P ROJECT R EPORT ON

D IRECTORS

UNDER THE

C OMPANIES ACT

2013

Submitted to:
Mr. S K Sinha
(Faculty Corporate Law)

Submitted by:
Prashasti Janghel
Roll no. 97
Semester VII (B)

Hidayatullah National Law University, Raipur

Submitted on: 10 th October, 2014

Corporate Law- Honours II

Directors under the Companies Act 2013

C ONTENTS
A CKNOWLEDGEMENTS

II

A N I NTRODUCTION
III

R ESEARCH M ETHODOLOGY
C HAPTER 1 :DE FINITION
1- 3
C HAPTER 2 :K INDS
4-7

OF

IV

D IRECTORS

AND NEW FORMS OF DIRECTORS

C HAPTER 3 : T HE
8-10

DUTIES OF DIRECTORS ..

C HAPTER 4: T HE
11-12

LIABILITIES OF DIRECTORS ..

C ONCLUSION
23
B IBLIOGRAPHY

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Directors under the Companies Act 2013

A CKNOWLEDGEMENTS
I feel highly elated to work on the topic DIRECTORS UNDER

THE

COMPANIES ACT

2013 The practical realization of this project has obligated the assistance and help of
many people. I express my deepest regard and gratitude to my teacher, Mr. S K Sinha
for his unstinted support. His consistent supervision, constant inspiration and invaluable
guidance have been of immense help in understanding and carrying out the nuances of
the project report.
My gratitude also goes out to the staff and administration of HNLU for the
infrastructure in the form of our library and IT Lab that was a source of great help for
the completion of this project.
Prashasti Janghel
Roll no. 97
(Semester VII)

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Directors under the Companies Act 2013

INTRODUCTION
The Companies Act, 2013 ("Act") is enacted to gradually replace the old Act of 1956, with
the objective to bring more accountability and good corporate governance. The Ministry of
Corporate Affairs has notified ninety-eight sections of the Act which have come into effect
from September 12, 2013 and repealed the corresponding sections of the 1956 Act. The Act
appears to place a higher degree of responsibility on the Board members for good corporate
compliance. A clear understanding of these obligations and responsibilities will be critical for
current and prospective Board members. In the Act, the sections related to role, duties and
removal of directors are yet to be implemented but it will happen soon and, therefore, merits
attention. In the context of the Board of a company, the legislators have focused on the role of
independent directors and have codified the duties of directors, which were missing in the old
Act.
The Companies Act, 2013 has raised the bar for the boards in India. The New Act has made
several significant changes, which seek to redefine the board governance in India. New
concepts have been introduced such as women directors on the boards to bring in gender
diversity, small shareholder director, performance evaluation, corporate social responsibility
and class actions; the internal financial controls and risk management oversight of the boards
have been strongly emphasised; disclosures have been enhanced in boards report to
shareholders, additional rigour has been added to strengthen the Directors Responsibility
Statement; and the Independent Directors have been entrusted with new responsibilities to
make their role more objective and purposeful. Overall, the New Act aims to raise the
governance profile of Indian companies and their boards, at par with the roles and
responsibilities assumed by boards globally. We summarise the important new provisions of
the New Act, which relate to the boards.
Certain other major changes that the new act makes is with regard the duties of the directors.
Further the act specifies the new class of directors including women and independent
directors. Also the new act focuses on corporate social responsibility which is another major
perspective on liabilities of the directors when it comes to corporate liability.

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OBJECTIVES
The specific objectives of the study are as follows:
1)
2)
3)
4)

To know the new kinds of directors

To identify the duties of the directors
To look into the new perspective of liabilities of the directors
The various rules and regulations applicable on directors

RESEARCH METHODOLOGY
This project report is based on analytical and descriptive Research Methodology. The
research problem has been provided by our faculty keeping in view the needs of the topic.
Secondary and Electronic resources have been largely used to gather information and data
about the topic.
Books and other reference as guided by Faculty have been primarily helpful in giving
this project a firm structure. Websites, dictionaries and articles have also been referred.

