Comparative Study Companies Bill
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COMPANIES BILL 2011 AND DIRECTORS COMPARATIVE STUDY WITH THE COMPANIES ACT, 1956
Corporate governance generally places a fair amount of emphasis on board independence, and it is no different in India. To take a step further Companies Bill 2011 provides more power to Directors but poses greater responsibility also by defining duties of Directors. The Companies Bill 2011 has introduced new concept of One Person Company, Resident Director, more focus on Independent Directors, higher corporate accountability and responsibility and alongside introduced some industry friendly provisions. Some of the proposed changes in Companies Bill are summarized below.
BASIS OF COMPARISON THE COMPANIES ACT, 1956 THE COMPANIES BILL, 2011
1. Minimum No. of directors
Minimum 2 directors-Private Company Minimum 3 directors-Public Company (Sec. 252)
By introducing new concept of One Person Company in the Bill, new provision is inserted related one person company other than the existing provisions: Minimum 1 director-One Person Company. [Clause 149(1) (a)]
2. Maximum No. of Directors
• •
• •
Maximum Number of 12 • The maximum limit of directors in the Company has been increased Directors-Public Company from 12 to 15 with a power to add If Article specifies the number more directors upon passing of of directors less than 12, the Special Resolution. number of directors can be increased upto 12 in the general meeting by passing ordinary • Hence, no need to have Central Government approval for resolution. increasing the maximum limit of To increase beyond 12 then the directors. approval of central government [Proviso to Clause 149 (1)] is necessary. For the private company approval of central government is not required. (Sec. 259) In prescribed class or classes of companies, there should have atleast one woman director. [Proviso to Clause 149 (1)] Every Company should have atleast one director who has stayed in India for a total period of not less than 182
3. Woman Director
No Such Clause
4. One Resident Director
No Such Clause
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days in previous calendar year. [Proviso to Clause 149 (2)] 5. Independent Directors No Such Clause in Companies Act, 1956. Only Clause 49 of the listing agreement prescribes the same for Listed Companies. New Companies Bill has inserted the concept of Independent Directors(IDs) by providing Definition of IDs, Professional Conduct, Roles, Appointment, resignation etc. to enhance monitoring of the management and promoters, and thereby protecting the interests of the public shareholders. Some are summarized below: • Every Listed Company shall have atleast 1/3rd of total number of directors. This is a slight departure from clause 49 of the listing agreement, which requires at least 50% IDs in case the chairman is an executive capacity or a promoter or related to a promoter. • Central Govt. may prescribe minimum no. of directors in case of any class of companies. • Nominee directors shall not be counted as IDs. • Only an ID can be appointed as alternate director to an ID. [Clause 161(2)]. • An ID shall not be entitled to any remuneration, other than sitting fee and reimbursement of expenses and profit-related commission as approved by members. • The Company and IDs shall abide by Schedule IV of Bill. • Presence of atleast one ID is necessary in case Board Meeting has been called at shorter notice or in case not able to attend that meeting, decision taken at such meeting shall be circulated to all directors and shall be final only on ratification by atleast one ID. • Maximum term of 5 consecutive yrs. Can be eligible for 2nd term only by passing Special Resolution. • Eligible for appointment in the same company after exhausting both the terms only after a gap of 3 yrs. • The Bill provides provision for
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limiting the liability of IDs and non-executive director not being promoter or key managerial personnel. 6. Duties of Directors In order to induce a greater level of clarity in directors’ duties, the Companies Bill, 2011 has a specific However, over a period of time, the provision that deals with the subject judiciary has attempted to define matter. (Clause 166) Directors’ duties The following are some of the primary • as an agent of the company; duties specified by the Companies Bill, and 2011: • as a person with a fiduciary • to act in accordance with the duty to the company, while articles; discharging his duties. • to act in good faith and in the best interests of the company; • to exercise due and reasonable care, skill and diligence and exercise independent judgment; • not to involve in a situation that presents a conflict of interest; • not to achieve any undue gain or advantage; and • not to assign office. • In case of any contravention, director shall be punishable with a fine Rs. 1 lakh to Rs. 5 lakhs. Sec 274 deals with disqualification In addition to the existing, new of Directors. disqualifications have been inserted (clause 164): • If convicted for any offence and sentenced for more than 7 yrs. or more, not eligible to be appointed as Director in any Company; • Convicted of the offence dealing with related party transactions in the last preceding 5 yrs; • Provision of section 274(1)(g) has been made more stringent by extending default to “failure to file either Annual Returns or Annual Accounts” and applicable to companies other than public companies also. Additional Disqualification in Clause 152(3): No person shall be appointed as director unless he possesses DIN. The Act does not define the duties of Directors.
