UNIT-III

What are Sweat Equity Shares?

Sweat equity shares are a type of equity shares issued by a company to its employees in
recognition of their contribution to the company’s growth and success. Sweat equity shares
are issued at a discount or for consideration other than cash. The discount on the issue of
sweat equity shares cannot exceed 15% of the current market price of the shares or the price
as per SEBI guidelines, whichever is higher.

Features of Sweat Equity Shares

Sweat equity shares have the following features:

 Issued to employees, directors, or consultants who have contributed to the

growth and development of the company.
 Issued at a discounted price or for no consideration.
 Can only be issued after the company has been incorporated for at least one
year.
 Cannot be issued for more than 15% of the existing paid-up share capital of
the company.
 Cannot be issued for more than Rs. 5 crores in a financial year.
 Cannot be transferred or sold for a period of three years from the date of issue.
 Must be held for a minimum period of three years from the date of issue.

Conditions for Issuing Sweat Equity Shares

The issue of sweat equity shares is subject to certain conditions laid down by the Companies
Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations. Some of the
conditions for issuing sweat equity shares are:

 Approval of the shareholders: The issue of sweat equity shares must be

approved by the shareholders of the company by way of a special resolution passed
at a general meeting.
  Limit on issue: The total number of sweat equity shares issued by a company
cannot exceed 15% of the paid-up share capital of the company at any time.
 Lock-in period: The sweat equity shares issued by a company must be
locked-in for a minimum period of three years from the date of allotment.
 Valuation: The valuation of the sweat equity shares must be done by a
registered valuer as per the guidelines laid down by SEBI.
 Eligibility criteria: The employees eligible for the issue of sweat equity
shares must have contributed to the growth and success of the company in a
significant manner.
 Disclosure requirements: The Company must make adequate disclosure
regarding the issue of sweat equity shares in its annual report and on its website.

Advantages of Sweat Equity Shares

Sweat equity shares have several advantages for both the company and the employees,
directors, or consultants who receive them. These advantages are:

 Helps in attracting and retaining talent: Sweat equity shares are a great way
to attract and retain talented employees, directors, or consultants who are
instrumental in the growth and development of the company.
 Cost-effective way of compensation: Sweat equity shares are a cost-effective
way of compensating employees, directors, or consultants. They do not require cash
outflow from the company and are issued at a discounted price or for no
consideration.
 Aligns the interests of the employees with those of the company: Sweat
equity shares align the interests of the employees, directors, or consultants with
those of the company. This encourages them to work towards the growth and
development of the company
 Increases shareholder value: Sweat equity shares increase the value of the
company for its shareholders. This is because the employees, directors, or
consultants who receive sweat equity shares have a vested interest in the success of
the company.

Drawbacks of Issuing Sweat Equity Shares

The following are the drawbacks of issuing sweat equity shares:

  Dilution of Ownership: Issuing sweat equity shares can dilute the ownership
of existing shareholders, which can affect their control over the company.
 Accounting Complexities: Issuing sweat equity shares can lead to accounting
complexities, as the value of the sweat equity shares needs to be determined and
recorded accurately in the company’s financial statements.
 Legal and Regulatory Compliance: Issuing sweat equity shares requires
compliance with various legal and regulatory requirements, which can be time-
consuming and expensive.
 Misuse of Sweat Equity: There is a risk that sweats equity shares may be
misused by employees, who may not contribute as much to the company’s growth
and success as expected.

Procedure for Issue of Sweat Equity Shares

The procedure for the issue of sweat equity shares is as follows:

 The company must pass a special resolution authorizing the issue of sweat
equity shares.
 The company must obtain a valuation report from a registered valuer.
 The company must make an application to the Registrar of Companies (ROC)
within 30 days of the issue of sweat equity shares.
 The ROC must be provided with the valuation report, details of the employees
to whom the shares are being issued, and the terms and conditions of the issue.
 The ROC will scrutinize the application and if satisfied, will approve the issue
of sweat equity shares.
 The company must issue the sweat equity shares within 12 months of
receiving approval from the ROC.

Important points to be kept in mind regarding the Issue of Sweat Equity Shares

The following are the important to be kept in mind regarding the Issue of Sweat Equity
Shares:

 Eligibility Criteria: Only employees, directors or key managerial personnel

who have contributed towards the growth and development of the company are
eligible for the issue of sweat equity shares.
  Maximum Limit: The maximum limit for the issue of sweat equity shares is
15% of the paid-up share capital of the company in a year or up to Rs. 5 crores,
whichever is higher.
 Valuation: The valuation of sweat equity shares should be done by a
registered valuer as per the guidelines of the Securities and Exchange Board of India
(SEBI).
 Lock-in Period: Sweat equity shares are subject to a lock-in period of three
years from the date of allotment.
 Restrictions on Transfer: Sweat equity shares cannot be transferred, sold or
pledged until the completion of the lock-in period.
 Disclosure Requirements: Companies are required to disclose the details of
the issue of sweat equity shares in their annual report and on their website.
 Compliance: Companies must comply with the provisions of the Companies
Act, 2013 and the SEBI guidelines while issuing sweat equity shares.

Conclusion

In conclusion, the issue of sweat equity shares is a useful tool for companies to reward and
retain talented employees. The issue of sweat equity shares is subject to certain conditions
laid down by the Companies Act, 2013, and the SEBI regulations. The issue of sweat equity
shares must be approved by the shareholders of the company, and the total number of sweat
equity shares issued cannot exceed 15% of the paid-up share capital of the company at any
time. The sweat equity shares issued by a company must be locked-in for a minimum period
of three years from the date of allotment. The issue of sweat equity shares has several
advantages for companies, such as incentivizing employees to work towards the long-term
growth of the company and promoting a sense of ownership among the employees.