C HAPTER 1: D IRECTORS AS UNDERSTOOD IN

THE OLD ACT
The 1956 Act prescribes minimum 2 directors for private and 3 directors for a public
company. This criterion is retained in the Act, but the maximum directors on the Board have
been raised from 12 to 15 and the Act has also dispensed with the approval from Central
Government for raising the number of directors above the prescribed limit. The Act requires
the Board to devise mechanisms to ensure compliance with the applicable laws which should
be effective and adequate. The Board may consist of several categories of directors including
whole-time directors, managing directors, independent directors, nominee directors1 and
women directors. Officer: The definition of officer has been extended to include promoters
and key managerial personnel [section 2(59) of 2013 Act].
2.2 Key managerial personnel:
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The term key managerial personnel has been defined in the 2013 Act and has been used in
several sections, thus expanding the scope of persons covered by such sections [section 2(51)
of 2013 Act]. 2.3. Promoter: The term promoter has been defined in the following ways: A
person who has been named as such in a prospectus or is identified by the company in the
annual return referred to in Section 92 of 2013 Act that deals with annual return; or
who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act. The proviso to this section states that sub-section (c) would
not apply to a person who is acting merely in a professional capacity. [section 2(69) of 2013
Act]
The erstwhile Companies Act 1956 contains no statement at all of statutory duties of
directors, and until 1 April 2014, acts of directors were usually reviewed in the context of
their powers in terms of section 291 of the Companies Act, 1956 (and other applicable laws),
and their established roles under common law as laid down in several judicial precedents.
Section 166 is, therefore, the first time in Indian company law in which duties have been
statutorily specified for directors. Section 166 appears to have codified certain common law
and equitable duties of directors which evolved over time. In summary, the general duties of
directors [appointed to the board of directors] under the 2013 Act are:
1. To act in accordance with the articles of the company, in other words, to act within powers.
2. To act in good faith in order to promote the objects of the company for the benefit of its
members as a whole.
3. To exercise due and reasonable care, skill and diligence and independent judgment.
4. To avoid conflicts of interest.
5. To avoid undue gain or advantage either to himself or relatives, partners or associates.
6. Not to assign his office.

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From a glance, directors general duties in section 166 are largely derived from common law
rules and equitable principles. Some of the duties specified in section 166 correlate to
statutory duties of directors under the UK Companies Act 2006 (sections 171 177),
however, unlike the UK Act, which specifically states that the statutory duties of directors are
based on certain common law rules and equitable principles as they apply in relation to
directors, and would be interpreted and applied in the same way as those common law rules
and equitable principles, the 2013 Act specifies no such thing, begging the question, how will
the statutory duties specified in section 166 be interpreted in India? Indian courts will most
likely interpret and apply the statutory duties specified in section 166, in accordance with
established common law rules and equitable principles.
Common law and equitable principles
Common law is that body of law developed by judges based on customs and decisions of
courts (as opposed to statutes adopted through the legislative process). Equity emerged to
mitigate the rigours of common law, allowing courts to use their discretion and apply justice
in accordance with natural law. Under common law and equity, directors duties are largely
derived from the law of agency and trusts, and a large body of precedents imposed duties on
directors accordingly.
In Albert Judah Judah vs. Rampada Gupta and Another, Justice P.C. Mallick of the High
Court of Calcutta, citing Lord Selbourne in Great Eastern Railway Company vs. Turner,
stated that the two fold character of directors (as trustees and agents) have been well
expressed: The directors are the mere trustees or agents of the company; trustees of the
companys money and property; agents in the transactions which they enter into on behalf of
the company.
Under the law of trusts, courts imposed fiduciary duties on directors; while under the law of
agency, they imposed duties of skill, care and diligence on directors.
Fiduciary duties
The exemplar of a fiduciary is sometimes said to be a trustee and earlier on in the
development of fiduciary law, directors were considered to be an obvious extension, given
the power they have to deal with company property. The trusteeship of directors extends not

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Directors under the Companies Act 2013