7. New Disqualificatio ns
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8. Maximum limit of Directorships
A person cannot be director in The Limit has been increased from 15 more than 15 companies. While to 20. However with a following calculating 15 directorship, provisions (clause 165): following companies excluded • Limit of 20 also includes alternate under sec 278: directorships; • A private company which is not • Maximum no. of public company’s a subsidiary of a public directorships cannot be more than Company 10. • An unlimited company. • For calculating limit of public companies, directorships of • Section 25 Companies. private company that are either • A company in which he is holding or subsidiary of public appointed as alternate director. company shall be included. Office of the director would become vacant if he remains absents himself from 3 consecutive meetings of the Board of directors or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board [Sec 283(1)(g)] No specific section to deal with the issue. Office of the director would become vacant if he remains absent from all the meetings of the Board for a period of 12 months with or without seeking leave of absence of the Board [Clause 167(1)(b)]
9. Automatic Vacation from Directorship
10. Resignation by Director
Clause 168 deals with resignation by director: • May resign by giving notice in writing. • The board shall take note of it and intimate ROC • Also place resignation in the report of directors in next general meeting. • Directors are also required to mandatorily forward their resignation along with detailed reason for resignation to the ROC within 30 days of resignation. • The requirement of Central Govt. approval has been dispensed with for MD and wholetime directors subject to conditions. Provisions applicable for Private Companies also.(185)
11. Loan to Directors
Approval of Central Govt. is required to give loan to directors. (Sec 295). Pvt. Companies were exempt.
• 12. Participation in meeting through video conferencing No such provision. However, Ministry has by its recent circular allowed participation in meeting through video conferencing.
The Bill provides that director can participate in the board meeting through video conferencing or other visual mode. Clause 173(2).
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13. Items to be passed in meeting only
Section 292(1) of the Companies Act, 1956 provides that the Board of directors of a company shall exercise the following powers on behalf of the company and it shall do so only by means of resolution passed at meeting of the Board: to make calls on shareholders in respect of money unpaid on their shares; to authorize the buy-back to issue debentures; to borrow moneys otherwise than on debentures; to invest funds of the company; and to make loan. No such provision
The Bill provides certain new matters in addition to existing which are required to be passed in Board Meeting only (clause 179): • To issue securities including debentures. • To grant loans or give guarantee or provide security in respect of loan • To approve financial statement and Board Reports • To diversify the business of the Company. • To approve amalgamation, merger or reconstruction. • To take over a company or acquire a controlling or substantial stake in another company. • Any other matter prescribed. The Bill has prohibited forward dealing in securities and insider trading in the Company by Directors and Key Managerial Personnel. • • • • Provision related to appointment of MD or manager shall also apply to Private Company; The Appointment shall be approved by way of special resolution only in general meeting; New Schedule V will deal with Managerial appointment and remuneration; ROC return needs to be filed within 60 days of appointment.(196)
14. Prohibition of Forward Dealing in securities and Insider Trading 15. Appointment of Managerial Personnel
• •
•
Applicable in case of public companies ; Appointment of MD by way of Board Resolution or passing the ordinary resolution in general meeting as the case may be. (Sec 269 read with Schedule XIII); Prescribed return of appointment needs to be filed with ROC within 90 days of appointment.
Author: Mr. Anil Mahajan Kriti Advisory services Private Limited
1404A, Chiranjiv Tower, 43, Nehru Place, New Delhi‐110 019.
