Tag: Corporate Compliance

King III recommends that the delegation of powers to a committee be made official, in order for the members to have formal terms of reference to determine the scope of their powers, and the responsibilities they bear. The terms of reference should include detail pertaining to:

• The composition of the committee
• The objectives, purpose and activities
• The powers that have been delegated
• Any mandate to make recommendations to the board
• The lifespan of the committee, and
• How the committee reports to the board.

The Act requires public companies and state owned companies to appoint an audit committee comprising three independent non-executive directors. King III proposes that all other companies provide for the appointment of an audit committee (the composition, purpose and duties to be set out in the company’s Memorandum of Incorporation).

In addition, King III proposes that the board should appoint the audit, risk, remuneration and nomination committees as standing committees. The board may also consider establishing governance, IT steering and sustainability committees.

King III suggests that the committee should only comprise members of the board. The majority of the members should be non-executive, of which the majority should be independent. The ideal situation is for the chairperson of the board to also chair the nomination committee, failing which an independent non-executive director should be the chairperson.

The chairman of the committee should be an independent, non-executive director. The chair of the board should not chair the remuneration committee, but may be a member.

Insiders as Independent Directors

• Position: Current and former executives and directors of an issuer should not be permitted to sit as an independent non-executive directors until five years after leaving the relevant positions, and then only under certain restrictions.
• Rationale: Insiders such as individuals from these groups can retain emotional, financial, professional, and personal ties to the issuer, its management, and its directors. This retained loyalty may compel the insider to decide on matters in a way that does not first serve the interests of shareowners.

Independent Director’s Connection to the Company

• Position: Independent non-executive directors should not have been connected to a director, chief executive, or substantial shareowner of the issuer within the preceding five years.
• Rationale: Individuals with such links to insiders are more likely to make decisions on the basis of those links than on what is best for shareowners. After five years, the allegiance may diminish to a point where the independent, non-executive director may make decisions that run counter to the interests of the insider.

Mode of Appointment of Independent Directors

The appointment of independent directors should be made by the company from amongst persons, who in the opinion of the company, are persons with integrity, possessing relevant expertise and experience and who satisfy the above criteria for independence.

‘Material’ Transactions

The term material pecuniary relationship should also be clearly defined for the purpose of determining whether the director is independent or not. The concept of “Materiality’ is relevant from the recipient’s point of view and not from that of the company. The term ‘material’ needs to be defined in terms of percentage. In view of the Committee, 10% or more of recipient’s consolidated gross revenue / receipts for the preceding year should form a material condition affecting independence. For determining materiality of pecuniary relationship, transactions with an entity in which the director or his relatives hold more than 2% shareholding, should also be considered. An independent director should make a self-declaration in format prescribed to the Board that he satisfies the legal conditions for being an independent director. Such declaration should be given at the time of appointment of the independent director and at the time of change in status. Board should disclose in the Director’s Report that independent directors have given self-declaration and that also in the judgment of the Board they are independent. The Board should also disclose the basis for determination that a particular relationship is not material.

Director/ Attributes of Independent Directors

The Committee was of the view that definition of an Independent Director should be provided in law. The expression ‘independent director’ should mean a non-executive director of the company who:

a) Apart from receiving director’s remuneration, does not have, and none of his relatives or firms/companies controlled by him have, any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associate companies which may affect independence of the director. For this purpose “control” should be defined in law.

b) is not, and none of his relatives is, related to promoters or persons occupying management positions at the board level or at one level below the board;

c) is not affiliated to any non-profit organization that receives significant funding from the company, its promoters, its directors, its senior management or its holding or subsidiary company;

d) has not been, and none of his relatives has been, employee of the company in the immediately preceding year;

e) is not, and none of his relatives is, a partner or part of senior management (or has not been a partner or part of senior management) during the preceding one year, of any of the following:

i] The statutory audit firm or the internal audit firm that is associated with the company, its holding and subsidiary companies;

ii) The legal firm(s) and consulting firm(s) that have a material association with the company, its holding and subsidiary companies;

f) is not, and none of his relatives is, a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director; g) is not, and none of his relatives is, a substantial shareholder of the company i.e. owning two percent or more of voting power.

Explanation: For the above purposes:

(i) “Affiliate” should mean a promoter, director or employee of the non-profit organization.

(ii) “Relative” should mean the husband, the wife, brother or sister or one immediate lineal ascendant and all lineal descendents of that individual whether by blood, marriage or adoption.

(iii) “Senior management” should mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads.

(iv) “Significant Funding” Should mean 25% or more of funding of the Non Profit Organization.

(v) “Associate Company” Associate shall mean a company which is an “associate” as defined in Accounting Standard (AS) 23, “Accounting for Investments in Associates in Consolidated Financial Statements”, issued by the Institute of Chartered Accountants of India.

The Government has established an Investor Education and Protection Fund (IEPF) under Sec. 205 C of the Companies Act, 1956 under which unclaimed funds on account of dividends, matured deposits, matured debentures, share application money etc. are transferred through the IEPF to the Government by the company on completion of seven years. The Government is required to utilize this amount through an Investor Education and Protection Fund. For this purpose, the proceeds from the companies are credited to the Consolidated Fund of India through this fund. The Fund may then be entrusted with full-fledged responsibility to carry out activities for education of investors and protection of their rights.

BSE is the first Exchange to have set up the ‘Stock Exchange Investors Protection Fund (IPF) in the interest of the customers of the defaulter members of the Exchange. This fund was set up on 10th July, 1986 and has been registered with the Charity Commissioner, Government of Maharashtra as a Charitable Fund. The maximum amount of Rs. 10,00,000 payable to an investor from Investor Protection Fund in the event of a default by a Trading Member has been revised to Rs. 15,00,000; which shall be applicable to the clients of the Trading Member of the Exchange, who will be declared Defaulter after 5th December, 2009. (This has been progressively raised by BSE from Rs.10,000 in 1988 to the present level).

BSE is the only Exchange in India, which offers the highest compensation of Rs.15lacs in respect of the approved claims of any Investor against the defaulter Trading Members of the Exchange.

