CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW AND GOVERNANCE

PROJECT
“CORPORATE GOVERNANCE”
“CORPORATE GOVERNANCE AND ROLE OF
DIRECTORS”

TO................................................................Dr. Pradeep Kumar Das

Assistant Professor
School of Law and Governance
C.U.S.B., Gaya

BY...............................................................PALLAVI KUMARI
B.A.LL.B. (H)
Ninth Semester
Enrll. No: CUB1413125027

DATE: 19/11/2018
 CONTENTS

SR.NO. TITLE PAGE NO.

1. ACKNOWLEDGEMENT 3

2. RESEARCH 4

3. RESEARCH QUESTION OR PROBLEM 5

4. RESEARCH HYPOTHESIS 5

5. CHPTER : ONE 6
INTRODUCTION
6. CHAPTER : TWO 7-10

7. CHAPTER: THREE 11-15

8. CHAPTER: FOUR 16

9 CHAPTER: FIVE 17
ACKNOWLEDGEMENT

During the course of writing this project, I have received the help, encouragement and assistance from my
teacher, colleagues, friends, library staff and other. I am thankful to all of them.

I am particularly great thankful to my Corporate Governance professor, Dr. Pradeep Kumar Das for
encouragement and support that he provided during the preparation of the project.

I am deeply indebted to the eminent legal experts and corporate governance professor experts and other
scholars of repute whose valuable work has been highly useful in writing this project.
 LITERATURE REVIEW
BOOKS/STATUTES REFFERED
 The Companies Act, 2013.
 Company Law, Krati Rajoria, (,Allahadbad Law Agency, 2nd Edition, Haryana
 Company Law, Avtar Singh (Eastern Book Company 16th Edition, New Delhi.)
 Lectures On Conmpany Law, K S Anantharaman (LexisNexix,12th Edition, New
Delhi)
 Company Law and Practice, A K Majumdar and Dr.G K Kapoor (Taxmann
Publications (P) Ltd., 17th Edition New Delhi)
 Company Law, Sanjay Dhamija and Dr.G K Kapoor ( Taxmann Publications (P)
Ltd., 19th Edition New Delhi)

CASES REFFERED

LAW JOURNALS REFFERED

 ALL INDIA REPORTER

 MANUPATRA
 CORPORATE LAW ADVISOR

RESEARCH METHODOLOGY
The paper is conceptual in nature primarily, largely based on secondary source of information,
and focuses on various investor protection measures taken by The Companies Act, 2013 from
time to time. . A corporate form of entity has stakeholder’s viz. shareholders, creditors, banks
and financial institutions, employees; Corporate Governance is concerned with the functioning of
Board of Directors (BODs) –its structure, styles, process, their relationships and roles, activities
etc. Corporate Governance is concerned with the functioning of Board of Directors (BODs) –its
structure, styles, process, their relationships and roles, activities etc. Therefore, Boards of
directors (BODs) is considered as a crucial part of the Corporate Governance.

1. Primary data

2. Secondary data

Primary data:

In this study the questionnaire method have been used to collect primary data.
Secondary data:

Secondary data is collected from the website of SEBI (www.sebi.co.in) and Ministry Of
Corporate Governance, published National Company Law Tribunal and Government of India.
Thus, there is a need to provide protection to the company and investors.

The Main objectives of the study are:

1) To evaluate the performance of the incorporated company in India.

2) To know the historical development of Company law in the world as well as in India.

3) To study the Organizational frame work, Operational policies, Problems and Prospects
and financial performance of Company in India.

4) To identify the Investors’ expectations from the R B I and government.

5) To make appropriate and relevant recommendations to the management of the

organization under study.

RESEARCH QUESTION OR PROBLEM

1. What is Corporate Governance under Companies Act, 2013...............?

2. What is the scope and Importance of Corporate Governance in the

Company Law...?

3. In what manner the role of directors helps in the proper functioning of the
Corporate Governance.....?

RESEARCH HYPOTHESIS
 1. Board of directors is directors who roles of the Board of Directors and
shareholders are interactive and, therefore, the quality of governance
depends upon the level of interface.

2. The Indian Companies Act 1956 defines a director as follows, “A director

includes any person occupying the position of director by whatever name
called. The concept of directors was proposed in the legislation by means of
the company’s bill, 2009 which was finally enacted in the form of the
companies act, 2013.

3. The Board’s key purpose is to ensure the company’s prosperity by

collectively directing the company’s affairs, whilst meeting the appropriate
interests of its shareholders and stakeholders.

