Companies Act 201 3 Role & Responsibilities of Directors, Independent Directors, KMP

Companies Act 2013 Role & Responsibilities of Directors, Independent Directors, KMP Ashish MakhijaAdvocate LLM (USA), LLM (India), FCA, FCMA Standing Counsel for the Official Liquidator Attached to High Court of Delhi Member of:

Looking Back Companies Act 1956 • 658 Sections (Effectively 881 Sections) • 16 Schedules • 66 Definitions • 34 set of Rules & Regulations

Looking Forward Companies Bill 2009 • 426 Sections • No Schedules • 93 Definitions • Phrase “as may be prescribed” appeared “235 times” in the Bill

Looking Forward Companies Act 2013 • 470 Sections • 7 Schedules • 95 Definitions • Phrase “as may be prescribed” appears “346 times” in the Act • 46 sections of Part IX A of Companies Act, 1956 relating to Producer Companies will continue to apply even after Companies Act, 1956 is repealed

Companies Act 2013 - Status • President’s Assent on 29th August 2013 • 98 Sections notified on 12th September 2013 • Removal of Difficulties order issued on 20th September 2013 regarding implementation of Sections 24, 58 and 59 • Schedule VII & Section 135 notified on 27th February 2014 • 183 Sections notified on 26th March 2014 • Companies 1st (Removal of Difficulties) Order, 2014 regarding clarification on Section 2(76), the definition of related party • Companies 2nd (Removal of Difficulties) Order, 2014 regarding clarification on Section 92, the limit on Certification of Annual Return

Companies Act 2013 - Status Clarification No. 1 – General Circular 15/2013 dated 13.09.2013 • S. 2(68) – MoA, AoA filed till 11.9.13 can be registered as per definition of private company under CA 1956 • S.102 – Notices of general meetings issued on or after 12.9.13 must comply with additional requirements as prescribed in S. 102 • S.133 – Existing Accounting Standards notified shall continue to apply till new one are notified u/s 133 • S.180 – Resolutions can be passed as ordinary resolution if general meeting notice has been issued prior to 12.0.2013

Companies Act 2013 - Status Clarification No. 2 – General Circular 16/2013 dated 18.09.2013 • “It is clarified that w.e.f. 12.9.13, the relevant provisions of CA 1956, which correspond to the provisions of 98 sections of CA 2013 brought in force on 12.09.13, cease to have effect from that date.”

Companies Act 2013 - Status • Applies to whole of India • Central Government will notify date of applicability • Different dates may be appointed for different provisions • Applies to all banking, insurance and electricity companies also so long provisions are not inconsistent with Special Acts.

Understanding Layout • Divided in to 29 chapters • Incorporation, MoA, AoA – Chapter II – Sections 3 to 22 • Prospectus – Chapter III – Sections 23 to 42 • Share Capital – Chapter IV – Sections 43 to 72 • Public Deposits – Chapter V – Sections 73 to 76 • Registration of Charges – Chapter VI – Sections 77 to 87 • Management & Administration – Chapter VII – Sections 88 to 122 • Dividend – Chapter VIII – Sections 123 to 127

Understanding Layout • Accounts – Chapter IX – Sections 128 to 138 • Audit & Auditors – Chapter X – Sections 139 to 148 • Directors, Board & Remuneration – Chapters XI, XIII, XIII – Sections 149 to 205 • Inspection, Investigation – Chapter XIV – Sections 206 to 229 • Mergers – Chapter XV – Sections 230 to 240 • Oppression and Mismanagement – Chapter XVI – Sections 241 to 246 • Registered Valuers – Chapter XVII – Section 247

Understanding Layout • Removal of Names of Companies – Chapter XVIII – Sections 248 to 252 • Revival – Chapter XIX – Sections 253 to 269 • Winding –up – Chapter XX – Sections 270 to 378 • Companies Authorized to Register Under the Act – Chapter XXI – Sections 366 to 374 • Foreign Companies – Chapter XXII – Sections 379 to 393 • Government Companies – Chapter XXIII - Sections 394 & 395 • Registration Offices & Fees – Chapter XXIV – Sections 396 to 404 • Companies to furnish Information – Chapter XXV – Section 405 • Nidhis – Chapter XXVI – Section 406

