The new companies act in 2013 makes several new provisions for Directors and also lays down several new guidelines. Below are some important highlights from the Companies Act 2013 for directors and companies. The Indian boardroom is definitely changing for the better with these new rules and recommendations.
1. WOMAN DIRECTOR UNDER NEW COMPANIES ACT
The category of companies which need to comply with the requirement of having at least one woman director are as follows: * [section 149(1) of 2013 Act]
(i) Every listed company, within one year from the commencement of the second proviso to sub-section (1) of section 149.
(ii) Every other public company that has paid-up share capital of one hundred crore rupees or more or a turnover of three hundred crore rupees or more within three years from the commencement of the second proviso to sub-section (1) of section 149.
While this new requirement will go a long way in encouraging gender diversity, it has already created quite a stir in the manner in which companies will ensure compliance.
2. Number of directorships
The 2013 Act increases the limit for the number of directorships that can be held by an individual from 12 to 15 [section 149(1) of the 2013 Act].
3. One director to be resident in India
A new requirement with respect to directors is that at least one director to have stayed in India for at least 182 days in the previous calendar year [section 149(3) of 2013 Act]. This requirement appears to be a departure from the focus given in the 2013 Act towards the use of electronic modes such as the use of video conferences for meetings and electronic voting. With the increasing use of electronic media, the need, for a director to be resident in India for a minimum amount of time, becomes redundant.
4. Independent directors
One of the significant aspects of the 2013 Act is the effort made towards incorporating some of the salient requirements mandated by the SEBI in clause 49 of the listing agreement in the 2013 Act itself. To this effect, the 2013 Act requires every listed public company to have at least one-third of the total number of directors as independent directors. Further, the central government in the draft rules has prescribed the minimum number of independent directors in case of the following classes of public companies* [section 149(4) of the 2013 Act].
(i) Public companies having paid-up share capital of 100 crore INR or more; or
(ii) Public companies having a turnover of 300 crore INR or more
(iii) Public companies which have, in aggregate, outstanding loans or borrowings or debentures or deposits, exceeding 200 crore INR
The 2013 Act also states that companies will have a period of one year to ensure compliance with the 2013 Act and the Rules that are framed.
4.1 Conflicting requirements
While there have been attempts to harmonize the requirements of SEBI and the 2013 Act was made, there are several aspects relating to independent directors where the requirements of the 2013 Act differ from that of clause 49 of the equity listing agreement. The requirements of the 2013 Act and the manner in which they differ from those under clause 49 of the equity listing agreement include the definition itself. The other main differences are as follows:
1. Clause 49 does not require the board to exercise its judgment and opine on whether the independent director is a person of integrity or has relevant expertise or experience. This requirement poses difficultly in terms of the manner in which the integrity of an individual can be assessed by the board.
2. Clause 49 does not require examination of the independence of the relatives of independent directors. Extending the disqualification of the independent directors to consider the pecuniary relationship of the relatives would pose unnecessary hardship for the independent directors.
3. The qualification of the independent director has been left to be specified later.
4. The 2013 Act brings the constitution of the board in India at par with other international capital markets i.e., by mandating at least one-third of the board to be independent directors in case of listed companies. Whereas, the SEBI requirements are where the chairman of the board is a non-executive director, at least one-third of the board should comprise of independent directors and where the non-executive chairman is a promoter of the company or its related to any promoter or person occupying management positions at the board level or at one level below the board, at least one-half of the board of the company shall consist of independent directors.
Differing compliance requirements with respect to the appointment of independent directors, remuneration thereto, imposed by multiple regulators will lead to hardship as well as the increased cost of compliance for companies.
The 2013 Act limits the tenure of office of an independent director to a maximum of two tenures of five consecutive years, with a
cooling-off period of three years between the two tenures. During the cooling-off period of three years, should not be appointed in or be associated with the company in any other capacity, either directly or indirectly [proviso to section 149(11) of 2013 Act].
It is also relevant to note that the MCA had released the corporate governance voluntary guidelines in 2009, which permitted three tenures (with other conditions similar to those discussed above) for an independent director while as per the clause 49 of the equity listing agreement, an independent director cannot serve for more than nine consecutive years.