COMPANIES BILL 2011 AND DIRECTORS COMPARATIVE STUDY WITH THE COMPANIES ACT, 1956
Corporate governance generally places a fair amount of emphasis on board independence, and it is no different in India. To take a step further Companies Bill 2011 provides more power to Directors but poses greater responsibility also by defining duties of Directors. The Companies Bill 2011 has introduced new concept of One Person Company, Resident Director, more focus on Independent Directors, higher corporate accountability and responsibility and alongside introduced some industry friendly provisions. Some of the proposed changes in Companies Bill are summarized below.
BASIS OF COMPARISON THE COMPANIES ACT, 1956 THE COMPANIES BILL, 2011
1. Minimum No. of directors
Minimum 2 directors-Private Company Minimum 3 directors-Public Company (Sec. 252)
By introducing new concept of One Person Company in the Bill, new provision is inserted related one person company other than the existing provisions: Minimum 1 director-One Person Company. [Clause 149(1) (a)]
2. Maximum No. of Directors
• •
• •
Maximum Number of 12 • The maximum limit of directors in the Company has been increased Directors-Public Company from 12 to 15 with a power to add If Article specifies the number more directors upon passing of of directors less than 12, the Special Resolution. number of directors can be increased upto 12 in the general meeting by passing ordinary • Hence, no need to have Central Government approval for resolution. increasing the maximum limit of To increase beyond 12 then the directors. approval of central government [Proviso to Clause 149 (1)] is necessary. For the private company approval of central government is not required. (Sec. 259) In prescribed class or classes of companies, there should have atleast one woman director. [Proviso to Clause 149 (1)] Every Company should have atleast one director who has stayed in India for a total period of not less than 182
3. Woman Director
No Such Clause
4. One Resident Director
No Such Clause
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days in previous calendar year. [Proviso to Clause 149 (2)] 5. Independent Directors No Such Clause in Companies Act, 1956. Only Clause 49 of the listing agreement prescribes the same for Listed Companies. New Companies Bill has inserted the concept of Independent Directors(IDs) by providing Definition of IDs, Professional Conduct, Roles, Appointment, resignation etc. to enhance monitoring of the management and promoters, and thereby protecting the interests of the public shareholders. Some are summarized below: • Every Listed Company shall have atleast 1/3rd of total number of directors. This is a slight departure from clause 49 of the listing agreement, which requires at least 50% IDs in case the chairman is an executive capacity or a promoter or related to a promoter. • Central Govt. may prescribe minimum no. of directors in case of any class of companies. • Nominee directors shall not be counted as IDs. • Only an ID can be appointed as alternate director to an ID. [Clause 161(2)]. • An ID shall not be entitled to any remuneration, other than sitting fee and reimbursement of expenses and profit-related commission as approved by members. • The Company and IDs shall abide by Schedule IV of Bill. • Presence of atleast one ID is necessary in case Board Meeting has been called at shorter notice or in case not able to attend that meeting, decision taken at such meeting shall be circulated to all directors and shall be final only on ratification by atleast one ID. • Maximum term of 5 consecutive yrs. Can be eligible for 2nd term only by passing Special Resolution. • Eligible for appointment in the same company after exhausting both the terms only after a gap of 3 yrs. • The Bill provides provision for
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limiting the liability of IDs and non-executive director not being promoter or key managerial personnel. 6. Duties of Directors In order to induce a greater level of clarity in directors’ duties, the Companies Bill, 2011 has a specific However, over a period of time, the provision that deals with the subject judiciary has attempted to define matter. (Clause 166) Directors’ duties The following are some of the primary • as an agent of the company; duties specified by the Companies Bill, and 2011: • as a person with a fiduciary • to act in accordance with the duty to the company, while articles; discharging his duties. • to act in good faith and in the best interests of the company; • to exercise due and reasonable care, skill and diligence and exercise independent judgment; • not to involve in a situation that presents a conflict of interest; • not to achieve any undue gain or advantage; and • not to assign office. • In case of any contravention, director shall be punishable with a fine Rs. 1 lakh to Rs. 5 lakhs. Sec 274 deals with disqualification In addition to the existing, new of Directors. disqualifications have been inserted (clause 164): • If convicted for any offence and sentenced for more than 7 yrs. or more, not eligible to be appointed as Director in any Company; • Convicted of the offence dealing with related party transactions in the last preceding 5 yrs; • Provision of section 274(1)(g) has been made more stringent by extending default to “failure to file either Annual Returns or Annual Accounts” and applicable to companies other than public companies also. Additional Disqualification in Clause 152(3): No person shall be appointed as director unless he possesses DIN. The Act does not define the duties of Directors.