CHAPTER: ONE

INTRODUCTION

Corporate Governance is concerned with the functioning of Board of Directors (BODs) –its
structure, styles, process, their relationships and roles, activities etc. Therefore, Boards of
directors (BODs) is considered as a crucial part of the Corporate Governance. Directors are
appointed by the shareholders of the company, who set overall policy for the company, and the
board appoints one or more of them as managing directors/whole time directors/ executive
directors to be approved by the shareholders. As Tricker1 says, “Corporate Governance addresses
the issues facing Boards of Directors”. In this view, the main responsibility of governing a
company is upon the Board of Directors and, therefore, attention must be paid to their roles and
responsibilities. The roles of the Board of Directors and shareholders are interactive and,

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Company Law, Krati Rajoria, (,Allahadbad Law Agency, 2 nd Edition, Haryana
therefore, the quality of governance depends upon the level of interface set up by them. The
boards are accountable in many ways to the shareholders and stakeholders in a company. The
directors are required to attain a balance between competing interests of shareholders, customers,
lenders, promoters and directors. Preferably, the board should be the heart and soul of a
company. Whether or not, the company grows or declines, depends upon the sense of purpose
and direction, the values, the will to generate stakeholders’ satisfaction and the drive to achieve
them.

Section 2(13) of the Indian Companies Act 1956 defines a director as follows, “A director
includes any person occupying the position of director by whatever name called. The important
factor to determine whether a person is or is not a director is to refer to the nature of the office
and its duties. It does not matter by what name he is called. If he performs the functions of a
director, he would be termed as a director in the eyes of the law, even though he may be named
differently.

Section 2(6) of the Indian Companies Act 1956 states that directors are collectively referred to
as “Board of Directors” or simply the “Board”. As per the Companies Bill, 2009 Section 2(1)(j):
“Board of Directors” or “Board”, in relation to a company, means the collective body of the
directors of the company. They may attend board meetings and meetings of committees of the
board in which they are members. As per clause 49 of the listing agreement, there is one more
category of directors called Independent Directors.

Hence, it should have a right mix of outsiders and people from the management so that people
who execute the decisions have a say in decision making in parallel ensuring that the
stakeholder’s interests are protected.

CHAPTER : TWO

DIRECTORS IN COMPANY

The board of directors is the primary direct stakeholder influencing corporate governance. Directors are
elected by shareholders or appointed by other board members, and they represent shareholders of the
company. The board is tasked with making important decisions, such as corporate officer appointments,
executive compensation and dividend policy. In some instances, board obligations stretch beyond
financial optimization, when shareholder resolutions call for certain social or environmental concerns to
be prioritized. Boards are often made up of of inside and independent members2. . The roles of the
Board of Directors and shareholders are interactive and, therefore, the quality of governance
depends upon the level of interface set up by them. The boards are accountable in many ways to

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Company Law, Krati Rajoria, (,Allahadbad Law Agency, 2nd Edition, Haryana
the shareholders and stakeholders in a company3. The directors are required to attain a balance
between competing interests of shareholders, customers, lenders, promoters and directors.
Preferably, the board should be the heart and soul of a company. Whether or not, the company
grows or declines, depends upon the sense of purpose and direction, the values, the will to
generate stakeholders’ satisfaction and the drive to achieve them, but they are chosen because of
their experience managing or directing other large companies. Independents are considered
helpful for governance because they dilute the concentration of power and help align shareholder
interest with those of the insiders4.

Companies or the Public Companies, the role and responsibility of the Directors or the Board of
Directors depend upon the regulations in the Articles of the Company and the provisions of the
Companies Act, 1956. When it comes to listed Public Companies, other provisions like the SEBI
guidelines, regulations, provisions in the listing agreement etc. deserve consideration. Private
Limited Companies or the closely held Companies are actually run by the directors and we know
as to how Annual General Meetings (AGM’s) are conducted in these companies in reality. It may
not be the case when it comes to listed Public companies in view of various guidelines,
regulations and the provisions of listing agreement entered into with the Stock Exchange.
Directors or the Board of Directors has a very big role to play in any Company and they conduct
the day-to-day affairs of the company and it may not be possible for the AGM to give directions
to the Company from time to time though every company should act as per the provisions of the
companies act 1956 and certain decisions can only be taken by the shareholders in the AGM.

