Responsibilities of the board (supervisory)

Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominant structure for the board of directors (the board) of Indian-listed companies remains one-tier. The board consists of directors of the company and only individuals can be appointed as directors.

The Companies Act 2013 (the Companies Act) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (the Listing Regulations) provide for the formation of an audit committee, a nomination and remuneration committee (NRC) and a stakeholders’ relationship committee (SRC). However, the recommendations of these committees are not binding on the board as they are only advisory in nature.

Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The primary responsibilities of the board include managing the company’s affairs and assets and ensuring the company’s compliance with applicable laws. Apart from the powers specifically reserved for shareholders, the board is entitled to exercise all powers, as the company is authorised to do, subject to compliance with applicable laws, the provisions of the memorandum of association and articles of association (AOA) of the company and the regulations, if any, made by the shareholders in a general meeting.

Besides, directors owe a fiduciary duty to the company and are expected to show the utmost care, diligence and skill in the exercise of their power and, where the company has violated any applicable laws, they are generally deemed to be an ‘officer who is in default’. They are also expected to execute their duties in a manner that does not conflict with their personal interests. The directors must act in accordance with the provisions of the Companies Act and the AOA of the company, should act in good faith to promote the objects of the company for the benefit of its members, and should act in the best interest of the company, its employees, its shareholders, the community and for the protection of the environment. The Companies Act prescribes a binding ‘Code for Independent Directors’, which provides the standard for professional conduct for independent directors (IDs) (the Code).

Regarding the shareholders, the primary responsibilities of the board include finalising the company’s accounts and presenting them for shareholders’ approval, recommending dividends and convening shareholders’ meetings.

Board obligees

Whom does the board represent and to whom do directors owe legal duties?

The board represents the company, and all actions taken by the board in good faith and intra vires bind the company. The board owes legal duties to the company and the directors are per se not agents or trustees of the shareholders.

Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed? Is there a business judgement rule?

Directors can be held personally liable for, among other things, illegal acts, fraud, negligence, conspiracy, breach of trust and duties, false representation, wilful contribution to tortious action, misappropriating the company’s funds and assets, making improper payments including divi­dend payments and entering into contracts ultra vires. In such cases, the company or its shareholders (by means of derivative actions), along with the affected third parties, can sue the directors for such breaches, through class action or otherwise.

The business judgement rule is not prevalent in India.

Care and prudence

Do the duties of directors include a care or prudence element?

Directors owe a fiduciary duty to the company and are expected to show the utmost care, diligence and skill in the exercise of their power and decision-making. They are expected to execute their duties in a manner that does not conflict with their personal interests and must disclose to the board their direct and indirect interests in any business dealing concerning the company. If there is a conflicting personal interest, they are mandated to refrain from participating in such a decision-making process. However, in the case of private companies, the interested director may participate in the meeting after disclosure of his or her interest. Specific duties of care are prescribed for directors in cases of related-party transactions (RPTs). Further, IDs have to adhere to the Code, which also prescribes certain duties of care or prudence.

Board member duties

To what extent do the duties of individual members of the board differ?

Directors can be executive or non-executive. The managing director (MD) (who is an executive director) is entrusted with substantial management powers under the company’s AOA, other agreements, or resolutions passed by the shareholders or the board. Executive directors employed by the company are responsible for discharging duties as per their terms of employment and are usually assigned duties related to finance, human resources and legal compliance. Non-executive directors participate in the board’s decision-making process and discharge other duties that may be entrusted upon them.

IDs take part in the decision-making process at the board, the audit committee, the NRC and the corporate social responsibility (CSR) committee meetings. They bring about ‘independence’ to the decision-making process and generally ensure the company’s compliance with the corporate governance norms.

Owing to the varied roles of the directors, the Companies Act follows the concept of ‘officer who is in default’ as persons responsible for the breach of the provisions of the Companies Act.

Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The board cannot delegate functions that require judgement or discretion on its part. Certain such functions have been prescribed in the Companies Act; for example, issuance of securities; approving financial statements and the board’s report; diversification of the business of the company; amalgamation, merger or reconstruction of the company; and takeover or acquisition of a controlling or substantial stake in another company. Further, items reserved under the company’s AOA or by the shareholders in a general meeting for the board cannot be delegated.

