Term 2

Legal and Ethical Perspectives for

Managers

Topic: Directors’ responsibility towards stakeholders:

Legal and Ethical Issues

Group D
Team Members:
1. Sourav Anand (PGP/26/112)
2. Sravanti K Ramesh (PGP/26/113)
3. Tanishaa Nadkar (PGP/26/114)
4. Karan Thakkar (PGP/26/115)
5. Vaibhav (PGP/26/116)

Presentation date: 13th January, 2022

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Introduction and identifying ‘Who is a director?’
As per the provisions of Section 2(34) of the Companies Act, 2013 (“the Act” or “the
Companies Act”), a "director" means a director appointed to the Board of a company.
Generally, the board of directors of a company are responsible for:
a. identifying the strategic goals and policies of the company;
b. ensuring the policies adopted are assisting in achieving the objectives;
c. appoint the senior management of the organisation who will assist directors in achieving
the desired objectives;
d. accounting for company’s activities to relevant stakeholders like, shareholders,
government, employees.
It will be relevant to note that under the new Companies Act, there has been an increased
responsibility on directors to act in a manner which ensures maximization of stakeholder
interest in addition to maximization of shareholder/owners’ interest.
Who may be appointed as Director?
According to Section 149 of the Companies Act, only an individual may be appointed as a
director of the company. No corporation, organisation, or firm may, therefore, be appointed
as a director of a company.
There are no academic or professional requirements for directors in the Companies Act. The
Act also exempts directors from share qualification requirements. A director is therefore not
required to be a shareholder unless he chooses to be one freely, absent a provision to that
effect in the company's articles of incorporation. However, the articles, in case of a private
company. typically stipulate a minimum share requirement. This provision ensures that the
director will discharge his duties in an independent manner.
Provisions of Section 164 of the Companies Act provides for certain categories of individuals
who are disqualified from being appointed as a director. To name a few categories, (a) a
person of unsound mind; (b) he is undischarged insolvent; (c) he has applied to be
adjudicated as an insolvent and his application is pending, etc.
The following are two important points which are relevant to note (a) in order to be appointed
as a director of the company, an individual should mandatorily possess a Director
Identification Number (DIN); and (b) in case of private companies, its articles can provide for
qualifications/disqualifications which it deems appropriate, for an individual to be appointed
as a director of the company.
Legal position of Directors:
Honestly, it is not possible to define the exact legal position of the directors of the company.
The Companies Act is silent in relation to legal position of a director vis-à-vis a company.
Depending upon the context, they have been described, in various judicial pronouncements,
as agents, trustees or managing partners of the company. In the words of Lord Bowen, L.J.:

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 “Directors are described sometimes as agents, sometimes as
trustees and sometimes as managing partners. But each of these
expressions is used not as exhaustive of their powers and
responsibilities but as indicating useful points of view from which
they may for the moment and for the particular purpose to be
considered”
A. Directors as Agents:
A company is a separate juristic person, the same is well established in the Act as also by
various judicial pronouncements.
Thus, directors may correctly be described as agents of the company. Lord Cairn L.J.
observed that “The company itself cannot act in its own person; it can only act through
directors, and the case is, as regards those directors, merely the ordinary case of
principal and agent”. According to the agency principle, the directors should represent the
firm in all matters excluding those that are expressly reserved for the company to handle.
Therefore, any contract or transaction they enter into on the company's behalf will be
subject to the standard norms of agency. When the directors enter into a contract on the
company's behalf, the company, not the directors, is held accountable.
i. Some interesting judicial pronouncements:

 When a Chief executive/director of a company executed promissory note and

borrowed amount for company’s sake, it could not be said that amount was
borrowed by him, in his personal capacity - Kirlampudi Sugar Mills Ltd. v. G.
Venkata Rao [2003] 42 SCL 798 (AP)

 Directors as agents make the company liable for contempt of court - Vineet
Kumar Mathur v. Union of India [1996] 20 CLA 213 (SC). However, directors
incur a personal liability in the cases like when they entered contract in their
personal names, when they use name of the company indirectly, contract is signed
in such a way that it is not clear whether the principal (the company) or the agent
is signing. Lastly, when directors exceed their authority and borrow in excess of
the limits imposed upon them, they will be personally liable for the excess
borrowed - Weeks v. Propert [1873] LR 8 CP 427

Ratification of unauthorised acts – As held in the case of Bhajekar v. Shinkar [1934]

4 Comp. Cas. 434 (Bom.), a resolution of the company or even acquiescence can
ratify a transaction by the directors that is outside of their authority but within the
company's powers.