Understanding Layout • NCLT – Chapter XXVII – Sections 407 to 434 • Special Courts – Chapter XXVIII – Sections 435 to 446 • Miscellaneous - Chapter XXIX – Sections 447 to 470 • Schedule I – Table A to I • Schedule II – Depreciation • Schedule III – Balance Sheet • Schedule IV – Code for Independent Directors • Schedule V – Managerial Personnel • Schedule VI – Infrastructural Projects • Schedule VII – Activities for CSR Policy

Definitions

Independent Directors (S. 149) • Following Companies to have Independent Directors • Every listed public company • Class of companies – Public Companies satisfying any one of the following criterai as per last audited balance sheet • Paid-up share capital of Rs. 10 Crore or more • Turnover of Rs. 100 Crores or more • In aggregate outstanding loans, debentures and deposits, exceeding Rs 50 Crores

Independent Directors (S. 149) • At least one-third of the total number of directors must be independent directors • One year transition period granted to comply with these provision • Casual vacancy to be filled in not later immediate next Board meeting or 3 months of vacancy, whichever is earlier. • If a company ceases to fulfil any of the criteria in Rule 4 for 3 consecutive years it shall be exempted from complying with these provisions until such time as it meets such conditions

Independent Directors (S. 149) • Disclosure of Independence—First Board Meeting & thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence • Nominee Director appointed by banks/ financial institutions/ government/or any other persons shall not be treated as Independent Directors • Not entitled to any stock option and may receive remuneration by way of fee provided under sub-section (5) of section 197, • Reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

Independent Directors (S. 149) Term of Office • For five consecutive years • Shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report. Maximum Tenure • Two consecutive terms • shall be eligible for appointment after the expiration of three years of cessation • shall not during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly

Independent Directors (S. 149) • No Retrospective effect: Any tenure of an independent director on the date of commencement of this Act shall not be counted as a term • Liability: He shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

Manner & Selection of Independent Directors (S. 150) • Independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by any body, institute or association, as may by notified by the Central Government • The Agency shall put on their website for the use by the company making the appointment of such directors: • The responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director shall lie with the company • The appointment of independent director shall be approved by the company in general meeting as provided in sub-section (2) of section 152

Independent Directors • The explanatory statement annexed to the notice of the general meeting called to consider the said appointment shall indicate the justification for choosing the appointee for appointment as independent director. • Section 152(5)—Explanatory statement shall include a statement that in the opinion of the Board, he fulfils the conditions specified in this Act for such an appointment.(152(5)) • Section 161(2)--no person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act:

Independent Directors • Independent Director shall not be counted for the strength under Retirement by Rotation u/s 152(6) • Section 173(3) • Board Meeting on Shorter Notice subject to the condition, at least one independent director, if any, shall be present at the meeting • in case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

Committees • Audit Committee Section 177(2) • Requirement :Every Listed Company • Minimum 3 Directors with majority Independent • Nomination And Remuneration Committee And Stakeholders Relationship Committee. • every listed company and such other class or classes of companies, as may be prescribed shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors • CSR Committee—Atleast one Director on committee should be independent-Section 135

Independent Directors – Companies Act 2013 • Independent Director defined [S.149(6)] • Integrity certificate • Disqualifications • Qualifications • Other than Nominee Director, Managing Director or Whole-time Director • Integrity & Experience • In the opinion of the Board is a person of integrity and possesses relevant experience and expertise

Independent Directors – Companies Act 2013 Disqualifications • Not a promoter of the company, holding, subsidiary or associate companies • Not related to promoters or directors of the company, holding, subsidiary or associate companies • No pecuniary relationship • Company, holding, subsidiary or associate company • Promoters or directors of such companies • During 2 immediately preceding financial years or during current financial year

Independent Directors – Companies Act 2013 Disqualifications • None of the relatives has or had pecuniary relationship or transaction with • Company, holding, subsidiary or associate company • Promoters or directors of such companies • Transaction should not be more than 2 % or more of its gross turnover or total income or Rs. 50 lakhs or such higher amount as may be prescribed, whichever is lower • During 2 preceding financial years or during the current FY

