kgma.inkgma.in/resource/Image/Kgma_Corporate_Law_2013.pdf · 2015. 2. 28. · - + # ;C B D . # 3 ( ! - ' . # 5D E C + #( , ! &+- ' 0 > 8!- 6 8)N) ' ! 8)N) ! ' ' ! 8)N) + #! ' ' 2

CA Kamal Garg [B. Com (H), FCA, DISA (ICAI), LLB] Page 1

www.kgma.in

ENFORCEMENT DATE OF APPLICABLE PROVISIONS OF

COMPANIES ACT, 2013

[Relevant for CA Final Corporate and Allied Laws for May 2015 Examination]

S. No. Section Title of the Section Date of

Applicability

1. 123 Declaration of dividend 1-4-2014

2. 126 Right to dividend, rights shares and bonus shares to be held in abeyance

pending registration of transfer of shares

1-4-2014

3. 127 Punishment for failure to distribute dividends 12-9-2013

4. 128 Books of account, etc., to be kept by company 1-4-2014

5. 129 Financial statement 1-4-2014

6. 133 Central Government to prescribe accounting standards 12-9-2013

7. 134 Financial Statement, Board's report, etc. 1-4-2014

8. 135 Corporate Social Responsibility 1-4-2014

9. 136 Right of member to copies of audited financial statement 1-4-2014

10. 137 Copy of financial statement to be filed with Registrar 1-4-2014

11. 138 Internal Audit 1-4-2014

12. 139 Appointment of auditors 1-4-2014

13. 140 [except second proviso to

sub-section (4) and sub-section

(5)]

Removal, resignation of auditor and giving of special notice 1-4-2014

14. 141 Eligibility, qualifications and disqualifications of auditors 1-4-2014

15. 142 Remuneration of auditors 1-4-2014

16. 143 Powers and duties of auditors and auditing standards 1-4-2014

17. 144 Auditor not to render certain services 1-4-2014

18. 145 Auditors to sign audit reports, etc 1-4-2014

19. 146 Auditors to attend general meeting 1-4-2014

20. 147 Punishment for contravention 1-4-2014

21. 148 Central Government to specify audit of items of cost in respect of

certain companies 1-4-2014

22. 149 Company to have Board of Directors 1-4-2014

23. 150 Manner of selection of independent directors and maintenance of data

bank of independent directors 1-4-2014

24. 151 Appointment of director elected by small shareholders 1-4-2014

25. 152 Appointment of directors 1-4-2014

26. 153 Application for allotment of Director Identification Number 1-4-2014

27. 154 Allotment of Director Identification Number 1-4-2014

28. 155 Prohibition to obtain more than one Director Identification Number 1-4-2014

29. 156 Director to intimate Director Identification Number 1-4-2014

30. 157 Company to inform Director Identification Number to Registrar 1-4-2014

31. 158 Obligation to indicate Director Identification Number 1-4-2014


33. 160 Right of persons other than retiring directors to stand for directorship 1-4-2014

34. 161 [except sub-section (2)] Appointment of additional director, alternate director and nominee

director

12-9-2013

35. 161 [Sub-section (2)] 1-4-2014

36. 162 Appointment of directors to be voted individually 12-9-2013

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2 Enforcement Date of Applicable Provisions of Companies Act, 2013


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Applicability

37. 163 Option to adopt principle of proportional representation for appointment

of directors 12-9-2013

38. 164 Disqualifications for appointment of director 1-4-2014

39. 165 Number of directorships 1-4-2014

40. 166 Duties of directors 1-4-2014

41. 167 Vacation of office of director 1-4-2014

42. 168 Resignation of director 1-4-2014

43. 169 [except sub-section (4)] Removal of directors 1-4-2014

44. 170 Register of directors and key managerial personnel and their

shareholding 1-4-2014

45. 171 Members' right to inspect 1-4-2014

46. 172 Punishment 1-4-2014

47. 173 Meetings of Board 1-4-2014

48. 174 Quorum for meetings of Board 1-4-2014

49. 175 Passing of resolution by circulation 1-4-2014

50. 176 Defects in appointment of directors not to invalidate actions taken 12-9-2013

51. 177 Audit committee 1-4-2014

52. 178 Nomination and remuneration committee and stakholders relationship

committee 1-4-2014

53. 179 Powers of Board 1-4-2014

54. 180 Restrictions on powers of Board 12-9-2013

55. 181 Company to contribute to bona fide and charitable funds, etc 12-9-2013

56. 182 Prohibitions and restrictions regarding political contributions 12-9-2013

57. 183 Power of Board and other persons to make contributions to national

defence fund, etc

12-9-2013

58. 184 Disclosure of interest by director 1-4-2014

59. 185 Loan to directors, etc 12-9-2013

60. 186 Loan and investment by company 1-4-2014

61. 187 Investments of company to be held in its own name 1-4-2014

62. 188 Related party transactions 1-4-2014

63. 189 Register of contracts or arrangements in which directors are interested 1-4-2014

64. 190 Contract of employment with managing or whole-time directors 1-4-2014

65. 191 Payment to director for loss of office, etc., in connection with transfer of

undertaking, property or shares 1-4-2014

66. 192 Restriction on non-cash transactions involving directors 12-9-2013

67. 193 Contract by One Person Company 1-4-2014

68. 194 Prohibition on forward dealings in securities of company by director or

key managerial personnel

12-9-2013

69. 195 Prohibition on insider trading of securities 12-9-2013

70. 196 Appointment of managing director, whole-time director or manager 1-4-2014

71. 197 Overall maximum managerial remuneration and managerial

remuneration in case of absence or inadequacy of profits 1-4-2014

72. 198 Calculation of profits 1-4-2014

73. 199 Recovery of remuneration in certain cases 1-4-2014

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Enforcement Date of Applicable Provisions of Companies Act, 2013 3


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Applicability

74. 200 Central Government or company to fix limit with regard to

remuneration 1-4-2014

75. 201 Forms of, and procedure in relation to, certain applications 1-4-2014

76. 202 Compensation for loss of office of managing or whole-time director or

manager 12-9-2013

77. 203 Appointment of key managerial personnel 1-4-2014

78. 204 Secretarial audit for bigger companies 1-4-2014

79. 205 Functions of company secretary 1-4-2014

80. 206 Power to call for information, inspect books and conduct inquiries 1-4-2014

81. 207 Conduct of inspection and inquiry 1-4-2014

82. 208 Report on inspection made 1-4-2014

83. 209 Search and seizure 1-4-2014

84. 210 Investigation into affairs of company 1-4-2014

85. 211 Establishment of Serious Fraud Investigation Office 1-4-2014

86. 212 [except references of sub-

section (10) of section 66, sub-

section (5) of section 140, section

213, sub-section (1) of section

251 and sub-section (3) of section

339 made in sub-section (6) and

also sub-sections (8) to (10)]

Investigation into affairs of company by Serious Fraud Investigation

Office 1-4-2014

87. 214 Security for payment of costs and expenses of investigation 1-4-2014

88. 215 Firm, body corporate or association not to be appointed as inspector 1-4-2014

89. 216 [except sub-section (2)] Investigation of ownership of company 1-4-2014

90. 217 Procedure, powers, etc., of inspectors 1-4-2014

91. 219 Power of inspector to conduct investigation into affairs of related

companies, etc. 1-4-2014

92. 220 Seizure of documents by inspector 1-4-2014

93. 223 Inspector's report 1-4-2014

94. 224 [except sub-section (2) and

(5)] Actions to be taken in pursuance of inspector's report 1-4-2014

95. 225 Expenses of investigation 1-4-2014

96. 228 Investigation, etc., of foreign companies 1-4-2014

97. 229 Penalty for furnishing false statement, mutilation, destruction of

documents 1-4-2014

98. 366 Companies capable of being registered 1-4-2014

99. 367 Certificate of registration of existing companies 1-4-2014

100. 368 Vesting of property on registration 1-4-2014

101. 369 Saving of existing liabilities 1-4-2014

102. 370 (except the proviso) Continuation of pending legal proceedings 1-4-2014

103. 371 Effect of registration under this Part 1-4-2014

104. 374 Obligation of Companies registering under this Part 1-4-2014

105. 379 Application of Act to foreign companies 12-9-2013

106. 380 Documents, etc., to be delivered to Registrar by foreign companies 1-4-2014

107. 381 Accounts of foreign company 1-4-2014

108. 382 Display of name, etc., of foreign company 12-9-2013

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4 Enforcement Date of Applicable Provisions of Companies Act, 2013


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Applicability

109. 383 Service on foreign company 12-9-2013

110. 384 Debentures, annual return, registration of charges, books of account and

their inspection 1-4-2014

111. 385 Fee for registration of documents 1-4-2014

112. 386 [except clause (a)] Interpretation 12-9-2013

113. 386 [Clause (a)] 1-4-2014

114. 387 Dating of prospectus and particulars to be contained therein 1-4-2014

115. 388 Provisions as to expert's consent and allotment 1-4-2014

116. 389 Registration of prospectus 1-4-2014

117. 390 Offer of Indian Depository Receipts 1-4-2014

118. 391 [Sub-section (1)] Application of sections 34 to 36 and Chapter XX 1-4-2014


120. 393 Company's failure to comply with provisions of this Chapter not to

affect validity of contracts, etc 1-4-2014

121. 394 Annual reports on Government companies 12-9-2013

122. 395 Annual reports where one or more State Governments are members of

companies 1-4-2014

123. 396 Registration offices 1-4-2014

124. 397 Admissibility of certain documents as evidence 1-4-2014

125. 398 (both inclusive) Provisions relating to filing of applications, documents, inspection, etc.,

in electronic form

1-4-2014

126. 399 [except reference of word

Tribunal in sub-section (2)]

Inspection, production and evidence of documents kept by Registrar 1-4-2014

127. 400 Electronic form to be exclusive, alternative or in addition to physical

form

1-4-2014

128. 401 Provision of value added services through electronic form 1-4-2014

129. 402 Application of provisions of Information Technology Act, 2000 1-4-2014

130. 403 Fee for filing, etc 1-4-2014

131. 404 Fees, etc., to be credited into public account 1-4-2014

132. 405 Power of Central Government to direct companies to furnish

information or statistics

12-9-2013

133. 406 Power to modify Act in its application to Nidhis 1-4-2014

Provisions Not Applicable for May 2015 Examinations [Chapter 15 of Corporate and Allied Laws Study Material]

134. 407 Definitions 12-9-2013

135. 408 Constitution of National Company Law Tribunal 12-9-2013

136. 409 Qualification of President and Members of Tribunal 12-9-2013

137. 410 Constitution of Appellate Tribunal 12-9-2013

138. 411 Qualifications of Chairperson and members of Appellate Tribunal 12-9-2013

139. 412 Selection of Members of Tribunal and Appellate Tribunal 12-9-2013

140. 413 Term of office of President, Chairperson and other Members 12-9-2013

141. 414 Salary, allowances and other terms and conditions of service of

Members

12-9-2013

Thus, Sections mentioned at Serial Number 136 to 143 are not applicable for May 2015 Examination

142. 439 Offences to be non-cognizable 12-9-2013

143. 440 Transitional Provisions 12-9-2013

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Enforcement Date of Applicable Provisions of Companies Act, 2013 5


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Applicability

144. 441 Compounding of Certain Offences 12-9-2013

145. 442 Mediation and conciliation penal 1-4-2014

146. 443 Power of Central Government to appoint company prosecutors 12-9-2013

147. 444 Appeal against acquittal 12-9-2013

148. 445 Compensation for accusation without reasonable cause 12-9-2013

149. 446 Application of fines 12-9-2013

150. 447 Punishment for fraud 12-9-2013

151. 448 Punishment for false statements 12-9-2013

152. 449 Punishment for false evidence 12-9-2013

153. 450 Punishment where no specific penalty or punishment is provided 12-9-2013

154. 451 Punishment in case of repeated default 12-9-2013

155. 452 Punishment for wrongful withholding of property 12-9-2013

156. 453 Punishment for improper use of "Limited" or "Private Limited" 12-9-2013

157. 454 Adjudication of penalties 1-4-2014

158. 455 Dormant company 1-4-2014

159. 456 Protection of action taken in good faith 12-9-2013

160. 457 Non-disclosure of information in certain cases 12-9-2013

161. 458 Delegation by Central Government of its powers and functions 12-9-2013

162. 459 Powers of Central Government or Tribunal to accord approval, etc.,

subject to conditions and to prescribe fees on applications 12-9-2013

163. 460 Condonation of delay in certain cases 12-9-2013

164. 461 Annual report by Central Government 12-9-2013

165. 462 Power to exempt class or classes of companies from provisions of this

Act

12-9-2013

166. 463 Power of court to grant relief in certain cases 12-9-2013

167. 464 Prohibition of association or partnership of persons exceeding certain

number

1-4-2014

168. 467 Power of Central Government to amend Schedules 12-9-2013

169. 468 Powers of Central Government to make rules relating to winding up 12-9-2013

170. 469 Power of Central Government to make rules 12-9-2013

171. 470 Power to remove difficulties 12-9-2013

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12/13/2014

1

Inter Corporate Loans and Investments [Section 186 read with Companies (Meetings

of Board and its Powers) Rules, 2014]

By:CA Kamal Garg

[B. Com (H), FCA, DISA (ICAI), LLB]

Section 186(1): Without prejudice to the provisions contained in the Act,

a company shall,

unless otherwise prescribed,

make investment through

not more than “two layers of”

investment companies

H Ltd.

S1 Ltd.

S2 Ltd.

S3 Ltd.

Chart - 1

Investment Company

Investment Company

H Ltd.

