Applied Theory in Strategy and Competition

Indian Institute of Management Lucknow

Group Assignment
Company’s Act, 2013 was modified to
enhance corporate governance in India

Under the esteemed guidance of

Prof. Anadi Pande

Presented by:
Section: B
Group Number: B8
Group Members:
PGP36335 - Sachin Jangid || PGP36336 - Sanjana Gupta
PGP36347 - Utkarsh Anand || PGP36352 - Aditya Jain
PGP36352 - Ankita Goomer || PGP36368 - Khandare Shubham Sandip
Topic - Company’s Act, 2013 was modified to enhance corporate governance in India. Pick up five of

these and assess their ability to achieve the intended objective or otherwise

About the topic:

Corporate governance refers to a set of systems and principles by which a fair amount of transparency is

brought in the functioning of a company, thereby ensuring sustainable development for all stakeholders.

Corporate governance is also important for inculcating ethical standards in a company’s management.

The Companies Act, 2013, made significant changes in the way companies in India are governed. Key

provisions related to corporate governance include composition of the board, functioning of

independent directors, enhancing board responsibilities on financial reporting, related party

transactions, compliance with the laws of the land and corporate social responsibility

Why it was modified?

 To provide a boost to the economic growth

 To incorporate the latest trends of the corporate world

 To incorporate the changes which can provide a boost to the corporate sector in the economic

growth of the country

Analysis:

We analyzed 5 changes, to assess their ability to capture the intended objective. These are:

1. Easing out of the framework for Corporate Social Responsibility (R6)

The Company’s Act 2013 added the following provisions:

● “Provided also that if the company spends an amount in excess of the requirements

provided under this sub-section, such company may set off such excess amount against

the requirement to spend under this sub-section for such number of succeeding financial

years and in such manner, as may be prescribed”– This is done to ensure that the
 companies can be use the surplus in the years of difficulties or if the companies need to

retain the earnings for internal purposes. This provision is intended to promote the

excess spending as it creates a shield that can be used in the following years.

● “Company shall be liable to a penalty of twice the amount required to be transferred by

the company to the Fund specified in Schedule VII of the Unspent Corporate Social

Responsibility Account” – This amendment is intended to heavily penalize the

companies that default in fulfilling their corporate social responsibilities.

● “Every officer of the company who is in default shall be liable to a penalty of one-tenth of

the amount required to be transferred by the company to such Fund” – The purpose of

this amendment is to reduce corruption and lack of thoroughness on part of social

responsibility officer to report the companies which doesn’t follow their obligation.

Further, it puts pressure on the officer which in turn puts pressure on the companies to

fulfil the required corporate social responsibilities.

2. Reduction of timeline for rights issue (R5)

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.

This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can

purchase new shares at a discount to the market price on a stated future date. The company is giving

shareholders a chance to increase their exposure to the stock at a discount price.

Key takeaways of rights issue

● A rights issue is one way for a cash-strapped company to raise capital often to pay down debt.

● Shareholders can buy new shares at a discount for a certain period.

 ● With a rights issue, because more shares are issued to the market, the stock price is diluted and

will likely go down.

SEBI issued a discussion paper reviewing the process of rights issue. The paper highlighted the need to

reduce the timelines in both the pre-issue opening phase and after issue closure to better serve the

interests of both the issuers and investors. The timeline from the date of the board meeting to decide

upon the rights issue to the date of listing of shares was proposed to be cut down from 55-58 days to

roughly 31 days. In line with this, the CLC observed that as per market practice, the issuance of an offer

completely closes within 2-3 days and allotment is completed within 5-7 days. The Committee was of

the view that, in light of market practices, Section 62(1) of the Companies Act, 2013 be amended to

enable the Central Government to prescribe a shorter time period than the mandatory 15 days’ time

period provided in this provision.

3. Board Constitution / Committees & Processes

Board Composition -

Number of Directors :

● A one person company shall have a minimum of 1 (one) director

● A Company may have a maximum of 15 (fifteen) directors

Key Takeaway : Allowing companies to increase the maximum number of directors on their boards by

way of a special resolution would ensure greater flexibility to companies.

Classes of Directors :
 ● Resident Director - CA 2013 introduces the requirement of appointing a resident director

Key Takeaway : The requirement to have a resident director on the board of companies has been

viewed as a move to ensure that boards of Indian companies do not form entirely of non-resident

directors

Independent Directors :

As per CA 2013, the following companies are required to appoint independent directors:

● Public listed company: At Least one third of the board to be comprised of independent directors

● Certain specified companies that meet the criteria listed below are required to have at least 2

(two) independent directors:

Key Takeaway - Emphasis has been placed on ensuring greater independence of independent

directors.The overall intent behind these provisions is to ensure that an independent director has no

pecuniary relationship with, nor is he provided any incentives which may compromise his/her

independence. CA 2013 proposes to empower independent directors with a view to increase

accountability and transparency. Further, it seeks to hold independent directors liable for acts or

omissions or commission by a company that occurred with their knowledge and attributable through

board processes.

Woman Director -
 ● Listed companies and certain other public companies shall be required to appoint at least 1

woman director on its board.

Key Takeaway : The mandatory requirement for appointment of women directors is expected to bring

diversity on to the boards

Committees of the Board -

● Audit Committee

● Nomination & Remuneration Committee

● Stakeholders Relationship Committee

● CSR Committee

Board Meeting & Processes - Key changes introduced by CA 2013 with respect to board meetings and

processes.