Stock options: As per the 2013 Act, an independent director will not be eligible to get stock options but may get payment of fees
and profit linked commission subject to limits specified or to be specified in the rules [section 149 (9) of 2013 Act]. This again is in contradiction with SEBI’s requirements, whereby for the purpose of granting stock options, the term employee includes independent directors also.
4.2 DATABANK OF INDEPENDENT DIRECTORS
The 2013 Act makes the appointment process of the independent directors, independent of the company’s management by constituting a panel or a data bank to be maintained by the MCA, out of which companies may choose their independent directors. The proposal has its origins in the report of the 21st Standing Committee on finance, wherein it was acknowledged that preparation of a databank of independent directors would vest with a regulatory body that may comprise of representatives of MCA, SEBI, Reserve Bank of India, professional institutions, Chambers of Commerce and Industry, etc [section 150 of 2013 Act].
A drawback of constituting a panel of independent directors is that it may discourage people from registering with the panel and in that sense limit the options available to a company for appointment of independent directors.
4.3 Code for an independent director
The 2013 Act includes Schedule IV ‘Code for Independent Directors’ (Code) which broadly prescribes the following for independent directors:
• Professional conduct
• Role and functions
• Manner of appointment
• Resignation or removal
• Holding separate meetings
• Evaluation mechanism
The code appears to be mandatory which would lead to some of the following concerns:
• The code states that an independent director shall uphold ethical standards of integrity and probity, however, what would constitute ethical behavior is not defined and is open to interpretation.
• The code does not give any cognizance to the need for training for the independent directors.
• The code refers to the appointment of independent directors by the board after evaluating certain attributes. The concern that remains unaddressed is the manner in which companies need to carry out an assessment of the attributes of an independent director as specified under ‘manner of appointment’ in the code from the databank maintained by the MCA.
4.4 Liability of independent directors
The 2013 Act makes an attempt to distinguish between the liability of an independent director and non-executive director from the rest of the board and has accordingly inserted a provision to provide immunity from any civil or criminal action against the independent directors. The intention and effort to limit the liability of independent directors is demonstrated from the section 149(12) of the 2013 Act which inter-alia provides that liability for independent directors would be as under:
“Only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, with his consent or connivance or where he had not acted diligently.”
The section seeks to provide immunity from civil or criminal action against independent directors in certain cases. Further, in accordance with the requirement of section 166 (2) of the 2013 Act, the whole of the board is required to 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 interest of the company, its employees, the shareholders, the community and for the protection of the environment. By virtue of this section, the duty of independent directors actually goes beyond its normal definition and is not restricted to executive directors only.
It is amply clear that independent directors have little or no defense and their obligations continues to remain a debatable topic since they would still be treated equivalent to the other directors by holding them responsible for decisions made through board processes.
5. Appointment of an additional director
It is pertinent to note that, in order to discourage inappropriate practices, the 2013 Act states that any person who fails to get elected as a director in the general meeting can no longer be appointed as an additional director by the board of directors [section 161 of 2013 Act].
6. Additional compliance requirements for private companies
There are certain increased compliance requirements mandated for private companies which, till now, were mandated only for public companies and private companies which are subsidiaries of public companies. These include the following:
1. Appointment of director to be voted individually
2. Option to adopt the principle of proportional representation for the appointment of directors
3. Ineligibility on account of non-compliance with section 274(1)) (g) now extended for appointment or reappointment as a director in a private limited company also.
Meetings of the board and its powers
There have been significant inroads made by the MCA in the recent past with respect to giving cognizance to the use of electronic media in the day-to-day operations of corporates. The 2013 Act takes this further by allowing the use of electronic mode for sending notice of meetings [section 173(3) of 2013 Act], passing of a resolution by circulation [section 175 of 2013 Act] and other areas. Some of the other significant changes in relation to the board and its functioning include:
1. Audit committee
The requirements relating to audit committees were first introduced by the Companies (Amendment) Act, 2000. Audit committees are a measure of ensuring self-discipline, constituted with the object to strengthen and oversee management in public companies
and to ensure that the board of directors discharge their functions effectively. The 2013 Act acknowledges the importance of an audit committee and entrusts it with additional roles and responsibilities [section 177 of the 2013 Act].