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B. Directors as Trustees:

The directors or the Board of directors operate as Trustees with regard to the company's
assets and properties, which means they are also responsible for making sure there is no
loss or harm to those assets.

In addition, practically all of the director's authority—including the authority to grant

shares, make calls, forfeit shares, accept or refuse transfers, etc.—is vested in a trust. They
have been held accountable for good money that they have misused, just like trustees
would be
Minimum and Maximum number of Directors Required in a company
Provisions of Section 149 of the Companies Act, 2013 deal with minimum and maximum
number of directors. Section 149 of the Companies Act, 2013 provides the following:
Minimum number of directors:
a. Public company – 3 directors;
b. Private company – 2 directors;
c. One Person company – 1 director.
The maximum of directors which can be appointed in a company is 15. However, a company
may appoint more than 15 directors by passing a special resolution.
Various types of directors according to the Companies Act, 2013:
a. Resident Director: According to the Section 149(3) of the Act, every company needs to
ensure that they have at least one director who has stayed in India for a period of not less
than 182 days in the previous calendar year.

b. Independent Director: According to section 149(6) of the Act, an independent director in a

company is a director other than Managing Director, Whole Time Director or Nominee
Director. Certain types of companies, like public companies having (i) paid-up share
capital of Rs. 10 crores or more; (ii) turnover of Rs. 100 crores or more; (iii) outstanding
loans, debentures and deposits of Rs. 50 crores or more, have to compulsorily appoint an
independent director. Qualifications of an independent director is specified under Section
149(6).

c. Women Director: Section 149(1) (a) second proviso of the Act requires certain categories
of companies to have at least one-woman director on the board.

d. Additional Directors: Any individual can be appointed as additional directors by a

company under section 161(1).

e. Alternate Directors: According to section 161(2) of the Act, a company may appoint, if the
articles confer such power on company or a resolution is passed (if a Director is absent
from India for at least three months).

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f. Nominee Directors: These directors are either appointed by certain shareholders or third
parties through contractors or lending public financial institutions or banks, or by the
Central Government in case of oppression or mismanagement.

g. Executive and Non-Executive Directors: An Executive Director may be a Managing

Director (i.e., one who is employed by the company as such and has substantial powers of
management over the affairs of the company subject to the superintendence, direction and
control of the Board) or a Whole-time Director of the company (i.e., one who devotes all
of his working hours to the company and derives a sizable portion of his income from it) A
non-executive director, on the other hand, is a director who is neither a managing director
nor a whole-time director.
Who are stakeholders?
Stakeholders include any individual or team with an interest in a business or project of the
company.
A company has a number of stakeholders, most of whom can be divided into two categories,
(i) internal; and (ii) external.
Internal stakeholders are those who have a direct relationship with the organisation, such as
those who work there. Examples of internal stakeholders include employees.
People who do not work for a company but have a strong interest in it are known as external
stakeholders. Examples include investors, creditors, consumers, suppliers, government,
common public, and others.
Every stakeholder plays a very definite and important role in the success or failure of an
organisation.
Types of Stakeholders:

Internal Employees People who work for the organisation and expect
salary/wages in return
External Investors Investors include all the parties who invest in the
company like PE, VCs, owners, etc.
Suppliers/ They are usually the suppliers to the company for say,
Creditors their raw material requirement, office supplies, etc.
Customers They are arguably, the most important stakeholder for an
organisation. It is for the reason that they are the ones
who will eventually, buy the products or services
provided by the company.
Lenders For the purpose of running business, a company needs
capital. Lenders act a medium of providing requisite
capital to the company
Government In order to ensure that there is economic growth in a
country, government expects companies to be profitable.