merely to the property of the company, but also to the moneys of the company, trade secrets
and other items of intellectual property, the existence or particulars of which may be within
the personal knowledge of the directors.
In Chavalier I.I. Iyyappan and Another vs. The Dharmodayam Company, the Supreme Court
of India stated that it is now impossible to dispute the proposition that the directors are in
some sense, trustees a proposition which has been established by a long series of cases.
In Superintendent and Remembrancer of Legal Affairs vs. Akhil Bandu Guha and Others, the
High Court of Calcutta held that the directors of joint stock companies stand in a fiduciary
capacity with regard to the capital under their control, and are in the position of trustees.
In Albert Judah Judah supra, Justice Mallick stated that it is clear that the directors are
trustees in a very limited sense. They are liable as trustees for breach of trust, if they
misapplied the funds or committed breach of byelaws.
It would thus appear that the notion of a fiduciary relationship of directors established in
Indian judicial precedents has traditionally been one of status. It is out of this relationship
that strands of fiduciary duties the good faith duty, the no conflict of interest duty and
the no undue benefit or advantage duty which are now crystallised in the 2013 Act, arose.
Section 2(13) of the Companies Act, 1956 defined a term director and states that 'director'
includes any person occupying the position of director, by whatever name called. In the
ordinary sense a director is someone who administers, controls or directs something,
especially a member of a commercial company; one who supervises, controls or manages; a
person elected by the shareholders of a company to direct company's policies; person
appointed or elected according to law, authorised to manage and direct the affairs of a
company.

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C HAPTER 2: I NDEPENDENT DIRECTORS

As a company cannot itself act in its own person, for it has no person; it can only act through
directors and the case is, as regards the directors, merely the ordinary case of principal and
agent, for whenever an agent is liable the directors would be liable. In Albert Judah Judah
supra, Justice Mallick cited with approval the courts observation in Ferguson v. Wilson that
directors are agents of the company. Consequently, where directors enter into contracts on
behalf of the company, it is the company and not the directors, who are liable thereunder. In
Aberdeen Ry vs. Blaikie, Lord Cranworth stated in his judgment that a company can only act
by agents and it is the duty of those agents so to act as best to promote the interest of the
company whose affairs they are conducting. Like agents, directors are expected to display a
degree of care, skill and diligence in the exercise of their power and functions on behalf of
the company as is expected from men of their position. Again, from the common law

Corporate Law- Honours II

Directors under the Companies Act 2013

principle of directors as agents arose the duty of promoting the interest of the company, and
duty of care, skill and diligence.
However, directors are not always treated as agents of the company. The High Court of
Calcutta has held that the question as to whether one or two directors or the entire board of
directors acted as agents would depend on the evidence and would have to be determined
after a careful consideration of the facts and circumstances of the case refer Syham Sundar
Jalan vs. State. Also, if a director commits a fraud on the company his knowledge of such
fraud cannot be attributed to the company refer V.K.R.S.T Firm v. Official Liquidator,
Oriental Investment Trust.
Equitable principles
In applying general equitable principles to [common law] duties of directors, English courts
(refer Romer J, in City Equitable Fire Insurance Co.) laid down the following three
propositions:
(1) a director need not exhibit in the performance of his duties a greater degree of skill than
may reasonably be expected from a person of his knowledge and experience. This element of
subjectivity means that a director is to be held to his own, subjective standard of ability,
knowledge and experience, and not that of the reasonable man.
Later, a general standard of care, which was expressed as being both objective and subjective,
was re-stated by later decisions of English courts, as being that of a reasonably diligent
person having the knowledge, skill and experience both of a person carrying out that
directors functions and of that person himself. This may find acceptance in Indian courts
with respect to independent directors who are required to possess appropriate skills,
experience and knowledge in one or more fields (including of finance) related to the
companys business.
(2) A director is not bound to give continuous attention to the affairs of his company. His
duties are of an intermittent nature to be performed at periodical board meetings, and at
meetings of any committee of the board upon which he happens to be placed. He is not,
however, bound to attend all such meetings, though he ought to attend whenever, in the
circumstances, he is reasonably able to do so.

