ROLE AND RESPONSIBILITY OF INDEPENDENT

DIRECTORS UNDER COMPANIES ACT 2013

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CERTIFICATE

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CHAPTER-1
PROVISIONS RELATING TO COMPANY DIRECTOR
1.

A Director

Sec 2(13): Any person who occupies the position of a Director by whatever name called.
Case study: Ferguson v/s Wilson- Truly speaking the director of a company is an agent of the
company.
Case study: Smith v/s Anderson- Directors are truly the trustees of the property of the
company.

2.

Deemed Director

As per Sec. 5, Sec 303, Sec 372A: if directors act on advice of a person, that person is called
deemed director.

Sec. 7: if that person is giving professional advice that person will not be called deemed
director

3.

A Managing Director

Sec2 (26): a person who has been given substantial powers of management is called
managing director- he can be appointed by- board resolution / articles / AGM /agreements.
4.

Minimum number of Directors

Sec. 252: public company: 3, private company: 2. No maximum limit in law these limits can
be set in articles of association
Sec. 259- when the numbers of directors increase beyond 12, it may require Govt.
Permission.
5.

Directors Representing Small Shareholders

(Only on public companies with Rs. 5 crore or more)

As per Companies (appointment of small shareholders' director) rules 2001 there should
director / s representing small shareholders.
Small shareholders: holding upto Rs. 20000 nominal value (face value) of shares.
6.

First Directors

Sec 254- May be appointed by articles of association, the first directors are appointed by
subscribers of MOA & AOA.

7.

Subsequent Directors

Sec 255, Sec 256- They are appointed by AGM

2/3directors are retiring directors - 1/3maybe non retiring directors. Thus if you have 12
directors, 8 directors have to retire by rotation
Case study: S. Jabh Singh v/s Panesar Mech. Works P. Ltd.
Sec284-Where no period for retirement is prescribed in AOA, then directors will retire when
they are removed.
Case study: Consolidated Nickel Mines Ltd.
When AGM is not held, directors due to retire, will retire on their due date similarly when
AGM is adjourned, the directors due to retire, will retire on that that day retiring director may
be reappointed. FIFO in retirements.
8.

Becoming a Director

At least 14 day notice of willingness to become a director with fees of Rs. 500 (by the person
or the person who is proposing someone as director).
The person must also submit his accent to become a director to ROC atleast 30 days before
appointment.
9.

Board of Directors (BoD) Appointing Additional Directors

Sec 260- Yes IF AOA authorize it.

But this appointment will be till next AGM. If AGM is not held, the director will retire on the
date of AGM.
10.

Casual Appointments

Sec 262- If there is a vacancy, the board may appoint a director as per procedure in AoA. This
is casual appointment.
11.

Alternate Director

Sec 313- BoD may appoint alternate director in place of a director who is going for a long
vacation - the alternate director will leave the position when original director returns. It must
be for 3 months or more.

12.

Appointment by Central Government

Sec 408- If Company Law Board thinks it is necessary, then Central govt. May appoint a
director for a period upto 3 years.
This director will not require qualification shares (minimum number of shares to be held by
every director to be eligible to become a director).
While counting 2/3rd, we will not take this director into account.
13.

Appointment by 3rdParties

Financial institutions like IDBI/IFCI/ICICI/SBI etc. Can appoint addional nominee directors

14.

Appointment in AGM

Their particulars have to be submitted in form no. 32.

Sec. 263 a director is appointed by shareholders by simple majority. Each director will
require separate resolution.

15.

Principle of Proportional Representation

Sec 265-In order to enable minority shareholders, this principle has been introduced. The
directors appointed by this principle should hold office for 3 years and cannot be removed by
AGM as per sec. 284.
(upto 2/3rddirectors may be appointed by this system by single transferable vote /
cumulative voting).
16.

MD / whole time director

Sec 269- Every public company having 5 crore or more capital must have an MD / whole
time director.
It requires permission of Central Government / or apply as per schedule XIII and submit
return in form 25C within 90 day of appointment.
17. Schedule XIII Part I
The person being appointed as MD must not have violated any act like Central Excise,
Income Tax, Wealth Tax, Customs, and FEMA etc.
Age between 25 and 70 (A major with less than 25 years age / more than 70 ,can also
become, if special resolution + govt. Permission is obtained), must not have violated
COFEPOSA.
18.

Maximum Period of Term

The maximum period is 5 years - reappointment is permitted.

19.

Maximum Remuneration

Sec 198- 5% total managerial remuneration of the company = 11% of profit

(computed as per sec. 349 and350)
for part time director : 1% (if MD is there, 3%, if there is no MD)

20.