Companies that do not cooperate sufficiently with auditors or do not select auditors with the
appropriate scale can publish spurious or noncompliant financial results. Bad executive
compensation packages fail to create optimal incentive for corporate officers. Poorly structured
boards make it too difficult for shareholders to oust ineffective incumbents. Corporate
governance became a pressing issue following the 2002 introduction of the Sarbanes-Oxley Act
in the United States, which was ushered in to restore public confidence in companies and
markets after accounting fraud bankrupted high-profile companies such as Enron and
WorldCom.

The changes in executive compensation in the 1990s in USA, designed to align executive
interests with those of shareholders, provided a strong incentive to managers to overstate
earnings, even if this was not sustainable and illusionary. When chief executive officers spend

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Company Law and Practice, A K Majumdar and Dr.G K Kapoor (Taxmann Publications (P) Ltd., 17 th Edition New
Delhi)
three to four years in companies and cash their stock options and then markets are not quick to
respond then stakeholders face the consequences 5 . Good corporate governance creates a
transparent set of rules and controls in which shareholders, directors and officers have aligned
incentives. Most companies strive to have a high level of corporate governance. For many
shareholders, it is not enough for a company to merely be profitable; it also needs to demonstrate
good corporate citizenship through environmental awareness, ethical behavior and sound
corporate governance practices. The powers of management are vested in directors and they and
they alone can exercise these powers. The only way in which the General Body of a company
can overrule the BoDs is altering the Articles and refusing to re-elect the directors, whose actions
they disapprove. The shareholders cannot themselves usurp the powers, which by Articles are
vested in the directors. Thus the relationship of BoDs with the shareholders is more of a
federation than that one of subordinate and superior.

A company director is appointed to a limited company to manage the day-to-day business

activities and finances and to ensure all statutory filing obligations are met. Directors must act
lawfully and honestly and make decisions for the benefit of the company and its members. Using
their skills, experience and judgment, directors must try to make the company a success by
promoting and achieving its business objectives

1. To act within the powers granted to them in the articles of association.

2. To promote the success of the business.
3. To exercise independent judgement in all decision-making.
4. To use reasonable care, skill and diligence at all times.
5. To avoid or declare any conflict of interest.
6. To avoid the acceptance of benefits from third parties or using their position to make private
profits.
7. To declare an interest in a proposed transaction or arrangement with the company before it
enters into such a transaction.

CHAPTER : THREE

THE BOARD OF DIRECTORS – ROLES AND RESPONSIBILITIES

The Board’s key purpose is to ensure the company’s prosperity by collectively directing the
company’s affairs, whilst meeting the appropriate interests of its shareholders and stakeholders.
In India, there are many judgments on the role of directors and the responsibility of directors/
Board of Directors in any Company. In Private Limited provisions in the listing agreement etc.
deserve consideration. Private Limited Companies or the closely held Companies are actually

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Company Law, Krati Rajoria, (,Allahadbad Law Agency, 2 nd Edition, Haryana
run by the directors and we know as to how Annual General Meetings (AGM’s) 6 are conducted
in these companies in reality. It may not be the case when it comes to listed Public companies in
view of various guidelines, regulations and the provisions of listing agreement entered into with
the Stock Exchange. Directors or the Board of Directors has a very big role to play in any
Company and they conduct the day-to-day affairs of the company and it may not be possible for
the AGM to give directions to the Company from time to time though every company should act
as per the provisions of the companies act 1956 and certain decisions can only be taken by the
shareholders in the AGM.

Let us examine the role of Board of directors (BoDs) in terms of Companies Act and other legal
provisions. Company is a legal personality and Board of Director acts as its body and mind.
Under Section 291 of the Companies Act, BoD is authorized to do what the company is
authorized to do, unless barred by restrictions on their power by the provisions of the Companies
Act. It is well settled that directors, while exercising their powers, do not act as agents for the
majority or even all the members and so the members cannot by a resolution passed by a
majority of even unanimously, supersede the directors’ power and instruct them how they shall
exercise their power. The powers of management are vested in directors and they and they alone
can exercise these powers.

The size and magnitude of Enron’s failure challenges academic beliefs about corporate
governance and the role that could be played by board of directors, external auditors in
constraining executive managers from going too far, destroying companies and creating losses to
stakeholders. The aligning of manager’s interests with stakeholder’s interests needs more solid
foundations other than assuming that it is easily being aligned. Enron highlighted the way in
which loose regulations had led auditors to allow accounting methods that promote overstating
profits while analysts remained positive and sometimes silent in spite of un-logical financial
results 7 . The changes in executive compensation in the 1990s in USA, designed to align
executive interests with those of shareholders, provided a strong incentive to managers to
overstate earnings, even if this was not sustainable and illusionary. When chief executive officers
spend three to four years in companies and cash their stock options and then markets are not
quick to respond then stakeholders face the consequences.