The Trading members at present contribute 1 paisa per 1lakh of gross turnover. The Stock Exchange contributes 2.5% of the listing fees collected by it. Also the entire interest earned by the Exchange on 1% security deposit kept by with it by the companies making public / rights issues is credited to the Fund.

Investor Awareness Program

Launching the Securities Market Awareness Campaign organized by SEBI (January 2003), the Prime Minister said the prolonged quietness in the stock markets had tested the confidence of the small investor who was the backbone of the securities market. If investors are not attracted, then companies will not be able to raise money through the capital market. The Indian household investor, off late, has been putting much of his savings in non-financial assets. Even with financial assets, most of the savings are going to the banking system. This is not the best or the most productive use of our savings, he said. In recent years, there had been many instances of companies raising money from the market by creating hype and then defrauding the investor. Many of them issued shares at hefty premiums; most of their scrip are now trading well below their face value. Stock market scams brought a bad name to the Indian business community. This is how boom went bust and hopes turned to dust for many gullible investors. And that is how the investor community lost confidence in the market, leading to prolonged stagnation. The Prime Minister, therefore, called upon the market regulator and the intermediaries to learn the right lessons from our experience of the past few years. He said we need markets that are known for their safety and integrity.

Investor Awareness programs are being regularly conducted by stock exchanges to educate the investors and to create awareness among the Investors regarding the working of the capital market and in particular the working of the Stock Exchanges. These programs have been conducted in almost all over the country.

The Investor Awareness program covers extensive topics like Instruments of Investment, Portfolio approach, Mutual funds, Tax provisions, Trading, Clearing and Settlement, Rolling Settlement, Investors’ Protection Fund, Trade Guarantee Fund, Dematerialization of shares, information on Debt Market, Investors’ Grievance Redressal system available with SEBI, BSE & Company Law Board, information on Sensex and other Indices, workshops and Information on Derivatives, Futures and Options etc.

Further, for the benefit of the Investors’ the Bombay Stock Exchange has:

BSE Training Institute which organizes Training programs periodically on various subjects like comprehensive programs on Capital Markets, Fundamental Analysis, Technical Analysis, Derivatives, Index Futures and Options, Debt Market, etc. Further, for the Derivatives market BSE also conducts the compulsory BSE’s Certification on Derivatives Exchange (BCDE) certification for Trading Members and their dealers to impart basic minimum knowledge of the derivatives markets.

Compensation to the Investors

Capital market includes investment into risk bearing instruments. In such cases, the investor is required to make his own assessment of risk and reward. No compensation could be visualized for such investors whose investments were in risk bearing instruments. Similarly, investment in a fixed return instrument necessitated a careful review of the borrowing entity. Such actions would also be subjected to known or declared risks. Besides, the capital market also provides an opportunity for an investor to exit. The need therefore, is to ensure proper and healthy market operation so that investors could exercise their exit options in a reasonable and equitable environment. However, there may be situations where such a frame work is distorted through frauds. There may be provisions for compensation in the event of fraud by companies being established in securing funds from investors. For this purpose lifting of corporate veil may be enabled by the law.

The Companies Act, 2013 is enacted with the main aim to assure maximum protection to every section of investors irrespective of their classes. The Companies Act, 2013 has been embedded with several new provisions in regards to the protection of investor’s interest. Some of the provisions to protect investor’s interest under the Companies Act, 2013 are discussed hereunder.

Acceptance of Deposits: The acceptance of deposit from the general public is not permitted under the Act, and violation of any of the provision is a punishable offense. Section 73 of the Act provides that no company shall accept or review deposit under this Act from the public except in a manner recognized under Chapter V of the Act and Companies (Acceptance of Deposit) Rule 2014.

Misstatement in Prospectus: The prospectus is a written statement issued by the company to the general public containing brief information regarding companies profile and their investment proposals. Section 34 of the Act deals with the criminal liability for miss statement in the prospectus issued by a company. The prospectus issued, circulated or distributed, include any statement, which is untrue or misleading in form or context to induce people to make an investment, shall be liable for action u/S 447.

Fraudulently Inducing Person to Invest Money: Section 36 of the Act deals with the punishment of the person who intentionally or recklessly induces the investor to make the investment through any agreement for the purpose or the pretended purpose of which to secure a profit. This kind of deliberate concealment of fact shall be liable for punishment u/s 447.

Non-Payment Of Dividend: Declaration of the dividend is usually one of the items of agenda of every AGM. The dividend is nothing but profits earned by the company and divided among shareholders in proportion to the amount paid-up shares held by them, i.e., return on the investment made by shareholders. The Section 125 of the Act provides for the establishment of investors education and protection fund by the central government. This fund is credited with the unpaid/unclaimed amount of application money/matured money or mature deposits. Such accumulations of the fund are to be utilized for promotion of investor’s awareness and protection of investor interest. Section 123 of the Act state that the dividend should be credited in investors account within in five days after the declaration.

Right to Demand Financial Statements: Section 136 of the Act provides for the right of a member to obtain copies of Balance-Sheet and Auditors Reports. In the case of default complying with this requirement, the company shall be liable for a penalty of twenty-five rupees and the authorized officer who is in default shall be liable for a penalty of five thousand rupees. Besides, this investor has the option to proceed against the company or its authorities in a court of law under the guidelines determined under Section 436 of the Act.

The relationship between the board of directors and the management cannot be described as just being that of a relationship between an employee and his or her manager. Though the board oversees the decisions taken by the management and ratifies them along with acting as the final arbiters of the strategic direction and focus that the company is heading into, the relationship goes beyond that. For instance, the board of directors is responsible for the actions of the management and hence not only does the board need to monitor the management, the management needs to take the board into confidence about its decisions. Hence, the relationship can be described as being symbiotic with each with each serving in an ecosystem called the organization. The point here is that neither the management nor the board can exist without each other and hence both need each other to survive and flourish.

The role of boards

• Approve new digital strategies
• Assess the balance of short term wins with long term impacts
• Understand the impact on employees
• Assess corporate risk
• Communicate value to shareholders

Another aspect to the relationship between the board and the management is that more often than not, there is a significant representation of the management in the board. This means that the other board members have to study the decisions taken by these members carefully so that there are no agency problems, conflicts of interest and asymmetries of information.

