2. Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits [section 197 of the 2013 Act].
2. Number of directorships
The 2013 Act increases the limit for the number of directorships that can be held by an individual from 12 to 15 [section 149(1) of the 2013 Act].
3. One director to be resident in India
A new requirement with respect to directors is that at least one director to have stayed in India for at least 182 days in the previous calendar year [section 149(3) of 2013 Act]. This requirement appears to be a departure from the focus given in the 2013 Act towards the use of electronic modes such as the use of video conferences for meetings and electronic voting. With the increasing use of electronic media, the need, for a director to be resident in India for a minimum amount of time, becomes redundant.
4. Independent directors
One of the significant aspects of the 2013 Act is the effort made towards incorporating some of the salient requirements mandated by the SEBI in clause 49 of the listing agreement in the 2013 Act itself. To this effect, the 2013 Act requires every listed public company to have at least one-third of the total number of directors as independent directors. Further, the central government in the draft rules has prescribed the minimum number of independent directors in case of the following classes of public companies* [section 149(4) of the 2013 Act]. (i) Public companies having paid-up share capital of 100 crore INR or more; or (ii) Public companies having a turnover of 300 crore INR or more (iii) Public companies which have, in aggregate, outstanding loans or borrowings or debentures or deposits, exceeding 200 crore INR The 2013 Act also states that companies will have a period of one year to ensure compliance with the 2013 Act and the Rules that are framed.
4.1 Conflicting requirements
While there have been attempts to harmonize the requirements of SEBI and the 2013 Act was made, there are several aspects relating to independent directors where the requirements of the 2013 Act differ from that of clause 49 of the equity listing agreement. The requirements of the 2013 Act and the manner in which they differ from those under clause 49 of the equity listing agreement include the definition itself. The other main differences are as follows:
4.2 DATABANK OF INDEPENDENT DIRECTORS
The 2013 Act makes the appointment process of the independent directors, independent of the company’s management by constituting a panel or a data bank to be maintained by the MCA, out of which companies may choose their independent directors. The proposal has its origins in the report of the 21st Standing Committee on finance, wherein it was acknowledged that preparation of a databank of independent directors would vest with a regulatory body that may comprise of representatives of MCA, SEBI, Reserve Bank of India, professional institutions, Chambers of Commerce and Industry, etc [section 150 of 2013 Act]. A drawback of constituting a panel of independent directors is that it may discourage people from registering with the panel and in that sense limit the options available to a company for appointment of independent directors.
4.3 Code for an independent director
The 2013 Act includes Schedule IV ‘Code for Independent Directors’ (Code) which broadly prescribes the following for independent directors: • Professional conduct • Role and functions • Duties • Manner of appointment • Reappointment • Resignation or removal • Holding separate meetings • Evaluation mechanism The code appears to be mandatory which would lead to some of the following concerns: • The code states that an independent director shall uphold ethical standards of integrity and probity, however, what would constitute ethical behavior is not defined and is open to interpretation. • The code does not give any cognizance to the need for training for the independent directors. • The code refers to the appointment of independent directors by the board after evaluating certain attributes. The concern that remains unaddressed is the manner in which companies need to carry out an assessment of the attributes of an independent director as specified under ‘manner of appointment’ in the code from the databank maintained by the MCA.
4.4 Liability of independent directors
The 2013 Act makes an attempt to distinguish between the liability of an independent director and non-executive director from the rest of the board and has accordingly inserted a provision to provide immunity from any civil or criminal action against the independent directors. The intention and effort to limit the liability of independent directors is demonstrated from the section 149(12) of the 2013 Act which inter-alia provides that liability for independent directors would be as under: “Only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, with his consent or connivance or where he had not acted diligently.” The section seeks to provide immunity from civil or criminal action against independent directors in certain cases. Further, in accordance with the requirement of section 166 (2) of the 2013 Act, the whole of the board is required to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company, its employees, the shareholders, the community and for the protection of the environment. By virtue of this section, the duty of independent directors actually goes beyond its normal definition and is not restricted to executive directors only. It is amply clear that independent directors have little or no defense and their obligations continues to remain a debatable topic since they would still be treated equivalent to the other directors by holding them responsible for decisions made through board processes.
