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Board of Directors and its Powers

A company is an artificial person and it acts through directors. Directors are collectively known as the Board of Directors. The management of the affairs of the company is vested in the Board of Directors. The Board of Directors of the Company are said to be the nucleus, they are selected according to the procedure prescribed in the Companies Act, 2013 and Articles of Association of the company. Members of the Board of Directors are known as ‘Directors’.

Board of Directors shall exercise their powers bona fide and in the interest of the company[1]. Since the position of Board of Directors is that of Trustee, they are entrusted with the responsibility to manage the affairs of the company and to work in the interest of the Company and also safeguarding the interest of all the stakeholders. Directors when acting collectively can exercise all those powers of the Company, except those which are prescribed by the Act to be exercised in the General Meeting of the Company.

The policies of the Company are formulated by the Board which is expected to establish an organizational set up for implementing such policies to achieve the objects contained in the Memorandum of Association of the Company. To attain the objectives, set out in the Memorandum, these policies gather resources for the achievement of Company objectives and control, guide, direct and manage the affairs of the Company.

As per section 149 of the Companies Act, 2013 only an individual can be appointed as a Director of the Company, thus the Board of Directors shall consist of individuals only. No body corporate, association, or firm can be appointed as director of the Company[2]. The Board of Directors of the company have been entrusted with powers under Companies Act,2013 of which certain powers can be exercised at Board meeting and the powers which could be only be exercised with the consent of the company at the general meeting.

Board of Directors acting in the interest of the company should make sure that they do not commit such an act or enter into such transactions which would be in contravention to the provisions of Companies Act, 2013 and such other acts which would apply to the Company. Powers contained under section 179 can be exercised by the Board only by passing a resolution at the board meeting. However, some powers can be delegated by the Board in the manner prescribed.

The company is a separate legal entity from its shareholders and directors. Powers of the Company should be exercised lawfully and according to the Articles of association, some powers are exercised by Board, and the other powers are reserved for the shareholders in the general meeting. The powers of the management are vested in directors, they alone can exercise those powers. Shareholders of the Company cannot interfere into day to day affairs, the only way in which they control those powers vested in the Board, is by altering the Articles of the Company or they can even refuse to re-elect the directors whose action they disapprove.

Shareholders themselves cannot usurp the powers which have been vested in the Board by the Articles of the Company. In the case of Milan sen v. Guardian Plasticote Ltd[3], the Resolution for the rights issue was passed by the directors of the company which was questioned by certain shareholders. Calcutta High Court held the question of whether the company needed an additional capital is a question which should be decided by the board of the company and if the board is of the view that the additional capital was required in the form of rights issue then they may do so and the court would be slow to disturb the same unless the circumstances are such that they are acting in a mala fide manner or there has been a breach of trust. The general body of the shareholders can only intervene when the directors of the company have acted with an improper motive and in a mala fide manner, when the Board is incompetent to act and when there is a deadlock in the management.

Board Composition

Section 149(1) of the Companies Act, 2013 requires the company to have minimum 3 directors in the case of a public company, 2 directors in the case of a private company, and 1 director in the case of One Person Company. A company can appoint maximum 15 directors without passing a resolution. If the company wants to appoint more than 15 directors then it has to be by the way of passing a special resolution in the general meeting. Thus, the company can appoint a maximum of 15 directors without any specific compliance, although the limit can be increased by the way of passing a special resolution. Section 149(3) also requires the company to have at least one director who has stayed in India for 182 days such directors are called resident directors. As per section 149(1) read along with Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014 following class of companies should have at least one Women Director in the Board:
  1. All listed Companies.
  2. Public companies with paid-up capital of Rs 100cr or more or with a turnover of Rs 300cr or more.

As per Regulation 17 SEBI (Listing obligation and disclosure requirements) Regulation, 2018 every company which is listed on a recognized stock exchange should have an optimum combination of executive and non-executive directors along with at least one Women Director and at least 50% of non-executive directors. E.g.: If MS7 LTD. is a listed entity in India and it comprises of 15 Directors in its Board, as per SEBI (LODR) it should at least have 8 non-executive Directors.