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In a modern approach, this may be relevant when assessing the duties of non-executive
directors. However, where non-executive directors are appointed because of their particular
skills or qualifications, those will be taken into account by a court in assessing their duties.
(3) In respect of all duties that, having regard to the exigencies of business, and the articles of
association, may properly be left to some other official, a director is, in the absence of
grounds for suspicion, justified in trusting that official to perform such duties honestly.
Other rules that have emerged are: (1) that directors must act in good faith in what they
believe to be the best interests of the company; (2) that they must not exercise the powers
conferred upon them for purposes different from those for which they were conferred; (3) that
they must not fetter their discretion as to how they shall act; and (4) that, without the
informed consent of the company, they must not place themselves in a position in which their
personal interests or duties to other persons are liable to conflict with their duties to the
company.
Duty owed to company
Unlike the UK Companies Act 2006, which specifies that the duties specified in sections 171
177 are owed by a director of a company to the company, the 2013 Act is silent on who the
duties specified in section 166 are owed. However, in view of the legal relationship between
the directors and the company, it is safe to assume that the duties are owed to the company.
This would not prejudice or preclude, in special circumstances, additional duties owed by
directors to the shareholders arising from a special factual relationship.
Consequences of breach
The 2013 Act states that breach by a director of the provisions of section 166 is punishable
with a minimum fine of Rs. 100,000 (which may also extend to Rs. 500,000). There is,
however, no specified process or procedure in which the company may bring an action
against erring directors for an alleged breach of any of the duties of directors in section 166.
It is presently not clear if a shareholder can bring a derivative action in respect of an alleged
breach of duty by a director of his/her duties under section 166 (though the National
Company Law Tribunal to be constituted under section 408 would have all powers of a civil
court under the Code of Civil Procedure, 1908, for purposes of the 2013 Act). It is, however,

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possible for a shareholder to bring an application for relief under section 241 (yet to be
notified into effect) if the alleged breach of duties of the directors becomes prejudicial to the
interest of such shareholder or the company or public interest. A company may exempt its
directors from liability (by way of indemnity or otherwise by way of directors and officers
insurance) in connection with any breach of duty in relation to the company as the 2013 Act
does not specifically prohibit such exemptions.
Independent director separate definition of independent director under companies act listed
public company to have at least 1/3rd of the total number of directors as independent
directors. no. of independent director for unlisted company and its subsidiaries will be
prescribed by central government.
Independent director for appointment of independent directors , board shall give a declaration
for satisfaction of appointment conditions and criteria. limited liability of independent
directors liability only for such acts of omission or commission by a company which had
occurred with his knowledge, attributable through board processes, and with his consent or
connivance or where he had not acted diligently decision making of directors board meeting
first board meeting should be held within 30 days of the incorporation a notice of not less
than seven days in writing is required to call a board meeting notice of board meeting shall be
given to all directors, whether he is in India or outside India by hand delivery or by post or by
electronic means board meeting director can participate in the board meeting through video
conferencing or other audio visual mode as may be prescribed at least 4 board meeting should
be held each year, with a gap of not more than 120 days between two board meetings
requirement of holding the board meeting in every quarter has been discontinued board
meeting in case of one person company (opc), small company and dormant company at least
1 board meeting must be held in each half of a calendar year with a gap of not less than 90
days between two board meetings in case of only one director in opc, requirement of meeting
will not apply holding.
Independent directors
One of the significant aspects of the 2013 Act is the effort made towards incorporating some
of the salient requirements mandated by the SEBI in clause 49 of the listing agreement in the
2013 Act itself. To this effect, the 2013 Act requires every listed public company to have at
least one-third of the total number of directors as independent directors. Further, the central

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government in the draft rules has prescribed the minimum number of independent directors in
case of the following classes of public companies* [section 149(4) of 2013 Act].
(i) Public companies having paid up share capital of 100 crore INR or more; or
(ii) Public companies having turnover of 300 crore INR or more
(iii) Public companies which have, in aggregate, outstanding loans or borrowings or
debentures or deposits, exceeding 200 crore INR The 2013 Act also states that companies will
have a period of one year to ensure compliance with the 2013 Act and the Rules that are
framed.