S1 Ltd. -Textiles

S2 Ltd.-Salt

S3 Ltd. -Spinning

S5 Ltd. -Cotton

S4 Ltd. -Herbal

S6 Ltd. -Spices

Soda Ash Business

Chart - 2

6

12/13/2014

2

Comprehensive illustration:• DLF Limited, a listed company is prohibited by SEBI to

invest in Capital Market;

• It has surplus funds of Rs. 200 Crores which it still wants

to invest in Capital Market;

• DLF Limited promoted the following Investment

Companies with instructions to make further investments

of some it’s money in investment companies to acquire

shares from Capital Market and some money in non-

investment companies:

a) ABC Investment Co. Limited

b) DEF Investment Co. Limited

DLF Limited

ABC Investment Co. Limited

XYZ Investment Co. Limited

LMN Investment Co. Limited

DEF Investment Co. Limited

PQR Investment Co. Limited

60%

55%

100% 100%

60%Layer 1

Layer 2

Layer 3

Layer 1

Layer 2

DLF Limited


XYZ Stock Broker Limited




60%

55%

100% 100%

60%Layer 1

Layer 2

Layer 3

Layer 1

Layer 2

RST Investment Co. LimitedLayer 4

40%

DLF Limited



LMN Automobiles Limited



60%

55%

100% 100%

60%Layer 1

Layer 2

Layer 3

Layer 1

Layer 2

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12/13/2014

3

DLF Limited


XYZ Stock Broker Limited

LMN Automobiles Limited



60%

55%

100% 100%

60%Layer 1

Layer 2

Layer 3

Layer 1

Layer 2

DLF Limited






60%

55%

40% 100%

60%

Layer 0 for DLF

Layer 1

Layer 2Layer 0 for DLF

Layer 0 for DLF

DLF Limited




DEF Investments LLP


RST Investment Co. Limited

60%

55%

40% 100%

60%

Layer 1 for DLF

Layer 2 for DLF

Layer 3 for DLF

Layer 0 for DLF

Layer 0 for DLF

Layer 0 for DLF

BOD

DLF Limited




DEF Investments LLP



60%

If 55% by XYZ on its own

100% 100%

60%

Layer 1 for DLF

Layer 2 for DLF

Layer 3 for DLF

Layer 0 for DLF

Layer 0 for DLF

Layer 0 for DLF

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12/13/2014

4

DLF Limited




DEF Investments

LLP



Exceptions to Section 186(1)

This provision shall not affect

a Co. to acquire any other Co. incorporated in

another country

if such other Co. has investment subsidiaries

beyond two layers as per the laws of such country

a Subs. Co. to have any investment

subsidiary to comply with the requirements of any law or rule or regulation framed

under any law for the time being in force

• Limit for making inter-corporate loan, guarantee, providingsecurity or investment [Section 186(2)]: A company shall not,directly or indirectly-

(a) give loan to any person or other body corporate;(b) give any guarantee or provide security in connection witha loan to any body corporate or person; or(c) acquire by way of subscription, purchase or otherwise,the securities of any other body corporate.

Exceeding (i.e. Ceiling Limit):

1. 60% of [Paid Up Share Capital (+) Free Reserves (+)

Securities Premium Account]; or

2. 100% of [Free Reserves (+) Securities Premium Account],

whichever is more

• If: Amounts Involved [present (+) proposed] > Ceiling Limit

Then: Prior SR Approval is required [Section 186(3)]• Disclosure in F.S. and GM Notice: Particulars & purposesof such loans, investments etc. required to be disclosed

[Section 186(4)];

• BOD Approval always required: All the directors present inthe BOD Meeting [Section 186(5)];

• PFI Approval – when required: if any term loan is subsisting[Section 186(5)];

• PFI Approval – when not required: If:1. Amounts Involved [present (+) proposed] < Ceiling

Limit; and2. No default in repayment of their loan instalments or

payment of interest thereon

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12/13/2014

5

• Default in the repayment of any deposits and/or interestthereon: Co. prohibited to give any loan or guarantee or securityor make an acquisition till such default is subsisting [Sec. 186(8)];

• Restrictions for Co. registered u/s 12 of SEBI Act: Such Co.can’t take Inter-Corporate Loans and/or Deposits > Ceiling Limitsprescribed under SEBI Regulations [Sec. 186(6) and Rule 11(3)];

• Rate of Interest on Loans given > Prevailing Yield Rate Closetto 1 or 2 or 3 or 5 or 10 years’ Yield on Govt. Security [Sec.

186(7)];

• Register of loan, guarantee, security, or acquisition: To bekept at the registered office, in manual or e-mode, in Form MBP 2[Section 186(9) and Rule 12];

• Form MBP 2 open for inspection and extraction by Memberson payment of fees prescribed in AOA < Rs. 10 per page [Section186(10)]

• Section 186(2) to (10) not to apply in certain cases[Section 186(11) and Rule 11]:1. Loan, Guarantee, Security by Banking Co./ Insurance

Co./ HFC in ordinary course of business/ Company

engaged in “business of financing of companies” or“providing infra facilities”;

2. Acquisitions made:

� by NBFC having principal business of acquisition

of securities in respect of its investment and

lending activities;

� by a Company whose principal business is

acquisition of securities;

� through Right Issue u/s 62(1)(a)

Exemption to subsidiary company/joint ventures –conditions thereof: As per Rule 11(1):• Where a loan or guarantee is given or where a

security has been provided by a company to its:i. wholly owned subsidiary (WOS) company; orii. a joint venture (JV) company,OR

• Where an acquisition is made by a holdingcompany, by way of subscription, purchase or

otherwise of, the securities of its wholly owned

subsidiary (WOS) company,the requirement of section 186(3) shall not apply

• Transitional Provisions: SR u/s 186(3) can bepassed within 1 year of notification of thissection (i.e. by 31st March, 2015) [Section186(12) and Rule 13(1)];

• Penalty [Section 186(13)]:1. Company: Fine > Rs. 25,000 but < Rs. 5

Lakhs;2. Officer in Default:

� Imprisonment < 2 years; and� Fine > Rs. 25,000 but < Rs. 1 Lakh

10

Section 185 was also applicable in Nov

2014 Examination: No Amendments for

May 2015 Examination

1

Loan to Directors[Section 185 of Companies Act, 2013 read with Rule 10 of the Companies (Meetings of Board

and its Powers) Rules, 2014]

By:CA Kamal Garg


• Section 185(1) provides that save as otherwise

provided in the Companies Act, 2013, nocompany directly or indirectly shall:

a) advance any loan; or

b) any loan represented by a book debt; or

c) give any guarantee; or

d) provide any security in connection with any loan

taken,

to any director of the company or such otherperson in whom the director is interested

Restrictions on providing loan to a director or to a person connected with a director

Meaning of “to any other person in whom director is interested”

[Explanation under section 185(1)]

a) any director of the lending company, or

b) director of a company which is its holding company; or

c) any partner of any such director; or

d) any relative of any such director;e) any firm in which any such director is a partner; or

f) any firm in which any relative of such director is a partner; or

g) any private company of which any such director is a director or member;

h) any body corporate at a GM of which not less than (>) 25% of the total voting power may be exercised / controlled by any

such director, or by two or more such directors, together; or

i) any body corporate, the BOD, MD or Mgr, whereof is

accustomed to act in accordance with the directions or instructions of the Board, or of any director(s), of the lending company

11




2

Meaning of Relatives[Section 2(77) and Rule 4 of Companies (Specification of

Definitions Details) Rules, 2014]

1. Members of HUF;2. Husband and Wife;3. Father, including step-father;4. Mother, including step-mother;5. Son, including step-son;6. Son’s wife;7. Daughter;8. Daughter’s husband;9. Brother, including step-brother;10. Sister, including the step-sister

Exhaustive Definition

1. ABC Limited proposes to give a loan to Mr. Jain who is a director of itssubsidiary company, PQR Limited.

2. ABC Limited proposes to give a loan to M/s XYZ & Associates, apartnership firm in which Mr. Jain (who is a director of its subsidiarycompany PQR Limited) is a partner.

3. Mr. Jain is a director of ABC Limited and also DEF Limited. ABC Limitedproposes to give a loan to DEF Limited.

4. Mr. Jain is a director of ABC Limited and also a member of DEF Limited.ABC Limited proposes to give a loan to DEF Limited.

5. Mr. Jain is a director of ABC Pvt. Limited and also a member of DEFLimited. ABC Pvt. Limited proposes to give a loan to DEF Limited.

6. Mr. Jain is a member of ABC Limited and also a member of DEF Pvt.Limited. ABC Limited proposes to give a loan to DEF Pvt. Limited.

7. Mr. Jain is a member of ABC Limited and also a director of DEF Pvt.Limited. ABC Limited proposes to give a loan to DEF Pvt. Limited.

Case Studies – whether covered by Sec. 185

1. Loan is a Financial Assistance (it may or may not

carry interest) given on understanding that it shall be

paid back [Dr. Fredie Ardeshir Mehta vs. UOI];

2. Credit sale of immovable assets is out of purviewof section 185 [Dr. Fredie Ardeshir Mehta vs. UOI];

3. Restrictions apply only at the time of entering intothe transaction;

4. CG has, vide its Press Note No. 4/93, dated 20-8-

1993, permitted companies to grant loans to theirMD and WTD for house building purpose on such

terms and conditions as are applicable to its

officers/employees

• The proviso to section 185(1) provides that nothing contained

in this sub-section shall apply to—

(a) the giving of any loan to a MD or WTD—

i. as a part of the conditions of service extended by the

company to all its employees; orii. pursuant to any scheme approved by the members

by SR

(b) a company which in the ordinary course of its businessprovides loans or gives guarantees or securities for the

due repayment of any loan and in respect of such loans an

interest is charged at a rate > Bank Rate declared by RBI

Certain loans not covered/exempted u/s 185

12




3

1. any advance or deposit made in connection with

leasing/hire-purchase transaction;

2. any advance payment of salary given to anemployee who is a relative of a director as per the

rules of the company [M.R. Electronic Components

Ltd. v Asst. Registrar of Companies];

3. advance given for services to be rendered orgoods to be supplied provided it is on reasonable

terms;

4. section 185(1) does not apply to a governmentcompany provided that such company has obtained

the approval of CG/ SG

Non-applicability of section 185: certain cases • Exemptions to the holding company for its wholly ownedsubsidiary company: Rule 10(1) provides that;

a) any loan made; or

b) any guarantee given; or

c) any security provided;

by a holding company in respect of any loan made to its WOS

company is exempted from section 185, provided that such loans areutilised by the subsidiary company for its principle businessactivities.

• Exemptions to the holding company for its subsidiary company:Rule 10(2) provides that;

a) any guarantee given; or

b) Any security provided;

by a holding company in respect of loan made by any bank or

financial institution to its subsidiary company is exempted from

section 185, provided that such loans are utilised by the subsidiarycompany for its principle business activities.

• Company shall be punishable with:

1. Fine = not be less than Rs. 5 Lakhs butwhich may extend to Rs. 25 Lakhs,

• Director or the other person to whom any loan isadvanced or guarantee or security is given orprovided in connection with any loan taken by him or

the other person, shall be punishable with:

1. Imprisonment whichmay extend to 6 months; or

2. Fine = not be less than Rs. 5 Lakhs but whichmay extend to Rs. 25 Lakhs; or

3. Both

Penalty for contravention

KG Management Advisors LLPIFRS│Audit & Assurance│FEMA│Valuation│Corporate Advisory

[email protected], www.kgma.inM: 9811054015

KGMAKGMAKGMAKGMA

13

12/14/2014

1

Contract of employment with

Managing or Whole-time Directors

[Section 190]

Requirement to keep the Register of contracts of service [COS] with MD/ WTD

Every Co. to keep at its Reg. Office

A copy of COS with MD/ WTD, if its in

writing

A Written Memorandum setting out the terms, if COS

is not in writing

Members can inspect COS/ Memorandum, without any fees

Private Companies exempted from COS/

Memorandum requirements

Penalty for Default

Company = Fine of Rs. 25,000

Officer in Default = Fine of Rs. 5,000 for each default

Restriction on non-cash transactions

involving Directors

[Section 192]

Agreement for Acquisition of assets for consideration other than cash

Acquisition

by

Director of the company or its

holding or its subsidiary or its

associate company or a person

connected with him

the Company

Acquisition

from

the Company Director of the company or its

holding or its subsidiary or its

associate company or a person

connected with him

GM

Approvals 1. prior approval at GM of Company required;

2. prior approval at GM of Holding Company also required if director or

connected person is a director of its Holding Company;

3. GM Notice to include details of assets & registered valuer’s report

Penalty

Voidable at the

instance of the

Co., unless:

1. restitution is not possible and indemnification

made by any other person for loss or damage to the

Co.; or

2. rights are acquired bona fide for value and

without notice of the contravention

14

12/14/2014

2

Contract by One Person Company (OPC)

[Section 193]

Where OPC limited by shares or by guarantee

enters into a contract with the sole member of the company who is also the director of the company

the company shall,

unless the contract is in writing,

ensure that the terms of the contract or offer are

contained in a memorandum or

recorded in the minutes of the first meeting of BOD held next after

entering into contract,

except the contracts entered into by the company in the ordinary course of its business

Inform RoC for such

contracts within 15

days of BOD approval

Prohibition on Forward Dealings In

Securities of Company by Director Or KMP

[Section 194]

Director/ KMP of the Company

• Its Associate Company

Prohibited to buy in

• The Company

• Its Holding Company

• Its Subsidiary Company

• Its Associate Company

The right to call or make delivery of:

• Specified number of relevant shares

• Specified amount of relevant debentures

at a specified price and within a specified time

Penalty:

(i) Imprisonment < 2 years; or

(ii) Fine > Rs. 1 lakh but < Rs.5 lakhs; or

(iii) Both

(i) Directors & KMP liable to

the name of such directors or KMP

(i) Directors & KMP liable tosurrender; and(ii) restriction on the Co./ itsdepository to register:the relevant shares or debentures inthe name of such directors or KMP

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12/14/2014

3

Prohibition on directors and KMP for

insider trading of securities

[Section 195]