The only way in which the General Body of a company can overrule the BoDs is altering the
Articles and refusing to re-elect the directors, whose actions they disapprove. The shareholders
cannot themselves usurp the powers, which by Articles are vested in the directors. Thus the
relationship of BoDs with the shareholders is more of a federation than that one of subordinate
and superior. The Board of Directors can be greatly helped by focusing on four key areas:

(i) by establishing vision, mission and values;

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Company Law and Practice, A K Majumdar and Dr.G K Kapoor (Taxmann Publications (P) Ltd., 17 th Edition New
Delhi)

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Company Law, Krati Rajoria, (,Allahadbad Law Agency, 2 nd Edition, Haryana
(ii) by setting strategy and structure;

(iii) by delegating authority and responsibility to management; and,

(iv) by exercising accountability to shareholders and be responsible to relevant stakeholders.

In India, it is common to find family-owned concerns being run by promoters as their personal
fiefdoms. Though their investments may be meager, they manage the firms, holding positions of
CEOs, managing directors, Chairman and members of the Board of Directors.8 In such a set-up,
the board acts more like a rubberstamp, rather than shouldering large responsibilities. For better
governance, the board should function as follows:

1) The Board should meet regularly, retain full and effective control over the company and
monitor the executive management.

2) Directors should exhibit total commitment to the company. An efficient and independent
board should be conscious of protecting the interests of all stakeholders and should attend and
actively participates in the meetings.

3) Another important function of the directors is that they should steer discussions properly.
They should set priorities and ensure that these are acted upon.

4) A director is expected to have the courage of conviction to disagree. Directors should also be
alert to any deteriorating situations in functional areas of finance, stock market, sales, personnel,
and especially those relating to moral issues

5) Directors have great responsibility in the matter of employment and dismissal of the CEO.
The Board as a whole, should recruit the best CEO they can hire, based on antecedents and
market reports, evaluate objectively on a continuing basis his or her implementing effectively or
otherwise the strategic planning devised by the board.

6) An efficient board should be able to anticipate business events that would spell success or lead
to disaster if proper measures are not adopted in time. The directors should be alert to such
ensuing situations and be ready with the strategy to meet them so that either way the company
stands to gain.

7) The directors should always exercise their powers for a 'proper purpose' – that is, in
furtherance of the reason for which they were given those powers by the shareholders.

8) Directors must act in good faith in what they honestly believe to be the best interests of the
company, and not for any collateral purpose. This means that, particularly in the event of a
conflict of interest between the company's interests and their own, the directors must always
favour the company.

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Company Act, 2013
9) Board of Directors should provide counsel and oversight on the selection, evaluation,
development and compensation of senior management.
10) Board of Directors should monitor corporate performance against strategic business plans,
including overseeing operating results on a regular basis to evaluate whether the business is
being properly managed.
11) Directors should ensure that processes are in place for maintaining the integrity of the
company by way of the financial statements, compliance with laws and ethics, and integrity of
relationships with customers, suppliers and other stakeholders.
12) Board of Directors should ensure that the company is in compliance with all applicable
statutory and legal requirements.

ROLE OF THE CHAIRMAN

Board chairs interact with nearly everyone in the organization, so it’s essential that the board
selects a person to fill the role who can meet the strong expectations of this role. The primary
role of the board chair is to lead and guide the rest of the board. The board chair also serves as
the direct liaison between the board and management. The board chair needs to stay in the loop
of all board activities 9 . To this end, the board chair serves as an ex-officio member of all
committee meetings. Experienced board chairs know that they must develop solid relationships
with the board directors, the CEO, managers, the corporate secretary and committees in order to
lead effectively.
Under the umbrella of board chair, the person selected for this position helps the corporate
secretary to write the agenda, which is used as a tool for facilitating board meetings efficiently.
During meetings, the board chair guides the rest of the board by focusing on the organization’s
vision, mission and strategic direction. It’s critical for the board chair to set a tone for the
meeting that sets the stage for respect, collaboration and decision-making10. Many corporations
find that the most efficient way to govern is to form an executive committee that acts as a
steering committee to prioritize issues for the full board. The role of board chair is an influential
position on an executive committee and the full board to drive the agenda and to identify
priorities.