Only when the board and the management coexist together in a harmonious manner can there be true progress for the organization. For this to happen, there must be a provision for having independent directors and those directors that are not affiliated to the management. The point here is that unless there is objectivity and separation of the directors belonging to the management and those from outside can there is a semblance of avoidance of conflict of interest.

The third aspect of the relationship between the board and the management is the role played by institutional investors or directors from large equity houses and mutual fund companies. These directors bring to the table rich and varied expertise and experience in running companies and hence their input is crucial to the working of the company. It is for this reason that many regulators insist on having a certain percentage of the board as independent directors and another percentage from institutional shareholders. The reason for this is the fact that unless there is a process of due diligence and oversight over the actions of the management, the management can take unilateral decisions that are not always in the best interests of the company.

The role of CEOs

For their part, CEOs that lead businesses adopting digital ways of working need to be many things. They must be agile in their approach, have experience of change management, be open to partnerships, and have empathy with employees that are experiencing significant changes to the way they work.

CEOs must also work closely with boards to ensure that the pace of digital change doesn’t run out of control. Partly this means they need to be fully transparent with their boards on all potential risks particularly with regard to cybersecurity issues related to digital systems that 88% of boards now view as a serious risk.

On top of this, CEOs need to be aware of the boards’ thirst for data. This was highlighted in a recent survey that found that 70% of boards want their businesses to increase investment in technology for risk management to give them up to date data on both emerging and atypical threats.

At the same time CEOs should be tapping into the knowledge with their boards of adjacent markets and potential new opportunities. The successful Board/CEO partnership of the future will use every available insight to make sure that organisations can operate safely, confidently and with a 360° view of what’s coming next.

Bringing it all together

On a more practical level, boards and CEOs also need to find ways to collaborate via digital channels to make communication more frequent and to speed up decision making for example, by using specialist board portal technology.

With a board portal, directors can get easy access to both current and historical data from wherever they are located. CEOs can also use portals to share information securely with the board at any time and accelerate approval and sign off for new initiatives.

Along with the other requirements we’ve covered in this article, this kind of digital flow will be ultimately key to facilitating long-term partnerships between boards and CEOs and making their collective work on digital issues the success that it needs to be.

Finally, the relationship between the board and management is somewhat strained whenever the company is not doing well. This happens because the board has a top view of the organization and the management has a deeper insight. Hence, to be fair to the management, they are the ones who have to run the organization and so they cannot be constrained by what the board dictates sitting on its perch. This is the classic problem that many companies face especially when they are not doing well and the remedy for this is to take the board into confidence about the complexities of the day to day operations and apprise them of the nuances and subtleties of running the organization.

Need:

As a business director or owner it’s essential you can identify and meet the core skills your business needs to be successful.

These skills will be the same whatever business you run – whether you’re a self-employed graphic designer or you head a manufacturing company employing dozens of people.

There are intangible skills you will need, such as leadership skills, the ability to cope with long hours and hard work, and the inner resources to deal with stress and risk-taking. They also include strategy-setting and the ability to build and manage a team.

There are also functional skills that all businesses need. The smaller your business, the more of these skills you will need personally:

• Finance: Including cash flow planning, credit-management and managing relationships with your bank and accountant
• Marketing: including advertising, promotion and PR.
• Sales: including pricing, negotiating, customer service and tracking competitors
• Procurement and buying: including tendering, managing contracts, stock control and inventory planning
• Administration: including bookkeeping, billing, accounts preparation and payroll handling
• Personnel: including recruitment, dispute resolution, motivating staff and managing training
• Personal business skills: including computer, written and oral communication, and organisational skills

Objectives:

Leadership Supervisory Role: The Director of Training and Development’s first and most prominent role is his leadership role over the training and development department. In this position, the Director of Training and Development oversees all activities of the department and identifies the business’s developmental needs ensuring that there is consistency with core competencies and goals.

The Director of Training and Development also plans, organizes, and leads training programs, ensuring proper execution at all levels of the department. The Director of Training and Development also ensures consistency in the delivery and application of training standards across the business and oversees the planning, prioritization, and development of new training programs and initiatives, ensuring that these programs and initiatives are consistent with the business overall strategies, objectives, and needs.

He is also responsible for following up with the leadership and management of all departments in order to ensure that the parties involved in each training program complete their training. In this capacity, the Director of Training and Development also monitors and ensures the achievement of results within the approved training department budget. The Director of Training and Development also plays mentorship role to key personnel in the training and development department, ensuring constant development in their professional skills, and readying them for the occupation of his position in the event of his absence or retirement.

Strategy: The Director of Training and Development plays a strategic role where he is in charge of approving and developing effective training programs and materials, making regular modifications to programs where necessary. The Director of Training and Development also plays a leading role in the development and documentation of the training path for key positions within the business and communicating this information as needed.

For example, he is directly in charge of implementing AGM training programs as well as subsequent field leadership training programs that ensure optimal leadership within the business. It is also the director’s responsibility to lead the creation of training material and content for training programs, and identifying tools for relaying that content to relevant personnel.

Analytics: The Director of Training and Development is tasked with an analytical role where he conducts research, approves, and makes further recommendations for appropriate learning management systems and databases. The Director of Training and Development additionally develops, implements, monitors, and maintains both initial and ongoing training programs across the business.

He keeps track of departmental training records and develops opportunities in addition to developing dashboard reporting for all levels in the business. In this capacity, the Director of Training and Development also conducts analyses in order to identify and define present and future training needs. The Director of Training and Development also conducts follow-up studies on all completed training programs in order to evaluate and measure results and draw reports for senior HR management and key stakeholders.

Collaboration: The role of the Director of Training and Development is a collaborative role where he collaborates with other human resources departmental directors in defining strategies and ensuring their alignment in order to avoid conflicts of interest. In this collaboration, the Director of Training and Development also assists other HR professionals in their training needs specific to their areas of specialty.

He also liaises with various other departmental heads and managers ensuring proper execution of ongoing departmental training programs in order to achieve the desired results and ultimately improve the overall performance of the business. The Director of Training and Development also collaborates with these departmental heads and managers in order to establish and maintain training metrics and to evaluate the effectiveness of training. In his collaborative capacity, the Director of Training and Development also partners with key stakeholders ensuring adherence to the latest industry trends and practices.