C HAPTER 3: W OMEN DIRECTORS

Every listed company and unlisted companies with paid-up capital of INR 1,000 million will
now be required to appoint one woman director within one year and three years of
notification of Section 149(1), respectively. This requirement is introduced to facilitate the
presence of women in the Board room. India is already making progress in gender issues and
this is a welcome step which should help to put diverse views on the boards of companies.
The section also stipulates that at least one director of the company should stay in India for
182 days or more in the previous calendar year. This will ensure that the Board shall continue
to monitor directly the management of the company on a regular basis and shall be
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responsible for acts and deeds of the company. Their continued presence will not delay
statutory action steps and will be a step forward towards meeting the timely corporate
compliance requirements. This requirement was missing in the old Act and foreign companies
starting business in India typically appoint foreign directors as the directors of the Indian
subsidiary. With the implementation of this prerequisite, foreign companies doing business in
India will now have to appoint at least one resident director or Indian national to act as
director to comply with this qualification.
Independent Director: The term Independent Director has now been defined in the 2013 Act,
along with several new requirements relating to their appointment, role and responsibilities.
Further some of these requirements are not in line with the corresponding requirements under
the equity listing agreement [section 2(47), 149(5) of 2013 Act].
Officer: The definition of officer has been extended to include promoters and key managerial
personnel [section 2(59) of 2013 Act].
Key managerial personnel: The term key managerial personnel has been defined in the 2013
Act and has been used in several sections, thus expanding the scope of persons covered by
such sections [section 2(51) of 2013 Act].
Promoter: The term promoter has been defined in the following ways:
A person who has been named as such in a prospectus or is identified by the company in the
annual return referred to in Section 92 of 2013 Act that deals with annual return; or
who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act. The proviso to this section states that sub-section (c) would
not apply to a person who is acting merely in a professional capacity. [section 2(69) of 2013
Act]
Independent Director: The term Independent Director has now been defined in the 2013 Act,
along with several new requirements relating to their appointment, role and responsibilities.
Further some of these requirements are not in line with the corresponding requirements under
the equity listing agreement [section 2(47), 149(5) of 2013 Act].

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Whole time director includes a director in the whole-time employment of the Company.
OFFICER IN DEFAULT includes a director in the following instances: Whole-time
director Key Managerial Personnel (KMP) In case of no KMP such director as specified by
the Board and who has consented as such If no Director is so specified all the Directors
Person with whose advice Board of Directors is accustomed to act, other than a person who
gives in a professional capacity In respect of contravention, director who is aware of such
contravention By virtue of receipt of proceedings of the Board Participation in such
proceeding without objection Because of his consent for the same. KMP key managerial
personnel, in relation to a company, means the Chief Executive Officer or the managing
director or the manager; the company secretary; the whole-time director; the Chief Financial
Officer; and such other officer as may be prescribed.
Changing Roles of Directors:
Change in Law Concerning Director At least 1 woman director for prescribed class or classes
of companies At least 1 director shall be a person who has stayed in India for atleast 180 days
in the previous calendar year. The maximum limit of directors in the Company has been
increased to 15 from 12. Beyond 15, the number can be increased by Special Resolution,
approval of Central Government has been dispensed with. Change in Law Concerning
Director A person cannot become directors in more than 20 companies instead of Out of this
20, he cannot be director of more than 10 public companies Listed Companies may have 1
director elected by Small Shareholder The amount to be deposited along with notice of
nomination of any person to the office of director has been increased from Rs 500 to Rs
100000 or such higher amount as may be prescribed.
Types of Directorship Alternate/Additional/Nominee Alternate director can only be
appointed in case director leaves India for period of not less than 3 months Subject to
Articles, Board can appoint director nominated by any institution in pursuance of any law or
agreement has been specified in the Law Specifically Subject to the articles, the Board may
appoint any person, other than a person who fails to get appointed as a director in a general
meeting, as an additional director
NEW POWERS OF DIRECTORS TO BE EXERCISED IN BOARD MEETING ONLY To
issue securities whether in India or outside. To grant loans or give guarantee or provide
security in respect of loans; To approve financial statement and the directors report; To

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diversify the business of the company; To approve amalgamation, merger or reconstruction;

To take over a company or acquire a controlling or substantial stake in another company
RESOLUTION BY CIRCULATION Resolution by circulation shall be consented by
majority of directors present in India instead of requirement of consent of all directors present
in India or by majority of them, as provided in the Companies Act 1956
COMMITTEE MEETINGS Nomination and Remuneration Committee For listed and other
prescribed class of Companies 3 or more non-executive directors out of which not less than
one half shall be independent directors Stakeholders Relationship Committee For company
which consists of more than one thousand shareholders, debenture-holders, deposit-holders
and any other security holders at any time during a financial year Chairperson who shall be a
non-executive director and such other members as may be decided by the Board
COMMITTEE MEETINGS Audit Committee For listed and other prescribed class of
Companies 3 or more non-executive directors out of which not less than one half shall be
independent directors Corporate Social Responsibility Committee For every Company having
net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or
more or a net profit of rupees five crore or more during any financial year 3 or more
Directors, out of which at least one Director shall be an Independent Director.