Most people who serve as board chair are keenly aware that they need to develop a trusted
relationship with the CEO and other executives. In a mutually beneficial relationship, the board
chair acts as a mentor and advisor to the CEO. Working collaboratively, the board chair helps the
CEO to translate the board’s strategic plans into action. The board chair needs to be willing to
ask the CEO the hard, probing questions that come from the board, and be willing to work in
tandem with the CEO during times of crisis. Both parties work best together when the board
chair maintains an open-door policy in order to keep the lines of communication open. Board
chairs must also be mindful that their roles are vastly different from the CEO’s responsibilities.
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Company Law, Krati Rajoria, (,Allahadbad Law Agency, 2nd Edition, Haryana
10
Company Law and Practice, A K Majumdar and Dr.G K Kapoor (Taxmann Publications (P) Ltd., 17 th Edition
New Delhi)
It’s crucial that the board chair doesn’t usurp the CEO’s authority or overstep the CEO’s role.
The board chair also needs to develop a strong relationship with the board directors. The board
chair needs to facilitate board meetings in such a way that the board can do its own work. This
duty includes expecting and encouraging all board members to be actively engaged. The board
chair also typically participates in annual board member orientation, onboarding and
development. The bulk of board work happens in committees. The board chair makes
recommendations for committee chairs and seeks approval from fellow board directors. To stay
in the loop on committee work, the board chair typically serves as ex-officio member of all
committees. The responsibility here is for the board chair to align committee work with the
vision and mission of the company.

The Chairman’s role includes managing the board’s business and acting as its facilitator and
guide. This includes;
1) Determining Board composition and organization;
2) Clarifying board and management responsibilities;
3) Planning and managing Board and Board Committee meetings;
4) Developing the effectiveness of the Board.

ROLE OF INDEPENDENT DIRECTORS

In many countries shareholders have a dominant role in appointing board of directors.
Shareholders believe that appointed board and senior managers will act in their interests. Senior
managers are responsible of directing; planning and controlling work and take corrective actions
necessary. They should manage risk, have appropriate control systems, provide accurate
information and act ethically. Shareholders place their trust in board’s decisions in supervising
senior manager’s actions and proficiency. However, in many incidents this is not the case and
agency problem persist. When existing and potential investors are considering buying or selling
stocks of any companies, they often rely on financial information which is not forward looking,
subjective and sometimes incorrect. In this case, shareholders confidence for an effective role
and responsibilities of the board in supervising and selecting senior managers is crucial. In order
for corporate governance to function efficiently, several dimensions might be taken into
consideration including role and responsibilities of the board, board composition, management
process, relationship between board members, and duality of CEO and Chairman .

Corporate governance can be viewed as a nexus of relations between board of directors,

company management, shareholders, debt holders, customers, government and other
stakeholders within a social, legal and political framework. The effectiveness of corporate
governance flourish in an environment of compliance, transparency and accountability. Board of
directors has a control, strategic and resource provision roles the supervisory board “can help the
firm connect with the relevant segments and environmental constituencies”. Isik and Ince argued
that board of directors is a cornerstone in the governance mechanism. They explored the
relationship between board size and board composition on performance for a sample of 30
commercial banks from 2008 to 2012 in Turkey. They measured banks performance by operating
return on assets and return on assets.

Their findings showed that board size has a significantly positive effect on bank’s financial
performance while there is no significant relationship between for the percentage of outside
directors on banks’ financial performance 11 . Different critical areas should be taken into
consideration by the board such as emphasizing ethical values, standards in the work
environment and overseeing strategies that address sustainability and stakeholder interests.
Bernardi and Lacross surveyed a sample of quarter of Fortune 500 companies in order to explore
their concern about publishing their codes of ethics. They discovered that since the collapse of
Enron in 2002, companies generally give increasing emphasis to the code of ethics, which can be
seen as a positive sign. There were also no significant differences in the disclosure rates between
different industries.

The revised clause 49 stipulates that in companies which have executive chairmen, at least 50 per
cent of the board is required to have independent directors. For companies with non-executive
chairmen one-third of the board must comprise independent directors 12 . An “Independent
director” is a non-executive director on the board of a company who has integrity, sense of
accountability, track record of achievements, financial literacy, experience and the independence
to balance the interests of various stakeholders, ability to think strategically, degree of
commitment, sense of devotion. Independent Directors play an active role in various committees
to be set up by a company to ensure good governance. Listed Companies are required to set up
audit committees of minimum three directors, on which, two-thirds should be Independent
Directors. The audit committee chaired by an Independent Director shall inspect the company’s
financial statements and can also recommend replacement of the statutory auditor.