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 So that, in turn they will pay higher taxes which will be
utilised for conducting activities which bring upliftment
to the society
Common Public The manner in which the activities are conducted by a
company, common public is now a stakeholder too for a
company

Provisions of Section 166 of the Companies Act, 2013:

As stated earlier, under the new Companies Act, there has been an increased responsibility on
directors to act in a manner which ensures maximization of stakeholder interest in addition to
maximization of shareholder/owners’ interest. The J.J. Irani Committee set up by the ministry
of corporate affairs, recognized the importance of inclusion of duties of director into codified
law. Thus, a specific provision in the Companies Act, 2013 which lists down the duties and
responsibilities of directors. Provisions of Section 166 of the Companies Act, casts the
following responsibilities on the directors:
a. A director of a company 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 interests of the
company, its employees, the shareholders, the community and for the protection of
environment;

b. A director of a company shall exercise his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment;

c. A director of a company 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.

d. A director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates and if such director is
found guilty of making any undue gain, he shall be liable to pay an amount equal to that
gain to the company;

e. A director of a company shall not assign his office and any assignment so made shall be
void.
Not only the above responsibilities are to be compulsorily fulfilled by the directors, the Act
now provides for a penalty of not less than Rs. 1 lakh which may extend up to Rs. 5 lakhs, in
case of contravention of provisions of Section 166.
Provisions of Regulation 4(2)(f) SEBI (Listing Obligation and Disclosure Requirements)
Regulations, 2015
Given the fact that nowadays more and more companies are getting listed on stock
exchanges, it is required to have mandatory provisions under the SEBI Regulations which
provide for various responsibilities of directors. In addition to the responsibilities as casted

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under provisions of Section 166 of the Companies Act, SEBI Regulations also cast certain
responsibilities on the directors in case of listed companies. Regulation 4(2)(f) of the SEBI
(LODR) Regulations provide for the following responsibilities:
(i) Disclosure of information:
(1) Members of board of directors and key managerial personnel shall disclose to the board of
directors whether they, directly, indirectly, or on behalf of third parties, have a material
interest in any transaction or matter directly affecting the listed entity.
(2) The board of directors and senior management shall conduct themselves so as to meet the
expectations of operational transparency to stakeholders while at the same time
maintaining confidentiality of information in order to foster a culture of good decision-
making.
(ii) Key functions of the board of directors-
(1) Reviewing and guiding corporate strategy, major plans of action, risk policy, annual
budgets and business plans, setting performance objectives, monitoring implementation and
corporate performance, and overseeing major capital expenditures, acquisitions and
divestments.
(2) Monitoring the effectiveness of the listed entity’s governance practices and making
changes as needed.
(3) Selecting, compensating, monitoring and, when necessary, replacing key managerial
personnel and overseeing succession planning.
(4) Aligning key managerial personnel and remuneration of board of directors with the
longer-term interests of the listed entity and its shareholders.
(5) Ensuring a transparent nomination process to the board of directors with the diversity
of thought, experience, knowledge, perspective and gender in the board of directors.
(6) Monitoring and managing potential conflicts of interest of management, members of the
board of directors and shareholders, including misuse of corporate assets and abuse in related
party transactions.
(7) Ensuring the integrity of the listed entity’s accounting and financial reporting
systems, including the independent audit, and that appropriate systems of control are in place,
in particular, systems for risk management, financial and operational control, and compliance
with the law and relevant standards.
(8) Overseeing the process of disclosure and communications.
(9) Monitoring and reviewing board of director’s evaluation framework.
(iii) Other responsibilities:

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(1) The board of directors shall provide strategic guidance to the listed entity, ensure
effective monitoring of the management and shall be accountable to the listed entity and
the shareholders.
(2) The board of directors shall set a corporate culture and the values by which executives
throughout a group shall behave.
(3) Members of the board of directors shall act on a fully informed basis, in good faith,
with due diligence and care, and in the best interest of the listed entity and the shareholders.
(4) The board of directors shall encourage continuing directors training to ensure that the
members of board of directors are kept up to date.
(5) Where decisions of the board of directors may affect different shareholder groups
differently, the board of directors shall treat all shareholders fairly.
(6) The board of directors shall maintain high ethical standards and shall take into account
the interests of stakeholders.
(7) The board of directors shall exercise objective independent judgement on corporate
affairs.
(8) The board of directors shall consider assigning a sufficient number of non-executive
members of the board of directors capable of exercising independent judgement to tasks
where there is a potential for conflict of interest.
(9) The board of directors shall ensure that, while rightly encouraging positive thinking, these
do not result in over-optimism that either leads to significant risks not being recognised or
exposes the listed entity to excessive risk.
(10) The board of directors shall have ability to ‘step back’ to assist executive management
by challenging the assumptions underlying: strategy, strategic initiatives (such as
acquisitions), risk appetite, exposures and the key areas of the listed entity’s focus.
(11) When committees of the board of directors are established, their mandate,
composition and working procedures shall be well defined and disclosed by the board of
directors.
(12) Members of the board of directors shall be able to commit themselves effectively to
their responsibilities.
(13) In order to fulfil their responsibilities, members of the board of directors shall have
access to accurate, relevant and timely information.
(14) The board of directors and senior management shall facilitate the independent directors
to perform their role effectively as a member of the board of directors and also a member of a
committee of board of directors.
Independent Directors