CHAPTER 4: DUTIES OF DIRECTORS,

APPOINTMENT, QUALIFICATION AND
REMOVAL OF DIRECTORS
A director shall not involve in a situation in which he may have a direct or indirect interest
that conflicts, or possibly may conflict, with the interest of the company A director shall not
achieve or attempt to achieve any undue gain or advantage either to himself or to his
relatives, partners, or associates
SIGNIFICANT PROVISIONS RELATED TO DIRECTORS
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RESTRICTIONS FOR DIRECTORS RESTRICTION ON NON-CASH TRANSACTIONS

INVOLVING DIRECTORS Any Director of a company or Director of the Holding Company
or Any person connected with such person can not acquire assets for the consideration other
than cash from the company & vice versa without the approval of company in general
meeting
RESTRICTIONS FOR DIRECTORS PROHIBITION ON FORWARD DEALING IN
SECURITIES No director or KEY Managerial Personnel shall buy in the Company, or in its
holding, subsidiary or associate Company A right to call/make for delivery at a specified
price and within a specified time, of a specified number of relevant shares /debentures A
right, as he may elect, to call for delivery at a specified price and within a specified time, or
to make delivery at a specified price and within a specified time, of a specified number of
relevant shares/debentures
RESTRICTIONS FOR DIRECTORS PROHIBITION ON INSIDER TRADING OF
SECURITIES No person including the director or Key Managerial Personnel shall enter into
the act of insider trading concerning An act of subscribing, buying, selling, dealing or
agreeing to subscribe, buy, sell or deal in any securities either as principal or agent if such
person is reasonably expected to have access to any non- public price sensitive information in
respect of securities of company An act of counseling about, procuring or communicating
directly or indirectly any non- public price sensitive information to any person
LOAN TO DIRECTOR No company whether public or private can give any loan (including
loan represented by book debt) or provide any security or guarantee in connection with a loan
to a Director or any other person in whom he is interested, except by way of passing a special
resolution. The requirement for permission of Central Government for giving loan to Director
as provided in the Companies Act 1956 has been dispensed with The exemption given to loan
given, guarantee or security provided by any holding company to its subsidiary has been
dispensed with
RELATED PARTY TRANSACTION Apart from existing, new related party transactions for
which Board approval will be required: Selling or otherwise disposing of, or buying, property
of any kind Leasing of property of any kind Appointment of any agents for purchase or sale
of goods, materials, services or property

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RELATED PARTY TRANSACTION Appointment of any related party to any office or place
of profit in the company or its subsidiary company or associate company Contract for
underwriting the subscription of securities or derivatives thereof Companies with the
prescribed Capital require approval by Special resolution for entering into defined related
party transactions.
MISREPRESENTATION