Knowledge: The Director of Training and Development is tasked with the maintenance of knowledge in the training and development department. In this position, the Director stays up to date with the latest instructional technologies through the establishment of personal networks, attendance of workshops, reviewing of professional publications, and participation in professional industry associations. This way, the Director is able to introduce the latest and most applicable trends in training and development for inclusion in the overall strategy, constantly maintaining and updating training programs within the business.

Other Duties: The Director of Training and Development also performs similar duties as he deems necessary for the proper execution of his duties or other duties as delegated by the Chief Human Resources Officer.

Promoter

“Promoter” means a person:(

(a) Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92;

(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise;

(c) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

Nominee

Nominee directors could be appointed by a specific class of shareholders, banks or lending financial institutions, third parties through contracts, or by the Union Government in case of oppression or mismanagement.

Shareholder

A small shareholder is a person who is holding shares of nominal value amounting to a maximum of Rs 20,000 in a public company. Small shareholders are entitled to elect a director in a listed company. The directors elected by these shareholders will be known as a ‘Small Shareholders Director’.

• There is no mandate to appoint a small shareholders director under s.151, left up to the company’s discretion
• Companies must fulfil two criteria to be eligible to appoint a small shareholders director
• Must be a public company
• Must have at least 1000 or more small shareholders.

Tenure of Appointment

Small shareholders director can be appointed for a maximum period of three years. He/she may not necessarily retire by rotation. He/she cannot be reappointed after the cessation of services.

Moreover, small shareholders director cannot be associated with the company in any manner for a period of three years from the cessation of services.

Independent

A person becoming the independent director of the company must fulfil certain criteria given under section 149(6) of the Companies Act, 2013, which states that an independent director is a person other than managing director, whole-time director, or nominee director, and:

• He must have relevant experience and should be a person of integrity as per the board.
• A person appointed as an independent director shall not be a promoter of the same company or any other company which is the holding, subsidiary, or associate company of the same company in which he has been appointed.
• The person shall not be related to the promoters or directors of the company or its holding, subsidiary, or associate company.
• The person must not have any money-related relationship with the company or its holding, subsidiary, or associated company other than his salary.
• None of his relatives or he himself shall not have any kind of interest in the company. Provided, the relative can hold shares of face value up to Rs. 50 Lakhs or 2% of the paid-up capital.

Section 149(4) of the Companies Act, 2013, states that every listed public company must have 1/3rd of its total directors as independent directors.

Reduction of Share Capital is a significant restructuring activity undertaken by a company to either adjust its capital structure, return surplus capital to shareholders, or write off accumulated losses. Under the Companies Act, 2013, the process is strictly regulated to protect shareholders’ interests and ensure compliance with the law. The legal provisions regarding the reduction of share capital are primarily governed by Section 66 of the Companies Act, 2013, and associated rules.

Meaning and Purpose of Capital Reduction:

The reduction of share capital refers to the process by which a company reduces its issued, subscribed, and paid-up share capital. This process is typically undertaken for various purposes:

• Adjusting the company’s capital structure due to losses.
• Returning surplus capital to shareholders that is no longer needed for the business.
• Canceling unissued shares or reducing the nominal value of shares.
• Writing off accumulated losses to present a healthier balance sheet.
• Discharging shareholders who do not participate fully in the company’s growth.

Reduction of capital can be carried out in various ways, such as:

• Canceling or extinguishing the liability of unpaid capital.
• Reducing the face value of shares.
• Buying back shares, and subsequently canceling them.
• Canceling any paid-up capital that is no longer needed.

Section 66 of the Companies Act, 2013:

This section lays down the legal framework for reducing the share capital of a company. Here are the key provisions:

1. Special Resolution:

• The reduction of share capital can only be initiated if a special resolution is passed by the shareholders in a general meeting. A special resolution requires at least 75% of the votes cast to be in favor of the resolution.
• The resolution must clearly specify the details of the reduction, the reason for it, and its effect on the company’s capital structure.

2. Approval of the National Company Law Tribunal (NCLT):

• After passing the special resolution, the company must seek the approval of the NCLT (National Company Law Tribunal).
• The company must file an application with the NCLT, including the special resolution and detailed justification for the capital reduction.
• The tribunal will carefully examine the application to ensure that the reduction is not prejudicial to the company’s creditors or shareholders.

3. Notice to Creditors and Objections:

• Before approving the reduction, the NCLT will direct the company to notify its creditors. This is done to ensure that creditors’ interests are not adversely affected by the reduction.
• Creditors have the right to object to the reduction if they believe that it will impact their claims or financial position.
• If creditors object, the NCLT may ask the company to settle the objections, provide security for their debts, or pay off the debts before proceeding with the reduction.

4. Court’s Order and Registration:

• Once the NCLT is satisfied with the company’s application and resolves any objections raised by creditors, it will pass an order approving the reduction of share capital.
• The NCLT may impose conditions while granting the approval to safeguard the interests of shareholders and creditors.
• After obtaining the NCLT’s approval, the company must file a certified copy of the tribunal’s order with the Registrar of Companies (ROC) within 30 days.
• The reduction of capital takes effect only after the order is registered with the ROC.

5. Publication of the Order:

The company is required to publish the order approving the reduction of share capital in a newspaper, as directed by the NCLT. This ensures transparency and informs all stakeholders of the change in the company’s capital structure.

Forms of Capital Reduction:

Reduction of share capital can take various forms under the Companies Act, 2013:

• Canceling Paid-up Share Capital:

A company may reduce its share capital by canceling paid-up capital that is not represented by available assets. This is commonly done to write off accumulated losses or to cancel shares that are no longer needed.

• Extinguishing or Reducing Liability on Partly Paid-up Shares:

In some cases, a company may decide to reduce the unpaid liability on partly paid-up shares. This means that shareholders are no longer required to pay the remaining unpaid capital, reducing their liability.

• Paying off Surplus Capital:

If a company has surplus capital that is not required for its operations, it may return this surplus to shareholders by reducing the nominal value of shares or buying back shares and canceling them.