Apart from the above functions, the board can delegate certain specified powers to committees of directors, the MD, the company’s executive or non-executive directors, the manager or any other principal officer of the company by means of a board resolution and subject to the conditions as may be specified by the board. Certain such powers have been prescribed under the Companies Act; for example, borrowing money, investing the funds of the company and granting loans or giving guarantee or providing security in respect of loans.

Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

The Listing Regulations require half of the board of a listed entity to be non-executive directors. The Companies Act requires listed public companies to have at least one-third of the total number of directors as IDs. Further, unlisted public companies with paid-up share capital exceeding 100 million rupees or turnover exceeding 1 billion rupees or loans, debentures and deposits exceeding 500 million rupees must have at least two IDs.

Further, the Listing Regulations make it mandatory for listed companies to have at least half of their board made up of IDs if the listed company does not have a regular non-executive chair, or if the regular non-executive chair is a promoter or is related to the promoters or to a person holding a managerial position at board level or a level below that. This is also mandatory for listed companies that have outstanding superior voting rights equity shares (SR equity shares). In other cases, where the chair of the board is a non-executive director not falling into the category discussed above, the listed company must have at least one-third of their board comprise IDs. The Listing Regulations also require at least one ID on the board of the listed company to also be a director on the board of the unlisted material subsidiary (whether Indian or foreign subsidiary). A person cannot be appointed or continue as an alternate director for an ID.

Executive directors are whole-time directors of a company. Non-executive directors are directors other than whole-time directors and do not hold any managerial positions, apart from being a board member. An ID is a director (other than MD or a whole-time director or a nominee director) who fulfils the independence criteria prescribed under the Companies Act, including not having a pecuniary relationship above prescribed thresholds with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates during the two immediately preceding financial years, which may affect his or her independence; not being related to promoters or directors of the company or its holding subsidiary or associate company; not being a shareholder owning 2 per cent or more of the voting shares along with his relatives, etc. The Listing Regulation also provide a similar definition of IDs.

Unlike executive directors, the non-executive directors and the IDs are not responsible for the day-to-day management of the company.

The IDs actively participate in the board, the audit committee, the CSR committee and the NRC decision-making process (where their presence is mandatory). They instil external and wider perspective, bring independence to the decision-making process and generally ensure compliance by the company with corporate governance norms. IDs are also expected to act as whistle-blowers and act in the shareholders’ and the public interest for the implementation of corporate governance norms. IDs of a company must hold and attend at least one meeting in a year without the attendance of non-independent directors and members of the management to review the performance of non-independent directors, the board as a whole and the chair, and assess the quality, quantity and timeliness of the flow of information between the company’s management and the board.

Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

Board composition

Public and private companies must have a minimum of three and two directors, respectively, and a maximum of 15 directors. A ‘one-person company’ is required to appoint only one director. The AOA of a company may specify a higher minimum number of directors, and a company can appoint more than 15 directors by passing a special resolution. With effect from 1 April 2020, the top 2,000 listed entities by market capitalisation as at the end of the immediate previous financial year must have a minimum number of six directors.

The Companies Act requires every company to have at least one director who stays in India for at least 182 days during the financial year. Further, every listed company and every other public company with a paid-up share capital of at least 1 billion rupees or turnover of at least 3 billion rupees must have at least one woman director. Listed public companies must have at least one-third of the total number of directors as IDs. Further, unlisted public companies with paid-up share capital exceeding 100 million rupees or turnover exceeding 1 billion rupees or loans, debentures and deposits exceeding 500 million rupees must have at least two IDs.

The Listing Regulations require the board of a listed company to have an optimum combination of executive and non-executive directors with at least one woman director and not less than 50 per cent of the board comprise non-executive directors. The board of top 1,000 listed entities by market capitalisation as at the end of the immediate previous financial year must have at least one independent woman director by 1 April 2020. At least half of the board of a listed company must be made up of IDs if such listed company does not have a regular non-executive chair, or if the regular non-executive chair is a promoter or is related to the promoters or to a person holding managerial position at board level or a level below that. This is also mandatory for listed companies that have outstanding SR equity shares. In other cases, where the chair of the board is a non-executive director not falling into the category discussed above, the listed company must have at least one-third of their board comprise IDs.