6. Additional compliance requirements for private companies
There are certain increased compliance requirements mandated for private companies which, till now, were mandated only for public companies and private companies which are subsidiaries of public companies. These include the following:
Meetings of the board and its powers
Meetings of the board and its powers
There have been significant inroads made by the MCA in the recent past with respect to giving cognizance to the use of electronic media in the day-to-day operations of corporates. The 2013 Act takes this further by allowing the use of electronic mode for sending notice of meetings [section 173(3) of 2013 Act], passing of a resolution by circulation [section 175 of 2013 Act] and other areas. Some of the other significant changes in relation to the board and its functioning include:
1. Audit committee
The requirements relating to audit committees were first introduced by the Companies (Amendment) Act, 2000. Audit committees are a measure of ensuring self-discipline, constituted with the object to strengthen and oversee management in public companies and to ensure that the board of directors discharge their functions effectively. The 2013 Act acknowledges the importance of an audit committee and entrusts it with additional roles and responsibilities [section 177 of the 2013 Act]. However, the fact that the 2013 Act is not entirely in harmony with the requirements of clause 49 of the equity listing agreement, cannot be ignored. While most of the requirements including the establishment of a ‘vigil mechanism’ for directors and employees to report genuine concerns, that are similar to the requirements of clause 49 of the equity listing agreement have been incorporated in the 2013 Act, the differences are as follows:
2. Nomination and remuneration committee and stakeholders relationship committee
The 2013 Act includes this new section requiring constituting the nomination and remuneration committee by every listed company and the following classes of companies as prescribed in the draft rules:* (A) Every listed company (B) Every other public company that has a paid-up capital of 100 crore INR or more or which has, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 200 crore INR. The Nomination and Remuneration Committee is required to formulate and recommend to the Board of Directors, the company’s policies, relating to the remuneration for the directors, key managerial personnel and other employees, criteria for determining qualifications, positive attributes and independence of a director [section 178(1) of 2013 Act]. Further, a board of a company that has more than 1000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year is required to constitute a Stakeholders Relationship Committee [section 178(5) of 2013 Act]. Further, the limits of contribution to political parties are proposed to be increased to 7.5% of the average net profits during the three immediately preceding financial years [section 182 of 2013 Act] from the existing limit of 5% under the 1956 Act.
4. Disclosure of interest by director
The 2013 Act prescribes similar requirements with respect to the disclosure of interest by the director as contained in the existing section 299 of the 1956 Act. The only change that could be identified is where a contract or arrangement entered into by the company without disclosure of interest by the director or with participation by a director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company [section 184 of 2013 Act].
5. Loans and investments by a company
The 2013 Act states that companies can make investments only through two layers of investment companies subject to exceptions which include a company incorporated outside India [section 186 of 2013 Act]. There are no such restrictions that are currently imposed under the 1956 Act. Further, the exemption available from the provisions of section 372A of the 1956 Act to private companies as well as loans or investment given or made by a holding company to its subsidiary company is no longer available under the 2013 Act.
6. Related party transactions
Most of the provisions under Section 188 of the 2013 Act are quite similar to the requirements under sections 297 and 314 of the 1956 Act. Some of the key changes envisaged in the 2013 Act include the following:
Appointment and remuneration of managerial personnel
Appointment and remuneration of managerial personnel
The 2013 Act brings significant changes to the existing requirement of the 1956 Act with respect to appointment and remuneration of managerial personnel. One of the major changes that could be identified is in respect of the applicability of these provisions. The provisions for the appointment of managing director, whole-time director or manager are no longer restricted to the public companies and the private companies which are subsidiaries of public companies and now applicable to all companies. The overall ceiling in respect of payment of managerial remuneration by a public company remains at 11% of the profit for the financial year computed in the manner laid down in the 2013 Act.
1. Appointment of managing director, whole-time director or manager [section 196 of 2013 Act].
3. Calculation of profits [section 198 of the 2013 Act]
The 2013 Act sets out in detail about the allowances and deductions that a company should include while computing the profits for the purpose of determining the managerial remuneration. To illustrate, the 2013 Act states that while computing its profits, credit should not be given for any change in the carrying amount of an asset or of a liability recognized in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.
4. Recovery of remuneration in certain cases [section 199 of the 2013 Act]
The 2013 Act contains stringent provisions in case the company is required to restate its financial statements pursuant to fraud or non- compliance with any requirement under the 2013 Act and the Rules made thereunder. As against the existing requirement of section 309 of the 1956 Act which only refers to the fact that excess remuneration paid to managerial personnel cannot be waived except with the previous approval of the central government, the 2013 Act moves a step forward and enables the company to recover the excess remuneration paid (including stock options) from any past or present managing director or whole-time director or manager or chief executive officer who, during the period for which the financial statements have been restated, has acted in such capacity.
5. Appointment of key managerial personnel [section 203]
The 2013 Act provides for mandatory appointment of following whole-time key managerial personnel for every listed company and every other company having a paid-up share capital of five crore INR or more*: (I) Managing director, or chief executive officer or manager and in their absence, a whole-time director. (ii) Company Secretary. (iii) Chief financial officer Further, the 2013 Act also states that an individual cannot be appointed or reappointed as the chairperson of the company, as well as the. the managing director or chief executive officer of the company at the same time except where the articles of such a company provide otherwise or the company does not carry multiple businesses.