Restrictions and Prohibitions:

The reduction of share capital is subject to certain restrictions. A company that is in default of repaying deposits or interest thereon cannot reduce its share capital unless it rectifies the default. Capital reduction must not result in the company holding shares in itself, as this would violate the provisions regarding the prohibition of owning treasury shares.

Impact of Capital Reduction:

• Effect on Shareholders:

Depending on the method of capital reduction, shareholders may see a reduction in the nominal value of their shares, or they may receive a payment in exchange for the cancellation of shares.

• Effect on Creditors:

The NCLT ensures that creditors’ rights are safeguarded. Creditors may demand full payment or security before agreeing to the reduction.

• Accounting Impact:

The reduction is reflected in the company’s balance sheet, affecting the paid-up share capital, reserves, and any surplus or deficit.

Non-compliance and Penalties:

If a company reduces its capital without following the legal provisions, it will be considered void and illegal. Any directors or officers involved in such a reduction may face penalties, including fines or imprisonment, as per the Act.

Board of Directors (BODs) is a group of individuals elected or appointed to oversee the activities and strategic direction of a corporation or organization. They represent the interests of shareholders and are responsible for making high-level decisions regarding the company’s policies, goals, and overall management. The board plays a crucial role in ensuring the organization is well-governed and operates in a manner that aligns with its objectives and legal requirements.

Definitions of Board of Directors:

1. Corporate Governance Perspective:

The Board of Directors is a collective of individuals tasked with governing a company, making strategic decisions, and ensuring accountability to shareholders.

2. Legal Definition:

Legally, the Board of Directors is defined as a group of individuals who have been elected or appointed to manage the affairs of a corporation in accordance with the law and the company’s bylaws.

3. Management Definition:

From a management perspective, the Board of Directors serves as a link between the shareholders and management, providing oversight and guidance to enhance organizational performance.

4. Regulatory Perspective:

Regulatory bodies often define the Board of Directors as a governing entity that must comply with various laws and regulations regarding corporate conduct, ethics, and financial reporting.

Board Meetings

Board meeting is a formal gathering of the Board of Directors to discuss and make decisions regarding the company’s operations, strategies, and policies. These meetings are essential for ensuring that the board fulfills its responsibilities effectively.

Key Features of Board Meetings:

• Frequency:

Board meetings typically occur at regular intervals, such as quarterly or annually, but can also be convened as needed for urgent matters.

• Agenda:

Each meeting has a predetermined agenda outlining the topics to be discussed, including financial reports, strategic plans, and any pressing issues.

• Minutes:

Minutes are recorded during board meetings to document discussions, decisions made, and action items assigned. These serve as an official record for future reference.

• Quorum:

Quorum is required for decisions to be valid. This means a minimum number of directors must be present, as defined by the company’s bylaws.

• Voting:

Decisions are often made through voting, where each director has a say, and outcomes are determined based on majority rules.

• Transparency:

Board meetings promote transparency and accountability, providing an opportunity for directors to discuss matters openly and share their perspectives.

• Confidentiality:

Discussions in board meetings are typically confidential, protecting sensitive information and strategies from being disclosed outside the board.

Committee Meetings

Committee meetings are gatherings of a subgroup of the Board of Directors that focuses on specific areas of the organization’s operations, such as audit, finance, governance, or compensation. Committees are established to address particular issues more thoroughly than would be feasible in a full board meeting.

Key Features of Committee Meetings:

• Purpose:

Each committee has a distinct purpose, such as overseeing financial audits, ensuring compliance with regulations, or evaluating executive performance.

• Composition:

Committees usually consist of a subset of the board members, often including directors with relevant expertise or experience.

• Regularity:

Committee meetings can occur more frequently than board meetings, allowing for detailed examination and recommendations to the full board.

• Reports:

Committees report their findings and recommendations to the full board, often including detailed analyses and proposed actions.

• Specialization:

Committees allow for specialized attention to complex issues, enabling more informed decision-making by the board as a whole.

• Decision-Making:

While committees can make recommendations, they typically do not have the authority to make final decisions unless explicitly granted that power by the board.

• Documentation:

Like board meetings, committee meetings also require minutes to record discussions and decisions, which are then shared with the full board.

Section 110 of the Act mandates the transacting of certain business items by means of postal ballot. Postal Ballot means casting of vote by a shareholder by postal or electronic mode instead of voting personally by being present for transacting business in general meeting of the company.

As per Companies Act 2013, the provisions of postal ballot are applicable to all companies except the following companies which are not required to transact any business through postal ballot:

1. One Person Company
2. Other Companies having members up to 200.

If a resolution is assented to by the requisite majority of the shareholders by means of postal ballot, it shall be deemed to have been duly passed at a general meeting convened in that behalf.

For all equity listed companies, it is mandatory for companies to also provide an option of remote e-voting to its shareholders along with postal ballot. However, the same is not mandatory for unlisted companies.

Applicability

The system of voting is applicable for all public that consists of more than 200 members and private limited companies. One Person Company (OPC) or any other entity with membership strength of 200 or less cannot make use of this system.

Transaction of Business through Postal Ballot

Rule 22 of the Companies (Management and Administration) Rules, 2014 specifies the following items of business to be transacted by means of voting through postal ballot:

• Alteration of Object clause of Memorandum.
• Conversion of private company into a public company and vice versa.
• Change of location of the registered office outside the limits of any city, town or village.
• Change in Objects owing to which a company has gathered funds from the public through a prospectus, and the existence of any unutilized amount out of the money so raised.
• Issue of shares through differential voting rights.
• Variation of rights of shareholders, debenture holders or other security holders.
• Buy-back of a company’s shares.
• Sale of the whole or bulk of an undertaking of the company.
• Providing loans, guarantee or security in excess of the specified limit.

Postal Ballot Facilities for Absentee Voters

The Election Commission of India has made efforts to ensure that the electors those who are unable to come and vote in polling booth or absentee voters are facilitated with the process of a postal ballot paper. This facility ensures wider participation in the electoral process.

The absentee voters under clause (c) of section 60 of the Act, are as follows:

• Persons with Disabilities (PwD)
• Senior citizens of more than 80 years
• People who are employed under the essential services such as railways, state transport and aviation etc.

These provisions will include the process of identification of such voters, the manner of outreach, the processes of the collection as well as voting in the designated centres in each constituency.