Prohibiti

on

No person including any director or KMP of a company shall enter

into insider trading

“Insider

trading”

– It

means:

(a) an act of subscribing, buying, selling, dealing or agreeing to

subscribe, buy, sell or deal in any securities by any director or

KMP or any other officer of a Co. either as principal or agent if such

director or KMP or any other officer of Co. is reasonably expected to

have access to any non-public price sensitive information about

securities of Co.; or

(b) an act of counselling about procuring or communicating directly or

indirectly any non-public price-sensitive information to any person

“Price-

sensitive

informati

on”

Any information relating, directly or indirectly, to a Co., which if

published is likely to materially affect price of securities of the Co.;

Exception: communication required in the ordinary course of business

or profession or employment or under any law

Penalty 1. Imprisonment < 5 years; or

2. Fine > Rs. 5 lakhs but < Rs. 25 crores or 3 times the amount of

profits made out of insider trading, whichever is higher; or

3. Both

Punishment for Fraud

[Section 447]

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in

force

any person who is found to be guilty of fraud,

shall be punishable with:

• Imprisonment > 6 months but < 10 years; and

• Fine > amount involved in the fraud, but < 3 times the amount involved in the fraud

If fraud in question involves public interest, imprisonment > 3 years

16

12/20/2014

Copyright @ FCA Kamal Garg 1

Appointment and Removal of

Directors

By:

CA Kamal Garg


Minimum and Maximum Number of

Directors [Section 149(1) & (2)]

• Only Individuals can be appointed as Directors;

• Public Company = Minimum 3 Directors;

• Private Company = Minimum 2 Directors;

• One Person Company (OPC) = Minimum 1 Director;

• Maximum Directors in any Company = 15 Directors

• Transitional Provisions = Existing Companies to

comply within 1 year from commencement of this

Section (i.e. by 31.3.2015)

Increase in Number of Directors

[First Proviso to Section 149(1) & (2)]

• Upto 15 Directors = Increase in number of

directors can be made as per AOA;

• Beyond 15 Directors = Increase in number of

directors can be made after approval of members

by way of SR in a GM for amendment in the

Articles to have more than 15 directors

Women Director[Rule 3 of the Companies (Appointment and Qualification of Directors)

Rules, 2014 and Second Proviso to section 149(1)]

• Following Companies need to appoint atleast one Women Director:

a) every listed company;

b) every other public company having (as on the last date of

latest audited financial statements):

� Paid–up share capital > Rs. 100 Crores; or

� Turnover > Rs. 300 Crores

• Transitional Provisions =

1. Eligible Companies to comply within 6 months from the date

of incorporation;

2. Existing Companies to comply within 1 year from

commencement of this Section (i.e. by 31.3.2015)

• Vacancy of the women directors needs to be filled within 3

months or next Board meeting, whichever is later

17

12/20/2014


Resident Director [Section 149(3)]

• Appointment of any person who is a foreigner as a Director of a company not prohibited by Co. Act;

• Every company shall have at least one director who has stayed in India for a total period of > 182 days in the previous calendar year;

• Director's stay in India for 137 days during calendar year 2014 will satisfy residency requirement of the 2013 Act [MCA General Circular 25/2014, Dated 26-6-2014];

• The Bombay HC in the case of Ramaben A. Thanawal v JyotiLtd. held that the expression ‘whole-time director’ must referto a director who spends his whole-time in the managementof the company. So, literally, the Whole-time Director’scontinuous presence in India is not the criterion butspending his whole-time for the purposes of the managementof the company is important.

Small Shareholders’ Director (SSD)[Section 151 of the Companies Act, 2013 and Rule 7 of the Companies

(Appointment and Qualification of Directors) Rules, 2014]

• A listed company, may upon the notice of:

� > 1000 small shareholders; or

� > 1/10 of the total number of such shareholders,

whichever is lower, have a SSD elected by the small shareholders

• A listed company if opts to appoint SSD suo motu, then above

provisions shall not apply;

• SSD = a Shareholder holding shares of nominal value < Rs. 20,000;

• Tenure of appointment of SSD:

1. shall not exceed a period of 3 consecutive years;

2. shall not be liable to retire by rotation;

3. on the expiry of the tenure, the director shall not be eligible for

reappointment (reappointment possible after expiry of next 3

years)



Notice by Small Shareholders for appointing SSD:

• To be given atleast 14 days before the date of GM;

• To specify the name, address, shares held and folio number

of the proposed person [Provided that if the person being

proposed does not hold any shares in the company, the

details of shares held and folio number need not be

specified in the notice];

• To be accompanied by a statement signed by the proposed

person containing:

1. His DIN;

2. His Consent to act as SSD;

3. His declaration that he is not disqualified under the Act



• The person proposed for appointment of SSD should not

be disqualified;

• SSD will be considered as an independent director u/s

149(6) and hence should give declaration about his

independence u/s 149(7);

• Deemed vacation of office of SSD in if Sections 164, 167

and 149(6) violated;

• Same person cannot be SSD in more than two

Companies;

• SSD cannot be appointed as MD/ WTD of the same Co.;

• SSD cannot be associated with such company in any

other capacity, either directly or indirectly, after cessation

18

12/20/2014


Appointment of First Directors [Section 152(1)]

• Individuals named in the AOA to act as First Directors till the

directors are appointed at the first GM after incorporation of the Co.

• If AOA are silent then MOA Subscribers shall be the First

Directors;

• Form 32 (Now Form DIR-12) need not be filed in above cases;

• First directors to hold office till the vacation by death, resignation,

GM Meeting, etc.;

• For OPC, individual member shall be deemed to be First

Director;

• A private company, which is not a subsidiary of a public company,

can provide in its AOA the manner of appointment of directors;

• If AOA are silent for such appointment then directors of such

Private Co. shall be appointed at GM [Swapan Dasgupta v Navin

Chand Suchanti; Viswanathan (B.N.) v T B Asbestos & Paints Ltd.]

Appointment of Directors at General Meeting

[Section 152(2) to (5)]

• Save as otherwise expressly provided in this Act, every

director shall be appointed by the company in GM;

• A person to be appointed as a director only if he has DIN;

• A person proposed to be appointed as director, shall furnish:

1. His DIN;

2. A declaration in Form DIR-8 that he is not disqualified; and

3. A consent to act as a director

• Co. to file such consent with ROC by attaching in Form DIR-

12 along with prescribed fee;

• Independent Directors: BOD to provide a Statement

before members at GM about the fulfillment of required

conditions for appointment of Independent Directors

Rotation of Directors [Section 152(6)]• Rotational Directors: Unless AOA provides otherwise at

every AGM, not less than 2/3rd of the total number of directors of a public company shall—

a) be persons whose period of office is liable to determination by retirement of directors by rotation; and

b) save as otherwise expressly provided in this Act, be appointed by the company in general meeting

• Other Directors eligible for reappointment by default;

• Retiring Directors: 1/3rd of Rotational Directors (or a number nearest to 1/3rd if the number is not a multiple of three);

• Directors who have been longest in office shall be determined for retirement;

• Independent director shall not be included for the “total number” of Directors

Automatic re-appointment of retiring directors in

certain cases [Section 152(7)]• If at the AGM the vacancy of a retiring director is not filled, either

by reappointing the retiring director or appointing some other

person, it results in his automatic reappointment;

• If at AGM vacancy is not filled, AGM stands adjourned to next week

at same day, time & place (if public holiday then succeeding day);

• No Automatic reappointment if:

1. Resolution put but lost;

2. Written notice of unwillingness is given by retiring director;

3. He is disqualified for appointment;

4. Section 162 violation (appointment with individual voting)

• Directors cannot continue in office after the last day on which

AGM should have been held [B R Kundra vs. Motion Pictures

Association];

• Nominees of PFI are not liable to retire;

• MD/ WTD not liable to retire by rotation

19

12/20/2014


Appointment of other than retiring directors as

directors [Section 160]• A person, not being a retiring director shall be eligible for

appointment as a director at any GM, if he or some member, intending

to propose him has:

1. given atleast 14 days notice before the meeting about proposal

for such candidature;

2. deposit of Rs. 1,00,000 [would be refunded if he is elected as a

director or gets more than 25% of total valid votes casted];

• Atleast 7 days notice of candidature about directorship to be given

by Co. to other members either (i) manually or (ii) electronically and

website else (iii) Newspaper (Local + English);

• Tender of nomination need not be before a particular time on last

day [Oriental Benefit and Deposit Society Ltd. v Bharat Kumar K. Shah];

• BOD of Sec. 8 Co. has the right to decide to forfeit or refund the

deposit in case of failure to secure more than 25% valid votes [MCA

vide its Circular 38/2014, Dated 14.10.2014]

Composition of BOD of a Listed Company

[Clause 49]

• BOD shall have an optimum composition of executive and

non-executive directors, with not less than 50% of the BOD

comprising of non-executive directors;

• In case of a non-executive chairman, at least 1/3rd of the

Board should comprise of independent directors;

• In case of executive Chairman, at least half of the Board

should comprise of independent directors;

• If non-executive Chairman is a promoter of the company or is

related to any promoter or person occupying management, at

least one half of the Board of the company shall consist of

independent directors.

• Acquirer cannot appoint a director during the offer period

[Ranbaxy Laboratories Ltd. v Dr. Jayaram Chigurupati]

Particulars Additional Directors

[Sec 161(1)]

Casual Vacancy

[Sec 161(4)]

Alternate Directors

[Sec 161(2)]

Applies to All Companies Public Company All Companies

Wh

o c

an

app

oin

t

BOD may appoint

ADD anytime

BOD may fill

casual vacancy

arising in office of

director

appointed in GM

BOD may appoint to act in

place of original director

during his absence for

period of > 3 months from

‘India’

AOA

Power

Required [Needle

Industries (I) Ltd case]

Required Either AOA or GM

How to

Appoint

BM Resolution/

Circular Resolution

BM Resolution BM Resolution

Oth

er

Res

tric

tio

n(s

) A person who failed to

get appointed as

director at the GM

cannot be appointed

as ADD

NIL • Cannot become Alt. Dir.

for any other director(s) at

same time in same Co.;

• Alt Director to

Independent Director

must also be Independent

Particulars Additional Directors

[Sec 161]

Casual Vacancy

[Sec 161]

Alternate Directors

[Sec 161]

Term of

Office

Upto the date of next

AGM. If AGM not

held then upto the

day on which AGM

should have been

held [Ananthlakshmi

Ammal vs. Indian

Trade &

Investments Ltd.]

Upto the

unexpired term of

predecessor

director

• Upto the term

permissible to the

original director;

• Appointment of

Alt. Director comes

to an end once

original director

returns to India

Rotational

Status

Non-rotational Non-rotational Non-rotational

Count Comply Sec. 149 Comply Sec. 149 Comply Sec. 149

Special

CaseAppointment of ADD at the BM held by a single director for

getting minimum quorum is valid [Ranbaxy Laboratories Ltd v

Jayaram Chigurupati]

20

12/20/2014


Nominee Directors [Section 161(3)]

• Subject to the articles of a company, the Board may

appoint any person as a director nominated:

1. by any institution in pursuance of the provisions of

any law for the time being in force; or

2. by any institution in pursuance of the provisions of

any agreement; or

3. by the Central Government or the State Government

by virtue of its shareholding in a Government

company

Appointment of directors to be voted

individually [Section 162]

• Single resolution prohibited for directors appointment;

• Separate resolution required for directors appointment;

• Appointment includes reappointment also;

• Exception: Single resolution appointment valid if:

1. Before passing a single resolution,

2. A resolution is passed for appointment by single

resolution,

3. Without any vote being against it

• Section 162 not applicable to:

1. Appointments made by company otherwise than in GM

Appointment by

Proportional Representation [Section 163]

• Such kind of appointment not compulsory;

• Section 163 applies only if AOA requires such kind of appointment;

• At least 2/3rd of directors to be appointed by this method;

• Methods = Single Transferable Vote or Cumulative Voting

• Such appointment to be made once in 3 years;

• Casual vacancy to be filled u/s 161(4);

• Directors u/s 163 cannot be removed u/s 169 (i.e. removal by Members)

Disqualifications for appointment of Director

• Section 164(1): A person shall not be eligible for appointment as a

director of a company, if:

1. He is declared by competent court as a person of unsound mind;

2. He is undischarged insolvent;

3. He applied to be adjudged as insolvent & application is pending;

4. He is convicted of an offence (involving moral turpitude or

otherwise), and:

• Sentenced to imprisonment > 6 months; and

• 5 years have not expired from the date of expiry of such

sentence [If imprisonment > 7 years then not eligible for

appointment as director of any company]

5. He is disqualified by an order of Court or Tribunal (i.e. NCLT);

6. His (individually or jointly) calls are in arrears > 6 months from

the last date of payment of call;

7. He is convicted u/s 188 at any time in preceding 5 years;

8. He has not obtained DIN u/s 152(3)

21

12/20/2014



• Section 164(2): A person who is or has been a director of a company

which—

a) has not filed financial statements OR annual returns for any

continuous period of 3 financial years; or

b) has failed to:

1. repay the deposits accepted by it or pay interest thereon; or

2. redeem any debentures on the due date or pay interest due

thereon; or

3. pay any dividend declared;

and such failure to pay or redeem continues for one year or more, shall

not be eligible to be:

• re-appointed as a director of that company; or

• appointed as director in other company

for a period of 5 years from the date on which the said company fails

to do so


• A Private Company can provide additional grounds of disqualification

in its AOA [Section 164(3)];

• Directors (i) appointed by the BIFR, (ii) nominated by the Banks/

Financial Institutions are exempted from disqualification u/s 164(2)

• Disqualification will not attach to a director if he resigns his office

earlier

• Disqualifications due to:

a. Offence of moral turpitude otherwise,

b. Court/ Tribunal Order,

c. Offence u/s 188,

shall not take effect:

1. For first 30 days;

2. Until disposal of first appeal (if such appeal made in 30 days);

3. For 7 days from the day first appeal is disposed off;

4. Until disposal of further appeal (if such appeal made in 7 days)


• Disqualification u/s 164(2)(a) shall not be attracted if

director(s) filed the annual accounts and/or returns prior to

launch of CLSS – 2014 (by 15.8.2014);

• Statutory auditor to report on disqualification u/s

164(2) [Section 143(3)(g)];

• Director to report the disqualification to the Company

in Form DIR-8 before his appointment;

• Company to report the disqualification to ROC in Form

DIR-9 before his appointment;

• ROC shall place Form 9 for public inspection;

• Application (if any) for removal of disqualification shall

be made in Form DIR-10

Ceiling on Number of Directorships

[Section 165]• A director cannot hold directorship (including alternate

directorship) of more than 20 companies at a time;

• A person cannot hold directorship in more than 10 public

companies;

• U/s 165, Public Company includes a private company which is

holding or subsidiary of public company;

• The members may reduce the limits of directorship held by a

person by passing SR in GM;

• Transitional Provisions: 1 year time limit for complying with the

requirement for max. number of directorship by a person;

• Effective date of resignation by a director in case of resignation

from excess number of companies: effective immediately and no

need for formal acceptance of the resignation in the Board meeting;

• Penalty of > Rs. 5,000 but < Rs. 25,000 per day of default

22

12/20/2014


Duties of directors [Section 166]

• To act as per AOA subject to Companies Act, 2013;

• To act in good faith and promote objects of the Company for

interest of all stakeholders/ community;

• To protect the environment while promoting objects of the

Company;

• To exercise due care/ skill/ diligence/ independent judgement;

• To avoid conflict with Company’s Interest;

• To avoid achieving undue gain or advantage else liable to

pay amount equal to that gain to the Co.;

• Shall not assign “his” office and if assigned then its void [after

death, the office no more belongs to him, Oriental Metal

Pressing Pvt. Limited vs. B K Thakoor]

• Penalty of > Rs. 1 Lakh but < Rs. 5 Lakhs

Automatic Vacation of Office of Director [Section 167]

• Disqualified u/s 164 [automatic vacation applies even if he appeals against Court’s Sentence for offence of moral turpitude or otherwise];

• Absents himself from “all” the BM held during a period of 12 months with or without leave of absence of the Board

Proper notice of Board meeting must be given to the concerned director [Vijay Krishan Jaidka v Jaidka Motor Co. Ltd.];

• Contravention u/s 184 [regarding contracts or arrangements in which directors are interested];

• Removal in pursuance of Co. Act, 2013;

• Having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, he ceases to hold such office or other employment in that company

Automatic Vacation of Office of Director [Section 167]

• Private Company may prescribe additional grounds;

• Vacation of office is automatic on the happening of an event –

no separate resolution is required to be passed and no

opportunity of being heard required to be given to errant

director [Bharat Bhushan v H.B. Portfolio Leasing Ltd.];

• Promoters or the CG (in absence of promoter) shall

appoint directors to hold office till next GM, in case office of

“all” the directors is vacated due to any disqualification

[Section 167(3)];

• Penalty:

1. upto 1 year imprisonment; or

2. Fine > Rs. 1 Lakh but < Rs. 5 Lakhs; or

3. Both

Resignation by a Director from the Company[Section 168 read with Rule 15 and Rule 16]

• A director may resign by giving notice in writing to the Company and BOD;

• Co. shall intimate to ROC within 30 days in Form DIR-12;

• Co. to post this information on its Website, if any;

• Co. shall also place the fact of such resignation in the BOD Report to be laid in the immediate next GM;

• Resigning director shall also forward a copy of the resignation to ROC alongwith the reasons for resignation in Form DIR-11;

• Resignation should be addressed to the Company [ROC v Orissa Paper Products Ltd.];

• A director who has resigned liable for the acts during his tenure but would not be liable for anything that happens subsequently [Chokkalingam Chettiar v Official Liquidator]

23

12/20/2014


Resignation by a Director from the Company[Section 168 read with Rule 15 and Rule 16]

• Effective date of resignation by the Director [Sec. 168(2)]:Resignation shall take effect from the later of:

1. the date on which notice is received by the Co.; or

2. the date, if any, specified by the director in the notice

• Resignation to be effective only on acceptance in following cases:

1. AOA requirement;

2. Resignation itself states so;

3. MD/WTD/Manager tendered resignation [Achuta Pai v ROC]

• Oral Resignation: In Latchford Premier Cinema Ltd. v Ennion & Paterson, it was held that oral resignation of director in GM is valid if it is accepted at the GM, even though the AOA provide that a director shall vacate office if by notice in writing he resigns his office

Removal of Directors [Section 169]• Co. may remove a director before the expiry of his period by

passing OR and providing him OBH;

• U/s 169, following directors cannot be removed:

1. Director appointed by Tribunal u/s 242;

2. Nominee Directors by PFI;

3. Directors appointed u/s 163 [Proportional Representation]

• A permanent director can also be removed [Tarlok Chand

Khanna v Rajkumar Kapoor];

• Tenure of the director appointed in place of the removed

director limited till the date up to which his predecessor would

have held office if he had not been removed [Section 169(6)];

• Directors cannot reappoint the person removed u/s 169;

• Civil Court cannot interfere in the matters of removal of a director

[Khetan Industries Pvt. Ltd. v Manju R P Khetan]

Removal of Directors [Section 169]: Steps

• At least 14 days (before GM) special notice to company required from member;

• A copy of special notice to be given to director by Co.;• Any omission to serve a special notice on the directors

invalidates the OR for his removal [Varadarajan (S.) v UdhayemLeasings & Investments P. Ltd.]

• Director has the right to make representation;• Director’s representation to be sent to the members [at least

7 days before GM considered reasonable];• If not sent then to be read at GM;• Tribunal empowered to prevent (i) Director to represent,

and/ or (ii) Company to Circulate such representation, if such representation is meant to be abused/ secure publicity for defamatory matter [Dabur India Ltd. v Anil Kr. Poddar];

• Any other person can be appointed as director if special notice given for it

Special Points w.r.t Section 169• Even a single member holding only one share is eligible to

give special notice u/s 169 [Karnataka Bank vs. A B Datar];

• Member cannot be compelled to disclose reasons for

proposing resolution for removal [LIC vs. Escorts Ltd.];

• AOA cannot prohibit members from removing directors

(else ultra vires section 169);

• A person removed u/s 169 is not deprived of any

compensation or damages payable to him under his contract

of service [Section 169(8)];

• Any power to remove a director under other provisions of

this Act shall not be derogated [Section 169(8)]. For example,

the BOD can remove MD as per other provisions of the Act

24

KGMA 12/26/2014


Independent Directors

By:

CA Kamal Garg


Companies Required to have IDs[Section 149(4) and Rule 4 of the Companies


• Every Listed Company (to have IDs of atleast 1/3rd

of total directors on its Board);

• Every Public Company (to have atleast 2 IDs on its

Board), if (as per its latest audited F.S.):

1. Its Paid-up Share Capital > Rs. 10 Crores; or

2. Its Turnover > Rs. 100 Crores; or

3. Its loans, debentures, deposits > 50 Crores

Independent Director [Section 149(6)] -

Meaning

Independent Director (ID) in relation to a Company means a person who:

1. Is not MD/ WTD/ Nominee Director;

2. Has integrity, relevant expertise and experience as per BOD opinion;

3. Is not/ was not a promoter of Co./ Holding/ Subs./ Associate;

4. Is not related to promoters/ directors in Co./ Holding/ Subs./ Associate;

5. Has/ had no pecuniary (i.e. monetary) relationship with Co./ Holding/ Subs./ Associate/ their promoters/ directors, during (i) current F.Y. or (ii) immediately preceding 2 F.Y.;


Meaning6. His relatives has/ had no pecuniary relationship/ transaction with

Co./ Holding/ Subs./ Associate/ their promoters/ directors,

amounting to the lower of:

• > 2% of its gross turnover;

• > 2% of its total income;

• Rs. 50 lakhs

during (i) current F.Y. or (ii) immediately preceding 2 F.Y.;

7. Neither himself/ nor his relatives, in any 3 preceding F.Y :

• Is/ was KMP/ employee of Co./ Holding/ Subs./ Associate;

• Is/ was employee/ proprietor/ partner, in firm of Auditors/ CS/

Cost Auditors, of Co./ Holding/ Subs./ Associate;

• Is/ was employee/ proprietor/ partner, in any legal or consulting

firm having transaction of >10% of the gross turnover of such

firm, with such Co./ Holding/ Subs./ Associate


Meaning8. Neither himself and/ nor his relatives:

• holds > 2% of the total voting power of the company;

• Is CEO/ Director, of any NPO that receives > 25% receipts

from Co./ its promoters/ directors/ Holding/ Subs./ Associate;

• Is CEO/ Director, of any NPO that holds > 2% of the total

voting power of the company

9. Possesses such other qualifications as may be prescribed

Additional Conditions under Clause 49:

• who, neither himself nor any of his relatives is a material supplier,

service provider or customer or a lessor or lessee of the

company;

• who is not less than 21 years of age

May 2015 Examination –

Applicability of Clause 49

• New Clause 49 applicable from 1.10.2014

• So instead of doing definition given in Para 2 on

Page 87, do the definition given in Para B on Page

316

25

KGMA 12/26/2014


Other Requirements u/s 149• Appointment of IDs to be approved in GM alongwith

explanatory statement containing justification of his appointment

• Requirement for appointment of higher number of IDs in other

specified law or regulation, if any, shall prevail;

• Confirmation by the Board through its Statement in its BOD

Report regarding independent director;

• IDs and Company to abide Code of Conduct under Sch. IV; (see

Para 17 on Page 93)

• IDs are not entitled for stock option but may receive sitting/

meeting fee and reimbursement of expenses for BOD Meeting

[Under Clause 49, Remuneration is also permitted];

• Tenure of IDs up to 5/10 years [reappointment possible through

SR only];

• No ID to hold office for more than 2 consecutive terms of 5

years each;

Other Requirements u/s 149• ID become qualify after 3 years of cessation but during these 3 years

he cannot be appointed in or be associated with Co. in any other

capacity, either directly or indirectly

• ID not liable for the acts of Co. unless he himself was party to it;

• ID is not liable to retire by rotation;

• Manner of selection of IDs through https://independentdirector.in/,

i.e. the IDs Repository - a joint initiative of MCA and agencies like ICAI/

ICSI/ ICWAI;

• Databank of IDs to be maintained by these agencies with display of

Disclaimer (see Para 16,1 on Page 91 for contents of Databank);

• Co. shall carry out its own due diligence for selection of IDs

• Transitional Provisions: 1 year w.e.f. 1.4.2014;

• Vacancy of IDs: to be filled at the later of immediate next BM or within

next 3 months, from such vacancy;

• Non applicability of the requirement for appointment of IDs on

cessation of prescribed conditions for 3 continuous years

Restrictions under Clause 49

• A person shall not serve as an ID in more than 7 listed

companies;

• If any person who is serving as a WTD in any listed

company then he shall serve as an ID in not more than 3

listed companies;

• Co. shall issue a formal letter of appointment to ID in the

manner as provided in the Companies Act, 2013;

• The terms and conditions of appointment shall be

disclosed on the website of the company;

• IDs of the Co. shall hold at least 1 meeting in a year,

without the attendance of non-independent directors and

members of management. All the IDs of the company shall

strive to be present at such meeting

26

Page | 1

Appointment and Remuneration of Managerial Personnel1

4.1 Appointment of Managing Director, Whole Time Director or Manager (Section 196 of the Companies Act,

2013): A new section 196 of the Companies Act, 2013 came into force from 1st April, 2014 which provides for the provisions for appointment of Managing Director, Whole Time Director or Manager. According to this section:

(i) A company shall not appoint or employ a managing director and a manager at the same time. [Section 196(1)]

(ii) Tenure [section 196(2)]:

(a) No company shall appoint or re-appoint any person as its managing director, whole-time director or manager for a term exceeding five years at a time.

(b) It is further provided that no re-appointment shall be made earlier than one year before the expiry of his term.

(iii) Disqualification [section 196(3)]: No company shall appoint or continue the employment of any person as managing director, whole-time director or manager who-

(a) is below the age of 21 years or has attained the age of 70 years.

Provided that a person who has attained the age of seventy years may be appointed to such office by the passing of a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person.

(b) is an undischarged insolvent or has at any time been adjudged as an insolvent; or

(c) has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; or

(d) has at any time been convicted by a court of an offence and sentenced for a period of more than six months.

Schedule V (Part I) to the Companies Act, 2013, has prescribed following additional conditions for managing or whole-time director or a manager to be eligible for appointment:

No person shall be eligible for appointment as a managing or whole-time director or a manager (hereinafter referred to as managerial person) of a company unless he satisfies the following conditions, namely:—

(a) he had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offence under any of the following Acts, namely:—

(i) the Indian Stamp Act, 1899;

(ii) the Central Excise Act, 1944;

(iii) the Industries (Development and Regulation) Act, 1951;

(iv) the Prevention of Food Adulteration Act, 1954;

(v) the Essential Commodities Act, 1955;

(vi) the Companies Act, 2013;

(vii) the Securities Contracts (Regulation) Act, 1956;

(viii) the Wealth-tax Act, 1957;

(ix) the Income-tax Act, 1961;

(x) the Customs Act, 1962;

(xi) the Competition Act, 2002;

(xii) the Foreign Exchange Management Act, 1999;

(xiii) the Sick Industrial Companies (Special Provisions) Act, 1985;

(xiv) the Securities and Exchange Board of India Act, 1992;

(xv) the Foreign Trade (Development and Regulation) Act, 1992;

(xvi) the Prevention of Money-laundering Act, 2002;

1 The contents are adapted from the Study Material published by the Board of Studies of The Institute of Chartered Accountants of

India. The Study Material is available on www.icai.org. The Chapter in Study Material contains no decided case law on this topic.