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Though one appreciates the responsibilities provided in Companies Act, 2013 as also SEBI
(LODR) Regulations, 2015. However, as an additional layer of corporate governance,
Companies Act, 2013 provides that in case of certain types of companies, as specified above,
the company is obliged to appoint independent directors.
An independent director is a board member of a company who, except from their sitting fees,
primarily has no financial ties to the firm and no stake in it. Also prohibited is the director's
ownership of company stock. Only the Old Clause 49 of the Listing Agreement of SEBI had
guidelines for the appointment of independent directors to the listed firms, while the older
Indian Companies Act of 1956 lacked any express provisions for the independent directors.
The new Indian Companies Act, 2013 mandates that every listed company must contain at
least one third of the total number of directors as independent directors. The independent
directors according to the act of 2013 are not permitted for more than two consecutive terms
of five years.
The new statute has greatly expanded the purview of independent directors, and several
brand-new topics have been thoroughly covered. The legislation attempts to improve
corporate governance and transparency. The independent directors have been wisely given
the extremely serious duty of arbitrator by the act. According to the new statute, a few of the
important responsibilities, obligations, and liabilities of independent directors are as follows:

 To assist in forwarding equitable and independent judgment to the board;

 To secure and promote the interests of all stakeholders of the concerned company,
particularly of the minority shareholders;
 To conciliate and balance the conflicting interests of the stakeholders;
 To attend actively and constructively most of the board and committee meetings;
 To pay proper and adequate attention to Related Party Transactions (RPTs);
 To report concerns honestly and impartially about any unethical behavior, violation of the
code of conduct, or any suspected fraud in the company
Certain additional responsibilities of directors
a. A company should hold a minimum 4 meetings of its Board of Directors every year.
However, not more than 120 days shall intervene between two consecutive meetings of the
Board. In case of any director being absent from all the meetings, his/her office becomes
vacant.
b. The Board’s report is required to be attached with the financial statements of the company
and the Board’s report shall be laid out before the Company in every General meeting;
c. An increased attention to related party transactions (RPTs);
d. Reveal the related party transaction interests and not vote in the resolution concerning the
related party transactions;
e. Always in the definition of “officer-in-default”. Onus is now on the director to prove that
he/she had not participated in the meetings which the alleged fraud transaction was
discussed and approved.
Ethical Responsibilities of a Director

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The directors, officials, and staff of a company are all subject to the code of ethics. It aims to
direct directors, officers, and staff members toward areas of ethical risk and assist them in
identifying it. Each director, officer, or staff has particular ethical standards that they should
uphold. This is done to protect the company's reputation.
Some such ethical practices are as follows:
a. Integrity of records and public reporting:
In order to fulfil the company's obligations and to give the stakeholders and authorities
concerned with the full, fair, accurate and timely information and its understandable
disclosure, it is imperative that directors, officers, and employees work together to promote
the accurate and reliable preparation of the companies' records. In this regard, everyone
should meticulously record all transactions, books, vouchers, bills, and invoices in order to
utilise them as a basis for measuring how a business is performing.
b. Conflict of Interest
Directors, officers, and employees must endeavour to handle all plausible and apparent
conflicts among themselves and/or outside of the company with diligence and decency.
Directors, officers, or employees of the company should not engage in improper conduct or
activities, such as receiving compensation from outside the company or using company
resources for personal gain, etc. These are all regarded as immoral and unethical behaviours
that should be avoided.
c. Confidentiality
Directors, officials, and employees have a moral obligation to keep all information provided
to them by the company in the strictest confidence and should not divulge it to third parties.
Such disclosure need to be made only when it is permitted or required by law. As a result, the
code requires that any confidential information pertaining to company business be kept a
secret.
d. Reporting illegal or unethical behavior
Any suspicious conduct or rule violation should be immediately brought to the attention of
the company's top executives by the directors of the company. A suspected code breach
should also be reported by directors and officers to the audit committee chair. Directors and
employees should not be retaliated against for reporting in good faith search suspected
violations, as the reported violations are investigated by the board of directors or a person
designated by the board, and appropriate disciplinary action, including termination, is then
taken in the event of any violations.
e. Stakeholder theory
Nowadays, it has become essential to ensure collective good rather than just ensuring that
there is maximization of profit. Thus, it is essential that stakeholders’ interest is ensured
rather than shareholders’ interest. If the same is followed, sustainable growth of the
organisation will be ensured.

