Corporate leadershipi Board structure and practices
Indian law prescribes a one-tier board, with additional stipulations as to the constitution of the board depending on whether or not the company is listed and, for unlisted companies, the quantum of paid-up share capital.
Private companies must have a minimum of two directors and unlisted public companies must have at least three directors. In each case, at least one director must be a person who stays in India for a total period of not less than 182 days during the relevant financial year.
All listed companies, as well as all unlisted public companies having paid-up share capital of 1,000 million rupees or more or a turnover of 3,000 million rupees or more, must have at least one female director.
Additionally, for listed companies:
- a minimum of one-third of the directors of all listed companies are to be independent directors;
- there should be a mix of executive and non-executive directors, with at least half the board composed of non-executive directors;
- at least one-third of the board should be composed of independent directors if the chair is a non-executive director who is also neither a promoter nor a relative of a promoter of the company, failing which (i.e., if the chair is an executive director) at least half the board must be composed of independent directors; and
- where the non-executive chair is a promoter of the company or is related to any promoter or person occupying management positions at the level of the board of directors or at one level below the board of directors, at least half the board of directors of the listed company must consist of independent directors.
A person does not qualify for appointment if that person:
- is of unsound mind, an undischarged insolvent;
- has been sentenced to imprisonment for at least six months, and less than five years has lapsed from the end of that sentence;
- has been convicted of an offence concerning related-party transactions; or
- has not paid call money on shares of the company.
A company may prescribe additional disqualifications in its articles of association.
Every director must submit a list of entities in which he or she has an interest when taking office, and update that list when necessary and at least annually.Independent directors
Listed companies and unlisted public companies with paid-up share capital of 100 million rupees or more, or a turnover of 1 billion rupees or more, or an aggregate of outstanding loans, debentures and deposits exceeding 500 million rupees, must appoint at least two independent directors.
An independent director is a non-executive director who:
- is not and should not have been a promoter;
- does not and should not have had, directly or through a relative, any pecuniary relationship with the company during the immediately preceding two financial years where the transactions exceed the lower of 2 per cent or more of the company's gross turnover or total income or 5 million rupees; and
- individually, or with relatives:
- does not hold 2 per cent or more of the total voting power of the company;
- does not hold or has not held a key managerial personnel position, nor is or has been an employee of the company in the immediately preceding three financial years;
- is not nor has been an employee, proprietor or partner, in any of the three immediately preceding financial years, of a firm of auditors or company secretaries in practice or cost auditors of the company; or any legal or consulting firm that has or had any transaction with the company amounting to 10 per cent or more of the gross turnover of the firm; or
- is not a chief executive or director, by whatever name called, of any non-profit organisation that receives 25 per cent or more of its receipts from the company, any of its promoters, directors, or its holding, subsidiary or associate companies, or that holds 2 per cent or more of the total voting power of the company.
Generally, an independent director is a person who has significant expertise relevant to the company.
Indian legislators and regulators have emphasised the requirement for, and role of, independent directors as a significant factor contributing towards good corporate governance. While there is no doubt that reducing promoter nominees on the board necessarily reduces direct promoter control of the board, there is reason to continue to monitor the real impact of independent directors given the concentration of promoter control in the Indian economy.
The fact that shareholders retain the ultimate authority to appoint and remove a director is not uncommon, but poses unique challenges in India.Who can represent companies?
The board of directors is entitled to perform all acts and things that the company itself is authorised to do, provided the acts of the board of directors shall always be subject to:
- the Companies Act 2013;
- the memorandum and articles of association of the company;
- restrictions and conditions that may follow from resolutions passed in a general meeting; and
- applicable law.
Of course, no director may act on behalf of the company unless duly authorised by a resolution of the board.
The Companies Act 2013 sets out a list of matters that mandatorily require shareholder approval. These include, inter alia:
- the sale, lease out or disposal of the whole or substantially the whole of the undertaking of the company, or, where the company owns more than one undertaking, of the whole or substantially the whole of any of the undertakings;
- investing otherwise in trust securities the amount of compensation received by the undertaking as a result of any merger or amalgamation; and
- borrowing money, where the money to be borrowed, together with the money already borrowed by the company, will exceed the aggregate of its paid-up share capital and free reserves and securities premium, apart from temporary loans obtained from the company's bankers in the ordinary course of business.
Note also that for listed companies, the SEBI (Listing Obligations and Disclosure Requirements), 2015 (Listing Regulations) set out specific responsibilities for the boards of listed companies including, inter alia, selecting, monitoring, compensating and replacing key managerial personnel to run the affairs of the company; ensuring the integrity of the accounting and financial reporting systems of the company; and monitoring and managing potential conflicts of interest.
Subject to these requirements and any additional stipulations set out in a company's articles of association, the board may delegate its responsibilities to a committee of the board, an individual director, a key managerial person or such other person as the board deems fit.
Typically, officers of the company are authorised to execute routine operational matters, and the board may also issue a standing authority to a director or senior managerial personnel, inter alia, to execute contracts. It is paramount only that where the subject matter of the authority is expressly stated to be subject to shareholder approval, then that approval must be sought before the authority is exercised.Chair's control of the board
Indian companies may designate a chair of the board who holds office for the duration of the appointment, or not make such a designation, in which event any director must be appointed chair for the purpose of each meeting.
A designated chair may or may not exercise a casting vote: the determination must be set out in each company's articles of association.
A chair presides over the meetings of the board and the shareholders. The Companies Act 2013 provides the chair with the discretion to finalise the contents of the minutes of the meetings of the board and the shareholders, and to finally determine any disputes relating to the contents of the minutes.
The effective executive responsibility vests with a managing director or an executive director. A chief executive officer (CEO) is a recognised designation, but a CEO need not necessarily be a director.