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(b) he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 [COFEPOSA]:

Provided that where the Central Government has given its approval to the appointment of a person convicted or detained under sub-paragraph (a) or sub-paragraph (b), as the case may be, no further approval of the Central Government shall be necessary for the subsequent appointment of that person if he had not been so convicted or detained subsequent to such approval.

(c) he has completed the age of 21 years and has not attained the age of 70 years:

Provided that where he has attained the age of 70 years; and where his appointment is approved by a special resolution passed by the company in general meeting, no further approval of the Central Government shall be necessary for such appointment;

(d) where he is a managerial person in more than one company, he draws remuneration from one or more companies subject to the ceiling provided in section V of Part II;

(e) he is resident of India.

Explanation I.—For the purpose of this Schedule, resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India,—

(i) for taking up employment in India; or

(ii) for carrying on a business or vacation in India.

Explanation II.—This condition shall not apply to the companies in SEZ as notified by Department of Commerce from time to time :

Provided that a person, being a non-resident in India shall enter India only after obtaining a proper Employment Visa from the concerned Indian mission abroad. For this purpose, such person shall be required to furnish, along with the visa application form, profile of the company, the principal employer and terms and conditions of such person's appointment.

(iv) Procedure of appointment [section 196(4)]:

(i) Subject to the provisions of section 197 and Schedule V, a managing director, whole-time director or manager shall be appointed, and the terms and conditions of such appointment and remuneration payable be approved by the Board of Directors at a meeting.

(ii) The terms and conditions and remuneration approved by Board of Directors as above shall be subject to the approval of shareholders by a resolution at the next general meeting of the company.

(iii) In case such appointment is at variance to the conditions specified in the Schedule V of the Companies Act, 2013, the appointment shall be approved by the Central Government.

(iv) The notice convening Board or general meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any.

(v) A return in the Form No. MR.1 shall be filed with the ROC within 60y days of such appointment.

(v) Validity of acts [Section 196(5)]: Where an appointment of a managing director, whole-time director or manager is not approved by the company at a general meeting, any act done by him before such approval shall deemed to be valid.

Managing Director [Section 2(54)]: Section 2(54) of the Companies Act, 2013 defines a “Managing Director” as a director who is entrusted with substantial powers of management of the affairs of the company by:

(i) virtue of the articles of a company or

(ii) an agreement with the company or

(iii) a resolution passed in its general meeting, or by its Board of Directors,

and includes a director occupying the position of the managing director, by whatever name called. Explanation to Section 2 (54) clarifies that substantial powers of the management shall not be deemed to include the power to do such administrative acts of a routine nature when so authorised by the Board such as:

(i) the power to affix the common seal of the company to any document or

(ii) to draw and endorse any cheque on the account of the company in any bank or

(iii) to draw and endorse any negotiable instrument or

(iv) to sign any certificate of share or

(v) to direct registration of transfer of any share

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Whole Time Director [Section 2(94)]: “whole-time director” includes a director in the whole- time employment of the company.

Manager [Section 2(53)]: “Manager” means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not.

4.2 Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits (Section 197 of the Companies Act, 2013):

(i) Overall Maximum Managerial Remuneration [Section 197(1)]

(a) The overall managerial remuneration to the Directors including managing director, whole time director and manager is summarized as under:

S.No. Persons entitled for

remuneration

Maximum remuneration

in any financial year

If remuneration exceeds

maximum remuneration

in any financial year as

provided under

column (b)

(a) (b) (c)

(i) Directors including managing director, whole time director and manager ofpublic companies

11% of the net profits of the company for that financial year

Company in general meeting with approval of Central Government subject to provisions of Schedule V may pay remuneration in excess of 11% of the net profits of the company

(ii) One Managing director/ Whole time director/ manager

5% of the net profits of the company for that year

With the approval of the company in general meeting this limit may be exceeded.

(iii) More than one Managing director/ Whole time director/manager

10% of the net profits With the approval of the company in general meeting this limit may be exceeded.

(iv) Directors who are neither Managing director nor whole time directors

1% of the net profits of the company if there is a managing director or a whole time director

Approval of the company in general meeting is required

(v) Directors who are neither Managing director nor whole time directors

3% of the net profits of the company if there is no managing director or whole time director

Approval of the company in general meeting is required

(b) Section 197(8) further provides that the net profits shall be computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

(ii) Remuneration rendered in any other capacity [Section 197(4)]

(a) The remuneration payable to the directors of a company, including any managing or whole-time director or manager, shall be determined, in accordance with and subject to the provisions of this section, either

(i) by the articles of the company, or

(ii) by a resolution or,

(ii) if the articles so require, by a special resolution, passed by the company in general meeting, and

(b) The remuneration payable to a director determined aforesaid shall be inclusive of the remuneration payable to him for the services rendered by him in any other capacity.

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(c) Any remuneration for services rendered by any such director in other capacity shall not be so included if—

(1) the services rendered are of a professional nature; and

(2) in the opinion of the Nomination and Remuneration Committee, if the company is covered under sub-section (1) of section 178, or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.

(iii) Sitting Fees to directors [Section 197(5)]:

(a) A director may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board.

(b) The sitting fees shall not exceed one lakh rupees per meeting of the Board or committee thereof. [As per the Companies (Appointment and Remuneration of Managerial personnel) Rules, 2014]

However, for Independent Directors and Women Directors, the sitting fee shall not be less than the sitting fee payable to other directors.

(c) The percentages under sub-section (1) shall be exclusive of any sitting fees payable to directors for attending meetings of the Board or committee thereof or for any other purpose whatsoever as may be decided by the Board.

(d) Different fees for different classes of companies and fees in respect to independent directors may be such as may be prescribed.

(iv) Mode of remuneration [Section 197(6)]: A director or manager may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other.

(v) No profits or profits are inadequate [Section 197(3) & (11)]

(a) If in any financial year, a company has no profits or its profits are inadequate, the company shall not pay by way of remuneration any sum exclusive of sitting fees to its directors, including any managing or whole- time director or manager except in accordance with the provisions of Schedule V.

(b) If the company is not able to comply with such provisions of Schedule V in the above case, then previous approval of the Central Government shall be taken.

(vii) Remuneration of Independent Director [Section 197(7)]

Notwithstanding anything contained in any other provision of this Act but subject to the provisions of this section, an independent director shall not be entitled to any stock option and may receive remuneration by way of

(1) sitting fees in terms of section 197(5),

(2) reimbursement of expenses for participation in the Board and other meetings; and

(3) profit related commission as may be approved by the members.

(viii) Refund of excess [Section 197(9)]

If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company (i.e. he cannot use such amount for his personal purpose or he cannot spend such amount). The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless permitted by the Central Government. [Section 197(10)]

(ix) Disclosure by listed company [Section 197(12)]:

(a) Every listed company shall disclose in the Board’s report, the ratio of the remuneration of each director to the median employee’s remuneration and other details as prescribed under the Companies (Appointment and Remuneration of Managerial personnel) Rules, 2014.

(b) The board’s report shall include a statement showing the name of every employee of the company, who-

(i) if employed throughout the financial year, was in receipt of remuneration for that year which, in the aggregate, was not less than 60 lakh rupees;

(ii) if employed for a part of the financial year, was in receipt of remuneration for any part of that year, at a rate which, in the aggregate, was not less than 5 lakh rupees per month;

(iii) if employed throughout the financial year or part thereof, was in receipt of remuneration in that year which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of that drawn by the managing director or whole-time director or manager and holds by himself or along with his spouse and dependent children, not less than 2% of the equity shares of the company.

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(c) The statement referred above shall also indicate particulars of the above employees like designation, remuneration received, nature of employment, qualification and experience, date of commencement of employment, age, last employment held by such employee before joining the company, the percentage of equity shares held by the employee in the company within the meaning of clause (iii) of para (b) above, and whether any such employee is a relative of any director or manager of the company and if so, name of such director or manager.

(x) Insurance for indemnification [Section 197(13)]:

(a) Where any insurance is 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, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel.

(b) Provided that, if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration.

(xi) Receiving Commission [Section 197(14)]: Subject to the provisions of this section, any director who is in receipt of any commission from the company and who is a managing or whole-time director of the company shall not be disqualified from receiving any remuneration or commission from any holding company or subsidiary company of such company subject to its disclosure by the company in the Board’s report.

(xii) Contravention [Section 197(15)]: If any person contravenes the provisions of section 197, he shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs.

4.3 Calculation of profits (Section 198 of the Companies Act, 2013): See Para 26 on Page 226 of our Text Book

4.4 Recovery of managerial remuneration in certain cases (Section 199 of the Companies Act, 2013): Without prejudice to any liability incurred under the provisions of this Act or any other law for the time being in force, where a company is required to re-state its financial statements due to fraud or non-compliance with any requirement under this Act and the rules made thereunder, the company shall recover from any past or present managing director or whole-time director or manager or Chief Executive Officer (by whatever name called) who, during the period for which the financial statements are required to be re-stated, received the remuneration (including stock option) in excess of what would have been payable to him as per restatement of financial statements.

4.5 CG or Company to fix limit with regard to remuneration (Section 200 of the Companies Act, 2013): According to section 200 of the Companies Act, 2013, the CG or a company may, while according its approval under section 196, to any appointment or to any remuneration under section 197 in respect of cases where the company has inadequate or no profits, fix the remuneration within the limits specified in this Act, at such amount or percentage of profits of the company, as it may deem fit and while fixing such remuneration the CG shall have regard to:

(a) the financial position of the company;

(b) the remuneration or commission drawn by the individual concerned in any other capacity;

(c) the remuneration or commission drawn by him from any other company;

(d) professional qualifications and experience of the individual concerned;

(e) any other matters as may be prescribed

According to the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, for the purposes of clause (e) above the Central Government or the company shall have regard to the following matters, namely:-

(1) the Financial and operating performance of the company during the three preceding financial years.

(2) the relationship between remuneration and performance.

(3) the principle of proportionality of remuneration within the company, ideally by a rating methodology which compares the remuneration of directors to that of other directors on the board and employees or executives of the company.

(4) whether remuneration policy for directors differs from remuneration policy for other employees and if so, an explanation for the difference.

(5) the securities held by the director, including options and details of the shares pledged as at the end of the preceding financial year.

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4.6 Managerial Remuneration under Schedule V

SCHEDULE V

(See sections 196 and 197)

PART I

CONDITIONS TO BE FULFILLED FOR THE APPOINTMENT OF A MANAGING OR WHOLE-TIME DIRECTOR OR A MANAGER WITHOUT THE APPROVAL OF THE CENTRAL GOVERNMENT (already covered above in Para 4.1)

PART II

REMUNERATION

SECTION I

Remuneration payable by companies having profits

Subject to the provisions of section 197, a company having profits in a financial year may pay remuneration to a managerial person or persons not exceeding the limits specified in such section.

SECTION II

Remuneration payable by companies having no profit or inadequate profit without Central Government approval

Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, without Central Government approval, pay remuneration to the managerial person not exceeding the higher of the limits under (A) and (B) given below:—

(A):

(1) (2)

Where the effective capital is Limit of yearly remuneration payable shall not exceed (Rupees)

(i) Negative or less than 5 crores 30 lakhs

(ii) 5 crores and above but less than 100 crores 42 lakhs

(iii) 100 crores and above but less than 250 crores

60 lakhs

(iv) 250 crores and above 60 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores:

Provided that the above limits shall be doubled if the resolution passed by the shareholders is a special resolution.

Explanation.—It is hereby clarified that for a period less than one year, the limits shall be pro-rated.

(B):

In the case of a managerial person who was not a security holder holding securities of the company of nominal value of rupees five lakh or more or an employee or a director of the company or not related to any director or promoter at any time during the two years prior to his appointment as a managerial person, —2.5% of the current relevant profit:

Provided that if the resolution passed by the shareholders is a special resolution, this limit shall be doubled:

Provided further that the limits specified under this section shall apply, if—

(i) payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered under sub-section (1) of section 178 also by the Nomination and Remuneration Committee;

(ii) the company has not made any default in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding financial year before the date of appointment of such managerial person;

(iii) a special resolution has been passed at the general meeting of the company for payment of remuneration for a period not exceeding three years;

(iv) a statement along with a notice calling the general meeting referred to in clause (iii) is given to the shareholders containing the following information, namely:—

I. General Information:

(1) Nature of industry

(2) Date or expected date of commencement of commercial production

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(3) In case of new companies, expected date of commencement of activities as per project approved by financial institutions appearing in the prospectus

(4) Financial performance based on given indicators

(5) Foreign investments or collaborations, if any.

II. Information about the appointee:

(1) Background details

(2) Past remuneration

(3) Recognition or awards

(4) Job profile and his suitability

(5) Remuneration proposed

(6) Comparative remuneration profile with respect to industry, size of the company, profile of the position and person (in case of expatriates the relevant details would be with respect to the country of his origin)

(7) Pecuniary relationship directly or indirectly with the company, or relationship with the managerial personnel, if any.

III. Other information:

(1) Reasons of loss or inadequate profits

(2) Steps taken or proposed to be taken for improvement

(3) Expected increase in productivity and profits in measurable terms.

IV. Disclosures:

The following disclosures shall be mentioned in the Board of Director's report under the heading "Corporate Governance", if any, attached to the financial statement:—

(i) all elements of remuneration package such as salary, benefits, bonuses, stock options, pension, etc., of all the directors;

(ii) details of fixed component and performance linked incentives along with the performance criteria;

(iii) service contracts, notice period, severance fees;

(iv) stock option details, if any, and whether the same has been issued at a discount as well as the period over which accrued and over which exercisable.