Application

In case of an absentee voter, the application would be made in the form 12D along with the particulars as specified therein. The application to be duly verified by the nodal officer for the absentee voter, except the senior citizen or person with a disability, which would reach the returning officer within 5 working days from the date of election notification. In such case, the postal ballot paper will be returned to the centre provided for recording of the vote under the rule 27F, subject to any direction that would be issued by the Election Commission in this behalf.

These two categories of a senior citizen voters of more than 80 years of age and PwD electors will be marked in the electoral roll having a choice of voting either as an absentee voter or as a regular voter on the poll day. In the case, any of the electors belonging to these categories intends to vote early, then as per the amended Rule 27C of the Conduct of Election Rules, 1961, the applicant can make an application in a new Form 12D, that would reach the Returning Officer within 5 days from following the date of notification of election. After the receipt of such application, the voter will be issued with a postal ballot paper, which would be deposited in the specified centre after the recording of the vote.

Postal Ballot Paper

As per the election commission, the voting facility through the postal ballot is accessible only to those doing election duties, army personnel, disabled people and senior citizens above 80 years of age. The ballot is sent through the postal service to the employees and military officers who do not have an electronic facility. If the electors do not use it or do not receive it then it returns to the sender’s address.

Resolutions that Cannot be Passed through Postal Ballot

The following resolutions cannot be passed through postal ballot:

• Ordinary Business.
• Businesses where directors or auditors are entitled to be heard at any meeting.

Procedure for Postal Ballot

As we now understand the fundamental aspects of the postal ballot, let us examine its procedures.

Personnel to Scrutinize

The Board shall appoint a scrutinizer who is not being employed by the company, so as to ensure fairness and efficiency in the voting process.

Board Resolution

The company must pass the requisite Board resolution for postal ballot. Also, the Board must plan and fix the recommended date and time schedule for various activities, and finalize the schedule of events.

Issue of Notice

The company is required to send a notice of postal ballot to all the shareholders, along with a draft resolution that describes the reason for the event. The shareholders must respond to the notice conveying their assent or dissent on the postal ballot, within a period of 30 days from the date of dispatch of the notice. The notice should also be published on the website of the company if any.

Notices can be sent through the following means:

• Registered post or speed post
• Any electronic means
• Courier service

Advertising in Newspaper

An advertisement pertaining to the dispatch of the postal ballot should be published in an English and vernacular newspaper. The advertisement must specify the following:

• A statement concerning the transacting of business through postal ballot.
• The date of completion of dispatch of notices.
• The date of commencement of voting through postal ballot.
• The concluding date of voting through postal ballot.
• A statement declaring that postal ballots received after the end of the voting period will be invalid.
• A statement declaring that the members, who have not received postal ballot forms may apply to the company and obtain a duplicate postal ballot.
• The contact details of the concerned person, in case of any grievances with postal ballot voting.

Safe Custody of Postal Ballot

Postal ballot and other relevant papers returned by the shareholders should be safely maintained by the scrutinizer, until the Chairman signs minutes. Scrutinizer should maintain a register to record assent or dissent received along with other details.

Declaration of Result

The result of postal ballot along with the scrutinizer’s report pertaining to the details of the ballot should be deemed to be passed on the date of a general meeting.

Director is an individual appointed to the board of a company to oversee and manage its affairs and operations. Directors are responsible for making strategic decisions, ensuring legal compliance, and safeguarding shareholders’ interests. They act as fiduciaries, meaning they must prioritize the company’s well-being over personal gain. Under the Companies Act, 2013 (India), a director is defined as “a person appointed to the board of a company.” Directors can be executive, non-executive, or independent, each playing a distinct role in governance. Their duties include policy-making, risk management, financial oversight, and representing the company to stakeholders.

Director Identification Number [DIN]

Director Identification Number (DIN) is a unique identification number assigned to an individual who is appointed as a director of a company or is intending to become a director in India. Introduced under the Companies Act, 2006, and later incorporated into the Companies Act, 2013, the DIN system aims to streamline the governance and tracking of individuals serving as directors across multiple companies. Ministry of Corporate Affairs (MCA) is responsible for issuing and managing the DIN database.

Key Features of DIN:

• Unique and Lifetime Validity:

DIN is a unique, eight-digit number assigned to an individual for a lifetime. Once issued, it remains valid irrespective of any change in the individual’s directorship status, company affiliation, or personal details. This ensures a consistent track record of a person’s involvement with companies.

• Mandatory for Directors:

As per the Companies Act, 2013, every individual intending to become a director must first obtain a DIN before they can be appointed to the board of any company. No person can be appointed as a director without possessing a valid DIN.

• Application Process:

To obtain a DIN, an individual must submit an application through Form DIR-3 on the MCA portal, along with personal details and supporting documents, including proof of identity and address. The form must be digitally signed by a practicing professional (such as a Chartered Accountant or Company Secretary) who verifies the applicant’s credentials.

• DIN for Foreign Nationals:

Foreign nationals, too, can apply for a DIN if they are appointed as directors of Indian companies. They must follow the same application process, but the identity and address proof requirements may differ based on their country of residence.

• DIN Database:

Once issued, a DIN is stored in a central database maintained by the MCA. This allows authorities, companies, and stakeholders to track an individual’s involvement in multiple companies, providing transparency and accountability.

• Updating DIN Information:

Any change in the personal details of the director, such as a change in name, address, or contact information, must be updated through Form DIR-6. This ensures that the records in the MCA database are current.

• Cancellation or Deactivation of DIN:

DIN can be deactivated by the MCA in cases of disqualification of the director, submission of incorrect information, or upon the director’s resignation or death. Additionally, directors who fail to comply with regulatory requirements, such as not filing financial statements, may also face the suspension of their DIN.

Qualification of Director

The qualifications required for becoming a director in India are outlined under the Companies Act, 2013, as well as through specific company bylaws or the articles of association. The Act provides a basic framework for eligibility, while individual companies may impose additional criteria based on their industry or governance needs.

1. Minimum Age Requirement

• A person must be at least 18 years old to be eligible to serve as a director.
• There is no maximum age limit under the Companies Act, 2013, but a company’s articles of association may set a retirement age for directors.