Further, a person cannot be appointed as director in more than 20 companies at a time, out of which not more than 10 can be public companies. A person cannot be appointed as a director in more than seven listed entities with effect from 1 April 2020. Further, a person cannot be appointed as an ID in more than seven listed entities. In addition, any person who is serving as a whole-time director or MD in any listed entity is not permitted to serve as an ID in more than three listed entities.

The AOA of a company may give the board the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director. Further, if authorised by the AOA of the company or a shareholders’ resolution, the board may appoint a person as an alternate director for a director, in his or her absence from India for a minimum period of three months, provided such person is not already an alternate director for another director or holding directorship in the same company. The board of a company can fill any casual vacancy on the board that may arise if the office of a director is vacated during his or her term in the normal course, subject to the AOA and subsequent approval of the same by the shareholders in the next general meeting.

Directors’ qualification

The Companies Act only permits natural persons to be directors. It prohibits, inter alia, the following from being appointed as directors:

  • any person of unsound mind;
  • an undischarged insolvent;
  • any person who has been convicted by a court of an offence involving ‘moral turpitude’ and his or her sentence expired in the past five years;
  • any person who has been convicted for an offence dealing with a related-party transaction under the Companies Act in the preceding five years; or
  • any person who holds more than the prescribed number of directorships in companies.

 

The MD, whole-time director and manager cannot be below 21 years or above 70 years of age (although a person who has attained the age of 70 years can be appointed by passing a special resolution). A person above 18 years of age can be appointed as a director. Further, a person cannot be appointed or continue the directorship as a non-executive director in a listed entity if he or she has attained the age of 75 years unless a special resolution is passed to that effect.

Private companies, through their AOA, may provide for more director disqualification grounds. Further, there are additional qualifications applicable to IDs, managers, MD and whole-time directors, in relation to, inter alia, age and criminal record.

Board composition disclosure

Every company is required to keep a register of its directors and key managerial personnel at its registered office, and it must report any changes in directorship to the Registrar of Companies (ROC) within 30 days. Board composition is also part of the company’s annual return that is filed with the ROC. Every director is required to make disclosures of his or her directorship in all companies or any changes therein to companies in which he or she is a director. In addition, a listed company must disclose its board composition in its corporate governance report as part of its annual report.

The director of a company is required to disclose his or her concern or interest in any corporate entity at the first board meeting in which he or she participates as a director and thereafter at the first board meeting in every financial year or whenever there is a change in disclosures.

Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chair and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The Companies Act prohibits the appointment of the same person as the chair of the company as well as the MD or CEO unless the AOA provides otherwise or the company does not carry on multiple businesses. The top 500 listed entities must ensure that the chair of the board of such listed entity should be a non-executive director and should not be related to the MD or the CEO, with effect from 1 April 2022.

Generally, closely held Indian companies have a chair and managing director who acts both as a CEO and board chair.

Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

Audit committee and NRC

Under the Companies Act, listed public companies and public companies with paid-up share capital exceeding 100 million rupees, or turnover exceeding 1 billion rupees, or aggregate outstanding loans or borrowings or debentures or deposits exceeding 500 million rupees have to constitute an audit committee and an NRC.

The audit committee must have at least three directors with IDs forming a majority, and a majority of its members must have the ability to read and understand financial statements. The Listing Regulations require every listed company to constitute an audit committee with a minimum of three directors, of which two-thirds and the chair should be IDs; all members should be able to read and understand financial statements; and at least one member should have accounting or related financial management expertise. In the case of a listed entity with outstanding SR equity shares, the audit committee shall only comprise IDs.

The NRC must consist of at least three non-executive directors out of which at least half must be IDs. The chair of the company (whether executive or non-executive) may be appointed as a member of this committee but cannot chair this committee. A listed company must constitute an NRC with at least 50 per cent of the directors being IDs. In the case of a listed entity with outstanding SR equity shares, two-thirds of the NRC shall comprise IDs. The NRC of a listed company must be chaired by an ID.