Sitting Fees

Sec 309- Maximum fees: 20000 for each meeting (when turnover is above 50 crore and
capital + reserves at least 10 crores).
Otherwise maximum: 10000 / per meeting.
21.

Qualification of Directors

Sec 274- Qualifications are not mentioned, but disqualifications are mentioned in the law. A
person of unsound mind, insolvent, a person imprisoned for moral turpitude for 6 months or
more is not eligible for directorship.
Case study : Oriental Metal Pressing works P. Ltd vs. Bhaskar KashinathThe court held that only individual can be director, a firm or association cant be director, as
it is a position of trust.
Case study: People's Bank of Northern IndiaArticles of association may exempt persons of technical / professional qualification from
having qualification shares. Otherwise the articles may require the director to have
qualification shares.
22.

Qualification shares

Sec 270- Director must have qualification shares in 2 months from appointment the nominal
value of qualification shares should not be more than Rs. 5000 bearer of share warrant cant
be said to be holding qualification shares.
23.

Penalty

Sec 272- If a director doesnt acquire qualification shares in 2 months, he shall pay penalty
Rs. 500 per day. (all these provisions are applicable only on public companies).
24.

Number of directorship (max.)

Sec. 275- No person can become director of more than 15 companies (public companies).
25.

Exclusion from 15 companies

Sec 278- Following are not counted in 15 companies : private company unlimited company a
company in which the person is alternate director association not for profit
8

26.

Penalty

Sec 279- Upto 50000 if you become director of more than 15 public companies.
27.

Vacation of Post of Director

Sec 283- A director has to vacate if:

He is of unsound mind, he doesnt acquire qualification shares in 2 months, he is judged
insolvent, convicted for moral turpitude & imprisoned for 6 months or more, absents the 3
consecutive meetings or for 3 months (without leave), he doesnt disclose his interest in a
contract (sec. 299), by court (sec. 203), when he is there as an employee, but he retires.
28.

Removal of Director

Sec 284, sec 388b, Sec 402- Shareholders can remove a director by ordinary resolution. They
have to send a special notice (14 day notice) for this meeting and pass the resolution. They
cannot remove a director appointed by Govt./ Financial Institution.
29.

Removal by Government in Case of Fraud

Sec 388 (b), Sec 388 (e)-If the director is engaged in fraud, mal- practices, anti-social
activities etc. Or the company is not managed properly or the company is working against the
interest of lenders / financers, or the company is following unsound business practices, the
director can be removed by government.
30.

Removal by Company Law Board

Sec 397, Sec 398, Sec 402- In order to prevent oppression and mismanagement, CLB can
remove director that director cant become director of another company for 5 years.
31.

Loans to director

Sec 295- Without prior permission from government, no company can give loan to its
director / firm (where the director of this company is a partner / proprietor / company of its
director (its director is holding 25% voting power in that company), however, these
provisions dont apply to private / banking / holding company.
Case study: MR electronics componentsAdvance salary to the wife of a director will not come in sec. 295.
9

Case study: Dr. Fredie ArdeshirSale of flat on installment to the director will not come under sec. 295.
32.

Contract with Firms Related to Director

Sec 297- A company cannot enter into a contract with another firm / company in which its
own director is a partner / owner, unless it has been approved by the board.
Exemptions: if it is cash transaction, or it is a ordinary transaction in banking / insurance firm
or if the value of transaction is less than Rs. 5000 per annum.
33.

Notice by Director

Sec 299- A director has to give notice in form 24AA when a company is about to enter into
contract in which director is interested. The notice must be given to the board of directors
when they meet.
34.

Penalty: Rs. 500

Case study: General Tire Rubber Co v. Firestone Tire & Rubber Co Firestone Tire & Rubber
Co
.-Interest here means personal interest not official interest and includes closeness of
relatives (like father son).
35.

Director not to participate in some Meetings

Sec 300- A director cannot participate in a meeting in which a matter / contract

related to

his issue / in which he is interested.

36.

Office of Profit

Sec.314-Director / his relatives cannot hold an office of profit having remuneration of Rs.
10000 or more per month without special resolution.
Any firm / company in which director is a partner / owner also cant hold a place of profit
without special resolution.
37.

Restriction on the Powers of the Board

10

Sec. 293 restricts the powers of the board : it cant remit loan due to director or his firm, it
cant invest compensation received otherwise than as per law, it cant dive charity of more than
5% of profit (or 50000) it cant borrow more than equity + reserves without permission.
38.

Directors Keeping Accounts in Other Places than Registered Office

Yes the board of directors have to take a decision and communicate it in 7 days to ROC
(registrar of companies) in form23 AA.
It can keep its accounts of branch offices at branch office but a summarized report should
be sent to the registered office at intervals of 3 months.
39.