Independent Directors – Companies Act 2013 Disqualifications • Neither himself nor any of his relatives • Is or was a KMP or Employee of company, holding, subsidiary or associate company in any of the 3 FY immediately preceding the financial year in which he is proposed to be appointed • Is or was an employee or proprietor or partner • of a firm of auditors or company secretaries or cost auditors of the company or its holding, subsidiary or associate company • any legal or consulting firm that has or had any transactions of 10% or more of the gross turnover of such firm • In any of the 3 FY immediately preceding the financial year in which he is proposed to be appointed

Independent Directors – Companies Act 2013 Disqualifications • Holds with relatives 2% or more of the total voting power of the company • Chief Executive or Director, by whatever name called, of any non-profit organization that • receives 25% or more of its receipts from that company or any of its promoters, directors, or holding, subsidiary or associate company • Holds more than 2% or more of the total voting power of the company

Independent Directors – Companies Act 2013 • Qualifications • Possess appropriate balance of skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to company’s business • Declaration by Independent Director at first meeting after appointment and first meeting every FY or whenever there is change in status • Company and Independent Director to abide by Schedule IV

Independent Directors – Companies Act 2013 Remuneration • No stock options • Sitting Fee • Upto Rs. 1 Lakh as decided by Board • Reimbursement of expenses for attending board meeting • Profit related commission, as approved by members

Independent Directors – Companies Act 2013 • 5 year term, renewable for another 5 year by special resolution then 3 year cooling off period • Term to start afresh – present tenure not to be counted • Making Independent directors liability proof unless fraud done with knowledge attributable through board processes, consent and connivance or not acting diligently • Creation of panel or data bank by authorized institutions • Procedure of selection – ‘as may be prescribed’

Schedule IV CODE FOR INDEPENDENT DIRECTORS • Acts as a guide to professional conduct for independent directors I. Guidelines of professional conduct II. Role and functions III. Duties IV. Manner of appointment V. Re-appointment VI. Resignation or removal VII. Separate meetings VIII. Evaluation mechanism

Schedule IVGuidelines of Professional Conduct An independent director shall: • uphold ethical standards of integrity and probity; • act objectively and constructively while exercising his duties; • exercise his responsibilities in a bona fide manner in the interest of the company; • devote sufficient time and attention to his professional obligations for informed and balanced decision making; • not allow any extraneous considerations that will vitiate his exercise of objective independent judgment in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making;

Schedule IVGuidelines of Professional Conduct • not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person; • refrain from any action that would lead to loss of his independence; • where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly; • assist the company in implementing the best corporate governance practices.

Schedule IVRole & Functions The independent directors shall: (1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct; (2) bring an objective view in the evaluation of the performance of board and management; (3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; (4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible; (5) safeguard the interests of all stakeholders, particularly the minority shareholders;

Schedule IVRole & Functions (6) balance the conflicting interest of the stakeholders; (7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management; (8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.

Schedule IV-Duties The independent directors shall— • undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company; • seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company; • strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member; • participate constructively and actively in the committees of the Board in which they are chairpersons or members; .

Schedule IV-Duties • He shall strive to attend the general meetings of the company; • where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting; • keep themselves well informed about the company and the external environment in which it operates; • not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board; • pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company

Schedule IV-Duites • He shall ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use; • He shall report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy; • He shall be acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees; • He shall not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law

Schedule IVManner of Appointment • Shall be independent of the company management; • while selecting independent directors the Board shall ensure that there is appropriate balance of skills, experience and knowledge in the Board so as to enable the Board to discharge its functions and duties effectively. • The appointment of independent director(s) of the company shall be approved at the meeting of the shareholders. • The explanatory statement attached to the notice of the meeting for approving the appointment of independent director shall include a statement that in the opinion of the Board, the independent director proposed to be appointed fulfils the conditions specified in the Act and the rules made thereunder and that the proposed director is independent of the management.

Schedule IVAppointment Letter The appointment shall be formalised through a letter of appointment, which shall set out : • the term of appointment; • expectation of the Board from the appointed director; • Board-level committee(s) in which the director is expected to serve and its tasks; • the fiduciary duties that come with such an appointment along with accompanying liabilities;

Schedule IVAppointment Letter The appointment shall be formalised through a letter of appointment, which shall set out : • provision for Directors and Officers (D and O) insurance, if any; • the Code of Business Ethics that the company expects its directors and employees to follow; • the list of actions that a director should not do while functioning as such in the company; and • the remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any.

Companies Act 201 3 Role & Responsibilities of Directors, Independent Directors, KMP