Stakeholders’ relationship committee

Any company that consists of more than 1,000 security holders at any time during a financial year must constitute an SRC to consider and resolve the grievances of security holders of the company. The SRC consists of a chair who must be a non-executive director and other members as may be decided by the board. At least three directors, with at least one being an ID, must be the members of the SRC. In the case of a listed entity with outstanding SR equity shares, at least two-thirds of the SRC shall comprise of IDs.

CSR committee

Every company with net worth exceeding 5 billion rupees or turnover exceeding 10 billion rupees or net profit exceeding 50 million rupees during the immediately preceding financial year is required to constitute a CSR committee.

The CSR committee consists of at least three directors, out of which at least one director should be an ID. Unlisted public companies or private companies that are not required to appoint an ID should have their CSR committees without such director. Further, a private company having only two directors on its board should constitute its CSR committee with them.

Other committees

In addition, the board may constitute directors’ committees or other expert committees to assist them and to discharge their functions.

In accordance with the Listing Regulations, the top 500 listed companies have to constitute a risk management committee (RMC), consisting of a director as the chair and senior executives of the company as members. The majority of members of RMC must be members of the board, and in the case of a listed entity with outstanding SR equity shares, at least two-thirds of the RMC shall comprise of IDs.

The Listing Regulations also provide that a director should not be a member in more than 10 committees or act as a chair of more than five committees across all listed entities in which he or she is a director.

Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

A company must have at least four board meetings in a year, such that not more than 120 days intervene between two consecutive board meetings. The directors can participate in board meetings either in person or through videoconferencing or other prescribed audiovisual means. In the case that there is quorum in a board meeting through the physical presence of directors, any other director can participate through videoconferencing or other prescribed audiovisual means in such meeting on specified matters. The quorum for a board meeting should be one-third of the total strength of directors or two directors, whichever is higher and participation by videoconferencing or other prescribed audiovisual means must be counted for quorum.

The quorum for board meetings of the top 2,000 listed entities with effect from 1 April 2020 should be one-third of the total strength of the board or three directors, whichever is higher, including at least one ID.

Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

In accordance with the Companies Act, all companies are required to provide details with regard to the board and its committees in the board’s report (which is mandatory under the Companies Act and is to be presented by the board to the shareholders at the general meeting). The board’s report includes, inter alia, directors’ responsibility statement and a declaration by the IDs verifying their independence based on prescribed criteria. 

In accordance with the Listing Regulations, listed companies must submit periodic compliance reports to the stock exchanges containing specified information regarding the board, including the composition of the board and board committees, remuneration of directors and RPTs approved by the board, among other things. Furthermore, listed companies must have a separate section in the annual report containing a detailed compliance report on corporate governance aspects. Every listed entity and its material unlisted subsidiaries incorporated in India are required to undertake secretarial audit and annex with its annual report, a secretarial audit report, given by a company secretary in practice, in the prescribed form with effect from the year ended 31 March 2019.

Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

The Companies Act requires listed companies and public companies with paid-up share capital exceeding 250 million rupees, to disclose the manner in which formal annual evaluation has been undertaken of the performance of the board, the committees constituted by the board and individual directors in the board’s report.

The NRC and the IDs have been made responsible for carrying out the evaluation of each director’s performance; however, the Companies Act does not provide for the mode, manner and process to be followed for such evaluation.

The Listing Regulations additionally require the board of listed companies to undertake an evaluation of the performance of the IDs on the board. Such evaluation shall include the performance of the directors and fulfilment of the independence criteria as specified in the Listing Regulations and their independence from the management. The entire board is required to participate in the evaluation of each ID, except for the individual ID being evaluated.

The NRC of listed companies has been tasked with formulating the criteria for evaluating the performance of IDs, as well as the board as a whole, and the evaluation criteria are to be disclosed by the company in its annual report. The board of listed companies is required to monitor and review the evaluation framework for the board.

The Securities and Exchange Board of India issued a guidance note in January 2017 to guide listed entities on various aspects of board evaluation. Further, the Institute of Company Secretaries of India published a ‘Guide to Board Evaluation’ in June 2017 to provide guidance to companies on how to evaluate the performance of its board with suggested parameters and sample models for evaluation.

Law stated date

Correct on

Give the date on which the information above is accurate.

8 May 2020