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LEGAL ASPECTS OF

BUSINESS

ASSIGNMENT

As a Consultant of a newly started

Petroleum Refinery advice the

Management about the Position, Powers

and Duties of Directors under theCompanies Act, 2013

Date: 22ndDecember, 2014

Submitted to: Submitted by:

Mr. D G Shukla Megha Mishra

School of Petroleum Management

Roll No: 20135036

PGP 13 GM

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Contents1. Introduction ........................................................................................................................................ 3

1.1 Who is Director? ........................................................................................................................... 3

1.2 Number of Directors ..................................................................................................................... 4

1.3 Appointment of Directors ............................................................................................................. 4

1.4 Disqualification for appointment as Director ............................................................................... 5

2. New Categories and Qualifications of Directors ................................................................................. 6

2.1 Resident Director .......................................................................................................................... 6

2.2 Woman Director ........................................................................................................................... 6

2.3 Independent Director ................................................................................................................... 6

2.4 Additional Directors ...................................................................................................................... 8

2.5 Nominee Director.......................................................................................................................... 8

2.6 Alternate Directors........................................................................................................................ 8

2.7 Maximum number of directorship ................................................................................................ 9

3. Roles of Director ............................................................................................................................... 10

3.1 Director as Agents ....................................................................................................................... 10

3.2 Director as Employees ................................................................................................................ 10

3.3 Director as Officers ..................................................................................................................... 10

3.4 Director as Trustees .................................................................................................................... 10

4. Directors Fiduciary Responsibilities................................................................................................. 11

5. Appointment of Key Managerial Personnel ...................................................................................... 12

6. Key changes and New requirements - Review .................................................................................. 13

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1. IntroductionThe Companies Act, 2013 is enacted to gradually replace the old Act of 1956, with the

objective to bring more accountability and good corporate governance. The Ministry of

Corporate Affairs has notified ninety-eight sections of the Act which have come into

effect from September 12, 2013 and repealed the corresponding sections of the 1956Act. The Act appears to place a higher degree of responsibility on the Board members

for good corporate compliance. A clear understanding of these obligations and

responsibilities will be critical for current and prospective Board members. In the

context of the Board of a company, the legislators have focused on the role of

independent directors and have codified the duties of directors, which were missing in

the old Act.

The 1956 Act prescribes minimum 2 directors for private and 3 directors for a public

company. The Act requires the Board to devise mechanisms to ensure compliance with

the applicable laws which should be effective and adequate. The Board may consist ofseveral categories of directors including whole-time directors, managing directors,

independent directors, nominee directors and women directors.

Under the Act, there is a mandatory requirement that one-third (1/3) of the Board

should consist of independent directors for listed companies and public companies with

a paid-up capital of INR 1,000 million (approx. $16 million) or debt of INR 2,000 million

(approx. $32 million).

One of the section also stipulates that at least one director of the company should stay in

India for 182 days or more in the previous calendar year. This will ensure that theBoard shall continue to monitor directly the management of the company on a regular

basis and shall be responsible for acts and deeds of the company. Their continued

presence will not delay statutory action steps and will be a step forward towards

meeting the timely corporate compliance requirements. This requirement was missing

in the old Act and foreign companies starting business in India typically appoint foreign

directors as the directors of the Indian subsidiary. With the implementation of this

prerequisite, foreign companies doing business in India will now have to appoint at

least one resident director or Indian national to act as director to comply with this

qualification.

1.1 Who is Director?

They are appointed or elected member of the board of directors of a company.

Has the responsibility for determining and implementing the companys policy.

A company director need not to be a shareholder or an employee, and may hold only the

office of director under the provisions of the Act.

Directors derive their powers emanating from board resolutions

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Unlike shareholders, directors cannot participate through proxy.

Unlike employees, cannot absolve themselves of their responsibility for the delegated

duties.

Section 2(34) of the Companies Act, 2013 defines a director as director means adirector appointed to the Board of a company.

