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Directors and Board Provisions of Companies Act

Directors and Board Provisions of Companies Act

  1. Board of Directors [Sec 149]:

Every private limited company to have a minimum of 2 directors & maximum of 15 directors; of which at least one must be one who has stayed in India for a total period of 182 days in the previous calendar year. Moreover, any company may appoint more than 15 directors after passing a special resolution (i.e. there is no requirement of CG approval).

No requirement of independent directors or woman directors or small shareholder’s directors in the case of a private limited company. The provision of retirement of Directors by rotation is not applicable to a private limited company.

  1. Maximum Number of Directors

No person, after the commencement of this Act, shall hold office as a director, in more than 20 companies at the same time. The exemptions granted earlier to alternate directorships and directorships in Private company have been removed. Moreover, the maximum number of public companies in which a person can be appointed as a director shall not exceed 10. Further a person can be a whole time director in a maximum of 3 companies. A person can be an independent director in a maximum of 7 companies.

  1. Appointment of directors [Sec 152]:

Every director shall be appointed by the company in general meeting. Proposed director to provide DIN & a declaration that he is not disqualified to become a director under the Companies Act. Further a person appointed as a director shall not act as a director unless he gives his consent to hold the office as director in Form No. DIR-2, and such consent has been filed with the Registrar in Form No. DIR-12 within 30 days of his appointment.

  1. Importance of DIN [Sec 157 & 158]:

Every company shall furnish the DIN of all its directors to the Registrar. Further every person or company, while furnishing any return, information or particulars as are required to be furnished under this Act, shall mention DIN in such return, information or particulars in case it relates to the director or contain any reference to the director.

Every individual who has been appointed a DIN shall, in the event of any change in his particulars, intimate to the Central Govt. within a period of 30 days in Form No. DIR-6 together with declaration in Form No. DIR-7.

  1. Appointment of directors to be voted individually [Sec 162]:

At a general meeting of a company, a motion for the appointment of two or more persons as directors of the company by a single resolution shall not be moved unless a proposal to move such a motion has first been agreed to at the meeting without any vote being caste against it.

  1. Resignation of Director [Sec 168]:

A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same, intimate ROC & place the fact of such resignation in the report of Directors. The Director shall also forward a copy of his resignation along with detailed reasons to the ROC within 30 days in Form No. DIR-11.

  1. Register of directors [Sec 170]:

Every company shall keep at its registered office, a register containing prescribed particulars of its directors & key management personnel. Further a return in Form No. DIR-12 shall be filed with the Registrar within 30 days from the appointment of every director & KMP.

Penalty for contravention: Rs 50,000 – 5 lacs; an officer in default: Rs 50,000 – 5 lacs.

  1. Meetings of Board [Sec 173]:

Every company shall hold a minimum number of 4 meetings of its board of directors every year in such a manner that no more than 120 days shall intervene between two consecutive meetings of the board. First meeting of the Board of Directors shall be called within 30 days of the date of incorporation. The participation of directors in a meeting of the Board may be either in person or through video conferencing, which is capable of recording & recognizing the participation of the directors & of recording & storing the proceedings of such meetings along with date & time. A meeting of the Board shall be called by giving notice of not less than 7 days to every director either by post, or hand delivery or by electronic means. Provided that a meeting of the Board may be called at shorter notice to transact urgent business.

  1. Quorum for meetings of Board [Sec 174]:

Quorum shall be 1/3 of total strength or two directors, whichever is higher. Where at any time the number of interested directors exceeds or is equal to 2/3 of the total strength of the Board of Directors, the number of directors who are non-interested directors and present at the meeting, being not less than two, shall be the quorum during such time.

  1. Power of Board [Sec 179]:

They are empowered to do all such acts as a company is authorized and do subject to the provisions of the Act, Memorandum & Articles. No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made. The following powers shall be exercise by means of a Board resolution: –

  1. i)        To issue securities, including debentures
  2. ii)       To borrow monies

iii)     To invest the funds of the company

  1. iv)     To approve financial statement and the Board’s report
  2. v)      To appoint internal auditors and secretarial auditor
  3. vi)     To appoint or remove KMP

vii)   To take note of the disclosure of director’s interest and shareholding etc. (MBP-1 is not to be filed; BR has to just say that Board has taken note of the same as submitted by directors)

As per Sec 117, any resolution u/s 179 shall be filed with ROC in Form No. MGT-14.

  1. Restrictions on powers of Board [Sec 180]:

The Board of Directors shall exercise the following powers only with the consent of the company by a special resolution: –

  1. i)        To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company.
  2. ii)       To borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid up share capital & free reserves.
  3. Disclosure of interest by Director [Sec 184]:

Sec 184(1): Every director shall at the first meeting of the board in which he participates as a director and thereafter at the first meeting of the Board in every FY or whenever there is any change in the disclosures, already made, then at the first Board meeting held after such change, disclose his concern or interest in any entity in Form No. MBP- 1.

Sec 184(2): Every director of a company who is any way, whether directly or indirectly, concerned or interested in a contract or arrangement (i) with a body corporate in which such director in association with any other director, holds more than 2% shareholding of that body corporate, or is a promoter, manager or CEO of that body corporate; (ii) with a firm or other entity in which, such director is a partner, owner or member shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

Note: 184(2) include indirect interest as well. For instance firm in which director’s wife is a partner. However MBP-1 is not applicable on 184(2). It has to provide details only with respect to director’s direct interest.

Penalty for contravention on officer in default: Rs 50,000 – Rs 100,000 or 1 year imprisonment or both.

  1. Loan to Directors [Sec 185]:

No company shall directly or indirectly advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person. However this will not include (i) any loan extended to MD/WTD as part of the conditions of service extended to all employees of the company; (ii) any loan extended to MD/WTD pursuant to any scheme approved by the members by a special resolution; or (iii) by a company which in the ordinary course of its business provides loans etc. (iv) to a WOS.