No person can hold office as chair and managing director or chief executive officer of the company, except when the articles of association of the company provide otherwise; or the company does not carry on multiple businesses.
Generally, a designated chair is accorded significant respect as the leader of the board but, subject always to the determination of each company, does not necessarily exercise significant authority.Remuneration of directors
Private limited companies have no cap on the remuneration that may be paid to directors and senior management. However, the Companies Act 2013 prescribes the following conditions with respect to the remuneration that may be paid by public companies to their directors and managers:
- the total managerial remuneration payable by a public company to its directors, including the managing director and whole-time (i.e., full-time) director, and its manager in respect of any financial year shall not exceed 11 per cent of the net profits of that company for that financial year. However, this limit may be exceeded if the excess is approved by the shareholders;
- further, unless authorised by the shareholders in a general meeting via a special resolution:
- the remuneration payable to any one managing director, or whole-time director or manager, cannot exceed 5 per cent of the net profits of the company and, if there is more than one such director, remuneration shall not exceed 10 per cent of the net profits to all such directors and managers taken together; and
- the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed 1 per cent of the net profits of the company if there is a managing or whole-time director or manager; and 3 per cent of the net profits in any other case; and
- directors may also receive sitting fees subject to prescribed caps.
Note that the remuneration paid to a director is deemed to include the consideration paid to the director for any services that a director provides to the company, save and except where those services are professional services and the consideration paid is the fee for the services. Remuneration payable to the directors of listed companies is further regulated, requiring, inter alia, the remuneration to be approved by the shareholders.
Directors drawing remuneration above the limits prescribed by the Companies Act 2013 are required to refund the excess remuneration to the company.Remuneration of independent directors
Independent directors of listed entities are not entitled to any stock option in the company, and independent directors may receive remuneration by way of a fee for attending meetings, reimbursement of expenses incurred for participation in meetings and profit-related commissions as approved by the shareholders.Code of conduct
Independent directors are required, inter alia, to:
- uphold ethical standards of integrity and probity;
- act objectively and constructively;
- devote sufficient time and attention to the company;
- not abuse office as a director to the detriment of the company; and
- refrain from any action that would lead to the loss of independence.
The duties of independent directors include, inter alia:
- undertaking the appropriate induction of and regularly updating directors' skills, knowledge and familiarity with the company and the environment in which the company operates;
- seeking appropriate clarification or amplification of information and, where necessary, take external expert advice at the cost of the company;
- striving to attend all board meetings of the company;
- ensuring that their concerns are addressed by the board or at least recorded in the minutes of the relevant board meetings;
- participating constructively and actively in the committees of the board in which they are chairpersons or members;
- ensuring that related-party transactions are in the interests of the company;
- ascertaining and ensuring that the company has adequate and functional vigil mechanisms that do not prejudice a person who uses those mechanisms; and
- reporting concerns about unethical behaviour, actual or suspected fraud or violation of the companies.
In the ongoing management dispute at Tata Sons Limited, the holding company of the Tata Group, an independent director was removed by the shareholders following comments he made in favour of Cyrus Mistry. This has invited significant comment on the role of independent directors and their capacity to genuinely influence governance.Committees of the board
Indian law mandates committees for companies that meet specified criteria:
- audit committee: every listed company must have an audit committee. The audit committee must consist of a minimum of three directors, with independent directors forming a majority of this committee. The audit committee must, inter alia, confirm all related-party transactions for public listed companies;
- nomination and remuneration committee: every listed company must have a nomination and remuneration committee comprising three or more non-executive directors, of which not less than half should be independent directors;
- stakeholders relationship committee: every company that has more than 1,000 shareholders, deposit holders or holders of other securities must have a stakeholders' relationship committee to consider and resolve the grievances of security holders of the company. The chair of this committee must be a non-executive director; and
- risk management committee: pursuant to the Listing Regulations, every listed company must have a risk management committee, the specific duties of which are defined by the board.
The board of a target company must act in compliance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 and the fiduciary duty each director owes the company. Where the board believes that a takeover is not necessarily in the best interests of the company, it may seek a counter-offer from a white knight or otherwise act within the scope of the law to better protect the company.ii Directors
Independent directors play an increasingly important role in India. While their engagement is in the ordinary course limited to board meetings, they have the right to call for all documents and records, and also to visit company premises and interact with the executives other than simply at board meetings. While all directors are treated on equal terms, an executive director will necessarily be more aware of management proposals and initiatives even while those proposals and initiatives are at nascent stages, whereas independent directors will generally receive notice of these matters only when the management seeks board approval in respect of the proposals and initiatives.Appointment, term and succession
Directors are appointed by shareholders. The board may appoint a director subject to that appointment being approved by the shareholders in due course. Of course, every person being appointed as director must qualify as such.
While it is possible for private limited companies to appoint permanent directors, two-thirds of the directors in public companies must mandatorily retire by rotation annually.
Independent directors may be appointed for a term not exceeding five consecutive years, which can be extended for a further five-year period. Thereafter, reappointment is possible only after three years during which the independent director must not associate with the company.Liabilities and duties of directors
Indian law is clear that every director is a fiduciary and is principally obliged to protect the interests of the company. A director nominated by a shareholder or a lender must nonetheless act in the best interests of the company.
Indian jurisprudence is clear that a director of the company is liable for the acts of the company only to the extent that the director was actively involved in the relevant act. However, increasingly Indian regulators and investigating agencies follow the principle that the burden of proof lies on each director to demonstrate the absence of responsibility, and this principle also finds place in the Companies Act 2013. It is, therefore, imperative that each director fully discharges the duty of care that the law imposes, and ensures that dissent, if any, is appropriately recorded.