SECTION III

Remuneration payable by companies having no profit or inadequate profit without Central Government approval in certain special circumstances

In the following circumstances a company may, without the Central Government approval, pay remuneration to a managerial person in excess of the amounts provided in Section II above:—

(a) where the remuneration in excess of the limits specified in Section I or Section II is paid by any other company and that other company is either a foreign company or has got the approval of its shareholders in general meeting to make such payment, and treats this amount as managerial remuneration for the purpose of section 197 and the total managerial remuneration payable by such other company to its managerial persons including such amount or amounts is within permissible limits under section 197.

(b) where the company—

(i) is a newly incorporated company, for a period of seven years from the date of its incorporation, or

(ii) is a sick company, for whom a scheme of revival or rehabilitation has been ordered by the Board for Industrial and Financial Reconstruction or National Company Law Tribunal, for a period of five years from the date of sanction of scheme of revival,

it may pay remuneration up to two times the amount permissible under Section II.

(c) where remuneration of a managerial person exceeds the limits in Section II but the remuneration has been fixed by the Board for Industrial and Financial Reconstruction or the National Company Law Tribunal:

Provided that the limits under this section shall be applicable subject to meeting all the conditions

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specified under Section II and the following additional conditions:—

(i) except as provided in para (a) of this section, the managerial person is not receiving remuneration from any other company;

(ii) the auditor or Company Secretary of the company or where the company has not appointed a Secretary, a Secretary in whole-time practice, certifies that all secured creditors and term lenders have stated in writing that they have no objection for the appointment of the managerial person as well as the quantum of remuneration and such certificate is filed along with the return as prescribed under sub-section (4) of section 196.

(iii) the auditor or Company Secretary or where the company has not appointed a secretary, a secretary in whole-time practice certifies that there is no default on payments to any creditors, and all dues to deposit holders are being settled on time.

(d) A company in a Special Economic Zone as notified by Department of Commerce from time to time which has not raised any money by public issue of shares or debentures in India, and has not made any default in India in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of thirty days in any financial year, may pay remuneration up to Rs. 2,40,00,000 per annum.

SECTION IV

Perquisites not included in managerial remuneration

1. A managerial person shall be eligible for the following perquisites which shall not be included in the computation of the ceiling on remuneration specified in Section II and Section III:—

(a) contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put together are not taxable under the Income-tax Act, 1961 (43 of 1961);

(b) gratuity payable at a rate not exceeding half a month's salary for each completed year of service; and

(c) encashment of leave at the end of the tenure.

2. In addition to the perquisites specified in paragraph 1 of this section, an expatriate managerial person (including a non-resident Indian) shall be eligible to the following perquisites which shall not be included in the computation of the ceiling on remuneration specified in Section II or Section III—

(a) Children's education allowance : In case of children studying in or outside India, an allowance limited to a maximum of Rs. 12,000 per month per child or actual expenses incurred, whichever is less. Such allowance is admissible up to a maximum of two children.

(b) Holiday passage for children studying outside India or family staying abroad : Return holiday passage once in a year by economy class or once in two years by first class to children and to the members of the family from the place of their study or stay abroad to India if they are not residing in India, with the managerial person.

(c) Leave travel concession : Return passage for self and family in accordance with the rules specified by the company where it is proposed that the leave be spent in home country instead of anywhere in India.

Explanation I.— For the purposes of Section II of this Part, "effective capital" means the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off.

Explanation II.— (a) Where the appointment of the managerial person is made in the year in which company has been incorporated, the effective capital shall be calculated as on the date of such appointment;

(b) In any other case the effective capital shall be calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made.

Explanation III.— For the purposes of this Schedule, "family" means the spouse, dependent children and dependent parents of the managerial person.

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Explanation IV.— The Nomination and Remuneration Committee while approving the remuneration under Section II or Section III, shall—

(a) take into account, financial position of the company, trend in the industry, appointee's qualification, experience, past performance, past remuneration, etc;

(b) be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders.

Explanation V.—For the purposes of this Schedule, "negative effective capital" means the effective capital which is calculated in accordance with the provisions contained in Explanation I of this Part is less than zero.

Explanation VI.—For the purposes of this Schedule:—

(A) "current relevant profit" means the profit as calculated under section 198 but without deducting the excess of expenditure over income referred to in sub-section (4)(1)*; thereof in respect of those years during which the managerial person was not an employee, director or shareholder of the company or its holding or subsidiary companies.

(B) "Remuneration" means remuneration as defined in clause (78) of section 2 and includes reimbursement of any direct taxes to the managerial person.

SECTION V

Remuneration payable to a managerial person in two companies

Subject to the provisions of sections I to IV, a managerial person shall draw remuneration from one or both companies, provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person.

PART III

PROVISIONS APPLICABLE TO PARTS I AND II OF THIS SCHEDULE

1. The appointment and remuneration referred to in Part I and Part II of this Schedule shall be subject to approval by a resolution of the shareholders in general meeting.

2. The auditor or the Secretary of the company or where the company is not required to appoint a Secretary, a Secretary in whole-time practice shall certify that the requirement of this Schedule have been complied with and such certificate shall be incorporated in the return filed with the Registrar under sub-section (4) of section 196.

PART IV

EXEMPTION TO CERTAIN COMPANIES

The Central Government may, by notification, exempt any class or classes of companies from any of the requirements contained in this Schedule.

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Powers of the Board

1

Validity of acts of directors [Section 176]

The act(s) done by a director is/ are valid

even if it is discovered later

that the appointment was invalid

Appointment may become invalid because of any:

defect disqualification termination due to any provision

in AOA

2


Acts of directors done after the termination of their office

Acts of directors done after the termination of their office

Other directors claiming a person as Co. director even after

his termination

Other directors claiming a person as Co. director even after

his termination

Such person entered into a

agreement with third party on Co. behalf

Such person entered into a

agreement with third party on Co. behalf

Such third party

acted in good faith

Such third party

acted in good faith

Shareholders ratified and acted on such

agreement

Shareholders ratified and acted on such

agreement

Then Co. can not declare

such agreement as invalid [Charles

Joseph v Kyauktaga

Grant Co Ltd.]

Then Co. can not declare

such agreement as invalid [Charles

Joseph v Kyauktaga

Grant Co Ltd.]

Such terminated director not personally liable but company remains

liable [Albert Judah v

RamapadaGupta]

Such terminated director not personally liable but company remains

liable [Albert Judah v

RamapadaGupta]

Logic: Doctrine of

Indoor Management

and Rule of Estoppel3


General Meeting of members of the Co.

Resolution passed at such meeting:

• To override the powers of the Board vested in it;

• To give directions to the Board as to how it shall exercise the powers vested in it

Such resolution is invalid [John Shaw & Sons Salford Ltd. v Shaw]

4

Concepts same as per 1956 Act. Only Section Numbers & Various Limits changed under 2013 Act

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General Powers of the Board [Section 179]

BOD Powers are exercised for and on behalf of Co.

BOD Powers are subject to

the provisions of the Co. Act, MOA, AOA

and Regulations

at GM

BOD shall exercise certain

powers only through

resolutions passed at BM

BOD cannot exercise certain powers

which are to be exercised by the Co. in

GM5

General Powers of the Board [Section 179]

• Making calls on shareholders for money unpaid on their shares;

• Authorising buy-back of securities u/s 68;

• Issuing securities, including debentures, whether in or outside India;

• Borrowing monies;

• Investing funds of the company;

• Granting loans or give guarantee or provide securityin respect of loans;

• Approving F.S. and the Board’s report;

• Diversifying business of the company;

• Approving amalgamation, merger or reconstruction;

• Taking over a company or acquire a controlling or substantial stake in another company;

• Any other prescribed matters [Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014]

Certain Powersexercisa-ble by BOD

through BM (i.e. GM

approval not

required) [Section 179(3)]

Delegation Allowed

Delegation Allowed

Delegation Allowed

6

Other Prescribed Matters [Section 179(3) read with Rule 8 (supra)]

Making political contributions;

Filling casual vacancy in the Board;

Entering into a J.V. or technical or financial collaboration or any othercollaboration agreement;

Commencing a new business;

Shifting location of a plant or factory or the registered office;

Appointing or removing KMP and senior management personnel one levelbelow the KMP;

Appointing internal auditors and secretarial auditor;

Adopting common seal;

Noticing of the disclosure of director’s interest and shareholding;

Buying/ selling the investments held by the company (other than tradeinvestments), constituting 5% or more of the paid–up share capital andfree reserves of the investee company;

Inviting or accepting public deposits and related matters, or reviewing orchanging the terms and conditions of public deposit;

Approving quarterly, half yearly and annual F.S. or Financial Results 7

Restrictions on powers of the Board [Section 179(1) & (4)]

The Board shall not exercise

any power or do any act or thing

1. which is directed or required, whether by:

this or any other Act; or

the MOA; or

the AOA

2. to be exercised by the General Meeting

i.e., even BOD cannot usurp the powers of a company in general

meeting

8


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BOD Powers subject to SR Approval [Section 180]

• Section 180(1) states that the BOD of a company shall exercise the

following powers only with the consent of the company by a

special resolution, namely:—

a) to sell, lease or otherwise dispose of:

• the whole or substantially the whole of the undertaking of the

company; or

• where the company owns more than one undertaking, of the

whole or substantially the whole of any of such undertakings

The SR so passed may prescribe the conditions for use,

disposal, investment etc. of the sale proceeds from such

transactions [Section 184(4)] ;

Such transactions shall not result in reduction of Capital

[Section 184(4)]9

Undertaking and Substantial Undertaking u/s 180

Undertaking covered u/s 180 Substantial Undertaking

1. An Undertaking in which

Investment of the company >

20% of its net worth as per

the audited balance sheet of

the preceding financial year; or

2. It generates >= 20% of the

total income of the company

during the previous financial

year

An Undertaking which

accounts for >= 20% of

the value as per the

company’s audited balance

sheet of the preceding

financial year

10

Special Points

Ordinary Resolution passed under section 293 prior to 12.09.2013 shall bevalid for 1 year [MCA Circular No. 04/2014, dated 25.03.2014]

The word 'undertaking' means any business or any work or projectwhich one engages in or attempts an enterprise similar to business or trade.The business or undertaking must be distinguished from theproperties belonging to the company. [International CottonCorporation Ltd. v Bank of Maharashtra]

By the word 'undertaking' is meant the entire organisation. A companywhether it has a plant or whether it has an organisation is considered asone whole unit and the entire business of the going concern is includedwithin the word 'undertaking'. [Rustom Cavasjee Cooper v UOI]

The sale of shares, whatever be their number, even if it amounts to atransfer of the controlling interest of a company, cannot be equated tothe sale of any part of the 'undertaking' so as to come within the scope ofsection 180(1) [Brooke Bond India Ltd. v U.B. Ltd.]

11

b) to invest the amount of compensation received

by it as a result of any merger or amalgamation

Exception: No SR approval required if amount of

compensation is invested in trust securities

12


38

KGMA 12/25/2014


c) Borrowings (current + proposed) > Paid up Share Capital+ Free Reserves;

• Exception: No SR approval required for temporary loansobtained from company’s bankers in the ordinary courseof business.

"Temporary Loans" means:

(a) loans repayable on demand; or

(b) payable within 6 months from the date of the loan[such as OD/ CC Limits, Bills discounted, seasonal loans,etc.]

Note:

• Temporary Loans do not include loans raised for thepurpose of financing capital expenditure

13

d) to remit, or give time for the repayment of, any

debt due from a director

When a resolution is called as Special Resolution

[Section 114(2)]: All the following conditions must be fulfilled:

1. intention to propose the resolution as a special resolution

has been duly specified in the GM notice; and

2. the notice required under this Act has been duly given;

and

3. Votes in Favour > 3 (x) Votes in Against

Thus, if:

• Total valid votes casted = 100;

• Total votes in against = 30;

• The votes in favour must atleast be = 3 (x) 30 = 90 votes

14

Political Contributions [Section 182]

• Contribution for political purpose etc. = to any political

party Or to any other person;

• Prohibition to make political contribution:

1. Govt. Co.;

2. Any Co. in existence for < 3 years

• Amount of Contribution in a F.Y. < 7.5% of Avg. 3 past

years Profits;

• Profits as per section 198 of Companies Act, 2013;

• Resolution at BM required;

• Amount and Contributee disclosures in P & L A/c

15

Contribution to National Defence Fund etc. [Section 183]

• Fund = National Defence/ PM National Relief Fund/

Others Notified u/s 183;

• Contributors:

1. BOD through BM resolution; or

2. Any person being authorised by BOD; or

3. Members through GM resolution

• P & L disclosure is required for the amount(s)

being contributed;

• Section 183 overrides Companies Act/ MOA/ AOA

16


39

KGMA 12/25/2014


Disclosure of Interest by Director

17

Objective and Scope of Section 184

• A director occupies a fiduciary position in

relation to a company and he must act bona fide

in the interests of the company;

• If a director makes a contract with the company

and does not disclose his interest, he will be

committing breach of trust. [Yashovardhan Saboo

v Groz-Beckert Saboo Ltd.]

18

Applicability for disclosure [Sec. 184 (1) & (2)]

Every director of a company

who is in any way, whether directly or indirectly

concerned or interested

in

a contract or arrangement

a proposed contract or arrangement

entered into or to be entered

into

with Specified Persons

shall disclose the nature of his concern or interest at the BOD meeting in which

the contract or arrangement is discussed

shall not participate in such meeting

Or

&

19

Applicability for disclosure [Section 184(2)]

Specified Persons

a body corporate in which

such director or such director in association with

any other director

holds > 2%

shareholding

is a

Promoter

is a

Manager

is a CEO

a firm or other entity in which

such director is

Partner

Owner

Mem

ber

20


40

KGMA 12/25/2014


Concern or Interest – commentary thereof

What need to be disclosed [Imperial Mercantile Credit Association v Coleman]:

• Fact of Concern/ Interest

• Nature of Concern/ Interest

Contract or arrangement may be oral or written

Burden of proof of non-disclosure of interest lies on the plaintiff Director

21

Concern or Interest – commentary thereof

Concern or Interest

Interest means personal

interest and not official interest

Indirect financial interest

If any of the relatives has any personal interest in

any contract or agreement the concerned directors would be deemed to be "indirectly" interested

Mere relationship is not enough to establish 'interest' of a director, some pecuniary interest has to be proved.