2. DIN (Director Identification Number)

• Every person appointed as a director must have a Director Identification Number (DIN). This unique identification number is issued by the Ministry of Corporate Affairs (MCA) and is mandatory for anyone intending to become a director in India.
• The DIN helps in maintaining a record of all directors and their roles across companies.

3. Nationality

• A director can be of any nationality, meaning both Indian nationals and foreigners can be appointed as directors in Indian companies.
• However, certain types of companies (like Public Sector Undertakings or companies in regulated industries) may have specific restrictions regarding the nationality of directors.

4. Educational and Professional Qualification

• The Companies Act, 2013 does not impose any minimum educational or professional qualifications for directors.
• However, certain companies, particularly in sectors such as banking, finance, and healthcare, may require directors to have specific qualifications or expertise.
• Independent directors, as mandated for listed companies, are required to possess appropriate qualifications or experience relevant to the company’s sector.

5. Financial Soundness

• Directors should not be insolvent or declared bankrupt. If a director has been adjudged insolvent or declared bankrupt and has not been discharged, they are disqualified from holding the position of a director.

6. Sound Mind

• A director must be of sound mind and capable of making decisions in the company’s best interests. Any individual who has been declared of unsound mind by a court is disqualified from serving as a director.

7. Non-Disqualification under Section 164 of the Companies Act, 2013

Under Section 164 of the Companies Act, 2013, certain disqualifications prevent a person from being appointed as a director. These include:

• Being convicted of any offence involving moral turpitude or sentenced to imprisonment for a period of six months or more (unless a period of five years has passed since the completion of the sentence).
• Failure to pay calls on shares of the company they hold.
• Disqualification by an order of a court or tribunal.
• Not filing financial statements or annual returns for three continuous financial years.
• If a person has been a director of a company that has failed to repay deposits, debentures, or interest for more than a year.

8. Residency Requirements

As per the Companies Act, 2013, every company must have at least one director who has stayed in India for a total period of not less than 182 days during the financial year. This provision ensures that there is at least one resident Indian director on the board.

9. Limit on Directorships

• A person cannot be a director in more than 20 companies at the same time, including private companies. Of these, they can only be a director in 10 public companies at most.
• This limit ensures that a director can effectively manage and fulfill their duties in all the companies they serve.

Position of Director:

1. Fiduciary Position

Directors hold a fiduciary position, meaning they are entrusted with the responsibility to act in good faith and prioritize the company’s interests over personal or third-party benefits. They must exercise care, diligence, and loyalty when making decisions that impact the company’s operations, financial health, and future.

2. Agent of the Company

As agents, directors act on behalf of the company in dealings with third parties. They represent the company in contractual matters, negotiations, and legal proceedings. The authority they exercise is governed by the company’s memorandum and articles of association. However, directors must always act within the scope of their authority to avoid personal liability.

3. Trustee of the Company’s Assets

Directors are considered trustees of the company’s assets and must manage them responsibly. They cannot misuse company funds or property for personal gain or purposes unrelated to the company’s objectives. As trustees, directors are expected to safeguard the company’s assets, ensuring they are used efficiently for business operations and in line with shareholder interests.

4. Corporate Decision-Maker

Directors play a pivotal role in the company’s decision-making processes. They are responsible for setting the company’s strategic direction, establishing policies, and making high-level decisions that shape the future of the company. Their decisions can include mergers, acquisitions, entering into contracts, approving financial statements, or appointing key management personnel.

5. Governance Role

The position of a director involves a strong governance function, ensuring that the company complies with legal, regulatory, and ethical standards. Directors are tasked with upholding corporate governance principles, maintaining transparency, and ensuring that the company adheres to rules and regulations, such as those outlined in the Companies Act, 2013 (India).

6. Individual and Collective Responsibility

Director operates within a board of directors, which means they share collective responsibility for the board’s decisions. While individual directors may have specific duties based on their role (executive, non-executive, independent), they are also responsible for the overall governance and outcomes of board decisions. Each director is expected to contribute to discussions and decision-making processes and share accountability.

7. Liaison Between Shareholders and Management

Directors serve as a bridge between shareholders and the company’s management. They represent shareholders’ interests by overseeing the performance of the company’s executive team and ensuring that management acts in accordance with the board’s directives. Directors must strike a balance between allowing management operational freedom and maintaining oversight.

8. Legal Status

The position of a director carries legal status under the Companies Act, 2013 (India). They are subject to statutory duties, including maintaining accurate financial records, submitting periodic reports, and ensuring the company follows legal compliance. Directors can be held legally liable for breaches of duty, negligence, or fraudulent activities within the company.

Rights of Director:

1. Right to Participate in Board Meetings

Directors have the right to participate in all board meetings, where they can discuss and make decisions on key business matters. They are entitled to be notified in advance about the meetings and must have access to the agenda and related documents. Participation allows directors to engage in decision-making, express their views, and vote on company policies, strategies, and resolutions.

2. Right to Access Financial Records and Information

Directors have the right to access the company’s books of accounts, financial records, and other key documents. This right ensures that they can evaluate the financial health of the company and make informed decisions. It also helps them oversee the management’s performance, monitor the use of company resources, and ensure compliance with financial regulations.

3. Right to Remuneration

Directors are entitled to receive remuneration for their services. The form and amount of this compensation are typically determined by the company’s articles of association or as decided by the shareholders. Remuneration can be in the form of salaries, fees, commissions, or bonuses. Non-executive and independent directors may receive sitting fees or other compensation for their involvement.

4. Right to Delegate Powers

Directors have the right to delegate certain powers and duties to committees or other directors, provided that the company’s articles of association permit such delegation. This right helps directors manage responsibilities more effectively by appointing specialists or experts to handle specific areas, such as finance, audit, or risk management.

5. Right to Indemnity

Directors have the right to be indemnified for liabilities incurred while performing their duties in good faith. Many companies provide indemnity insurance for directors to cover legal costs, settlements, or damages arising from lawsuits or claims made against them in their official capacity. This right protects directors from personal financial loss when acting in the company’s best interests.

6. Right to Seek Independent Professional Advice

If a director feels that expert guidance is necessary for decision-making, they have the right to seek independent professional advice at the company’s expense. This can include legal, financial, or technical advice, especially in complex matters requiring specialist knowledge. It helps ensure that directors make informed, well-considered decisions.