Key Takeaway - In the backdrop of global corporate transactions, the changes relating to participation of

directors by audio visual and electronic means are a welcome step, aimed at keeping pace with

technological advancements.

4. Provisions for allowing payment of Remuneration to Non-Executive Directors in case of

Inadequacy of Profits (R3, R4)

Sections 197 and 198 of the Companies Act, 2013 Act set out the provisions for the remuneration payable

by a public company to its executive directors and non-executive.

Section 197(3) provides that if a company has no profits or its profits are inadequate, then the company

shall not pay any remuneration (other than sitting fee) to its directors, including managing director, whole-

time director or manager, except as provided under Schedule V of the Companies Act, 2013.

Schedule V of the Companies Act, 2013 provides remuneration payable to managerial persons where the

company has no or inadequate profits, similar provisioning has not been done for nonexecutive directors.

In case of independent directors, Section 149(9) provides that “notwithstanding anything contained in

any other provision of this Act, but subject to the provisions of sections 197 and 198, an independent

director shall not be entitled to any stock option and may receive remuneration by way of fee provided

under subsection (5) of section 197, reimbursement of expenses for participation in the Board and other

meetings and profit related commission as may be approved by the members.”

Amendment noted that non-executive directors, including independent directors, devote their valuable

time and have experience to give critical advice to the company. Therefore, they should be appropriately

compensated for the same even in case of inadequacy of profits or losses as is permissible for executive

directors. The crucial role played by independent directors of a company in terms of bringing objectivity

into the functioning of the Board and improving its effectiveness.

Thus, the Committee felt the need for companies to adopt remuneration policies that would attract and

retain talented and motivated directors. It was felt that inconsistency in payment of remuneration in case

of inadequacy of profits or losses to executive directors vis-à-vis non-executive directors would dis-

incentivise the latter. Therefore, the Committee concluded that it would be appropriate to bring specific

provisions in this regard in Section 149 and 197 before any amendment is made to Schedule V in this

regard.
Now by amendment to the provisions of section 149(5) and 197 (3) of the Companies Act, 2013, the

payment of remuneration to non-executive directors including Independent Directors has been provided

and such remuneration shall be payable in accordance with the provisions of Schedule V of the Companies

Act, 2013. Such remuneration shall be exclusive of any fee payable for attending the meetings of the Board

or Committees or for any other purpose whatsoever as may be decided by the Board under section 197(5)

of the Act.

This is an effective measure that enables companies to attract talented directors on their Boards and elicit

their interest in the functioning of the board and not to overlook the responsibility bestowed upon them.

The issue of effective board functioning arises multiple times in industry where non-executive members

had minimal interest towards the firm. Changes like this may align or incentivise their efforts for the

proper functioning of the board and uphold the interest of shareholders.

5. Change of definition of small (R1, R2)

The Announcement: The Ministry of Corporate Affairs has announced the change of definition of

‘small company’. The change was proposed by Finance Minister Nirmala Sitharaman while

presenting the Union Budget on Monday wherein the paid-up capital increased to ₹2 cr and

turnover increased to ₹20 cr. The changes will come into effect from April 1, 2021.

Benefits to Small Companies: The Companies Act 2013 provides certain benefits to the Small

companies which includes:-

● Small Company needs to hold only 2 Board meetings in a calendar year i.e. one board

meeting in each half of the calendar year.

● In the case of a Small Company, the Annual Return can be signed by the Company

Secretary alone or if there is no CS, by a single Director only.

 ● A small company is not required to maintain a Cash flow statement as a part of its

Financial Statements.

● A Small company is exempt from the requirement of this section. change its auditor by

rotation according to Section 139(2) of Companies Act 2013.

● A Small Company does not require to report in its Audit Report regarding Internal

Financial controls and the operating effectiveness of the company.

● In the case of a Small Company, the Companies Act prescribes lesser penalties.

Ability to achieve the intended objectives

● With the new notified change in definition more companies can now enjoy these benefits

improving the ease of doing business for these companies

● This change seems to be highly effective in achieving the intended objective as it clearly brings a

lot more companies in the category of small companies, which are supposed to receive certain

benefits. The only thing that will decide the effectiveness would be the execution of benefit

transfer.
 References

1. https://taxguru.in/company-law/amendment-companies-act-2013-persuant-budget-2021.html

2. https://www.taxscan.in/mca-changes-definition-of-small-companies-raises-threshold-for-paid-

up-capital-from-rs-50-lakhs-to-rs-2-cr-read-notification/98910/

3. https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.mca.gov.in/Ministry/p

df/CompaniesAct2013.pdf&ved=2ahUKEwiszZm-

pqfzAhVgwTgGHb_UADIQFnoECDEQAQ&usg=AOvVaw0gT0arPjCTG3CrZBD8LC6A

4. https://www.google.com/url?sa=t&source=web&rct=j&url=https://wap.business-

standard.com/article-amp/companies/ls-passes-bill-to-amend-companies-act-here-are-the-

proposed-amendments-

120092000212_1.html&ved=2ahUKEwiQsKjNpqfzAhURwTgGHTtjAeAQFnoECC0QAQ&usg=AOvV

aw1YYoLni6kErcRdSpR2bBnU&ampcf=1

5. https://timesofindia.indiatimes.com/business/india-business/sebi-decides-to-reduce-time-

taken-for-rights-issue-process-to-31-days/articleshow/72145493.cms

6. https://economictimes.indiatimes.com/news/economy/policy/govt-changes-rules-of-

corporates-social-responsibility/to-improve-ease-of-doing-business/slideshow/80579802.cms