[Batts Combe Quarry v Ford]

Director being simply an employee of other body corporate etc. is

not deemed as interested director

22

Meaning of Relatives[Section 2(77) and Rule 4 of Companies (Specification of

Definitions Details) Rules, 2014]

1. Members of HUF;

2. Husband and Wife;

3. Father, including step-father;

4. Mother, including step-mother;

5. Son, including step-son;

6. Son’s wife;

7. Daughter;

8. Daughter’s husband;

9. Brother, including step-brother;

10. Sister, including the step-sister

Exhaustive

Definition

23

Concern or Interest – point of time for

more than 2% Shareholding, etc.

The point of time with reference to which the fact

whether or not such

holding > 2%

is the date on which the contract is entered into.

[Company News & Notes, dated 1 July,

1963]

Status upon sale of shares of another

company, pending for registration of transfer

Disclose the fact that his shares having been transferred, and he is no longer personally interested in the other company

or the contract. [Company News & Notes, dated 1 July,

1963] 24


41

KGMA 12/25/2014


Manner of Disclosure

[Section 184 (1) & (2) and Rule 9 of the Companies

(Meetings of the Board and its Powers) Rules, 2014]

Disclosure of Concern/ Interest to be made at BOD Meeting

General Notice in Form MBP-1

Validity till the last day of the F.Y. in which it is given

may be renewed for one F.Y. at a

time by giving a fresh notice in the last month of the F.Y.

Disclosure made at the beginning of the next F.Y. shall be deemed to be complying with Sec. 184 [ICICI v Parasrampuria

Synthetics Ltd.]25

Manner of Disclosure

[Section 184 (1) & (2) and Rule 9 of the Companies


Director duty bound to see that his notice of interest has been disclosed at the Board

meeting [Rule 9(2)]

Notice of disclosure to be kept at the

registered office and preserved for next 8 years [Rule 9(3)]

Under the custody of CS or any person authorised by BOD

Specific Disclosure

if a director becomes concerned or interested after entering into

contract by the Company

Then Disclosure has to be made

Either when he becomes concerned

or interested

Or at the first BM held after he becomes so concerned or interested

26

Manner of applicability of Section 184

• Section 184 does not prohibit entering into contract

or arrangement but the precondition is the Disclosure

to be made as per Rule 9 [Section 184(5)]

• Section 184 disclosure requirements not applicable

if shareholding does not exceed 2% [Section 184(5)]

27

Penal Consequences for contravention of Section 184

Non-disclosure of interest by a director will result in

Penalties u/s 184(4)

Imprisonment for upto 1 year or Fine of atleast Rs. 50,000 but can be upto Rs. 1,00,000 or Both

Automatic Vacation of office of

the director [Section 167(1)(c) &

(d)]

Penalties u/s 167(2)

Imprisonmentfor upto 1 year or Fine of atleast Rs. 1,00,000 but can be upto Rs. 5,00,000 or Both

Liability to refund

remuneration received

after vacation (+) the secret profits [Heley

Hutchinson v Brayhead

Ltd.]

28


42

KGMA 12/25/2014


Related Party Transactions and

Office or Place of Profit

29

Scope of Section 188

A company cannot enter

into

Specified Contracts with

Specified Persons

without the consent of

• the Board; or

• the GM, as the case may be

30

Specified Contractsa) sale, purchase or supply of any goods or materials;

b) selling or otherwise disposing of, or buying, property

of any kind;

c) leasing of property of any kind;

d) availing or rendering of any services;

e) appointment of any agent for purchase or sale of

goods, materials, services or property;

f) appointment to any office or place of profit in:

i. the company,

ii. its subsidiary company, or

iii. its associate company

g) underwriting the subscription of any securities or

derivatives thereof, of the company31

Specified Persons

[or Related Parties u/s 2(76) for the purpose of S. 188]

In relation to a Company the specified persons are

Director of Co.

His Relative

KMP

His Relative

Firm in which

Director is

partner

Manager is partner

Relative of

Director/ Manager

is partner

32


43

KGMA 12/25/2014


Specified Persons



Private Co. in which

Director is a director/ member

Manager is a director/ member

Relative of Director/ Manager is a director/ member

Public company in which

Director or Manager is a director

and

holds along with his relatives > 2% of its paid-up

share capital

33

Specified Persons



any body corporate whose

Board of Directors, Managing Director or Manager

are accustomed to act in accordance with

the advice, directions or instructions of

a director or manager of the Company

any person on whose advice, directions or

instructions

a director or manager of the Company is

accustomed to act

34

Specified Persons



any company which is

a holding, subsidiary or an associate company of such company; or

a subsidiary of a holding company to which it is

also a subsidiary

such other person as may be prescribed

35

Requirement of Consent at BM and/ or GM

Consent through

Board Meeting

Required in all cases

Prior “OR” at General Meeting

Required only if Paid-up Capital > Rs. 1 Crore

36


44

KGMA 12/25/2014


Requirement of Consent through

Special Resolution at GM[Section 188 read with Rule 15(3) of the Companies


37

Case 1

Paid-up Capital > Rs. 10 Crores, irrespective of amount involved in

Specified Contracts of Arrangements

Prior “SR” at GM

Case 2

Specified Contracts or Arrangements under Rule 15(3), irrespective

of paid-up capital amount

Prior “SR” at GM

38

Case 2.1: Specified Contracts or Arrangements

Nature of contracts or

arrangements

Criteria

1.Sale, purchase or

supply of any goods

or materials

Sale, purchase or

supply of any goods or

materials, directly,

exceeding:

• 10% of the turnover of

the company; or

•Rs. 100 crore,

whichever is lower39



arrangements

Criteria

1. Selling or otherwise

disposing of, or buying,

property of any kind;

Selling or otherwise

disposing of or buying

property of any kind,

directly,

exceeding:

• 10% of net worth of the

company; or

• Rs. 100 crore,



45

KGMA 12/25/2014




arrangements

Criteria

1. Leasing of property of

any kind

Leasing of property of any

kind,

exceeding:

• 10% of net worth of the

company; or

• 10% of turnover of the

company; or

• Rs. 100 crore,




arrangements

Criteria

1. Availing or rendering

of any services;

Availing or rendering of

any services, directly,

exceeding:

• 10% of the turnover of

the company; or

• Rs. 50 crore,

whichever is lower

42


Appointment of any agent for purchase or sale of

goods, materials, services or property

Sale, purchase or

supply of any goods

or materials, through

appointment of

agent,

exceeding:

• 10% of the turnover

of the company; or

• Rs. 100 crore,

whichever is lower

Selling or otherwise

disposing of or

buying property of

any kind, through

appointment of

agent,

exceeding:

• 10% of net worth of

the company; or

• Rs. 100 crore,

whichever is lower

Availing or rendering

of any services,

through appointment

of agent,

exceeding:

• 10% of the

turnover of the

company; or

• Rs. 50 crore,


Explanation to Rule 15(3)

The limits specified above shall apply:

for transaction(s) to be entered into, during

a financial year:

either individually

or taken together with the previous transactions

The Turnover or Net Worth

Shall be on the basis of the

Audited F.S. of the preceding

F.Y.

44


46

KGMA 12/25/2014


Case 2.2: Remuneration for underwriters etc.

Exceeds (>) 1% of the Networth (as per AFS of the preceding F.Y.)

the subscription of any securities or derivatives thereof of the company

Remuneration for underwriting

Prior SR required if

45

Special Points• Contract must be approved by the Board at the meeting and thus consent

through a circular resolution is not valid [Mahesh Co. v Oil Mills Ltd.];

• Interested director is not entitled to present in the BM while considering

such contracts by the Board [Rule 15(2)];

• Agenda for BM/ GM– contents of Notice for Meeting as per Rule 15(1):

a) name of the related party and nature of relationship;

b) nature, duration and other particulars of contract or arrangement;

c) material terms of the contract/ arrangement including value, if any;

d) any advance paid or received for the contract or arrangement;

e) the manner of determining pricing & other commercial terms

[included as part of contract and not considered as part of contract];

f) whether all factors relevant to the contract have been considered, if

not, the details of factors not considered with the rationale for not

considering those factors;

g) any other information relevant or important for the Board to take a

decision on the proposed transaction46

Case 2.3: Office or Place of Profit [OPP][Section 188(1) read with Rule 15(3)(b)]

Appointment of a “related party” to

any OPP in

the company

its subsidiary company

its associate company

Appointee’s Remuneration > Rs. 2,50,000 per month

Then appointment shall be made

only with the approval of the

Company at GM by way of SR

47

Meaning of ‘office or place of profit’

OPP held by

Director himself

He receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free

accommodation, or otherwise

Individual other than Director/ Firm/ Pvt. Co./ Body Corporate

He/ It receives from the company anything by way of remuneration, salary, fee,

commission, perquisites, any rent-free accommodation, or

otherwise

48


47

KGMA 12/25/2014


Non-applicability of Section 188(1)(f): Additional Points

SR not necessary because following are not deemed as OPP

Payment of guarantee commission to a Director

Payment of interest on

loans obtained from a

Director of a company

Appointment of firm of

professionals on case to case basisin which a director or manager or

relative, is partner, etc. [Harper Ticket

Issuing & Recording

Machines Ltd]

Appointment of a director who renders professional services

on case to case basis, not as a director but as a

qualified professional[Ruby Mills Ltd. v UOI; Harper Ticket Issuing & Recording

Machines Ltd]

49

Monthly Remuneration: Exclusions

• Bonus, leave encashment, reimbursement of

medical expenses, etc., which are not events of

monthly regularity or occurrence cannot be taken

into account [Ravindra Kumar Sangal v Auto Lamps

Ltd.]

50

Commentary Points• Section 188(1)(f) do not have retrospective application [e.g.

Section 188(1)(f) not applicable if the relatives were appointed

before his appointment as a director in the company];

• If the appointment is made under time scale in the first

instance, there will be no need for further approval of

members;

• Where relative of any director or any of the person mentioned

above is or appointed to OPP without the knowledge of

director of the company, such appointment shall:

1. require the approval of the members in the general

meeting

2. by way of special resolution within 3 months of the date

of appointment [Rule 15(3)]51

Consequences on non-compliance with

section 188(1)(f) [about OPP]

• Section 188(3):

1. Such an appointment shall be invalid

2. Any remuneration received by such persons

who were holding the OPP profit as such shall

pay back the remuneration received by them

from the company

52


48

KGMA 12/25/2014


Common Points for Section 188

• Restriction on the members related in transaction for votingat a resolution [Proviso to section 188(1)];

• In case of a wholly owned subsidiary company, the holdingcompany may pass SR [Rule 15];

• Section 188 has no retrospective application, but anymodification is made in the terms of contract or it isrenewed after the expiry of its original period, previousapproval of the shareholders would become necessary [MCACircular 30/2014, Dated 17-7-2014];

• Contracts carried out in ordinary course of business onarm’s length basis are exempted u/s 188 [proviso to section188(1)];

• Requirement for providing disclosure of related partytransaction alongwith its justification in the Directors’Report [Section 188(2)]

53

Special Points for GM Notice [Section 101]

• At least 21 days notice shall be required;

• Shorter Duration of notice possible only if > 95%

Members agree for it;

• Notice must be in writing either through:

1. Manual Mode; or

2. Electronic Mode;

• Any accidental omission to give the notice or non-

receipt of such notice, shall not invalidate the

proceedings of the GM

54

Contravention of Section 188:

Consequences u/s 188(3) and Penalty u/s 188(5)• Contract or arrangement shall be voidable at the option ofthe Board, i.e., the contract is not illegal but voidable atthe option of the Board;

• Concerned director or employee, as the case may be, hasto indemnify the company against losses;

• Company may file case for recovery of losses againstconcerned director or employee, as the case may be;

• Penalty on Director/ Employee u/s 188(5):

1. Listed Company: Imprisonment upto 10 years or Fine >Rs. 25,000 but < Rs. 5 Lakhs or Both;

2. Other Company: Fine > Rs. 25,000 but < Rs. 5 Lakhs55

Investments of Company to be

held in its Own Name

[Section 187]

56


49

KGMA 12/25/2014


Section 187(1)

All the investments made or held by a company in any

Property, Security, or Other asset

shall be made and held by it in its own name

57

Exemptions from the requirement of

Section 187 [Section 187(2)]

Company not prevented from

Depositing with its bankers shares/

securities for dividend/ interest collection

Depositing with/ Transferring to/ Holding in

The name of SBI/ Scheduled Bank, being its

Banker(s)

In order to facilitate the

transfer thereof

If no transfer takes place in next 6

months

Retransfer in Company’s name as soon as practicable58

Exemptions from the requirement of

Section 187 [Section 187(2)]

Company not prevented from

Depositing with/ Transferring to any

person

By way of security for repayment of loan advanced to it/ performance of any of

its obligation

Holding investments in name of the Depository

59

Register of Investments [Section 187(3) read with Rule 14 of Companies

(Meetings of Board and its Powers) Rules, 2014 )]

Register of Investments

Prescribed Form MBP-3

Entries, with reasons u/s 187(1) & (2), if any, to be made in

chronological order

Open for inspection by member/

debentureholders

Without any charges

During business hours

Subject to reasonable restrictions

as per AOA/ GM 60


50

KGMA 12/25/2014


Register of Contracts or Arrangements

in which Directors are interested[Section 189 and Rule 16 of the Companies (Meetings

of Board and its Powers) Rules, 2014]

61

Every Company

Shall keep a Register [Form MBP 4] containing following details about contracts or arrangements u/s

184 & 188

Date of Contract

or Arrangement

Name of the Parties

Major Terms and

Conditions

Date on which the

contractswere placed before the

Board

Names of directors voting in favour or against or remaining neutral

Entities in which

Directors etc. are

interested and how they are interested

62

No Details required to be mentioned for these Contracts or Arrangements

[Section 189(5)]

Sale, purchase or supply of any goods, materials or services if the value < Rs. 5,00,000 in aggregate in any year

Collection of bills by a

Banking Co. in the ordinary course of its business or to

any transaction thereto

Transaction by a banking or insurance company in the ordinary course of business

63


51

2/7/2015

1

Board Meetings

By:

CA Kamal Garg


1

Periodicity of Board Meetings [Section 173]

• Every company to observe ICSI’s secretarial standards with respect to GM and BM [Sec. 173 read with Sec. 118(10)];

• New Companies: First BM within 30 days of Co. Incorporation;

• Existing Companies (other than OPC/ Small Co./ Dormant Co.) = Min. 4 BMs in every calendar year (Jan-Dec);

• There should not be gap of more than 120 days between 2 consecutive BM;

• CG empowered to notify different requirements;

2

BM of OPC/ Small Co./ Dormant Co.

