MR Ravi Kulkarni

Ravi Kulkarni | Khaitan & Co
FICCI | New Delhi | 12 September 2013

COMPANIES ACT, 2013

Corporate Governance
Key Changes and Takeaways
Copyright Khaitan & Co 2013 | 2

Contents

1. Board Composition
2. Independent Directors
3. Powers of the Board
4. Duties of Directors
5. Liability of Directors and Officers
6. Board Committees
7. Related Party Transactions


Board Composition
TYPE OF
COMPANY
INDEPENDENT DIRECTOR
WOMAN
DIRECTOR
SMALL
SHAREHOLDER
DIRECTOR
RESIDENT
DIRECTOR
Private
Company
1 Independent Director on
Corporate Social Responsibility
(CSR) Committee if CSR
requirement is triggered
Rule 11.1
Required if paid-up
share capital > INR
100 crores (to be
appointed within 5
years) from the
commencement of
the Act
Section 151
Rule 11.5
Not applicable
1 director
required to be
resident in India
for at least 182
days in a
calendar year
Section 149(3)
Public
Unlisted
Company
1/3
rd
of the Board to be
Independent if the Company
has:
Paid-up share capital of INR
100 crores or more; or
Aggregate outstanding loans,
borrowings, debentures or
deposits exceeding INR 200
crores
Required if paid-up
share capital > INR
100 crores (to be
appointed within 5
years) from the
commencement of
the Act
Not applicable
Listed
Company
All listed companies to have
1/3rd of the Board comprised
of Independent Director
Requirement increases to half
of the Board if there is an
executive chairman [Clause
49, Listing Agreement]
All listed companies
to have a woman
director (to be
appointed within 1
year) from the
commencement of
the Act
Mandatory? Suo
motu option
Request of 1/10
th
the
number of small
shareholders or 500
small shareholders
(whichever is lower)

Independent Directors
Term Restrictions [Section 149]:
2 consecutive terms of 5 years each;
3 year cool-off (no association with the company)
before becoming eligible again.
Boards Report [Section 134]:
To provide statements that the Independent Director
possesses the appropriate balance of skills, experience
and knowledge

Impact
Investor Nominee Directors cannot be regarded as
Independent Directors [Section 149 (7)]
Definition [Section 149 (6)]: A director other than a
Managing Director, Whole-Time Director or Nominee
Director, who:
in the opinion of the Board, is a person of integrity,
with relevant experience and expertise;

is or was not a promoter or director of the company or
any holding, subsidiary or associate company;
is not related to a promoter or director of the company,
or any holding, subsidiary or associate company;
does not have and has not had any pecuniary
relationship with the company and its promoters or
directors, including any holding company, subsidiary or
associate company (no materiality threshold, unlike Listing
Agreement)

whose relatives do not have any pecuniary relationship
or transaction with the company or its holding, subsidiary or
associate company, or their promoters or directors
amounting to 2% or more of the gross turnover of the
relevant entity, or INR 50 lakhs (subject to change),
whichever is lower, during the current financial year or the
two preceding financial years
who neither himself nor any of his relatives:
holds or has held the position of Key Managerial
Personnel or has been an employee of the company,
or its holding, subsidiary or associate company in the
preceding 3 financial years;


is or has been an employee, proprietor or partner (in the
preceding 3 financial years) of:
any firm of auditors, company secretaries or cost
auditors of the company or its holding, subsidiary or
associate company; or
any legal or consulting firm that has or has had any
transaction with the company, or its holding,
subsidiary or associate company amounting to 10%
or more of the gross turnover of such company
holds, together with his relatives, 2% or more of the
total voting power;

is a Chief Executive Officer or director of any non-
profit organisation that receives more than 25% of
its receipts from the company, its promoters,
directors or any holding, subsidiary or associate
company, or holds more than 2% of the company;
and
who possesses such other qualifications as may be
prescribed.

Qualifications [Rule 11.3]
Independent Director must possess appropriate balance of
skills, experience, and knowledge in one or more fields of
finance, law, management, sales, marketing,
administration, corporate governance, technical operations
or other disciplines related to the companys business.
Board to furnish a statement in its first report after such
appointment that in its opinion the Independent Director
possesses the appropriate balance of skills, experience
and knowledge as required.

Independent Directors may be drawn from a data-bank of
persons eligible and willing, maintained by any body,
institute or association as may be prescribed by the Central
Government [Section 150 and Rule 11.4]
Appointment has to be approved by members in general
meeting and the explanatory statement to the notice should
indicate justification of such appointment


No retirement by rotation
Independent Directors are eligible for sitting fees,
commission from profits and reimbursement of expenses
Independent Directors are not entitled to any stock options.
This is contrary to the Listing Agreement, where the
maximum limit can be fixed by shareholders resolution

The law now prescribes a code of conduct (Code) to be
complied with by the Independent Directors (Schedule IV)
The Code provides for the following:
Guidelines of professional conduct;
Specific roles, functions and duties;
Manner of appointment, re-appointment, resignation
and removal;
Separate meetings of Independent Directors; and
Evaluation mechanisms.

Powers of the Board
Key Changes [Section 179]
There has been an addition to the list of powers which
can be exercised only at a meeting of the Board of
Directors:
Approval of financial statements and Board reports;
Diversification of business;
Approval of amalgamation, merger or reconstruction;
Approval of takeover of another company or
acquisition of a substantial stake in another
company.


