Corporate Governance -

Liability of Management
By
Harry Chawla
Senior Partner

Key Considerations
Board and Management Structure and Responsibility


Emphasis on Investor Protection


Inclusive CSR Agenda

Board Management
Structure and Responsibility
Section 2 (53) Manager

an individual who has the management of the whole or substantially
the whole of the affairs of the company,

includes a director or any other person occupying the position of a
manager (by whatever name called),

whether under a contract of service or not,

subject to the superintendence, control and direction of the Board of
Directors.


Board and Management
Structure and Responsibility
Company
Parameters
1 Director
Resident in
India 182
days
1 Woman
Director
1/3
rd

Independent
Directors
Audit
Committee
Nomination
and
Remuneration
Committee
Stakeholders
Relationship
Committee
Listed
Unlisted (All)
Public Cos.
with (i) Share
Capital INR
10 cr; or
(ii) Turnover
INR 100 cr; or
(iii) Loans /
Debentures /
Deposits INR
50 cr

Public Cos.
with Share
Capital INR
100 cr or
Turnover INR
300 cr


Security /
Debenture
Holders 1000

Board and Management Structure
and Responsibility (contd.)
Enhanced responsibility for Board and its committees
Board to have maximum of 15 directors (minimum directors public
companies: 3; private companies: 2)
Companies to have one resident director
Specified unlisted companies to have independent directors
Code of professional conduct imposing stringent responsibility and
accountability on independent directors
Mandatory woman directors for certain companies
Majority of Audit Committee members including Chairperson to have the
ability to read and understand financial statements
Mandatory Key Managerial Personnel CEO / MD / WTD, CFO and CS
(every listed company and every other public company having a paid up share
capital INR 100 mn; Whole time CS for every company having a paid up
share capital INR 50 mn)
A listed company to have one director elected by small shareholders
Codified duties of directors
Significant penalties for directors for defaults in discharge of duties
Board and Management Structure
and Responsibility Liability of
Managers / Directors (contd.)
Liability of Non Executive / Independent Directors
Liable only in respect of acts of omission or commission which occurred with
their knowledge, attributable through Board processes, and with his consent
or connivance or where he had not acted diligently

Liability as Officers
For compliances / actions / omissions under various sections of the
Companies Act, 2013

Liability as Officer in Default
Liable under all sections where specific penalty is provided for each officer in
default
Where no specific penalty is provided, liable under Section 450
Board and Management Structure
and Responsibility Liability of
Managers / Directors (contd.)
Liability for Fraud
Fraud in relation to affairs of a company
Imprisonment for a term which shall not be less than 6 months but which may
extend to 10 years, and pecuniary liability of not less than the amount
involved in the fraud, but which may extend to 3 times the amount involved

Personal Liability of Directors
Where directors enter into contracts in their own name
Where they enter into contracts on behalf of the company but fail to use the
word Limited or Private Limited
Where directors exceed their powers
Director not to enter into contracts without Boards authorizations
Civil liability for misstatement in prospectus
Damages for fraud
Liability for fraudulent conduct of business
Emphasis on Investor Protection
Related Party Transactions:
[Section 2(76), read with Rule 3 of Companies (Specification of definitions details) Rules, 2014]
Individuals:
Director or his relative
Key Managerial Personnel or his Relative
Any person on whose advice, directions or instructions a director or manager is
accustomed to act
A director or key managerial personnel of the holding company or his relative
Other than individuals:
A firm, in which a director, manager or his relative is a partner
A private company in which a director or manager is a member or director
A public company in which a director or manager is a director or holds along
with his relatives, more than 2% of its paid up share capital
Any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a
director or manager
A holding, subsidiary or an associate company
A subsidiary of a holding company to which it is also a subsidiary



Transactions in ordinary course of business on arms length basis
permissible. Central Govt approval no longer required.
Board approval necessary where transactions are not in ordinary
course of business / not at arms length basis.
Special resolution, where no related party can vote, required for non
arms length transactions or transactions not in ordinary course of
business where:
Share capital > INR 100 mn; or
Sale, purchase or supply of any goods or material > 25% of annual turnover
Selling or otherwise disposing of, or buying, property of any kind > 10% of
networth
Leasing of property of any kind > 10% of networth
Availing or rendering of any services > 10% of networth
Appointment to any office or place of profit in any company, subsidiary or
associate @ monthly remuneration > INR 250,000
Remuneration for underwriting subscription of any securities or derivaties 1%
of networth


Emphasis on Investor Protection
(contd.)
Emphasis on Investor Protection
(contd.)
Insider Trading
Director / KMP to refrain from forward dealing / buy options in shares or
debentures of company / holding company/ subsidiary / associate
No company person (including Director / KMP) with access to non-
public price sensitive information to indulge in any form of insider
trading / counseling

Fraud Risk Mitigation
Fraud defined / referred to under various sections and includes acts,
omissions, concealment of facts, abuse of position.
Considered fraud irrespective of any wrongful gain or loss
Serious Fraud Investigation Officer (SFIO) made statutory body with
significant powers
Mandatory establishment of vigil mechanism for directors / employees
to report concerns
Inclusive CSR Agenda
Obligation, Trigger and Calculation
Covers all companies in India meeting any one or more of the following
conditions:
Turnover INR 10 bn
Networth INR 5 bn
Net profits INR 50 mn
CSR contribution to be 2% of average net profit before tax for last three financial
years
Contributions to be made towards causes set forth in Schedule VII. Entries of
Schedule VII to be interpreted liberally.
Administration and Reporting
Board to appoint 3 member CSR Committee including 1 independent director
(except for private companies requiring not more than 2 directors)
CSR Committee to formulate CSR policy, recommend CSR activities and
monitor CSR expenditure
Mandatory reporting on CSR under Section 135
In case of failure to spend, reasons to be disclosed. Non disclosure entails
penal consequences
The End