The top 500 listed entities shall have at least one independent Women Director in the Board of the Company by April 1, 2019, and the Top 1000 listed entities shall include 1 independent Women Director by April 1, 2020. If the chairperson of the Board of Directors is a non-executive director then at least one-third of the Board of Directors shall comprise independent directors and if the listed entity does not have a non-executive director as its chairperson then the one-half Board of Directors should comprise of independent directors.

If the non-executive director who is the chairperson and also the promoter of the company or related to the promoter of the company or any other person who has occupied a high level position in the company which deals with the management of the company or one level below such position in that company then the Board of Directors of that Company should consist of at least one-half of the independent directors.

The Board of Directors of the top 1000 listed entities should have at least 6 directors from April 1, 2019, and the top 2000 entities should have at least 6 directors with effect from April 1, 2020.

As per Regulation 17, no listed entity shall appoint or continue the Directorship of any person as a non-executive director who has attained the age of 75 years provided that special resolution is passed in the general meeting for appointing a such person as a Director and explanatory statement annexed to the notice of the general meeting should contain the justification for appointing such person as a Director.

Board Meetings

  1. Frequency of the Board meetings:
    Section 173 of the Companies Act, 2013 deals with the Board meetings. The First Board meeting should be held within 30 days of the incorporation. At least 4 Board meetings should be held in a calendar year and the gap between two meetings should not exceed more than 120 days. An OPC which has only a director need not comply with the above provisions. Section 8 Company shall hold one Board meeting once in every 6 calendar months. Central Government however may exempt any company or class of companies from the above provisions subject to such conditions, modifications, or exceptions as may be specified.
     
  2. Day, Time, and Place of Board Meeting:
    Board meeting can be held on the day but if the meeting is adjourned for the want of the quorum and if articles do not provide anything, the meeting will stand adjourned automatically till the same day, in the next week at same place and time and if that day happens to be a national holiday then the next succeeding day, which is not a national holiday at same place and time.

    Board meetings can be held at any time it can also be outside the business hours. Unlike the General meeting of the company, the Board can be held at any place and it is not necessary that the Board meeting should be held at the registered office of the company. Board meetings can also be held by the way of video conferencing, Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 deals with conducting the Board meeting through video-conferencing or other audio-visual means. Directors can hold a board meeting even abroad.
     
  3. Notice of the Board meeting:
    As per Regulation 67 of Table F of Companies Act, 2013 Board meeting can be called by any director or manager or secretary on the requisition of any director. A board meeting should be called by giving 7 days’ notice writing:
    • By hand delivery; or
    • By post; or
    • By electronic means.

      If the director specifies any particular method of sending notice then it should be given as per that specified method.

      Notice of the Board meeting is required to be given to every director of the company at his usual address in India. In Parameshwari Prasad Gupta v. Union of India[4], the Supreme Court held that board meetings to be effective must be duly convened by proper notice to each director and in case of default the meeting is irregular. The notice should be given even if the director has stated he will not be able to attend the meeting.

      The notice should also be given even if he could not participate or vote on the subject matter to be transacted at the meeting. If the loan agreement with a bank or financial institution provides, a notice of the board meeting is also to be given to them. If the Board meeting is adjourned then the fresh notice is not required but if the meeting adjourned is sine die, fresh notice is required. Failure to send notice even to the director would render the resolution passed at the meeting null and void. In the case of default in providing notice, every officer of the company would be liable to pay the fine of Rs. 25,000.
       
  4. Quorum:
    Quorum means the minimum number of directors who are competent to transact and vote on any business at the meeting. The director must be personally present for the board meeting. Proxies are not allowed for a board meeting. Any expert can attend a board meeting if he is invited by the Board provided that he cannot vote and is not counted for quorum.

    The quorum for the board meeting is one-third of the total strength or 2 directors whichever is higher. Interested directors are not counted for a quorum if at any time the interested director exceeds or is equal to two-thirds of total strength, the remaining non-interested directors are counted for the quorum provided that it is not less than two. Director whose place is liable to vacant should not be considered for calculating total strength.