7. Right to Resist Unlawful Instructions

Directors have the right to refuse to follow any instructions from shareholders, other directors, or management that are illegal, unethical, or detrimental to the company. They must act in the company’s best interest and can challenge decisions or actions that violate the law or harm the company’s reputation or financial stability.

Whole-time Director (WTD) plays a crucial role in the overall management and functioning of a company. They are involved in the day-to-day affairs of the company and are an essential part of its leadership. According to the Companies Act, 2013, a whole-time director is defined as a director who is in full-time employment with the company and devotes their entire time and attention to managing its operations. The appointment, qualifications, and duties of a whole-time director are governed by the Companies Act, ensuring that the role is structured to meet corporate governance standards and to ensure effective management of the company.

Appointment of Whole-time Director:

The appointment of a whole-time director must follow a structured process that is outlined by the Companies Act, 2013, and subject to certain conditions. The whole-time director can be appointed by the board of directors, shareholders, or as per the company’s articles of association.

• Appointment by the Board of Directors:

The board of directors can appoint a whole-time director through a resolution passed at a board meeting. The company’s articles of association must authorize the appointment of a whole-time director. If the articles do not contain provisions for the appointment, they may need to be amended.

• Approval from Shareholders:

The appointment of a whole-time director also requires approval from the shareholders in the next general meeting. If the board appoints a whole-time director, the shareholders must confirm this appointment. It is also essential that the shareholders are informed about the terms and conditions of the appointment, including remuneration.

• Compliance with the Companies Act, 2013:

In accordance with Section 196 of the Companies Act, 2013, a whole-time director cannot be appointed for a period exceeding five years at a time. However, they may be reappointed after the end of their term. The act also specifies that a whole-time director should not hold office in more than one company at a time, except with the approval of the board and the shareholders.

• Listed Companies and SEBI Regulations:

In the case of listed companies, the appointment of a whole-time director must also comply with the guidelines laid down by the Securities and Exchange Board of India (SEBI). The appointment must be in line with corporate governance principles, and relevant disclosures must be made to the stock exchanges.

• Remuneration of Whole-time Director:

The remuneration paid to a whole-time director must comply with the provisions of the Companies Act, 2013 (specifically Section 197), which outlines the limits on managerial remuneration. Any remuneration exceeding the prescribed limits must be approved by the shareholders in a general meeting and be within the overall limit of managerial remuneration for the company.

Qualifications of Whole-time Director:

Companies Act, 2013 does not lay down specific educational or professional qualifications for a whole-time director. However, certain general qualifications and restrictions are necessary for an individual to be eligible for this role.

• Age Requirement:

As per Section 196(3) of the Companies Act, 2013, a whole-time director must be at least 21 years old and should not be more than 70 years old. However, an individual above 70 years of age can be appointed if the shareholders pass a special resolution with proper justification.

• Non-disqualification under Section 164:

The individual must not be disqualified under Section 164 of the Companies Act. This section specifies that a person who has failed to file financial statements or returns for a continuous period of three years, or who has been convicted of any offense involving moral turpitude, is disqualified from being appointed as a director.

• Professional Experience:

While the Act does not mandate specific qualifications, companies typically expect their whole-time directors to have significant experience in business management, finance, operations, or industry-specific expertise. Since whole-time directors are involved in the day-to-day management of the company, their expertise in operational matters is essential.

• Legal Eligibility:

Whole-time director must not have been declared bankrupt, must not be of unsound mind, and must not have been convicted of any fraud or financial irregularities. These legal requirements ensure that only individuals with a clean record are eligible for appointment to this key managerial position.

Duties of Whole-time Director:

The duties of a whole-time director encompass both operational and strategic aspects of the company. As full-time employees of the company, whole-time directors are expected to take an active role in ensuring the efficient running of the business. Some key duties are:

• Day-to-Day Management:

Whole-time director is responsible for managing the day-to-day affairs of the company. This includes overseeing various functions such as production, sales, marketing, human resources, and finance. They ensure that the company’s operations align with its objectives and strategies.

• Compliance with Laws and Regulations:

One of the primary duties of a whole-time director is to ensure that the company complies with all applicable laws and regulations. This includes filing statutory returns, adhering to tax laws, maintaining proper records, and ensuring compliance with corporate governance requirements as laid down by SEBI and the Companies Act, 2013.

• Reporting to the Board of Directors:

Whole-time director is required to report regularly to the board of directors regarding the company’s performance, challenges, and opportunities. The director provides the board with updates on operational matters, financial health, and any significant issues that may affect the company.

• Corporate Governance:

Whole-time directors play a crucial role in ensuring that the company adheres to strong corporate governance practices. They must ensure transparency in decision-making, fair dealings with stakeholders, and compliance with ethical standards. This also includes taking decisions that protect the interests of shareholders and stakeholders.

• Leadership and Employee Management:

Whole-time director provides leadership to the company’s employees. They are responsible for setting corporate culture, motivating employees, managing conflict, and ensuring that all employees are aligned with the company’s goals. Additionally, they oversee the performance of key managers and ensure efficient execution of corporate strategies.

• Strategic Planning and Implementation:

Whole-time directors are involved in the formulation and implementation of the company’s strategic plans. They work closely with the board to develop business strategies, set objectives, and identify areas for growth. They also ensure that the company is well-positioned to capitalize on opportunities and mitigate risks.

• Financial Oversight:

Whole-time directors are responsible for overseeing the financial performance of the company. This includes budgeting, managing cash flow, ensuring that financial records are accurate, and preparing financial statements. They must ensure that the company’s financial practices adhere to the regulations laid down by the Companies Act and other relevant authorities.

• Risk Management:

The whole-time director is also responsible for identifying and managing risks that could affect the company’s performance. This includes financial, operational, reputational, and compliance risks. By managing risks effectively, whole-time directors help protect the company’s assets and ensure long-term stability.

• Representing the Company:

In many instances, the whole-time director represents the company in external matters, such as negotiations with suppliers, business partners, investors, and regulators. They act as a spokesperson for the company and are expected to uphold its reputation in all dealings.