7. New Disqualificatio ns
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8. Maximum limit of Directorships
A person cannot be director in The Limit has been increased from 15 more than 15 companies. While to 20. However with a following calculating 15 directorship, provisions (clause 165): following companies excluded • Limit of 20 also includes alternate under sec 278: directorships; • A private company which is not • Maximum no. of public company’s a subsidiary of a public directorships cannot be more than Company 10. • An unlimited company. • For calculating limit of public companies, directorships of • Section 25 Companies. private company that are either • A company in which he is holding or subsidiary of public appointed as alternate director. company shall be included. Office of the director would become vacant if he remains absents himself from 3 consecutive meetings of the Board of directors or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board [Sec 283(1)(g)] No specific section to deal with the issue. Office of the director would become vacant if he remains absent from all the meetings of the Board for a period of 12 months with or without seeking leave of absence of the Board [Clause 167(1)(b)]
9. Automatic Vacation from Directorship
10. Resignation by Director
Clause 168 deals with resignation by director: • May resign by giving notice in writing. • The board shall take note of it and intimate ROC • Also place resignation in the report of directors in next general meeting. • Directors are also required to mandatorily forward their resignation along with detailed reason for resignation to the ROC within 30 days of resignation. • The requirement of Central Govt. approval has been dispensed with for MD and wholetime directors subject to conditions. Provisions applicable for Private Companies also.(185)
11. Loan to Directors
Approval of Central Govt. is required to give loan to directors. (Sec 295). Pvt. Companies were exempt.
• 12. Participation in meeting through video conferencing No such provision. However, Ministry has by its recent circular allowed participation in meeting through video conferencing.
The Bill provides that director can participate in the board meeting through video conferencing or other visual mode. Clause 173(2).
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13. Items to be passed in meeting only
Section 292(1) of the Companies Act, 1956 provides that the Board of directors of a company shall exercise the following powers on behalf of the company and it shall do so only by means of resolution passed at meeting of the Board: to make calls on shareholders in respect of money unpaid on their shares; to authorize the buy-back to issue debentures; to borrow moneys otherwise than on debentures; to invest funds of the company; and to make loan. No such provision
The Bill provides certain new matters in addition to existing which are required to be passed in Board Meeting only (clause 179): • To issue securities including debentures. • To grant loans or give guarantee or provide security in respect of loan • To approve financial statement and Board Reports • To diversify the business of the Company. • To approve amalgamation, merger or reconstruction. • To take over a company or acquire a controlling or substantial stake in another company. • Any other matter prescribed. The Bill has prohibited forward dealing in securities and insider trading in the Company by Directors and Key Managerial Personnel. • • • • Provision related to appointment of MD or manager shall also apply to Private Company; The Appointment shall be approved by way of special resolution only in general meeting; New Schedule V will deal with Managerial appointment and remuneration; ROC return needs to be filed within 60 days of appointment.(196)
14. Prohibition of Forward Dealing in securities and Insider Trading 15. Appointment of Managerial Personnel
• •
•
Applicable in case of public companies ; Appointment of MD by way of Board Resolution or passing the ordinary resolution in general meeting as the case may be. (Sec 269 read with Schedule XIII); Prescribed return of appointment needs to be filed with ROC within 90 days of appointment.
Author: Mr. Anil Mahajan Kriti Advisory services Private Limited
1404A, Chiranjiv Tower, 43, Nehru Place, New Delhi‐110 019.
