Section 149: Independent director

Section 149: Independent director

·         An independent director is someone who does not have any material or pecuniary relationship with the company or directors.

·         MD or WTD of company can’t be considered as independent director.

·         CG may prescribe the minimum number of independent directors for class of public companies.

·         Listed public company shall have at least 1/3^rd of the total number of directors as independent directors.

·         Rules 4 of Companies Rules, 2014 mandates the requirement of at least two independent directors for the following public companies:

-> Which is having paid up share capital of Rs. 10 crore or more; or

->Which is having turnover of Rs. 100 crore or more; or

->Which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs. 50 crore.

·         An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.

·         According to section 149(6), following persons are eligible to be appointed as independent director:

-> A person who is not a MD or WTD or nominee director.

->Person of integrity and possesses relevant experience and expertise in opinion of board.

-> A person who is or was not promoter of company, its holding, subsidiary or associate company.

-> A person who is not related to promoter or director of company, its holding or subsidiary or associate company.

-> A person who or whose relative has no pecuniary relationship with company, its holding company or subsidiary company or associate company or their promoters, or directors, during last 2 financial years or during the current financial year.

-> A person none of relative has or had pecuniary relation or transaction with the company, its holding, subsidiary or associate company or their promoters, or directors, amounting to 2% or more of its gross turnover or total income of Rs. 50 lacs, whichever is lower, during the 2 immediate preceding financial year or during current financial year.

->Who, neither himself nor any of his relatives:

-          holds or has held the position of a KMP or employee of the company or its holding, subsidiary or associate company in any of the 3 immediate preceding financial years;

-          is or has been an employee or proprietor or a partner, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed, or

-          a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

-          any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;

-          holds together with his relatives 2% or more of the total voting power of the company; or

-          is a Chief Executive or director, by whatever name called, of any NPO that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company.

·         Independent directors are not required to be retired by rotation.

·         The tenure of the independent directors must not exceed two consecutive periods of 5 years each, and can be extended for a second term only after a SR and disclosure of such appointment in the Board’s report.

·         Section 149(11) mandates that reappointment after the expiry of second term can be done only after a cooling period of 3 years.

·         During the cooling off period of 3 years, independent directors can’t be appointed in or be associated with the company in any other capacity, either directly or indirectly.

·         The Act expressly disallows independent directors from obtaining stock options and remuneration other than sitting fees and reimbursement of travel expenses for attending the board and other meetings.

·         Profit related commission may be paid to independent directors subject to the approval of the shareholders.

·         The Act specifically provides that they can be implicated only for offences committed with their knowledge, connivance or negligence.

CL: Provisions regarding BOD powers and non-cash trannsaction

Section 179: Power of BOD

·         The BOD of a company shall be eligible to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do as per provisions of Act, memorandum and article of company.

·         Shareholders may restrict the powers of the Board by amendment in article.

·         Shareholders have no power to interfere into routine business for which BODs are authorized to act. However, the GM of shareholders is competent to intervene and act in following matter delegated to the BODs:

-> Where the directors acting mala fide.

-> Director’s personal interests are in conflict with interest of company or their duty.

-> Where the directors themselves the wrong doers and have acted mala fide.->

When the Board has become incompetent to act.

-> When there is a deadlock in the management so that director cannot exercise some of their powers.

·         Individual director does not have any general powers.

·         Section 179 of Companies Act, 2013 specifies certain powers which can be exercised by the Board only by passing a resolution at a BM. However, some of these powers may be delegated by the Board in the manner prescribed.

·         According to section 179, the Board shall exercise the following powers only by means of a resolution passed at a meeting of the Board:

a.       To make calls on shares.

b.      To authorize buy-back upto 10% of paid up capital and free reserve in year.

c.       To issue securities including debentures, whether in or outside India.

d.      To borrow money.

e.      To invest funds of the company.

f.        Grant loans or give guarantee or provide security in respect of loans.

g.       Approve financial statement and the Board’s report.

h.      Diversify the business of the company.

i.         Approve amalgamation, merger or reconstruction.

j.        Take over a company or acquire a controlling or substantial stake in another company.

Delegation of powers

·         The power to invest, borrow and grant loan or guarantee or security can be delegated.

·         Power of board can be delegated to committee of board or MD, manager or other principal officer of company or by branch officer in case of branch by resolution passed by board.