Director Inspecting any Book of Accounts

Sec. 209 (4) - Yes - during business hours

40.

Directors Getting the Accounts and Reports Approved from Shareholders

Sec 210- Within 6 months of date of closure of financial year, it must be adopted by AGM
Financial year can be extended upto 15 months and with permission of ROC, upto 18 months.
41.

Signing of Annual Accounts

Annual accounts must be signed by 2 directors / manager / secretary if you have MD, he must
sign it.
Sec. 216: P & L as per format must be attached with balance sheet.
Sec. 217: board of director must add his report on working of company with the annual
accounts.

CORPORATE GOVERNANCE GUIDELINES

The Board of Directors is elected by the stockholders to manage the business of the
Company. The Board oversees the Companys senior management, to whom it has delegated
the authority and responsibility for the day-to-day operations of the business. Directors have a
duty to act in good faith and with a view to the interests of the Company. Directors are
expected to attend all meetings of the Board and the Board committees upon which they
11

serve, and all annual meetings of the Companys stockholders at which they are standing for
election or re-election as directors. Directors should spend the time needed and meet as
frequently as necessary to properly discharge their responsibilities.
COMPOSITION OF THE BOARD
Size of Board
The Board is currently comprised of nine directors. The Companys Bylaws permit the Board
to change its size to not less than three directors and not more than fifteen directors.
Selection of Directors
All directors are elected each year by the Companys stockholders at the annual meeting of
stockholders. The Board recommends to the stockholders a slate of nominees for election at
the annual meeting. Between annual meetings, the Board may elect directors to serve until the
next annual meeting. The Nominating/Corporate Governance Committee, with input from the
Chief Executive Officer, selects and recommends to the Board all director candidates for
inclusion in the Boards slate of nominees at the annual meeting or for election by the Board
between annual meetings.
Director Independence
A majority of the directors shall be independent. A director is independent if he or she
satisfies the requirements for director independence established by the New York Stock
Exchange, and the Board of Directors affirmatively determines that the director has no
material relationship with the Company (either directly, or as a partner, shareholder or officer
of an organization that has a relationship with the Company). The Companys annual proxy
statement will identify the independent directors.
Director Qualification Standards
(a) Service on Other Boards
Directors should not serve as a director of another company if doing so would create actual or
potential conflicts or interfere with their ability to devote sufficient time and effort to their
duties as a director of the Company. Directors who have a full-time job should not serve on
the boards of more than three companies with publicly traded equity, in addition to the
Company. Directors who do not have a full-time job should not serve on the boards of more
12

than four companies with publicly traded equity, in addition to the Company. All Directors
should consult with the Nominating and Corporate Governance Committee prior to joining
the board of another public company.
(b) Change in Job Responsibility
Directors who experience a material change in their job responsibility, other than on account
of retirement, shall offer to resign from the Board. The Nominating/Corporate Governance
Committee, after reviewing the appropriateness of continued Board service under these
circumstances, and with input from the Chief Executive Officer, will recommend whether the
Board should accept such resignation.
(c) Retirement
Pursuant to the Companys Bylaws, a director is required to retire from the Board at the first
annual meeting of stockholders held after he or she reaches age 72, unless the Board, upon
recommendation of the Nominating/Corporate Governance Committee, determines that it is
in the best interests of the Company and its stockholders for the director to continue to serve
as a director until a subsequent annual meeting.
(d) Resignation of Employee Directors
The Chief Executive Officer shall offer to resign from the Board when he or she ceases to be
an employee of the Company. Any other employee director shall resign from the Board when
he or she ceases to be an employee of the Company.
Chairman of the Board
The Board elects the Chairman of the Board.

COMMITTEES OF THE BOARD

General
The Board will at all times have an Audit Committee, Compensation Committee and
Nominating/Corporate Governance Committee, each comprised entirely of independent
directors. The Board from time to time establishes such additional committees as it deems

13

appropriate. Each committee has a charter setting forth its purpose, authority and
responsibilities, as well as the qualifications for committee membership.