IN

PROSPECTUS APPOINTMENT & VACATION

OF

DIRECTORS APPOINTMENT OF MD/WTD Appointment of Managing Director, Whole

Time Director or Manager to now be approved by special resolution in a General Meeting
compared to the earlier provision requiring Ordinary Resolution If appointment is not in
accordance with Schedule V of the Act, then approval of Central Government is also
required. Whole Time Director shall not be appointed for a period of more than 5 years
Provisions to apply to Private Companies as well
APPOINTMENT OF OTHER DIRECTORS The appointment of Independent Director to be
approved by the Company in general meeting Board may appoint Additional, Alternate &
Nominee Director as the case may be
DISQUALIFICATION & VACATION NEW DISQUALIFICATIONS OF DIRECTORS
Person has been convicted for offence dealing with Related Party Transaction anytime during
the previous 5 years Person has not obtained Director Identification Number Person has been
convicted for any offence and has been sentenced for an imprisonment extending to 7 years
or more
DISQUALIFICATION & VACATION OF OFFICE OF DIRECTOR Director to vacate his
office if he fails to attend all Board Meetings for a consecutive period of 12 months as
opposed to previous provision prescribing a 3 month period. This even when the leave of
absence has been granted. If all directors have vacated the office, the promoter shall appoint
minimum number of members And if that is not possible, the Central Government may
appoint Directors till the Company makes appointment in a General Meeting
A director shall act in accordance with the articles of the company A director shall act in good
faith in order to promote the objects of the company for the benefit of its members as a
whole, and in the best interest of the company, its employees, the shareholders, the
community and for the protection of environment. A director shall exercise his duties with
due and reasonable care, skill and diligence and shall exercise independent judgment
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.
Woman director
The category of companies which need to comply with the requirement of having at least of
one woman director are as follows: [section 149(1) of 2013 Act]
(i) Every listed company, within one year from the commencement of second proviso to subsection (1) of section 149
(ii) Every other public company that has paidup share capital of one hundred crore rupees or
more, or a turnover of three hundred crore rupees or more within three years from the
commencement of second proviso to sub-section (1) of section 149 While this new
requirement will go a long way in encouraging gender diversity, it has already created quite a
stir in the manner in which companies will ensure compliance.
Number of directorship The 2013 Act increases the limit for number of directorships that
can be held by an individual from 12 to 15 [section 149(1) of 2013 Act].3. One director to be
resident in India
A new requirement with respect to directors is that at least one director to have stayed in
India for at least 182 days in the previous calendar year [section 149(3) of 2013 Act]. This
requirement appears to be a departure from the focus given in the 2013 Act towards use of
electronic mode such as use of video conferences for meetings and electronic voting. With
the increasing use of electronic media, the need, for a director to be resident in India for a
minimum amount of time, becomes redundant.
4.1 Conflicting requirements
While there have been attempts to harmonise the requirements of SEBI and the 2013 Act was
made, there are several aspects relating to independent directors where the requirements of
the 2013 Act differ from that of clause 49 of the equity listing agreement. The requirements
of the 2013 Act and the manner in which they differ from those under the clause 49 of the
equity listing agreement include the definition itself. The other main differences are as
follows:
Clause 49 does not require the board to exercise its judgment and opine on whether the
independent director is a person of integrity or has relevant expertise or experience. This
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requirement poses difficultly in terms of the manner in which integrity of an individual can
be assessed by the board.
Clause 49 does not require examination of the independence of the relatives of independent
directors. Extending the disqualification of the independent directors to consider the
pecuniary relationship of the relatives would pose unnecessary hardship for the independent
directors.
The qualification of the independent director has been left to be specified later.
The 2013 Act brings the constitution of the board in India at par with other international
capital markets i.e., by mandating at least one-third of the board to be independent directors
in case of listed companies. Whereas, the SEBI requirements are where the chairman of the
board is a non-executive director, at least one-third of the board should comprise of
independent directors and where the non-executive chairman is a promoter of the company or
is related to any promoter or person occupying management positions at the board level or at
one level below the board, at least one-half of the board of the company shall consist of
independent director
The 2013 Act limits the tenure of office of an independent director to a maximum of two
tenures of five consecutive years, with a cooling-off period of three years between the two
tenures. During the cooling-off period of three years, should not be appointed in or be
associated with the company in any other capacity, either directly or indirectly [proviso to
section 149(11) of 2013 Act]. It is also relevant to note that the MCA had released the
corporate governance voluntary guidelines in 2009, which permitted three tenures (with other
conditions similar to those discussed above) for an independent director while as per the
clause 49 of the equity listing agreement, an independent director cannot serve for more than
nine consecutive years. Stock options: As per the 2013 Act, an independent director will not
be eligible to get stock options but may get payment of feesand profit linked commission
subject to limits specified or to be specified in the rules [section 149 (9) of 2013 Act]. This
again, is in contradiction with SEBIs requirements, whereby for the purpose of granting
stock options, the term employee includes independent directors also. 4.2 Databank of
independent directors The 2013 Act makes the appointment process of the independent
directors, independent of the companys management by constituting a panel or a data bank
to be maintained by the MCA, out of which companies may choose their independent
directors.
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The proposal has its origins in the report of the 21st Standing Committee on finance, wherein
it was acknowledged that preparation of a databank of independent directors would vest with
a regulatory body that may comprise of representatives of MCA, SEBI, Reserve Bank of
India, professional institutions, Chambers of Commerce and Industry etc [section 150 of 2013
Act]. A drawback of constituting a panel of independent directors is that it may discourage
people from registering with the panel and in that sense limit the options available to a
company for appointment of independent directors. 4.3 Code for independent director The
2013 Act includes Schedule IV Code for Independent Directors (Code) which broadly
prescribes the following for independent directors:
Professional conduct
Role and functions
Duties
Manner of appointment
Reappointment
Resignation or removal
Holding separate meetings
Evaluation mechanism The code appears to be mandatory which would lead to some of the
following concerns:
The code states that an independent director shall uphold ethical standards of integrity and
probity, however what would constitute ethical behaviour is not defined and is open to
interpretation.
The code does not give any cognisance to the need for training for the independent
directors.
The code refers to appointment of independent directors by the board after evaluating
certain attributes. The concern that remains unaddressed is the manner in which companies
need to carry out an assessment of the attributes of an independent director as specified under
manner of appointment in the code from the databank maintained by the MCA.