·         Resolution delegating powers is passed at a Board meeting.

·         Power to make inter-corporate loans and investments cannot be delegated by company.

·         Company in GM may impose any restrictions and conditions on the exercise by the Board of any of the powers specified above.

·         Beside the powers specified in section 179, there are certain other powers also which can be exercised only at the meeting of the Board:

-> The power of filling casual vacancies in the Board.

-> The power to make political contributions.

·         Approval of every directors entitle to vote and present is required at Board’s meeting for the following matters:

-> The power to appoint a person as MD or manager who is holding either office in another company.

-> The power to give loan to, or invest in any shares of, any other body corporate.

Section 192: Restriction on non-cash transaction involving directors

·  Section 192 regulates arrangements in respect of acquisition of assets for consideration other than cash between a company and a director of company or holding company or its subsidiary company or its associate or person connected with such director. A company can’t enter into an agreement by which:

-> A director of the company or its holding, subsidiary or associate company or a person connected with him acquires assets for consideration other than cash, from the company;  or

-> Company acquires assets for consideration other than cash, from such director or person so connected.

·         Such arrangements shall require prior approval by a resolution in GM.

·         If a director or connected person is a director of its holding company, approval is also required to be obtained by passing a resolution in GM of holding company.

·         The value of SR shall include the particulars of the arrangement along with the value of the assets involved in such arrangement duly calculated by a registered valuer.

·         If arrangement is entered into by company or its holding company in contravention of provisions is voidable at the option of company.

·         The arrangement will be valid if:

-> Restitution of any money is not possible and the company has been indemnified by any other person; or

-> Any rights are acquired bona fide for value and without notice of the contravention of the provisions of this section by any other person.

Meaning of associate company

Associate company means a company in which other company has control of 20% of total share capital or business decisions under agreement, but which is not subsidiary of company and includes a joint venture company

CL: Inter-Corporate Loans and Investment (section 186)

Section 186: Inter-Corporate Loans and Investment

According to section 186, Company shall not directly or indirectly:

-> make any loan to any person or other body corporate;

-> give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate;

-> acquire, by way of subscription, purchase or otherwise the securities of any other body corporate.

Exceeding 60% of its paid-up share capital, free reserves and security premium account or 100% of its free reserves and security premium account, whichever is more.

·         *  If aggregate of inter-corporate loan, investment, guarantee and securities in connection with loan already made and proposed to be made together is not above limit (higher of 60% of paid up capital, free reserve and security premium or 100% free reserve and security premium account), inter corporate loan and investment is possible by passing board resolution with approval of all directors present at meeting.

·        * However, if it is beyond the above limit then prior SR and prior approval of financial institute is required if term loan is subsisting.

·         * No loan shall be given under at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year government security closed to the period of the loan.

·         * The company shall disclose to the members in the financial statement, the amount of the loans given, investment made or guarantee given or security provided and the purpose for which it is given.

·        * Company can’t make inter-corporate loan, guarantee and security if it has defaulted in payment of deposit or interest thereon till default is continuing.

·         * Company is not allowed to make investment through not more than two layers of investment companies. However, this provision is not applicable to company while acquiring any other company incorporated outside India which has investment subsidiaries beyond two layers as per law of such country.

Procedure for Inter-corporate loan beyond limit

·         * Unanimous consent of BOD is required to provide any loan, give guarantee or provide security.

·         * When the aggregate of the loans and investments so far made, the amounts for which guarantee or security so far provided to in all other bodies corporate, along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceeds the aforesaid limit, no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorized by a SR passed in a GM.  SR must be passed by postal ballot.

   

Non applicability of section 186

Section 186 shall not apply when any loan made, any guarantee given or any security provided or any investment made by:

-          A banking company, an insurance company or a housing finance company in the ordinary course of its business.

-          A company established with the object of financing industrial enterprises, or of providing infrastructure facilities.

-          Registered NBFC (Non-Banking Finance Company) and whose principal business is acquisition of securities.

-          A company whose principal business is the acquisition of securities.

-          Purchase of right issues.

-          To any loan made, guarantee given or any security provided by a holding company to its wholly owned subsidiary or joint venture company.

-          To acquisition by a holding company, by way of subscription, purchase or otherwise, the securities of its wholly owned subsidiary or joint venture company.