    If the number of directors are reduced below the quorum, then the director may hold a meeting for the following purpose:
    • To call a general meeting; or
    • To increase the number of directors.
    It was held in the case of Rajan N. Doshi v. British Burma Petroleum Co[5]. Ltd that a single director cannot act for a purpose other than calling a general meeting for the appointment of directors.
     
  5. Voting:
    Matters at the board meeting are decided by the majority of votes. The interested director cannot participate or vote on the resolution in which the director is interested directly or indirectly. Voting at a board meeting is by the show of hands.
     
  6. Chairman of Board Meeting:
    For a proper board meeting proper person should be in the chair. Only a director can be chairman of the board meeting. In case of an equality of votes, the chairman has a second vote or casting vote and has absolute discretion on casting vote he may refuse to cast a second vote on equality.
     
  7. Board meeting through Video-conferencing:
    Rule 3 of Companies (meeting of board and its powers) Rules, 2014
    • Roll call by the chairman
    • Directors introduce themselves before they speak on matters
    • The presence will be counted for the want of quorum
    • No unauthorized access
    • Directors to repeat if there are any disturbances
    • Chairperson to announce the summary at the end of the meeting.

However following matters cannot be dealt with at board meeting held through video-conferencing
  • Approval of the annual financial statements
  • Approval of the board’s report
  • Approval of prospectus
  • Audit committee meetings for the consideration of financial statements including consolidated financial statements and
  • Approval of any matter relating to merger, demerger, amalgamation, acquisition and takeover.

Committees of the Board

A committee of directors may be constituted by the Board of directors by passing a resolution. Board may delegate certain powers to an individual director or committee of directors. The resolution may also specify the powers delegated subject to which the committee shall work on the relevant matters. Following types of Board committees shall be constituted compulsory by certain specified companies:
  1. Audit Committee
  2. Nomination and Remuneration Committee
  3. Stakeholders Relationship Committee
  4. Corporate Social Responsibility Committee
However, Board may also constitute any of the following committees voluntarily:
  1. Corporate Governance Committee
  2. Risk Management Committee
  3. Regulatory, Compliance, and Government Affairs Committee.

Audit Committee- Section 177- Board of directors of the following class of companies as specified below shall constitute Audit Committee and Nomination and Remuneration Committee (NRC):
  • All Listed companies
  • All Public companies having paid-up capital of Rs. 10cr or more
  • All Public companies having a turnover of Rs. 100cr or more
  • All Public companies having in aggregate of outstanding loans and borrowings or debentures or deposits exceeding Rs. 50cr or more.
The Audit Committee shall be constituted by the Board of directors and the only director can become a member of the Audit Committee. The Audit Committee should at least have 3 directors with independent directors forming a majority. Members of the Audit Committee should be financially literate.

Financially literate here means the person who can read and understand the financial statement. In addition to the Companies Act, 2013 listed companies also have to comply with the SEBI (LODR) Regulations, 2015. The Audit Committee is responsible for making recommendations for appointment, remuneration, and terms of appointment of auditors. The recommendation made by the Audit Committee does not stand final, they just act as advisory regarding the recommendation of the auditors.

They also have to review the performance and effectiveness of the audit process. The Audit committee of the company can also investigate any matter if the same is referred to it by the Board of the company. They can also obtain any professional advice from external sources and have full access to information contained in the records of the company. A Meeting of the Audit Committee should be held at least four times a year. The maximum gap should not be of more than four months.

Nomination and Remuneration Committee:

Section 178: The Nomination and Remuneration committee of the company should consist of at least 3 or more non-executive directors. Listed companies also have to comply with the SEBI (LODR) Regulations, 2015.

The Nomination & Remuneration Committee is in charge of:

  • Identification of individuals who are qualified to become directors and who may be appointed to senior positions in management;
  • Specifying the manner in which the Board's performance is evaluated effectively.
  • Formulating the qualification criteria, positive attributes, and the autonomy of a director.
  • Recommend to the board a strategy pertaining to the directors, key managerial personnel, and other employees.