Independent directors are responsible for formulating and implementing business strategies on
behalf of shareholders and have to ensure that the business activities of the company are
compatible with all legal requirements. They have to perform crucial governance functions. The
presence of independent Directors on the Board, capable of challenging the decisions of the
management, is widely considered as a means of protecting the interests of shareholders and
other stakeholders.

A board’s independence depends on a bargaining game between the board and the CEO of the
many responsible parties implicated in Enron’s scandal, it could be said that the board’s
inactions, up to a certain extent, led the company to its demise in December 2001. Enron’s board
approved a disclosure policy that made the firm’s financial results substantially opaque to public
capital markets. It also approved a compensation strategy that made managerial payoffs highly

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Company Law and Practice, A K Majumdar and Dr.G K Kapoor (Taxmann Publications (P) Ltd., 17 th Edition
New Delhi)

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Company Law, Krati Rajoria, (,Allahadbad Law Agency, 2 nd Edition, Haryana
sensitive to stock price changes and it also failed to engage in an intense monitoring of business
results and financial controls.13

The roles and responsibilities of a Board of directors are different, depending on the nature and
type of organization and the laws applied in a certain country. Similarly, the establishment of
different committees is a means to channel the functions of a board into expertise groups of
directors that focus on specific issues in organization. The role of the board is critical for the
success of companies. According to UK Corporate Governance Code (2016), the board should
make sure that financial and human are available to fulfill companies objectives. They board is
responsible for making sure an amalgam of skills and experience in the board for running
companies smoothly and efficiently. In Saudi Arabia, The General Department of Finance is in
charge of controlling the financial sector and has the authority to supervise the activities of
finance companies according to Finance Companies Control Law. Although rules and
regulations are available, monitoring implementation is necessary when managers and board try
to manipulate it whether intently or by ignorance and this will be the concern of the case going to
be presented.

ROLE OF BOARD COMMITTEES

The Board of the Company has the following Committees:

1) Audit Committee: - Section 292A of the Companies Act, 1956 requires that every public
limited company (whether listed or unlisted) having a paid-up capital of at least Rs.5 crore
should constitute a committee of the board to be known as Audit Committee. The meetings of
the Audit Committee shall at least be held four times a year and preferably on the day preceding
the date of each of Board meeting. Being mandatory under Section 292A of the Companies Act,
1956 and Clause 49 of the listing agreement, the audit committee can be of facilitator of Board to
implement, monitor and continue good corporate governance practices for the benefit of the
company and its stakeholders. The main function of Audit Committee is to oversee the
company’s financial reporting process and the disclosure of its financial information to ensure
that the financial statement is correct, sufficient and credible.
The Audit Committee can recommend to the Board, the appointment, re-appointment and, if
required, the replacement or removal of the statutory auditor and the fixation of audit fees. The
members of Audit Committee should have formal knowledge of accounting and financial
management or experience of interpreting financial statements.

2) Remuneration Committee: - The remuneration Committee shall be held at least four times a
year on the day preceding the date of every Board meeting. The Committee’s principle functions
are to authorize the remuneration, business and other benefits of executive directors, including
the CEO, and to grant awards under the Courtaulds Long-Term Incentive Scheme.

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Company Act, 2013
3) Nomination Committee: - The Nomination Committee shall be held at least twice in a year.
The Committee’s functions are to make recommendations to the Board about the future
appointments of non-executive directors and of the chairman and the chief executive, and to
consider recommendations from the chief executive to the Board about the future appointments
of executive directors.

4) Shareholders’s/Investors’ Grievance and Administrative Committee: - The

Shareholders’/Investors’ Grievance and Administrative Committee meetings shall be at least
held thrice in a month. The Chairman of this Committee shall be a Non-executive Independent
Director. This Committee shall approve transfer of shares, transmission of shares, issue of
duplicate share certificate, etc. This Committee shall also review the queries/complaints received
from the shareholders during the fortnight and responses given to the shareholders.
In addition to above committees the board may constitute other committees, the benefit of the
company and its stakeholders. The main function of Audit Committee is to oversee the
company’s financial reporting process and the disclosure of its financial information to ensure
that the financial statement is correct, sufficient and credible. The Audit Committee can
recommend to the Board, the appointment, re-appointment and, if required, the replacement or
removal of the statutory auditor and the fixation of audit fees. The members of Audit Committee
should have formal knowledge of accounting and financial management or experience of
interpreting financial statements.

