Responsibilities of the board (supervisory)

Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The Board’s primary responsibilities 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 and to do all acts and things, as the company is authorised to do, subject to compliance with applicable laws, the provisions of the company’s charter documents 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 AOA of the company, should act in good faith to promote the objects of the company for the benefit of its members, and in the best interest of the company, its employees, its shareholders, the community and for the protection of the environment.

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. The Companies Act and the Listing Regulations specifically provide that directors are generally liable to members of the company while carrying out the company’s business and are expected to act in good faith and promote the object of the company for the benefit of its members as a whole.

The Companies Act prescribes a binding ‘Code for Independent Directors’, which provides the standard for professional conduct for IDs (the Code).

Board obligees

Whom does the board represent and to whom does it 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. However, the Board is expected to exercise its duties with the utmost care, diligence and skill while exercising its powers and any breach thereof may make it liable to the shareholders and to affected third parties, such as creditors, debenture holders, trustees or other persons dealing with the company.

The directors must act in accordance with the AOA of the company, should act in good faith to promote the objects of the company for the benefit of its members, and in the best interest of the company, its employees, its shareholders, the community and for the protection of the environment.

Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Directors can be held personally liable for, among others, illegal acts, fraud, negligence, conspiracy, breach of trust and duties, false representation, wilful contribution to tortious action, misappropriation of 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 (see question 8) or otherwise.

Care and prudence

Do the board’s duties 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 are required to 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 case of private companies, the interested director may participate in the meeting after disclosure of his or her interest.

In case of RPTs, the restriction on the member of a company (who is a related party) on voting on a shareholders’ resolution to approve any contract or arrangement which may be entered into by the company, is not applicable: in case of private companies; or in case of a company in which 90 per cent or more members, in number, are relatives of promoters or are related parties.

The Code for requires IDs to, inter alia, satisfy themselves on the integrity of the financial information of the company, and the robustness of its financial controls and systems of risk management, safeguard the interests of all stakeholders, particularly the minority shareholders, and seek clarification or amplification of the information provided to the Board, and where necessary, obtain and follow professional advice and the opinion of external experts at the expense of the company.

Judicial pronouncements suggest that the directors must use their skill reasonably and in sync with their knowledge and experience. They are expected to adopt the standard of care that an ordinary person might be expected to take in the circumstances and therefore they cannot be held responsible for mere judgement errors if they have acted in good faith.

Recently, the Amendment Regulations have amended the definition of the term ‘related party’ under the Listing Regulations to the effect that any person or entity belonging to the promoter or promoter group of a listed entity and holding 20 per cent or more of the shareholding in such listed entity will be deemed to be a related party. The Amendment Regulations have further amended the Listing Regulations to require the listed entity:

  • to formulate a policy on materiality of RPTs and on dealing with RPTs including clear threshold limits duly approved by the Board; and
  • to pass necessary resolution of shareholders for payment with respect to brand usage or royalty (for the transaction to be entered into individually or taken together with previous transactions during a financial year) exceeds 2 per cent of the annual consolidated turnover (as per the last audited financial statements) where no related party shall vote to approve.
Board member duties

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

Directors can be executive or non-executive. Executive directors, such as managing and full-time directors, perform day-to-day management duties for the company in addition to being Board members.

The MD is entrusted with substantial management powers under the company’s AOA, other agreements, or resolutions passed by the shareholders or the Board. Full-time directors in the employment of 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 are directors simpliciter who participate in the Board decision-making process and discharge other duties that may be entrusted upon them by the Board or the shareholders.

IDs take part in the decision-making process at the Board, audit, remuneration and CSR committee meetings (where their presence is mandatory). They bring about ‘independence’ to the decision-making process and generally ensure the company’s compliance with the corporate governance norms, as well as acting as a whistle-blower in the shareholders’ interest and in the larger public interest.

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 Companies Act’s provisions. The MD, whole-time director and key managerial personnel (KMP) (a role akin to that of MD, but who need not necessarily be a Board member) are the persons primarily responsible as ‘officer who is in default’ and in their absence and in the absence of any other director who has been entrusted with that specific duty, all of the company’s directors become liable.

The Companies Act mandates that a majority of the directors comprising the audit committee must be persons having the ability to read and understand financial statements, and as stated in question 25, the Listing Regulations further require listed companies to ensure that all members of its audit committee are able to read and understand financial statements; and at least one member has accounting or related financial management expertise.