However, the fact that the 2013 Act is not entirely in harmony with the requirements of clause 49 of the equity listing agreement, cannot be ignored. While most of the requirements including the establishment of a ‘vigil mechanism’ for directors and employees to report genuine concerns, that are similar to the requirements of clause 49 of the equity listing agreement have been incorporated in the 2013 Act, the differences are as follows:
1. As per the 2013 Act, the audit committee should have a majority of independent directors.
2. The Chairman of the audit committee need not be an independent director.
3. A majority of the members of the audit committee should be financially literate, i.e. should have the ability to read and understand the financial statements.
4. Every listed company and the following class (es) of companies as prescribed in the draft rules should establish a vigil mechanism for directors and employees to report genuine concerns such as :*
a. Companies that accept deposits from the public.
b. Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees
2. Nomination and remuneration committee and stakeholders relationship committee
The 2013 Act includes this new section requiring constituting the nomination and remuneration committee by every listed company and the following classes of companies as prescribed in the draft rules:*
(A) Every listed company
(B) Every other public company that has a paid-up capital of 100 crore INR or more or which has, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 200 crore INR.
The Nomination and Remuneration Committee is required to formulate and recommend to the Board of Directors, the company’s policies, relating to the remuneration for the directors, key managerial personnel and other employees, criteria for determining qualifications, positive attributes and independence of a director [section 178(1) of 2013 Act].
Further, a board of a company that has more than 1000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year is required to constitute a Stakeholders Relationship Committee [section 178(5) of 2013
3. Contributions to charitable funds and political parties
As per the 2013 Act, the power of making contributions to ‘bona fide’ charitable and other funds is proposed to be available to the board subject to certain limits [section 181 of 2013 Act]. As per the existing requirement of section 293 of the 1956 Act, such power could only be exercised in the general meeting in case of public companies and subsidiaries of public companies as per the 1956 Act.
Further, the limits of contribution to political parties are proposed to be increased to 7.5% of the average net profits during the three immediately preceding financial years [section 182 of 2013 Act] from the existing limit of 5% under the 1956 Act.
4. Disclosure of interest by director
The 2013 Act prescribes similar requirements with respect to the disclosure of interest by the director as contained in the existing section
299 of the 1956 Act. The only change that could be identified is where a contract or arrangement entered into by the company without disclosure of interest by the director or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company [section 184 of 2013 Act].
5. Loans and investments by a company
The 2013 Act states that companies can make investments only through two layers of investment companies subject to exceptions which include a company incorporated outside India [section 186 of 2013 Act]. There are no such restrictions that are currently imposed under the 1956 Act.
Further, the exemption available from the provisions of section 372A of the 1956 Act to private companies as well as loans or investment given or made by a holding company to its subsidiary company is no longer available under the 2013 Act.
6. Related party transactions
Most of the provisions under Section 188 of the 2013 Act are quite similar to the requirements under sections 297 and 314 of the 1956 Act. Some of the key changes envisaged in the 2013 Act include the following:
1. The need for central government approval has been done away with.
2. The 2013 Act has widened the ambit of transactions such as leasing of property of any kind, the appointment of any agent for purchase and sale of goods, material, services or property.
3. Cash at the prevailing market price has now been substituted with ‘arm’s length transaction’ which has been defined in the section.
4. Transactions entered into with related parties now to be included in the board’s report along with justification for entering into such contracts and arrangements.
5. Penalty for contravention of the provisions of section 297 was covered in general provisions in the 1956 Act. However, this is now covered specifically in the section itself which now extends to imprisonment.
6. The central government may prescribe additional conditions.
Appointment and remuneration of managerial personnel
The 2013 Act brings significant changes to the existing requirement of the 1956 Act with respect to appointment and remuneration of managerial personnel. One of the major changes that could be identified is in respect of the applicability of these provisions. The provisions for the appointment of managing director, whole-time director or manager are no longer restricted to the public companies and the private companies which are subsidiaries of public companies and now applicable to all companies. The overall ceiling in respect of payment of managerial remuneration by a public company remains at 11% of the profit for the financial year computed in the manner laid down in the 2013 Act.
1. Appointment of managing director, whole-time director or manager [section 196 of 2013 Act].
1. The re-appointment of a managerial person cannot be made earlier than one year before the expiry of the term instead of two years as per the existing provision of section 317 of the 1956 Act, however, the term for which managerial personnel can be appointed remains as five years.