Powers of the Board
Key Changes Restrictions [Section 180]
Powers which can only be exercised subject to a special
(not ordinary) resolution of the shareholders:
Sell or otherwise dispose off whole or substantially
the whole of an undertaking;
Invest proceeds of a merger or amalgamation;
Borrow money in excess of the paid-up share
capital and free reserves (other than temporary
loans) and the limit of such borrowing should be
specified in the special resolution;

Powers of the Board
Temporary loans must be: (a) from the companys
bankers; (b) in the ordinary course of business; and
(c) repayable within 6 months.
Special resolutions may include conditions.
This section has been extended to private companies.
Definition of the term Undertaking and
substantially the whole undertaking has been
introduced


Powers of the Board
Undertaking means:
An undertaking in which the companys investment
exceeds 20% of its net worth as per the last audited
balance sheet
An undertaking which generates 20% or more of the
companys total income in the previous year
Substantially the whole undertaking means 20% or
more of the value of the undertaking as per the last audited
balance sheet


Powers of the Board
Political contribution limits enhanced to 7.5% of average net
profits of the company for the immediately 3 preceding
financial years
Charitable contribution, permission required where
contribution exceeds the limit of 5% of the average net
profits for the immediately preceding 3 financial years. The
limits of monetary value have been dispensed with


Duties of Directors
[Section 166]
To act in accordance with the articles of association of the company;
To act in good faith to promote the objects of the company for the best
interests of the company and for the benefit of the members as a whole and
in the best interests of the employees, shareholders, the community and the
environment;
To exercise his duties with due and reasonable care, skill, diligence and
independent judgment;
To avoid situations where he may have a direct or indirect interest which
conflicts or may conflict with the interests of the company;
To avoid any undue gain to himself or his relatives, partners, or associates
(if found guilty of this, the director may be required to pay an amount equal
to such gain to the company);
Not to assign his office, such assignment being void.

Liability of Directors and Officers
Key Changes
Liability of Directors under Section 166 relating to duties;
Liability under Section 172 of the company and any officer
in default for any contravention;
Independent and non-executive Directors only face liability
for an act or omission where they have knowledge
(attributable through the Board process) or if there is
consent, connivance or a lack of diligence.

Board Committees: Applicability
TYPE OF
COMPANY
AUDIT COMMITTEE
NOMINATION &
REMUNERATION
COMMITTEE
CSR COMMITTEE
STAKEHOLDER
RELATIONSHIP
COMMITTEE
Private
Company
Not applicable Not applicable
Independent Director
required on CSR
Committee if:
Net worth INR 500
Crores
Turnover INR 1000
Crores
Net profit INR 5
crores
Not applicable
Public
Unlisted
Company
Both committees required if the company has:
Paid-up share capital of INR 100 crores or more; or
Aggregate outstanding loans, borrowings, debentures
or deposits exceeding INR 200 crores
Applies if the company
has 1000 or more
shareholders
Public Listed
Company
Applicable
Applies if the company
has 1000 or more
shareholders

Board Committees: Composition, etc.
TYPE OF COMMITTEE COMPOSITION OTHER REQUIREMENTS
Audit Committee [Section
177]
3 Directors
Majority Independent Directors
Roles stipulated
Decisions no longer binding
on the Board
Whistle-blower policy
required, providing direct
access to the chairman of
the Audit Committee
Nomination & Remuneration
Committee [Section 135]
3 Directors
Majority Independent Directors

CSR Committee [Section
178]
3 Directors
1 Independent Director

Stakeholder Relationship
Committee [Section 178]
Strength and composition
determined by the Board
Chairman to be non-executive
Purpose to solve the
grievances of security
holders

Related Party Transactions
RELATED PARTY - DEFINITION
Director, key managerial personnel or relative of such person
Firm in which a director, manager or relative is a partner
Private company in which a director or manager is a member or director
A public company in which a director or manager is (a) a director; or (b) along with relatives
holds more than 2%
Any body corporate whose Board, Managing Director or manager is accustomed to act in
accordance with the advice, directions or instructions of a director or manager
Any person on whose advice, directions or instructions a director or manager is accustomed to act
Any
a holding, subsidiary or an associate company of such company
a subsidiary of a holding company to which it is also a subsidiary

Prior consent of the Board and no Central Government permission
Interested Director not to remain present at the Board meeting
A related party transaction can be entered into only if it is approved by a special
resolution at the general meeting:
where the company has paid-up share capital, which is not less than INR
1 crore;
Transactions amount (individually or taken together with previous
transactions during a financial year)exceeds 5% of the annual turnover or
20% of the net worth of the company as per last audited financial
statements, whichever is higher;
Transaction relating to appointment to any office or place of profit in the
company, its subsidiary or associate company at a monthly remuneration
exceeding INR 1 lakh; or
Is for a remuneration for underwriting the subscription of any securities or
derivatives exceeding INR 10 lakhs.
No member of the company who is a related party can vote on the special
resolution

The scope of existing provisions has been widened to
include selling, buying and leasing
An arms length transaction entered into in the ordinary
course of business of the company is an exception to the
related party transaction rule
Related party transactions including the reasons for
entering into the relevant transactions are to be included in
the Boards report to the shareholders
Shareholders approval for non-cash transactions with
Directors of the company, its holding, its associated
company, or a person connected with him would be
required
Company should not acquire assets from such directors
www.khaitanco.com

MR Ravi Kulkarni

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Ravi Kulkarni | Khaitan & Co

FICCI | New Delhi | 12 September 2013

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