Delegation of board responsibilities

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

Among others, decisions that cannot be delegated include:

  • making calls to shareholders with regard to unpaid share monies;
  • approving the buy-back of securities;
  • issuance of securities, including debentures;
  • approving financial statements and the Board’s report;
  • diversification of the business of the company;
  • amalgamation, merger or reconstruction of the company;
  • takeover or acquisition of a controlling or substantial stake in another company;
  • filling in casual vacancies of directors;
  • making political contributions;
  • appointment or removal of KMP;
  • appointment of internal and secretarial auditors;
  • sanctioning contracts in which directors are interested;
  • receiving notice of directors’ interests or shareholdings;
  • appointment of an MD who is already MD in another company;
  • making loans and investments in certain cases;
  • approving a declaration of solvency in a voluntary winding up; and
  • approving the advertising text for attracting deposits.

The Board, as it is under a fiduciary duty, cannot delegate functions that require judgement or discretion on its part. 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 decisions, 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.

Further, the powers of a company’s MD, who is entrusted with substantial management powers (including the power exercisable by the Board, which the shareholders intend to delegate to the MD), are often prescribed in the company’s AOA.

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?

‘Non-executive directors’ are not per se defined in the Companies Act or otherwise. The term is commonly used to refer to directors who are directors simpliciter and do not hold any managerial positions, apart from being a Board member.

The Companies Act requires listed companies to have at least one-third of their Board made up of 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 are required to have at least two IDs on the Board.

The Companies Act defines ‘independent director’ as a non-­executive director who, among other factors:

  • does not have any pecuniary relationship, other than remuneration as such director or having transactions not exceeding 10 per cent of his or her total income or other prescribed amount, 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 the independence of the director;
  • is not related to promoters or directors of the company or its holding subsidiary or associate company;
  • has not been an executive of the company in the immediately preceding three financial years;
  • is not a partner or executive or was not a partner or executive, during the preceding three years, of:
  • the statutory audit firm or the internal audit firm that is associated with the company; or
  • legal firms and consulting firms that have a material association with the company; and
  • is not a substantial shareholder of the company, owning 2 per cent or more of the voting shares along with his or her relatives.

The Listing Regulations makes it mandatory for listed companies to have at least half of their Board made up of IDs if the Board chairman is an executive director, or a non-executive director who is a promoter or is related to the promoters or holds a managerial position at Board level or a level below that. In other cases, where the Board chairman is a non-executive director not falling into the category discussed above, listed companies are required to have at least one-third of their Board made up of IDs. The Listing Regulations further provide that IDs must be provided suitable training to familiarise them, inter alia, with the company, the nature of the industry in which the company operates, their role, rights and responsibilities in the company and the business model of the company; the details of such training imparted are to be disclosed by the company in its annual report.

Unlike executive directors, IDs are not responsible for day-to-day company management. They actively participate in the Board, audit, CSR and 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 are required to 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 and the Board as a whole and the chairman, and assess the quality, quantity and timeliness of flow of information between the company’s management and the Board.

The Companies Act provides stringent qualifications for an ID and provides for detailed guidelines for appointment, roles and responsibilities of IDs with a view to ensure that they work in an objective manner in the Code for Independent Directors. While there is no minimum age requirement for IDs under the Companies Act, in view of the nature of their responsibilities, it is essential that a person sought to be appointed as an ID must have legal competence, relevant experience and expertise, and therefore must not be less than 18 years of age.

The Amendment Regulations have amended the definition of the term ‘independent director’ under the Listing Regulations to specifically exclude persons who constitute the ‘promoter group’ of a listed entity. The ID should also not be a non-independent director of another company on the Board of which any non-independent director of the listed entity is an ID. These amendments will come into force on 1 October 2018. The Amendment Regulations further requires every ID is required to submit a declaration at the first meeting of the Board in which he or she participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in circumstances that may affect his or her status as an ID, that he or she meets the criteria of independence and that he or she is not aware of any circumstances or situation that could impair his or her ability to discharge his or her duties with an objective judgment and without external influence. The Board of the listed entity should take on record such declaration and confirmation after undertaking due assessment of the veracity of the same.