Any other person in whom the director is interested: relative/partner of director, relative/partner of holding company director, any firm in which such director/relative is a partner, any private company of which any such director is a director or member etc.

Penalty for contravention: Rs 500,000 – Rs 25,00,000; on director in default: Rs 500,000 – Rs 25,00,000 or 6 months imprisonment or both.

Section 185 was notified on 12th Sep 2013 and was applicable from that day itself. Therefore loan etc to director or any person on whom director is interested, outstanding as on 12.09.13 will not be hit by the provisions of sec 185. However they can’t be renewed and are to be repaid on the end of their term. If it is a loan repayable on demand then still it is suggested to make a formal agreement with tenure specified in it.

  1. Loan & investment by company [Sec 186]:
  2. No company shall directly or indirectly give any loan to any person or any other body corporate; give any guarantee or provide security in connection with a loan to any person or any other body corporate or; and acquire the securities of any other body corporate unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present & prior approval of a public financial institution, in case of default in loan, is taken.
  3. Further no investment shall be made or loan or guarantee or security given exceeding 60% of its paid up share capital, free reserves & securities premium or 100% of its free reserves & securities premium, whichever is more without prior consent by means of a special resolution passed at a general meeting & prior approval of a public financial institution concerned where any term loan is subsisting + Board resolution with the consent of all the directors present. No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, 3 years, 5 year or 10 year Govt. security closest to the tenor of the loan. Provided in case of a transaction with WOS or JV, condition for approval from members shall not apply.

The company shall disclose to its members in the financial statements the full particulars of such loans, guarantee or investment & their purpose. Further shall keep a register in Form No. MBP-2. Penalty for contravention: Rs 25,000 – Rs 500,000; on officer in default: Rs 25,000 – Rs 100,000 or 2 years imprisonment or both.

Note: If as on 01.04.2014 the company has given loan or guarantee in excess of limits specified then it has to file a Special resolution for this by 31.03.2015. Further genuine trade advances to be adjusted against supply of goods / services will not be considered as loans.

  1. Related party transactions [Sec 188]:
  2. No company shall enter into a contract or arrangement with a related party except with the consent of the Board of Directors given by a resolution at a meeting of the Board. Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.
  3. Prior approval of the company by a special resolution required in following cases:
  4. i)     If the company entering into the contract is having a paid up share capital of Rs 10 cr or more; or
  5. ii)    Sale, purchase or supply of goods > 25% of annual turnover

iii)  Buying, selling or leasing property or taking any service > 10% of net-worth

  1. iv)  Appointment to any office or place of profit in the company, its subsidiary or associate at a monthly remuneration of > Rs 2.5 lacs.

However none of above shall apply to transactions entered into in the ordinary course of business and at arm’s length.

Related party = (i) a director/KMP or his relative; (ii) a firm in which any of (i) is a partner; (iii) a pvt company in which any of (i) is a director or member; (iv) a public company in which any of (i) is a director or holds more than 2% of paid up capital; holding/subsidiary/associate/fellow subsidiary company;

Relative = spouse, parents, siblings, son, daughter, son-in law, daughter-in law.

Penalty for officer in default: Rs 25,000 – 500,000.

  1. Register of contracts in which directors are interested [Sec 189]:

Every company shall keep a register in Form No. MBP-4, giving details of all contracts referred to in Sec 184 & Sec 185 & such register shall be placed before the next meeting of the Board signed by all the directors present at the meeting.

Penalty for contravention on director in default: Rs 50,000.

Every director shall disclose his concern or interest in any entity by giving a notice in writing in Form No. MBP-1. Such notice shall be disclosed at the meeting and kept for 8 years.

  1. Appointment of MD/CEO/Company Secretary/CFO + Secretarial Audit

A private limited company is not compulsorily required to appoint key managerial personnel (KMP) viz. MD/CEO/CFO/Company Secretary.

A private limited company is also not required to get a secretarial audit done.

  1. Sitting Fee & Remuneration to Directors

A company may pay a sitting fee to a director for attending meetings of the Board or committees thereof, such sum as may be decided by the Board of directors thereof which shall not exceed Rs 100,000 per meeting + incidental expenses. No upper limit on payment of managerial remuneration in the case of a private limited company.

  1. Fee & General limit on time for filing with ROC [Sec 403]:

Any document, fact or information may be submitted, filed, registered or recorded, after the time specified in relevant provision within a period of 270 days from the prescribed date with additional prescribed fee.

  1. Punishment where no specific penalty/punishment is provided [Sec 450]:

If a company or any person contravenes any provision of this Act or the rules made there under, for which no penalty/punishment is provided elsewhere in this Act – fine upto Rs 10,000 on company and officer in default & in case of continuous contravention with further fine upto Rs 1,000 per day.

  1. Establishment of vigil Mechanism

Every company which has borrowings in excess of Rs 50 crores shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances. For this the Board shall appoint a director to whom other directors or employees may report their concerns. The vigil mechanism shall provide for adequate safeguards against victimization of employees and directors who avail of the vigil mechanism.

On the whole the above law needs to be hailed for its focus and understanding on the contemporary realities. What is heartening is that the Government adopted a very participative approach. The exercise of revamping the Companies Act, 1956 was first started in Aug 2004, when a concept paper was placed on the MCA website to elicit views and comments. Thereafter the Ministry adopted a Committee under the chairmanship of Dr. JJ Irani and the Committee’s recommendations were considered in seminars held all over the company. We hope that the Government shall continue to work in the spirit of such consultation and shall look seriously upon various recommendations made by ICAI and industry on some of the new provisions.

Directors and Board Provisions of Companies Act

CAKARt

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