitions under the Companies Act by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company;

5.

Listed Company 2(52)

“listed company” means a company which has any of its securities listed on any recognized stock exchange;

6.

Listed Entity

2(p) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

“listed entity” means an entity which has listed, on a recognised stock exchange(s), the designated securities issued by it or designated securities issued under schemes managed by it, in accordance with the listing agreement entered into between the entity and the recognised stock exchange(s);

7.

Foreign Company

2(42)

“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.

8.

Holding Company

2(46)

“holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies; The Companies Amendment Bill, 2017 (as passed by the Lok Sabha on 27 July 2017) proposed to insert the following explanation to the definition.

Explanation- For the purposes of this clause, the expression “company” includes any body corporate.

2(m) of the “holding company” means a holding SEBI (Listing company as defined in sec 2(46) of the Obligations and Companies Act, 2013; 8

Introduction

S Company No. Category

Chapter 1

Section Reference

Definitions under the Companies Act

Disclosure Requirements) Regulations, 2015 9.

6

Subsidiary Company

2(87)

“subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company— (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital6 either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation.—For the purposes of this clause,— a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or subclause (ii) is of another subsidiary company of the holding company; b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

As per Rule 2(1) (r) of the Companies (Specification of definitions details) Rules, 2014, ‘total share capital’ is the aggregate of the (a) paid-up equity share capital and (b) convertible preference share capital. The Companies Amendment Bill proposes to ssubstitute the words ‘total share capital’ with ‘total voting power’.

9

Chapter 1

S Company No. Category

The Director’s Handbook

Section Reference

Definitions under the Companies Act c) d)

10.

Associate Company

7

10

the expression “company” includes any body corporate; “layer” in relation to a holding company means its subsidiary or subsidiaries;

2(6)

“associate company“, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

Explanation.—For the purposes of this clause, “significant influence” means control of at least twenty per cent of total share capital7, or of business decisions under an agreement; The Companies (Amendment) Bill, 2017 proposes to replace this explanation with the following explanation: ‘Explanation.—For the purpose of this clause— (a) the expression “significant influence” means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement; (b) the expression “joint venture” means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;

2(b) of the SEBI (Listing Obligations and Disclosure

associate shall mean any entity which is an associate under sub-section (6) of section 2 of the Companies Act, 2013 or under the applicable accounting

As per rule 2(1) (r) of the Companies (Specification of definitions details) Rules, 2014, ‘total share capital’ is the aggregate of the (a) paid-up equity share capital and (b) convertible preference share capital.

Introduction

S Company No. Category

Chapter 1

Section Reference

Definitions under the Companies Act

Requirements) Regulations, 2015

standards: Provided that this definition shall not be applicable for the units issued by mutual fund which are listed on a recognised stock exchange(s) for which the provisions of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 shall be applicable;

11.

Specified IFSC MCA Public Company Notification GSR 08 (E) dated 4th January 2017

An unlisted public company which is licensed to operate by the Reserve Bank of India or the Securities and Exchange Board of India or the Insurance Regulatory and Development Authority of India from the International Financial Services Centre located in an approved multi services Special Economic Zone set-up under the Special Economic Zones Act, 2005 (28 of 2005) read with the Special Economic Zones Rules, 2006 (herein after referred to as “Specified IFSC public company”)

12.

Specified IFSC MCA Private Notification GSR 09 (E) dated 4th Company January 2017

A private company which is licensed to operate by the Reserve Bank of India or the Securities and Exchange Board of India or the Insurance Regulatory and Development Authority of India from the International Financial Services Centre located in an approved multi services Special Economic Zone set-up under the Special Economic Zones Act, 2005 (28 of 2005) read with the Special Economic Zones Rules, 2006 (hereinafter referred to as “Specified IFSC private company”).

11

Chapter 1

1.6

The Director’s Handbook

DIRECTORS

After going through the different types and categories of companies, it would be necessary to know about the term “director” used under the Companies Act in relation to the companies.