Stakeholders Relationship Committee:

Section 178(5): Company having combined membership of more than 1000 shareholders, debenture holders, deposit holders, and deposit holders at any time during the financial year should constitute Stakeholders Relationship Committee (SRC). The committee should consist of a chairperson who should be a non-executive director and the members as decided by the board. The function of the Stakeholders Relationship Committee is to resolve the grievances of the security holders of the company. The listed company should also comply with Regulation 20 of SEBI (LODR) Regulations, 2015.

Penalty for contravention of section 177 and 178:

If the company contravenes the provision of section 177 and 178 then it shall be punishable to pay the fine of not less than Rs. 1,00,000 and which may extend up to Rs. 5,00,000. Officer in default shall be punishable with imprisonment of not less than a year and fine of Rs. 25,000 which may extend up to Rs. 1,00,000 or with both. The additional fine will also be payable by the listed entity as per the SEBI (LODR) Regulations, 2015.

Corporate Social Responsibility Committee- Section 135: Every company either private ltd. or public ltd which either has:
  • A net worth of Rs. 500cr or more
  • Turnover of Rs.1000cr or more
  • Net profits of Rs. 5cr or more,
Need to constitute Corporate Social Responsibility Committee (CSR) and spend at least 2% of its average net profits for immediately three preceding financial years on CSR activities. Provisions of section 135 apply to both holding and subsidiary companies and as well as foreign companies. The company which does not satisfy the specified criteria for the period of three consecutive financial years is not required to comply with the CSR obligations. However, the provisions of section 135 state that one of three criteria has to be satisfied to attract the provisions of section 135. The activities of CSR should be undertaken as per the CSR policy of the company.

Powers of the Board
Section 179 of the Companies Act, 2013 states the general powers of the Board of directors of a company. The Board of directors can do all such acts and exercise their powers subject to the provisions of the act, memorandum, and articles of the company. This section specifies that certain powers can be exercised by the Board only by passing a board resolution at a board meeting.

Following powers can be exercised by the Board by the means of a resolution passed at a board meeting:
  1. To make calls on shares.
  2. To authorize buy-back of shares under section 68 of Companies Act, 2013.
  3. To issue securities including debentures.
  4. To borrow monies.
  5. To invest the funds of the Company[6].
  6. To grant loans or give guarantees or provide security in respect of shares.
  7. Approve financial statements and the Board’s report.
  8. Diversify the business of the company.
  9. Approve amalgamation, merger, de-merger, or reconstruction.
  10. The takeover of a company or acquiring or controlling or substantial stake in another company.

Rights of the Shareholders to intervene:

Shareholders of the company may restrict the powers of the Board by an amendment in the articles. Shareholders do not have any right to intervene in routine business of the for which Board is authorized to act. Amendment in the articles cannot be made retrospectively and it cannot invalidate the act validly done by the Board.

In the case of Jagdish Prasad v. Pt. Paras Ram[7], it was observed by the court that it is the first elementary principal of the company that when powers are vested with the Board of directors by the articles of the company, they cannot be interfered with by shareholders as such.

If shareholders are dissatisfied with the director their remedy is to remove them in accordance with the provisions of the act or articles. But so long as the Board of directors exists and particular powers are vested in it by articles, the Board is entitled to exercise those powers without interference by the shareholders.

However, in the following cases shareholders have right to intervene:
  1. When the directors are acting in a mala fide manner and against the interest of the company and security holders
  2. Director’s personal interests are in conflict with the interest of the company.
  3. When there is a deadlock in the management.

The Board of directors of the company also have certain other powers besides the power contained under section 179 of the act and such powers can be exercised at the meeting of the Board and these include:
  1. Power of the Board to fill up casual vacancy under section 161 of the act
  2. To recommend the rate of dividend.
  3. Sanctioning of contract in which the director is interested[8].
  4. Power of the Board to make a political contribution (Section 182).
  5. Power of the Board to contribute to the National Defense Fund (Section 183).
  6. To appoint internal auditors and secretarial auditors.
  7. The power to give loan to or invest in any shares of any other body corporate.[9]
  8. To enter into any contract with a related party (section 188).