1.2 Number of Directors

Under the new act-

Every company is to have a BOD consisting of individuals as directors. The

minimum number of directors for different classes of companies is as under:

Private company 2

Public company 3

One Person Company (OPC) 1

A director of a company can be resident or non-resident

Where no provision is made in the Article of Association (AOA) of the company

for the appointment of the first director, the subscribers to the Memorandum of

Association (MOA) who are individuals are deemed to be the first directors of the

company and in case of OPC an individual being member is deemed to be its first

director

No person shall be appointed as a director of a company unless he has been

allotted DIN

The New Act, by adding 149 (1) (b), has increased the limit on maximum number of

directors in a company to 15 which can be further increased by passing a special

resolution in the general meeting. This is to provide greater flexibility to a company to

attract and retain talent and benefit from experience and expertise of a larger strength

of the board.

1.3 Appointment of Directors

Section 152 of the New Act governs the appointment of directors. Certain specific

requirements for appointment of director as lay down in the New Act are-

If there is no provision for appointment of Director in the Articles (AoA), the

subscribers to the memorandum, i.e. the shareholders, who are individuals shall

be deemed to be the first directors of the company until the directors are duly

appointed;

Director to be appointed in a general meeting. If it is so done, an explanatorystatement for such appointment, annexed to the notice for the general meeting,

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shall include a statement that in the opinion of the Board, he fulfils the conditions

specified in this Act for such an appointment;

The proposed Director has to furnish his DIN (Director Identification Number)

mandatorily. DIN is allotted by the Central Government on application by a

person intending to be the Director of a company. DIN can be obtained inpursuance of section 153 and 154;

The proposed Director has to also furnish a declaration stating that he is not

disqualified to be a director.

Furthermore, such appointment should be with his consent. Earlier such consent

was not mandatory for private companies. Consent implies that being appointed

a director and taking the charge of the office are two different things;

Consent has to be filed with the Registrar of Companies within 30 days of

appointment

1.4 Disqualification for appointment as Director

A person shall not be eligible for appointment as a director of a company, if s/he

Is of sound mind and stands so declared by competent court.

Is an undischarged insolvent.

Has applied to be adjudicated as an insolvent and his/her application is pending.

Has been convicted and sentenced to imprisonment for at least 6 months and 5

years from the expiry of sentence have not got over. Has been convicted and sentenced for a period of 7 years or more.

Has disqualified through order passed by a court or tribunal.

Has not obtained DIN.

Has not filed financial statements or annual returns for 5 continuous years.

Private companies can provide for additional disqualifications in their articles.

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2. New Categories and Qualifications of DirectorsDirectors of a company hold the most crucial position in the Company. With the new

Companies Act, 2013 already in force, their position has become even more significant

than ever before. They are now formally included within the definition of key

managerial personnelor KMP under Section 2(51) of the New Act.

2.1 Resident Director

The new Act has made certain important changes in the earlier regime, particularly in

respect of the appointment of directors. For instance, as per Section 149 of the New Act,

Board of Directors of a company, must have at least one resident director, i.e. a person

who has lived not less than 182 days in India in the previous calendar year. The second

proviso added to section 149 in the New Act requires all companies to comply with

section 149 within a year.

2.2 Woman DirectorSimilarly, a new provision is introduced under section 149, which requires certain

categories of companies to have at least one woman director on the board. Such

companies are any listed company, and any public company having-

paid up capital of Rs. 100 cr. or more, or

Turnover of Rs. 300 cr. or more.

2.3 Independent Director

An ID in relation to a company, means a director other than a MD or a WTD or a

nominee director,-

who, in the opinion of the Board, is a person of integrity and possesses relevant

expertise and experience;

who is or was not a promoter of the company or its holding, subsidiary or

associate company;

who is not related to promoters or directors in the company, its holding,

subsidiary or associate company;

who has or had no pecuniary relationship with the company, its holding,

subsidiary or associate company, or their promoters, or directors, during the 2

immediately preceding FYs or during the current FY

none of whose relatives has or had pecuniary relationship or transaction with

the company, its holding, subsidiary or associate company, or their promoters, or