• OPC/ Small Co./ Dormant Co.:

a) 1 BM to be held in each half of the calendar year;

and

b) gap between 2 meetings is not more than 90 days.

In case of OPC, where there is only 1 director, BM

is not required to be conducted [Section 173(5)].

3

Notice of BM [Section 173(3)]

• 7 days Notice to given to:

1. Director who is for the time being in India;

2. Director who is for the time being outside India = At his usual Indian Address;

3. An Alternate Director = Notice to be served to original plusalternate director;

4. An Interested Director;

5. A director who has waived his right to receive notice [Re, Portuguese Consolidated Copper Mines Ltd, it was held that right to receive notice can’t be waived]

• Where a director mostly resides abroad, notice must be sent at his foreign address as a part of probity and fairness on the part of the Co. [Dr. Kamal Kumar Dutta vs. Ruby General Hospital Limited]

4


52

2/7/2015

2

Notice of BM [Section 173(3)]• If AOA provides any manner for sending notice, follow that

manner;

• In A.L.AR Arunachalam Chettair Firm vs. KaleeswararMills Limited, it was held that Notice of BM not requiredif:

1. BOD passes resolution at BM fixing day, time & place for all future BMs; and

2. A copy of such resolution sent to every director; or

3. AOA fixes day, time & place for all future BMs

• Notice invalid if intention is malafide (e.g. to secure absence of some directors notice was not accompanied with Agenda);

5

Notice of BM [Section 173(3)]

• Omission to give Notice – Consequences[Parmeshwari Prasad Gupta vs. UOI]:

1. BM shall be void even if single director is not given notice;

2. If BM at (1) is void, resolutions passed thereat also void;

3. Accidental/ Deliberate omission immaterial;

4. BM not void if:

• Absentee director do not complain of want of notice;

• The director to whom notice is not given, attends BM

6

Authority to Call a BM

• Any director can requisition a BM;

• On requisition of a BM by a director, the Mgr/

Secretary/ any Director can summon BM;

• Notice of BM shall be sent under the authority of

the company;

• A secretary has no authority to call BM on his own;

• If notice given by secretary without any authority, it

will be improper notice;

• Improper notice may be ratified by BOD

7

Quorum for a BM [Section 174]

• All Companies: Higher of

1. 1/3rd of total strength; or

2. 2 directors

Total Strength = Total Number less Vacant Places less

Interested Director [See the following examples]

• 11 Directors, 1 Dies and 2 Resign; Total Strength = 11- 3 =

8; Quorum = 8 x 1/3 = 2.33 or 3 (Fractions to be r.f. to next

whole number)

• Total Strength = 6 and Interested Directors = 4, therefore

Quorum = 2;

• Total Strength = 6 and Interested Directors = 5, therefore

Quorum = Not Available8


53

2/7/2015

3

Quorum for a BM

• Original Director and Alternate Director shall not be counted as two directors;

• Alternate Director if present at BM shall be counted in Quorum;

• AOA can increase but cannot reduce Quorum [Re, Sir Hormusji Wadia and Co. Ltd.];

• Quorum is required throughout BM, presence of quorum only at BM commencement not enough [Bell v Royal Western India Turf Club Ltd.];

• BM without quorum is void [Firestone Tyres & Rubber Company vs. Synthetic & Chemicals Ltd.]

9

Automatic Adjournment in case of Want of

Quorum [Section 174(4)]• AOA may provide for holding adjourned BM;

• If AOA silent then adjournment for same day, time & place in next week;

• If day in next week is public holiday, then to succeeding day which is not a public holiday;

• Quorum required in adjourned BM also;

• No fresh notice for adjourned BM required;

• Fresh notice required if AOA provides or BM adjourned sine die;

• Resolutions passed at adjourned BM deemed to be passed on the day on which adjourned meeting is held;

• No sitting fees for adjourned meeting but sitting fees can be paid if BM not held for quorum [MCA Circular]

10

Time, Place and Day of BM

• BM can held at any place (not necessarily registered

office);

• BM can held at any day even if it is a public holiday;

• BOD may voluntarily adjourn a duly convened BM for

a public holiday;

• BM can be held at anytime, even after business hours;

• AOA may provide other ways for time/ place and day;

• Director cannot appoint a Proxy for Board Meetings

[Section 173(2)]. However, an observer may be

appointed with the consent of BOD

11

Passing of resolution by circulation [Section 175 and

Rule 5 of Companies (Meetings of Board and its

Powers) Rules, 2014 ]

• All Conditions need to fulfilled:

1. Circulation of Draft Resolution to all the Directors along with necessary papers;

2. Draft (as abovesaid) to be sent at their registered address, by hand delivery/ post/ courier/ electronic means;

3. > 2/3rd of Directors are in favour of passing resolution through Circulation;

4. Majority Directors approve such resolution

• At the subsequent BM the minutes of previous BM shall be taken a note of by the Directors [Section 175(2)]

12


54

2/7/2015

4

Participation by directors in board meetings through

E Mode [Section 173(2) and Rule 3 of the Companies

(Meetings of Board and its Powers) Rules, 2014

• Directors may participate in meetings of Board/Committee of directors under the Companies Act, 2013through electronic mode;

• Electronic Mode means video conferencing facility,i.e. audio-visual electronic communication facilityemployed which enables all persons participating inthat meeting to communicate concurrently with eachother without an intermediary, and to participateeffectively in the meeting

13


E Mode• Conditions:

1. Every director in a financial year, must personally attend atleast

one meeting;

2. If e-participation is interrupted, then Chairman/ Secretary, shall

request for a repeat/ reiteration;

3. Notice of meeting to provide necessary details for such meeting

including the access mode;

4. Notice to seek confirmation about mode of participation by the

Concerned Director;

5. If he does not confirm then it will be presumed that he will

physically attend the meeting;

6. The scheduled venue of the meeting as set forth in the notice

convening the meeting, shall be taken as place of meeting;

7. Roll call required to ensure right director attending e-meeting

and presence of quorum 14


E Mode• Conditions:

7. Video Recording about summary of decisions at meeting to

be preserved for 1 year from conclusion of that meeting

(MCA Circular 20.5.2011);

8. Recording name of the dissenting director [Rule 3(11)(a)];

9. Soft Copy of Draft Minutes to be circulated for comments/

clarifications, etc., within 15 days of such meeting;

10. Thereafter, the minutes shall be entered in Minutes Book.

Special Point: Non confirmation of minutes does not have any

effect on the decision taken at the earlier meeting. [Kerala

State Electricity Board v Hindustan Construction Co.

Limited, SC]

15

Matters not to be dealt with in a meeting through video

conferencing or other audio visual means [Rule 4]

• Rule 4 provides that the following matters shall not be

dealt with in any meeting held through video

conferencing or other audio visual means:

a) Approval of the annual financial statements; and

b) Approval of the Board’s report.

c) Approval of the prospectus;

d) the Audit Committee Meetings for consideration of

financial statement including consolidated financial

statement, if any, to be approved by the Board

16


55

2/7/2015

1

Directors Identification Number [DIN][Section 153 to 159 and Rule 9 to 11 of the Companies

(Appointment and Qualification of Directors) Rules,

2014]

By:

CA Kamal Garg


• Application for allotment of DIN to be made in DIR 3 with prescribed fees;

• CG shall provide an electronic system to facilitate submission of

application for the allotment of DIN;

• Signed DIR 3 (duly verified by CA/ CS/ CMA/ MD/ Other Director) to be

filed by attaching the scanned copies of:

1. photograph;

2. proof of identity and PAN;

3. proof of residence; and

4. verification by the applicant in Form DIR-4 (through Affidavit);

5. specimen signature duly verified (through Affidavit)

• Provisional DIN will be generated automatically but it cant be used till

final DIN is allotted by CG;

• CG to allot DIN with 1 month from the receipt of the application (if

application rejected then CG shall communicate to applicant within this 1

month. However, fees won’t be refunded or adjusted);

• If application is defective or incomplete but provisional DIN is allotted

then rectification to be carried out within 15 days of communication

made by CG through email/ website posting

• DIN allotted under the Companies Act, 1956 and Companies (DIN)

Rules, 2006 shall be deemed to be allotted under the Companies

(Appointment and Qualification of Directors) Rules, 2014;

• DIN allotted shall be for life time and such DIN shall not be allotted to

any other person;

• Intimation of changes in particulars specified in DIN application

within 30 days in Form DIR-6 and DIR-7;

• Intimation by the concerned director to the Company for change in

the particulars of DIN within 15 days;

• Disclosure for changes in particulars of DIN in the Annual Return;

• Prohibition to obtain more than one DIN [Section 155];

• Obligation on the Director to intimate DIN to concerned

Companies [Section 156];

• If the DIN is not PAN based the same shall be blocked;

• Mention DIN while furnishing any return, information or particulars

as are required to be furnished under this Act

Cancellation of DIN• An application for Cancellation or Deactivation of DIN can be moved

subject to OBH, if any of the following situations exist (Rule 11):

1. The DIN is found to be duplicate;

2. The DIN was obtained by wrongful manner* or fraudulent

means**;

3. The concerned individual has died;

4. The concerned individual has been declared as a person of

unsound mind by the competent Court; or

5. The concerned individual has been adjudicated an insolvent

*Wrongful manner: The term means if the DIN has been obtained

without legally established documents.

**Fraudulent manner: The term means if the DIN has been obtained

unlawfully to deceive any other person or any authority including

CG


56

2/7/2015

2

Deactivation of DIN

• DIN holder can surrender his DIN by filing:

1. an application to CG in Form DIR-5;

2. declaration that he has never been appointed as

director in any company and the said DIN has never

been used for filing of any document with any

authority

• Provided that before deactivation of any DIN in such

case, the CG shall verify records [Rule 11]

• DIN (if not activated/ not used) may be deactivated/

cancelled after 365 days by the CG [MCA Notification

December 2012]

• Same DIN can be used as Designated Partner

Identification Number (DPIN): Integration of DIN

issued under Companies Act, 1956 with DPIN

issued under Limited Liability Partnership (LLP)

Act, 2008;

• Punishment [Section 159]:

1. Imprisonment of upto 6 months;

2. Fine upto Rs. 50,000 and Rs. 500 per day for

continuing default


57

Latest Amendments made in SEBI (ICDR) Regulations, 2009 (relevant for May 2015 Examination

and onwards)

1. Conditions for initial public offer [Regulation 26(6)(c) inserted by the SEBI (Issue of Capital and

Disclosure Requirements) (Second Amendment) Regulations, 2014, w.e.f. 25-8-2014]

If the specified securities offered for sale were issued under a bonus issue on securities held for a period

of at least one year prior to the filing of draft offer document with the Board, then an issuer shall also

need to comply with the following,—

(i) such specified securities are being issued out of free reserves and share premium existing in the books

of account as at the end of the financial year preceding the financial year in which the draft offer

document is filed with the Board ; and

(ii) such specified securities are not being issued by utilization of revaluation reserves or unrealized

profits of the issuer.

2. Frequently traded shares [Regulation 71A inserted by the SEBI (Issue of Capital and Disclosure

Requirements) (Second Amendment) Regulations, 2014, w.e.f. 25-8-2014]

For the purpose of this Chapter, "frequently traded shares" means shares of an issuer, in which the traded

turnover on any stock exchange during the twelve calendar months preceding the relevant date, is at least

ten per cent of the total number of shares of such class of shares of the issuer:

Provided that where the share capital of a particular class of shares of the issuer is not identical

throughout such period, the weighted average number of total shares of such class of the issuer shall

represent the total number of shares.

3. Pricing of equity shares – Infrequently traded shares [Regulation 76A inserted by the SEBI

(Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2014, w.e.f. 25-

8-2014]

Where the shares are not frequently traded, the price determined by the issuer shall take into account

valuation parameters including book value, comparable trading multiples, and such other parameters as

are customary for valuation of shares of such companies:

Provided that the issuer shall submit a certificate stating that the issuer is in compliance of this

regulation, obtained from an independent merchant banker or an independent chartered accountant in

practice having a minimum experience of ten years, to the stock exchange where the equity shares of the

issuer are listed

4. Adjustments in pricing - Frequently or Infrequently traded shares [Regulation 76B inserted by

the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2014,

w.e.f. 25-8-2014]

The price determined for preferential issue in accordance with regulation 76 or regulation 76A, shall be

subject to appropriate adjustments, if the issuer :

(a) makes an issue of equity shares by way of capitalization of profits or reserves, other than by way

of a dividend on shares;

(b) makes a rights issue of equity shares;

(c) consolidates its outstanding equity shares into a smaller number of shares;

(d) divides its outstanding equity shares including by way of stock split;

(e) re-classifies any of its equity shares into other securities of the issuer;

(f) is involved in such other similar events or circumstances, which in the opinion of the concerned

stock exchange, requires adjustments.

58