LIABILITY OF INDEPENDENT DIRECTORS

The 2013 Act makes an attempt to distinguish between the liability of an independent director
and non-executive director from the rest of the board and has accordingly inserted a provision
to provide immunity from any civil or criminal action against the independent directors. The
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intention and effort to limit liability of independent directors is demonstrated from the section
149(12) of the 2013 Act which inter-alia provides that liability for independent directors
would be as under: Only in respect of such acts of omission or commission by a company
which had occurred with his knowledge, attributable through board processes, with his
consent or connivance or where he had not acted diligently.
The section seeks to provide immunity from civil or criminal action against independent
directors in certain cases. Further, in accordance with the requirement of section 166 (2) of
2013 Act, whole of the board is required to act in good faith in order to promote the objects of
the company for the benefit of its members as a whole, and in the best interest of the
company, its employees, the shareholders, the community and for the protection of the
environment. By virtue of this section the duty of independent directors actually goes beyond
its normal definition and is not restricted to executive directors only. It is amply clear that
independent directors have little or no defence and their obligations continues to remain a
debatable topic since they would still be treated equivalent to the other directors by holding
them responsible for decisions made through board processes.
Appointment of an additional director
It is pertinent to note that, in order to discourage inappropriate practices, the 2013 Act states
that any person who fails to get elected as a director in the general meeting can no longer be
appointed as an additional director by the board of directors [section 161 of 2013 Act].
Additional compliance requirements for private companies There are certain increased
compliance requirements mandated for private companies which, till now, were mandated
only for

public companies and private companies which are subsidiaries of public

companies. These include the following:

Appointment of director to be voted individually
Option to adopt principle of proportional representation for appointment of directors
Ineligibility on account of non-compliance with section 274(1)) (g) now extended for
appointment or reappointment as a director in a private limited company also.

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CONCLUSION
The Act has focused on corporate compliance and a director will not be re-appointed if the
company has failed to file its annual returns for three continuous years. Re-appointment in
such cases, in that company or any other company, can happen only after five years from the
date of the failure to file accounts. However, if the company chooses to re-appoint a director
even after its failure to file the accounts shall be penalized. Additionally, the practice of
directors absenting themselves from meetings and sending proxy has been placed under
check. Any director who was absent from the board meetings for the previous twelve months,
whether he sought leave or not, will have to vacate his office. If the director continues to
function as a director even after he knows that he is disqualified to hold the office shall be
imprisoned for up to one year or punishable with fine. The Act prohibits directors from
buying, selling, leasing or disposing of any property, appointment of an agent and
appointment in place of profit in the company or associate/subsidiary and, in all such cases,
they are mandated to make a disclosure for these transactions. In case of non-disclosure by a
director, he will indemnify the company against any loss incurred by it. The Act has codified
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and set high standards for a director's duty and liability towards the company. With the
introduction of strict eligibility criteria for appointment of independent directors, their
pecuniary interest is bypassed and this is to create a watchdog for public/listed companies.
Penalty for any contravention by an independent director is also introduced, but they will be
liable only for those fraudulent transactions for which they will give their consent or where it
can be demonstrated that they have not acted diligently. This defense hardly provides any
immunity as most Indian laws charge the directors for any offence. The Act also permits an
Indian company to indemnify its directors and officers, unlike the 1956 Act. Women too are
encouraged to join the board room, thus bringing in diverse viewpoints and talent. In essence,
the Act has endowed responsibility and introduced high standards for directors so that they
are accountable to the shareholders for their action and personally liable for any damage
caused by them. But, the effectiveness of these provisions will depend on how strictly they
are enforced.

B IBLIOGRAPHY
S TATUES :
Companies Act 1956
Companies Act 2013

W EBSITES :
www.oecd.org/daf/internationalinvestment/investmentpolicy/foi.htm
www.mca.gov.in/MinistryV2/mcaguide.html
www.investor.sebi.gov.in/
www.mastercirculars.rbi.org.in/

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