directors, amounting to 2% or more of its gross turnover or total income or Rs 5 million

or such higher amount as may be prescribed, whichever is lower, during the 2

immediately preceding FYs or during the current FY;

who, neither himself nor any of his relatives-

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holds or has held the position of a KMP or is or has been employee of the

company or its holding, subsidiary or associate company in any of the 3 FYs

immediately preceding the FY in which he is proposed to be appointed;

is or has been an employee or proprietor or a partner, in any of the 3 FYs

immediately preceding the FY in which he is proposed to be appointed, of- a firm of auditors or CS in practice or cost auditors of the company or its

holding, subsidiary or associate company; or

any legal or a consulting firm that has or had any transaction with the

company, its holding, subsidiary or associate company amounting to 10%

or more of the gross turnover of such firm;

holds together with his relatives 2% or more of the total voting power of the

company; or

is a Chief Executive or director, by whatever name called, of any non-profit

organization that receives 25% or more of its receipts from the company, any of

its promoters, directors or its holding, subsidiary or associate company or that

holds 2% or more of the total voting power of the company; or

who possesses such other qualifications as may be prescribed.

Presently, clause 49 of the Listing Agreement provides for appointment of IDs by listed

companies. In order to facilitate greater independence in decision making by BOD, 2013

Act provides the following requirements for IDs:

Listed companies to have at least 1/3rd of its total number of directors as IDs

CG may prescribe minimum number of IDs in case of any class of public

companies. It may be noted that SEBI has put in place a proposed road map to align its

requirement relating to ID as provided under clause 49 of the Listing Agreement

(Corporate Governance) with 2013 Act requirement;

Alternate director of an ID can be appointed if such an alternate director is also

an ID

ID is not liable to retire by rotation and is not to be included in the total number

of directors liable to retire by rotation

An ID may be selected from data bank maintained by notified institute or

association having expertise in creation and maintenance of such data bank

ID shall be appointed at a general meeting for a term upto 5 consecutive years.

Justification for choosing the appointee as ID to be included in the explanatory

statement to the notice

ID is eligible for re-appointment for another term of upto 5 years subject to

compliance with conditions including performance evaluation by the entire BOD and

approval by members through special resolution

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Once the 2 consecutive terms of ID are completed, the ID will be eligible for

appointment after a cooling period of 3 years, provided he is not associated with the

company in any other capacity during this 3 years period, either directly or indirectly

IDs are not entitled to any stock option but may receive remuneration by way of

sitting fee, re-imbursement of expenses for participation in meetings, profit related

commission as approved by the members of the company.

ID and NED (not being promoter or KMP), shall be held liable, only for such acts

by a company which had occurred with his knowledge, attributable through Board

processes, and with his consent or connivance or where he had not acted diligently

Detailed code of conduct to be followed by companies and their IDs have been

included in 2013 Act

2.4 Additional Directors

Additional Directors may be appointed by a company under section 161 of the New Act.

The article should confer such power on the Board of Directors of the Company. A

provision further added in 2013 with regards to such appointment is that the proposed

person should not have failed to get appointed as a Director in a General Meeting.

2.5 Nominee DirectorNominee Director is defined under an explanation to section 149. He is a Director

nominated by any financial institution pursuant to any law for the time being in force, or

of any agreement or appointed by any Government or any other person to represent its

interest.

2.6 Alternate Directors

Alternate Directors, under section 161(2) of Companies Act, 2013, may be appointed by

a company if the articles confer such power or a decision is passed by a resolution if anindependent Director is absent from India for not less than three months. He must be

qualified to become an independent director, but should not hold any Directorship. An

alternate Director cannot hold the office longer than the term of the Director in whose

place he has been appointed. Additionally, he will have to vacate the office, if and when

the original Director returns to India. Any alteration in the term of office made during

the absence of the original Director will apply to the original Director and not to the

Alternate Director.

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2.7 Maximum number of directorship

Maximum number of directorships a person can hold in a company is increased

from 15 to 20. The limit of 20 will include any alternate directorship. However, the

maximum number of public companies (including private companies that are either

holding or subsidiary of a public company) in which a person can be appointed as adirector cannot exceed 10. This requirement is to be complied within 1 year from the

commencement of 2013 Act.