A director is any person (individual) who is appointed in the capacity of a Director in any company incorporated under the Companies Act, 2013. As per the Companies Act, 2013, the term is defined as under;

1.6.1

Definitions of the terms

Under the Companies Act •

Section 2(34) defines the term “director” as follows: “Director” means a director appointed to the Board of a company; A person can get appointed in the capacity of a director, either by the Board of Directors or by the General Body, i.e. the members of the company at their duly convened meeting.

•

Section 2(10) defines the term “Board of Directors” or “Board” as follows: “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.

The term has been also used under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred to as LODR).

Under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 Regulation 2(d) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, defines the term “board of directors or board of trustees” as follows: “Board of Directors” or “Board of Trustees” shall mean the board of directors or board of trustees, whichever applicable, of the listed entity.

1.6.2

Requirement of having a director/ a Board of Directors under the Companies Act

Section 149 of the Companies Act, 2013 provides for the requirement of having directors in every company. It not only specifies the minimum and maximum number of directors, but also provides for the requirement of having different categories of directors depending upon the type of company.

Following chart covers the main types of companies and the applicable provisions in relation to directors: 12

Introduction

S Particulars No.

Chapter 1

Type of Company One Person Company

Private Limited

Public Limited

Section 8 company

Govt. company 2 or 3 depending upon whether a Private/Pub lic company

1.

Minimum Number of Directors [Sec 149(1)(a)]

1

2

3

2 or 3 depending upon whether a Private/Pub lic company

2.

Maximum Number of Directors [Sec 149(1)(b)]

15

15

15

Not Not Applicable Applicable

3.

Where the maximum number of directors exceeds 15, a Special resolution will be required for increase in the Limit of such 15 (number of directors)

√

√

√

Special resolution not required

Special resolution not required

4.

Applicability for Not Not having a Woman Applicable Applicable Director [Sec 149(2)]

At least 1 In case of a Listed Company or such other Company having prescribed 8 capital

If a Public limited company having prescribed capital - At least 1

If a Public limited company having prescribed capital - At least 1

8

Every other public company having (a) paid–up share capital of one hundred crore rupees or more; or (b) turnover of three hundred crore rupees or more: 13

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Type of Company One Person Company

Private Limited

Public Limited

Section 8 company

Govt. company

At least 1/3rd 9 of the total number of directors if prescribed limits are exceeded

If a Public limited company At least 1/3rd of the total number of directors if prescribed limits are exceeded

If a Public limited company At least 1/3rd of the total number of directors if prescribed limits are exceeded

5.

Applicability for Not Not having an Applicable Applicable Independent Director [Sec 149(4)]

6.

Applicability for Applicable Applicable Applicable Applicable Applicable having a director At least 1 At least 1 At least 1 At least 1 At least 1 who has stayed in India for a total period of not less than 182 days in the previous financial year 10 [Sec 149(3)]

Section 149 also explains various eligibility criteria applicable to a person getting appointed as an Independent director in a company which are covered separately under the Chapter relating to the independent Directors.

Every person required to be appointed or who is willing to get appointed in any company as a director, needs to comply with certain pre-requisites, as covered in the next chapter.

9

Explanation to sec 149(4)—For the purposes of this sub-section, any fraction contained in such one-third number shall be rounded off as one.

10 The Companies Amendment Bill, 2017 (as passed by the Lok Sabha on 27 July 2017) proposes to add a provision for newly incorporated companies by virtue of which, in case of a newly incorporated company the requirement under sec 149(3) shall apply proportionately at the end of the financial year in which it is incorporated.

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Introduction

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IMPORTANT POINTS Particulars

Remarks

1.

How to check if the company is The company should have a minimum having minimum number of number of directors on its Board as directors on its Board? prescribed under sec 149, for which the provision in the Articles should be checked.

(Minimum no. of directors - 2 in case of Private & 3 in case of Public company)

2.

How to check whether the company has exceeded/not exceeded the maximum limit for the directors as prescribed under the Act, without following the necessary procedure?

3.

Whether the directors should reside The company should have at least one in India or abroad? director who has stayed in India for a total period of not less than 182 days during the previous calendar year.

The maximum number of directors shall not be more than 15. In case the maximum number is more than 15, the company should have passed a Special Resolution to that effect.

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The Director’s Handbook