Board of Directors and Governance

UNIT-6: Board of Directors and Governance

Sub Topics:
  • Board Constitution and Composition
  • Powers and Restrictions of Board
  • Board Committees:
    • Audit Committee
    • Nomination and Remuneration Committee
    • Stakeholder Relationship Committee
    • Other Committees
  • DIN Requirement for Directors
  • Types of Directors:
    • Appointment / Reappointment
    • Disqualifications
  • Vacation of Office, Retirement, Resignation and Removal
  • Duties and Rights of Directors
  • Loans to Directors
BOARD CONSTITUTION, COMPOSITION AND ITS POWERS
  • Every company must have a Board of Directors:
    • Public Company: Minimum of 3 directors
    • Private Company: Minimum of 2 directors
    • One Person Company: Minimum of 1 director
    • Maximum: 15 directors (can exceed with a special resolution)
  • Provisions under Section 165 of the Companies Act, 2013:
    1. Maximum of 20 directorships for an individual.
    2. Maximum of 10 public company directorships.
    3. Companies can reduce directorship limits via special resolution.
    4. Directors of subsidiary/holding companies will be counted as public company directors.
    5. Directorships in dormant companies are excluded from limits.
Powers and Restrictions of Board

  • Powers of Board (Section 179):

    • Make calls on unpaid shares
    • Authorize buy-back of securities
    • Issue securities, including debentures
    • Borrow money
    • Invest company funds
    • Grant loans, approve financial statements, diversify business, etc.

  • Restrictions on Powers of Board (Section 180):

    1. Cannot sell, lease, or dispose of significant company assets without approval.
    2. Cannot borrow excessively beyond paid-up capital or reserves, except temporary loans.
    3. Conditions on loans made to directors.
BOARD COMMITTEES
Audit Committee (Section 177)
  • Applicable to:
    • Listed public companies and public companies with specified capital/turnover thresholds.
  • Composition: Minimum of 3 directors; 2/3 must be independent.
  • Functions:
    • Recommend auditor appointments
    • Establish vigil mechanism
    • Review internal control systems
    • Address auditor issues at AGMs.
Nomination and Remuneration Committee (Section 178)
  • Applicable to: Listed public companies and those with required financial benchmarks.
  • Composition: Minimum of 3 non-executive directors, including an independent chairperson.
  • Functions:
    • Recommend director success plans
    • Review remuneration packages
    • Shortlist qualified candidates for senior management.
Stakeholders Relationship Committee (Section 178)
  • Applicable to: Companies with 1000 or more stakeholders.
  • Composition: Minimum of 3 directors; at least one independent member.
  • Functions: Address complaints concerning share transfers, dividends, etc.
DIN REQUIREMENT FOR DIRECTORS
  • Director Identification Number (DIN): Unique ID for anyone intending to be a director.
  • Application Process:
    1. Fill Form DIR-3 on the MCA website.
    2. Submit required documents and digitally sign.
    3. Pay the applicable fee.
  • KYC Renewal: Required annually to keep DIN active.
  • Cancellation Reasons: Duplicate DIN, fraud, deceased individuals, etc.
Types of Directors
  • Categories include:
    • Resident
    • Independent
    • Women
    • Small shareholders
    • Alternate
    • Executive and Non-executive
    • Managing
Duties and Rights of Directors
Duties (Section 166):
  • Acting in good faith, promoting company objects, exercising skill and diligence.
  • Avoiding conflicts of interest.
  • Not profit unduly at the company’s expense.
Rights:
  • Participation in meetings, receiving notices and fees, and inspection of accounts.
Vacation of Office, Retirement, Resignation and Removal
Vacation Conditions (Section 167):
  • Disqualifications, absence from meetings, contract contraventions, court orders.
Resignation Process (Section 168):
  • Give written notice, notify registrar, file resignation forms.
LOAN TO DIRECTORS (SECTION 185)
  • General Rule: No loans, guarantees or security provided to directors unless a special resolution is passed and loan is for principal business.
  • Specific exemptions such as loans to whole-time directors under certain conditions.
DISCLOSURE OF INTEREST (SECTION 184)
  • Directors must disclose interests at first board meeting of the financial year. Failure to disclose may void contracts.
Corporate Governance: Related Party Transactions
  • Related parties include directors or their relatives, KMPs, and entities they control.
Appointment of Key Managerial Personnel and Remuneration
  • Key Managerial Personnel: CEO, secretary, managing director, etc.
  • Remuneration ceiling: Generally not exceeding 11% of net profits, varies based on position.
Company Secretary: Roles and Responsibilities
  • Must ensure compliance and report to the board.
  • Handles appointment/resignation formalities and serves as a link between the board and stakeholders.
Best Wishes for Your End Semester Exams!