STRUCTURE, SIZE AND COMPOSITION OF BOARD OF DIRECTORS

Clause 49 of the listing agreement requires that the board of directors of the company shall have
an optimum combination of executive and non-executive directors with not less than fifty
percent of the board of directors comprising of non-executive directors and further that where the
Chairman is a non-executive director, at least one-third of board should comprise of independent
directors and in case he is an executive director, at least half of board should comprise of
independent directors. The said Clause also sets out the principles for determining “independent
director”. The said Clause also provides that nominee directors appointed by an investing or
lending institution shall be deemed to be independent directors.

The size of the Board should neither be too small nor too big. Experience indicates that smaller
boards allow for real strategic discussion. At the same time, larger Boards provide the benefit of
diverse experience and viewpoints. The board should strike a balance of executive and non-
executive directors. Every board should consider whether its size, diversity and demographics
make it effective. Diversity applies to academic qualifications, technical expertise, relevant
industry knowledge, experience, nationality, age and sex.

Diversity adds value, and adds to the bottom line. Gender diversity is an important aspect of
board diversity and companies should have women representation on the Boards. Every board
should consider whether its size, diversity and demographics make it effective. Diversity applies
to academic qualifications, technical expertise, relevant industry knowledge, experience,
nationality, age and sex.
 Diversity adds value, and adds to the bottom line. Gender diversity is an important aspect of
board diversity and companies should have women representation on the Boards. Boards need to
be regularly refreshed with new expertise, energy and experience. Independent directors should
not have long tenure. A balance should be sought between continuity in board membership,
subject to performance and eligibility for re-election and the sourcing of new ideas through the
introduction of new board members.
Every Company should frame a Board Renewal Policy of Independent Directors to facilitate
their independence. The policy may provide for maximum number of years a person could serve
on the Board as an Independent Director. The role and office of the Chairman and CEO should
be separated to promote balance of power and to prevent unfettered decision making power with
a single individual. Further, there should be a clear demarcation of the role and responsibilities of
Chairman and Managing Director/Chief Executive Officer (CEO).

POWERS OF THE BOARD OF DIRECTORS

Under the Indian Companies Act 1956, BoDs has powers to make calls on shareholders in
respect of money unpaid on their share, power to authorize the buy-back, power to issue
debentures, power to borrow moneys otherwise than on debentures, power to invest the funds of
the company and power to take and make loans. There is no doubt that BoDs may, by a
resolution passed at a meeting, delegate to any committee of Directors, the Managing Director,14
the Manager or any other principal officer of the company, the above powers. However the
principal power still vests in BoDs and the Manager or Managing Director acts only as an agent
of the BoDs. Apart from this, BoDs has power to form opinion about the solvency of the
company in respect of buy back shares (Section 77A), power to fill up casual vacancies in the
office of Directors (Section 262), power to constitute Audit Committee and specify terms of
reference thereof (Section 292A), power to make donation to political parties [Section 293A(2)],
power to accord sanction for specified contracts in which one or more directors are interested
[Section 297(4)], power to receive notice of disclosure of director’s interest [Section 299(3)(c)],
power to appoint or employ a person as Managing Director or Manager [Section 316(2)], power
to invest in shares or debentures of any other body corporate (Section 372A), power to appoint or
employ a person as its Manager [Section 386(2)], power to make a declaration of solvency,
where it is proposed to wind up the company voluntarily [Section 488(1)], power to approve the
text of advertising for inviting public deposits [Section 58A r/w Rule 4(4)]. Some of the powers
can only be exercised by resolution passed at the meeting with consent of the Directors present at
the meeting.
1. To make calls on shareholders in respect of money unpaid on their shares;
2. To authorise buy-back of securities under section 68 of company act, 2013;
3. To issue securities, including debentures, whether in or outside India;
4. To borrow monies;
5. To invest the funds of the company;
6. To grant loans or give guarantee or provide security in respect of loans;
7. To approve financial statement and the Board’s report;
8. To diversify the business of the company;
9. To approve amalgamation, merger or reconstruction;
14
Company Act, 2013
10. To take over a company or acquire a controlling or substantial stake in another company;
11. To make political contributions;
12. To fill a casual vacancy in the Board;
13. To enter into a joint venture or technical or financial collaboration or any collaboration
agreement;
14. To commence a new business;
15. To shift the location of a plant or factory or the registered office;
16. To appoint or remove key managerial persons and senior management personnel one level
below the key managerial personnel;
17. To appoint internal auditors;
18. To adopt a common seal;
19. To take note of the disclosure of Director’s interest and shareholding;
20.To sell investments held by the company, constituting five percent or more of the paid-up
share capital and free reserves of the investee company;