2. The eligibility criteria for the age limit has been revised to 21 years as against the existing requirement of 25 years. Further, the 2013
Act lifts the upper bar for age limit and thus an individual above the age of 70 years can be appointed as key managerial personnel by passing a special resolution.
3. Provisions in respect of the appointment of the managerial personnel have been specified in section 196 and Schedule V to the 2013 Act.
2. Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits [section 197 of the 2013 Act].
1. As against the existing requirement of section 198 of the 1956 Act, which specifically provides that the provisions of managerial remuneration would be applicable to both public companies and private companies which are subsidiaries of public companies; the
2013 Act states that such provisions would be applicable only to public limited companies.
2. Listed companies have been mandated to disclose in their board report, the ratio of remuneration of each director to median employee’s remuneration and such other details which are quite extensive as proposed in the draft rules*.
3. The existing 1956 Act under section 309 provides that a managing director or a whole-time director of a subsidiary company who is in receipt of commission from the holding company cannot receive any commission or remuneration from the subsidiary company. The said restriction has been removed by the 2013 Act, however, such receipt has to be disclosed in the Board’s report [section 197(14) of
4. The provisions of existing Schedule XIII of the 1956 Act have been incorporated in Schedule V of the 2013 Act and the requirements have been structured around the same rules, with revised remuneration limits and certain additional requirements, for example, the managerial personnel should not have been convicted of an offense under the Prevention of Money Laundering Act, 2002.
5. The 2013 Act has liberalized the administrative procedures by relaxing the requirement of obtaining the central government approval provided the company complies with certain requirements including seeking approval by way of special resolution for payment of managerial remuneration. Similar relaxation norms as envisaged in the 2013 Act had been incorporated in Schedule XIII of the 1956 Act by virtue of the recent circulars issued by MCA.
6. The definition of remuneration has undergone a few changes in the 2013 Act. The 2013 Act in section 2(78), defines remuneration as any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the income- tax Act, 1961. The remuneration thus defined includes reimbursement of any direct taxes to managerial personnel. The 1956 Act defined remuneration under section 198 by way of an explanation and provided for the certain specific inclusions that would be construed as remuneration. Section 200 of the 1956 Act specifically prohibited tax-free payments. The 2013 Act has indirectly incorporated the same requirement by clarifying that the term remuneration includes any reimbursement of direct taxes.
7. The 2013 Act clarifies that premium paid by a company for any insurance taken by a company on behalf of its managing director, whole time director, manager, chief executive officer, chief financial officer, or company secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company would not be treated as part of remuneration except for the cases where the person is proved to be guilty. The provisions cited above are similar to that of the existing provisions of section 201 of the 1956 Act.
3. Calculation of profits [section 198 of the 2013 Act]
The 2013 Act sets out in detail about the allowances and deductions that a company should include while computing the profits for the purpose of determining the managerial remuneration. To illustrate, the 2013 Act states that while computing its profits, credit should not be given for any change in the carrying amount of an asset or of a liability recognized in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.
4. Recovery of remuneration in certain cases [section 199 of the 2013 Act]
The 2013 Act contains stringent provisions in case the company is required to restate its financial statements pursuant to fraud or non- compliance with any requirement under the 2013 Act and the Rules made thereunder. As against the existing requirement of section 309 of the 1956 Act which only refers to the fact that excess remuneration paid to managerial personnel cannot be waived except with the previous approval of the central government, the 2013 Act moves a step forward and enables the company to recover the excess remuneration paid (including stock options) from any past or present managing director or whole-time director or manager or chief executive officer who, during the period for which the financial statements have been restated, has acted in such capacity.
5. Appointment of key managerial personnel [section 203]
The 2013 Act provides for mandatory appointment of following whole-time key managerial personnel for every listed company and every other company having a paid-up share capital of five crore INR or more*:
(I) Managing director, or chief executive officer or manager and in their absence, a whole-time director.
(ii) Company Secretary.
(iii) Chief financial officer Further, the 2013 Act also states that an individual cannot be appointed or reappointed as the chairperson of the company, as well as the.
the managing director or chief executive officer of the company at the same time except where the articles of such a company provide otherwise or the company does not carry multiple businesses.