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Case studies
Case 1: Satyam Case:
On December 16, 2008, Satyam Computers had announced the acquisition of a 100 percent
share in Maytas Properties and Maytas Infra, two firms owned by Chairman Ramalinga
Raju’s sons. The proposed $1.6 billion purchase was called off seven hours later owing to
investor opposition to the buyout. However, Satyam’s stock dropped 55% in trade on the
New York Stock Exchange. Approval for entering into these transactions led to suspicion of
management of Satyam. Ramalinga Raju resigned as chairman of Satyam on January 7, 2009,
after admitting to a financial scam involving over Rs. 7800 crores. In his letter, he indicated
that his purchase of Maytas firms was his final attempt to replace fictional assets with
genuine ones. It was like riding a tiger and not knowing how to get off without getting
devoured, he said in his letter.
Following financial fraud was committed:
a. The assets in the Balance sheet were overvalued. The corporation claimed to hold about
$1.04 billion in bank loans and cash, but none of it existed;
b. Over the course of several years, Satyam inflated income virtually every quarter in order
to match analyst expectations;
c. Mr. Raju fabricated bank accounts in order to inflate the balance sheet with fictitious
funds. By claiming interest revenue from the fictitious bank accounts, he inflated his
income statement.
d. Mr. Raju further said that during the last three years (2006-2008), he created 6,000 false
pay accounts and took the money when the corporation deposited it. To exaggerate
revenue, the company’s worldwide head of internal audit established fake customer
identities and made fraudulent invoices in their names.
Board of directors:
a. Concerns arose about the Board of Directors’ lack of independence;
b. No financial specialist on Board of Directors;
c. Approval of acquisitions of Maytas Properties and Maytas Infra. Only revoked the
decision when faced with revolt.
d. Was Board of directors actively monitoring Satyam as also the auditors?
Victims of the case were Employees, Banks, Government, etc. – in short, affecting all the
stakeholders in some way or the other.
Case 2: ICICI Bank:
Two conflicts of interest arose here majorly. The first one is the loan given to Videocon
Group and Deepak Kochhar, husband of Chanda Kochhar – the CEO of the ICICI Bank.
Since there is a relationship existing here, the tendency for conflict of interest is higher. This
could have been avoided by flagging it by the board of directors. The second one is in
relation to Avista, a company owned by Rajiv Kochhar, brother of Chanda Kochhar to advise
certain borrowers. Generally, such insiders can use their undue influence to get access and

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loans. Even though the facts do not reveal the actions of the directors in this scenario, better
care had to be taken by the directors to avoid such a scenario. These kinds of related party
transactions ought to be avoided by having appropriate internal checks and balances in place.
The shareholders and the customers were the stakeholders that were majorly impacted under
this.

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Conclusion
The implementation of the 2013 Companies Act has resulted in a number of advantageous
modifications with regards to the obligations and liabilities of directors. It makes an effort to
harmonise Indian laws with generally recognised norms. Section 166 and Rule 4(2)(f) of the
SEBI (LODR) Regulations ensures that responsibilities of directors are provided for in the
legislation. Along-with it is expected from the directors to follow certain ethics which ensures
smooth functioning of a company. There has been an increased responsibility on directors to
act in a manner which ensures maximization of stakeholder interest in addition to
maximization of shareholder/owners’ interest.

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