Committee Membership
Committee members and Chairmen are appointed by the Board. The Nominating/Corporate
Governance Committee, in consultation with the Chief Executive Officer and taking into
account the desires, experiences and expertise of the individual directors, recommends to the
Board the membership and Chairman of each committee.
Conduct of Meetings
Meeting Schedule and Agenda
The Chairman of the Board will establish a schedule of Board meetings. Special Board
meetings may be called at any time in the manner set forth in the Bylaws. The Chairman of
the Board will develop the agenda for each meeting. Any director may place an item on the
Board agenda at any time. The Chairman of each committee, in consultation with the
committee members and the appropriate members of management, will establish a schedule
of committee meetings. Special committee meetings may be called at any time in the manner
set forth in the committee charter. The Chairman of each committee, in consultation with the
appropriate members of management, will develop the agenda for each committee meeting.
Any director may place an item on the agenda of any committee at any time

Advance Distribution of Materials

Board and committee meeting materials will, whenever possible, be distributed to the
directors in advance of the meetings in ample time for review, and directors are expected to
review these materials prior to the meeting.
Executive Sessions of Non-Management Directors
The non-management directors of the Board regularly meet in executive session after the
conclusion of each regularly scheduled Board meeting, and at such additional times as they
may determine.
14

Lead Director; Duties

The independent directors shall designate a lead independent director who shall serve for a
term beginning at the first Board meeting following an annual meeting of stockholders at
which directors are elected, and continuing for two years thereafter. It is the policy of the
Board that no independent director shall serve as lead director for more than two consecutive
terms. The independent directors shall have the authority to depart from this policy if they
determine that it is in the best interests of the Company to do so in specific instances.
The lead independent directors duties include:
i.

Presiding over executive sessions;

ii.

Chairing meetings of the Board of Directors in the absence of the Chairman of the

Board;
iii.

Acting as a liaison between the independent directors and the Chairman of the Board;

iv.

Coordinating with the Chairman of the Board regarding meeting agendas and

schedules;
v.

Coordinating with the Chairman of the Board regarding information flow to the

Board;
vi.

Being available for consultation and communication with stockholders, as

appropriate; and

vii.

Calling meetings of the independent directors (executive sessions) as appropriate.

Access to Management and Independent Advisors

The Board, each committee and each director shall at all times have complete and direct
access to members of management. The Board and each committee are entitled to retain, at
the Companys expense, such independent counsel and other advisors as it may deem
necessary or advisable to carry out its duties.

The Role of Boards of Directors in Corporate Governance

15

People often question whether corporate boards matter because their day-today impact is
difficult to observe. But when things go wrong, they can become the center of attention.
Certainly this was true of the Enron, Worldcom, and Parmalat scandals. The directors of
Enron and Worldcom, in particular, were held liable for the fraud that occurred: Enron
directors had to pay $168 million to investor plaintiffs, of which $13 million was out of
pocket (not covered by insurance); and Worldcom directors had to pay $36 million, of which
$18 million was out of pocket.1 As a consequence of these scandals and ongoing concerns
about corporate governance, boards have been at the center of the policy debate concerning
governance reform and the focus of considerable academic research. Because of this renewed
interest in boards, a review of what we have and have not learned from research on corporate
boards is timely.

Much of the research on boards ultimately touches on the question what is the role of the
board? Possible answers range from boards being simply legal necessities, something akin
to the wearing of wigs in English courts, to their playing an active part in the overall
management and control of the corporation. No doubt the truth lies somewhere between these
extremes; indeed, there are probably multiple truths when this question is asked of different
firms, in different countries, or in different periods.

Given that all corporations have boards, the question of whether boards play a role cannot be
answered econometrically as there is no variation in the explanatory variable. Instead, studies
look at differences across boards and ask whether these differences explain differences in the
way firms function and how they perform. The board differences that one would most like to
capture are differences in behavior. Unfortunately, outside of detailed field work, it is difficult
to observe differences in behavior and harder still to quantify them in a way useful for
statistical study. Consequently, empirical work in this area has focused on structural
differences across boards that are presumed to correlate with differences in behavior. For
instance, a common presumption is that outside (non-management) directors will behave
differently than inside (management) directors. One can then look at the conduct of boards
1 Klausner et al. (2005).

16

(e.g., decision to dismiss the CEO when financial performance is poor) with different ratios
of outside to inside directors to see whether conduct varies in a statistically significant
manner across different ratios. When conduct is not directly observable (e.g., advice to the
CEO about strategy), one can look at a firms financial performance to see whether board
structure matters (e.g., the way accounting profits vary with the ratio of outside to inside
directors).