The members of a company are authorized by special resolution to specify any

lesser number of companies in which a director of the company may act as a director.

This may restrict ability of professional managers to accept directorship in other

companies.

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4. Directors Fiduciary ResponsibilitiesThe new Companies Act, 2013 can be seen as offering a landmark piece of legislation in

clarifying, redefining, and enlarging the ambit of duties and responsibilities of the

directors. These newly introduced provisions by Companies Act, 2013 regarding the

duties and responsibilities of the directors, including the independent directors, notonly provide greater certainty to the directors regarding their conducts and

responsibilities, and thus, ensuring better and impeccable corporate management and

governance; but also enable and empower the beneficiaries, regulators, and the courts,

to judge, regulate, and control the activities and obligations of the directors more

objectively and effectively.

Figure 5.1 Fiduciary Responsibilities

Other duties according to the act include:

Duty to act according to articles

Duty of good faith: Liability for breach of trust

Duty of care: Liability for negligence

Duty not to delegate or assign his office: Liability for co-directors defaults

Duty to disclose interests and to avoid conflict of interests

Duty not to make undue gains

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5. Appointment of Key Managerial PersonnelSection 203 is a new section. It provides that certain specified companies, as may be

prescribed by rules, shall have following whole-time key managerial personnel -

MD or CEO Company Secretary

CFO

Further, in the section:

Every whole-time KMP shall be appointed by a resolution of the Board

containing terms and conditions of appointment and remuneration.

Such KMP shall not hold office in more than one Company, except in its

subsidiary at the same time. However, he can be a director in any company with

the permission of the Board. If any KMP is holding such position in more thanone company at the time of commencement of the New Act, he will have to select

one of the Companies within 6 months of such commencement.

The company may appointment a MD who is already MD or Manager of one or

more companies. Such appointment will have to be approved by the Board by a

resolution to be passed at its meeting and should be approved by all the

Directors present at the meeting. Specific notice 38 giving details of such

proposal should be given for such Board Meeting. Such appointment will be

subject to other provisions of the Act as discussed earlier.

If office of such KMP is vacated, it should be filled up by the Board within 6months.

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6. Key changes and New requirements - Review

Women Director- Company should appoint at least one woman director on the

Board for such class or classes of companies as may be prescribed. A transitionalperiod of one year has been prescribed to companies for compliance with this

requirement.

Domicile of Director - Company should have at least one director who has

stayed in India for a total period of not less than hundred and eighty two days in

the previous calendar year.

Maximum number of Directors - Company can have a maximum of fifteen

directors on the Board and will be applicable to all companies. Any further

increase in number of directors, the company will need to pass a special

resolution at its General Meeting and no approval from the Central Governmentis required.

Cap on Directorship - A person will be able to become director in only 20

companies. However, out of this, not more than 10 companies can be public

companies.

Composition - At least 1/3rd of the total number of directors will be

independent directors. If higher number has been prescribed under any other

governing law/regulation then such company shall comply with the same.

Rotation - The independent director will be appointed for a period of five years

and be eligible for reappointment subject to certain conditions for two terms.

Thereafter, the independent director shall be eligible for reappointment after a

cooling period of three years.

Qualification - Majority of the audit committee members including its

chairperson will have an ability to read and understand the financial statements.

Manner of Selection - Independent directors to be selected from a data bank

maintained by a body, institute association, as may be notified by the central

government.

Nominee Director - Nominee directors appointed to the board by financial

institutions/investors shall not be considered as independent directors.

Relationship with External Firms - A person is prohibited to be appointed as

an independent director, if the person or his/her relative is/was a partner/

executive in an external audit firm, internal audit firm, legal firm and/or

consulting firm(s), which have association with the company.

Stock Options - An independent director will not be entitled to any stock

options in the company. The Act is not clear as to how a company will deal with

stock options granted in the past and which are outstanding at the date of its

enactment.