Restriction on the Powers of the Board

Certain powers of the Board of directors can be exercised with the consent of the company in general meeting and prior approval will be required by way of passing a special resolution. This section imposes a certain restriction on the powers of the Board.

Board of directors of the company shall not exercise the following powers:
  1. Sell or lease of an undertaking- section 180(1)(a):
    Board cannot sell, lease or dispose of the whole or substantial part of the undertaking without the prior consent of shareholders. Same provision is applicable if it has more than one undertaking. Provisions of this section is not applicable if the general business of the company is to sell or lease the property.

    The resolution shall be passed through postal ballot.
    For the purpose of this section, undertaking means in which the company has invested more than 20% of its net worth or an undertaking which generated 20% of income as per last audited balance sheet.

    In Thakur J. Bakshani v. Shriutivinda Agro Farms (P.) Ltd., Hyderabad[10], The Madras High Court held that the sale of immovable property as well plant and machinery either individually or collectively would fall within section 293(now section 180) and for effecting such sale consent of the shareholders is required.
  2. Invest otherwise than in trust securities- section 180(1)(b):
    Board cannot invest, otherwise than in trust securities the amount of compensation received by the way of compulsory acquisition of the undertaking as a result of the merger, amalgamation without the prior approval of shareholders.
     
  3. Borrow money in excess of paid up capital and free reserves- section 180(1)(c):
    Board cannot borrow monies, if money already borrowed exceeds the aggregate of paid up share capital, free reserves and securities premium of the company without the prior approval of its shareholders. However, temporary loans obtained from the company’s bankers in the ordinary course of business is not considered as borrowing.
     
  4. Give time limit to remit loan to directors- section 180(1)(d):
    Board cannot remit, or give any time for repayment of any debt due by director without the prior approval of shareholders.

Conclusion
As a company is incorporated and it has a separate identity, however, it operates through its Board of Directors who act as a brain for the company. The directors are the main essence and they are the primary secret behind a thriving company. The control of the company should be in the hands of conscientious persons who will use their influence and position in the interest of the company and also safeguard the interest of its stakeholders. The company has a Board of directors who oversees the business of the company and takes all the decisions.

Even though it has been shown that the company has a significant number of cases of mismanagement. The directors are found to be accountable and responsible in such a case. Boards of Directors can have immense and far-reaching duties, from the acceptance of the budgets and financial statements of companies to the development of large-scale human resources policies. It cannot be argued that authority without control would in no time become arbitrary.

Companies Act along with other regulations has provided for rules for regulating the actions of directors. The regulations mentioned in such acts are for protecting the interest of creditors and its shareholder. These rules guarantee that the directors do not enjoy personal benefits at the cost of the interest of the company or its stakeholders.

Bibliography
  1. Statutes
    • Companies Act, 2013.
    • SEBI (LODR) Regulations, 2015.
  2. Books Referred:
    • Company Law and Practice- Dr. G.K. Kapoor and Dr. Sanjay Dhamija, 24th edition, 2019, Taxmann
    • Bare Act (Companies Act, 2013).
    • Module of Institute of Company Secretaries of India.
  3. Case laws
    • Milan sen v. Guardian Plasticote Ltd, (1998) 2 Comp L j 320.
    • Rajan N. Doshi v. British Burma Petroleum Co, 1972 42 Comp Cas 197 Bom.
    • Jagdish Prasad v. Pt. Paras Ram, AIR 1941 All 360.
    • Thakur J. Bakshani v. Shriutivinda Agro Farms (P.) Ltd., Hyderabad, 91 taxmann.com 13 (Madras).
    • Parameshwari Prasad Gupta v. Union of India, 1973 AIR 2389, 1974 SCR (1) 304.
End-Notes:
  1. Section 166, Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).
  2. Section 149, Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).
  3. (1998) 2 Comp L j 320.
  4. 1973 AIR 2389, 1974 SCR (1) 304
  5. 1972 42 Comp Cas 197 Bom.
  6. This power shall however be subject to the provisions of sections 180 and 186.
  7. AIR 1941 All 360.
  8. Section 188, Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).
  9. Section 186 requires that unanimous consent of the board should be obtained.
  10. 91 taxmann.com 13 (Madras).

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