One problem confronting such an empirical approach is that there is no reason to suppose
board structure is exogenous; indeed, there are both theoretical arguments and empirical
evidence to suggest board structure is endogenous (see, e.g., Hermalin and Weisbach, 1988,
1998, and 2003). This endogeneity creates estimation problems if governance choices are
made on the basis of unobservables correlated with the error term in the regression equations
being estimated. In fact, one of our main points in this survey is the importance of
endogeneity. Governance structures arise endogenously because economic actors choose
them in response to the governance issues they face2

Beyond the implications endogeneity holds for econometric analysis, it also has implications
for how to view actual governance practice. In particular, when we observe what appears to
be a poor governance structure, we need to ask why that structure was chosen. Although it is
possible that the governance structure was chosen by mistake, one needs to give at least some
weight to the possibility that it represents the right, albeit poor, solution to the constrained
optimization problem the organization faces. After all, competition in factor, capital, and
product markets should lead, in Darwinian fashion, to the survival of the fittest. While
admittedly fittest does not mean optimal, anything that was sub-optimal for known
reasons would be unfit insofar as there would be pressure to address these reasons for suboptimality. In other words, existing sub-optimality is unlikely to lend itself to quick or
obvious fixes.

2 Demsetz and Lehn (1985) were among the first to make the general point that governance structures are
endogenous. Others who have raised it include Himmelbergetal. (1999), Palia (2001), and Coles et al. (2007).
The point has also been discussed in various surveys of the literature; consider, e.g., Bhagat and Jefferis (2002)
and Becht et al. (2003), among others.

17

This insight about endogeneity is, however, easy to forget in the face of data. Figure 1 shows
a plot of two data points3. On the horizontal axis is an attribute of governance (e.g., board
size). On the vertical axis is a measure of financial performance. One firm has more of the
attribute, but weaker performance; while the other firm has less of the attribute, but better
performance. A regression line through the points underscores the apparent negative relation
between attribute and performance. Without further analysis, one might be tempted to
conclude that a firm would do better if it shrank the size of its board. The problem with such
a conclusion is that it fails to consider why a large board might have been chosen in the first
place.

Figure 2 replicates Figure 1, but it also shows the optimization problems faced by the two
firms in question. Observe that, for a given firm, there is a non-monotonic relation between
the attribute and financial performance. In particular, the relation is concave and admits an
interior maximum. Moreover,
each of the two firms is at its maximum. Consequently, whereas Firm 2 would prefer ceteris
paribus to be on Firm 1s curve, it isnt and, thus, would do worse than it is doing if it were to
shrink its board in line with the native conclusion drawn from the regression in Figure 1.

Figures 1 and 2 illustrate another issue confronting the study of governance, namely
heterogeneity in the solutions firms choose for their governance problems 4 As illustrated,
Firms 1 and 2 face different governance problems and, not surprisingly, are driven to

3 Figure 1 is presented for illustrative purposes and should not be read as a critique of any existing research. In
particular, none of the studies discussed below are as nave as Figure 1.

4 To be sure, a real empirical study would attempt, in part, to control for such heterogeneity by putting in other
controls, Including if the data permitted, firm fixed effects. It should be noted, however, that (i) there can still be
a problem with the specification if the attribute enters into the specification only linearly (as opposed to
nonlinearly as suggested by the parabolas in Figure 2); and (ii) if different firms face different shaped tradeoffs
(e.g., if the parabolas arent the same shape for all firms), arent the same shape for all firms)

18

different

solutions.

Almost

every

model

of

surprisingly, are driven to different solutions. Almost every model of governance shows that
the equilibrium outcome is sensitive to its exogenous parameters; consequently, heterogeneity
in those parameters will lead to heterogeneity in solutions. Moreover, once one takes into
account various sources of non-convexity, such as those arising in optimal incentive schemes,
one may find that strategic considerations lead otherwise identical firms to adopt different
governance solutions (see, e.g., Hermalin, 1994).
19

Some help with the heterogeneity issue could be forthcoming from more theoretical analyses.
Although a commonand not necessarily inaccurate-perception of the literature on corporate
governance, particularly related to boards of directors, is that it is largely empirical, such a
view overlooks a large body of general theory that is readily applied to the specific topic of
boards. For instance, monitoring by the board would seem to fit into the general literature on
hierarchies and supervision (e.g., Williamson, 1975, Calvo and Wellisz, 1979, Kofman and
Lawarree, 1993, and Tirole, 1986, 1992). As a second example, issues of board collaboration
would seem to fit into the general literature on free-riding and the teams problem (see, e.g.,
Holmstrom, 1982).

The teams-problem example serves to illustrate a problem that can arise in applying off-theshelf theory to boards. It is well known that, as a members share of a teams output falls, he
or she supplies less effort. For boards, however, the question is not a single directors effort,
but what happens to total effort (e.g., are larger boards less capable monitors because of the
teams problem)? Yet, here, theory cannot provide a definitive answerwhether total
equilibrium effort increases or not with board size depends critically on assumptions about
functional forms5

5 For instance, if a teams total benefit isn is the effort of agent n, each agent gets 1/N of the benefit, and each
agent ns utility is

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