CHAPTER : FOUR

JUDICIAL DECISION

The Bhullar v Bhullar15

15
24 JUNE 1855
In this case it was held that is one of the important cases in which two brothers M and S were
having company which was later on divided between their wives and sons. The family relations
broke down and discussed to split the company. On the next door one of the properties was on
sale and it was purchased on the name of a company controlled by them. The family brought an
action on the basis of the breach of a fiduciary duty. The court held that it was a breach of the
fiduciary duty and that the property held is on trust for the company and orders them to return the
property to the company at cost and to be accountable for any profit. The same decision was
upheld by the court of appeal.

In Regal (Hasting) v Gulliver16

The four directors made some incidental profit because of their position as being the directors.
The court made them accountable for their profit although they worked in a bona fide manner.
The reason was given that fraud and lack of good faith were immaterial to the directors’
liabilities. The new owner of the Regal would receive a windfall, and this would lead to the
reduction of the shares’ price, paid by them for their share, as stated by Lord Porter.

In Percival v Wright17

It has been criticised a lot that it should not be deduce that the directors can never be placed in a
fiduciary relationship to the members. If the shareholders authorize the directors to negotiate for
them, then the directors owe a duty in the case of a takeover bidder. The establishment of an
agency relationship may be sufficient in the case of a family company, which depends on the
whole surrounding circumstances and the character of the responsibility which the directors have
assumed in a real and practical sense.

Commissioner Of Income Tax vs Shree Rajasthan Syntex Ltd18

In this case of additional liability incurred over and above the sum received by issue of on
premium cannot be differentiated from the case of additional liability incurred over and above
the sum received on account of discount issue of debenture. The principle remains the same that
where for generation of fund for the business activities, the entrepreneurs undertake to pay more
than what they actually receive from the lenders, is an allowable revenue expenditure.

Narendra Kumar Maheshwari vs Union Of India & Ors 19

It was held that therefore, Corporate governance can be viewed as a nexus of relations between
board of directors, company management, shareholders, debt holders, customers, government
and other stakeholders within a social, legal and political framework.

16
28 september (1894) cal.13
17
1 may, 1994
18
16 october 1985
19
on 3 May, 1989
Ganesh Banzoplast Ltd. vs Assistant Commissioner Of Income 20

It was held that the expenditure as was relatable to alone was allowable as a deduction. Director
pertaining to pre-conversion period were held as revenue in nature. After noticing this aspect the
Special Bench has highlighted that it is the substance which has to be seen and not the
nomenclature.

CONCLUSION
In the eyes of law, a company is an artificial person, who however, has no physical existence and
has neither a body nor soul. Therefore, a company cannot act itself in its own person, it can only
act through directors. The directors are a body to who has delegated the duty of managing the
general affairs of the company. A board of directors (BODs) is considered as a crucial part of the
Corporate Governance. Directors are appointed by the shareholders of the company, who set
overall policy for the company. The corporate board of directors assists in corporate governance

20
on 27 March, 2007
by supervising executive management and makes strategic decisions for the company. The board
is generally supposed to govern the corporation on behalf of the shareholders, effectively acting
as trustees for stockholder interests. The roles and responsibilities of a Board of Directors vary,
depending on the nature and type of business entity and the laws applying to the entity.
Similarly, the establishment of board committees is a means to channel the functions of a board
into segregated and specialized groups of directors that focus on specific subject of the
organization. In India, there are many judgments on the role of directors and the responsibility of
directors/ Board of Directors in any Company. In Private Limited Companies or the Public
Companies, the role and responsibility of the Directors or the Board of Directors depend upon
the regulations in the Articles of the Company and the provisions of the Companies Act, 1956.
When it comes to listed Public Companies, other provisions like the SEBI guidelines,
regulations, provisions in the listing agreement etc. deserve consideration.

The Company Act 2013 has introduced a codified set of duties for the directors of the company.
As the directors has certain duties to the company and the shareholders as they form a company
has got more powers in order to make the director accountable for their being undutiful and for
the misuse of the power conferred on them by CA 2013. The directors have duty to work within
their power and exercise reasonable care and skill as it is expected from them. The directors are
also accountable to the creditors of the company in the case of the insolvency of the company. It
is now expected more than ever from the directors of a company to act in good faith for the
greater interest of the company.