Feel free to connect with our experts at Legal Window in case you face any difficulty in
understanding the concept of Issue of Sweat Equity Shares under Companies Act, 2013. Our
experts would be happy help assist you.
UNIT-III
Provisions under the Companies Act, 2013 (�the Act�) for Buy-back of shares:
Section68, 69 and 70 brought in by the Companies Act, 2013, has caused this structural
change in the theme and philosophy of company law that, subject to the restrictions
envisaged in the section, a company may Buy-back its own securities. Thus now it falls under
the exceptions where no confirmation by the court is necessary. In line with this, SEBI also
came out with SEBI (Buy Back of Securities) Regulations, 1998 applicable to listed
Company. Rule 17 of Companies (Share Capital & Debenture) Rules, 2014 contains the
regulations regarding buy-back of securities for unlisted companies.

What is Buy-back share?

Buying shares is a financial engineering tool. In simple term Buy-back of shares implies the
act of purchasing its own shares from the existing shareholders is called Buy-back of shares.
Buy-back means the repurchase of its own share by the company. The company can Buy-
back both the kinds of shares i.e equity as well as preference. Buyback of shares is nothing
but reverse of issue of shares by a company.

Buyback is reverse of issue of shares by a company where it offers to take back its shares
owned by the investors at a specified price; this offer can be binding or optional to the
investors.
A company may opt to buy back the shares under any one of the following situations:

 When the quoted price on the stock exchange for the company's share does not
represent the true value of the shares; or
 When the company doesn't have paths to invest its accumulated funds, and it goes for
buyback of shares with a view to return the capital; or
 When the promoters are planning to increase their shareholding in the company.

Advantages of Buy-back share.

 Utilisation of Reserves:
The profitable and cash rich companies can utilize their earning and reserves to
reduce to outstanding equity shares.
 Revival of the capital market:
Buyback can lead to revival of capital market by flaring up the market value of shares
in a bearish market. It will help the company to maintain the market price of its
shares.
 Rise in market price of shares:
Buyback leads to rise in earning per share, which results in rise in market price of
shares as the demand of the share increases
 Increase promoters stake in the company.
 Proper utilisation of excess funds:
Many companies have excess cash without any profitable investment options.
It would be better for them to return surplus cash to shareholders than go on simply
spending for want of alternate.
Sources of Buy-back:-
Section 68 (1) of the Act provides that buy-back of shares can be financed only out of:

 its free reserves

 the securities premium account; or
 the proceeds of the issue of any shares or other specified securities:

It is provided that no Buy-back of any kind of shares or other specified securities can be
made out of the proceeds of an earlier issue of the same kind of shares or other specified
securities as it will frustrate the purpose sought to be achieved by an issue and will make no
sense. It can however be used for buy-back of another kind of security.
Conditions for a Buy-Back:

 Section 68 (2) of the Companies Act provides that a company can buy-back its shares
or other specified securities only when

o The buy-back is authorised by its articles;

o A special resolution has been passed at a general meeting of the company
authorising the buy-back:
o The buy-back is10% or less of the total paid-up equity capital and free
reserves of the company and such buy-back has been authorised by the Board
by means of a resolution passed at Board meeting;
o The overall limit of buy-back is 25% or less of the aggregate of paid-up capital
and free reserves of the company.
In respect of the buy-back of Equity shares in any financial year, the reference
to 25% in this clause shall be construed with respect to its total paid-up equity
capital in that financial year;
 The buy-back debt-equity ratio is within the permissible 2:1 range.

The ratio of the aggregate of secured and unsecured debts owed by the company after buy-
back is not more than twice the paid-up capital and its free reserves. The Central Government
is empowered to relax the debt-equity ratio in respect of a class or classes of companies but
not in respect of any particular company.

 All the shares or other specified securities for buy-back are fully paid-up. The buy-
back of the shares or other specified securities listed on any recognized stock
exchange is in accordance with the regulations made by the Securities and Exchange
Board in this behalf.
 Every buy-back is required to be completed within 12 months from the date of
passing the Special Resolution or the Board Resolution, as the case may be.

 No offer of buy-back under this sub-section 68 (2) shall be made within a period of 1
year reckoned from the date of the closure of the preceding offer of buy-back.

According to Section 68 (3) the notice containing the special resolution should be passed
and should be accompanied by an explanatory statement stating:
  All material facts, fully and completely disclosed:
 The necessity for buy-back;
 The class of security intended to be purchased by the buy-back;
 The amount to be invested under buy-back;

The time limit for completion of buy-back. The company is also required to pass a special
resolution in its general meeting after following the procedure laid down in section 101&
102.

Time Limit of completion of buy-back:

Section 68 (4) provides that every buy-back is required to be completed within 1year from
the date of passing the special resolution or the Board resolution, as the case may be.

Modes of Buy-Back:
Section 68 (5) states that the securities can be bought back from:

 From the existing shareholders or security holders on a proportionate basis

 From the open market;
 By purchasing the securities issued to employees of the company pursuant to a
scheme of stock option or sweat equity.

Other Formalities for Buy-back:

 The company which has been authorized by a special resolution shall, before the buy-
back of shares, file with the Registrar of Companies a letter of offer in Form No. SH-
8, along with the fee. Provided that such letter of offer shall be dated and signed on
behalf of the Board of directors of the company by not less than two directors of the
company, one of whom shall be the managing director, where there is one. [Rule 17
(2)]

 Under Section 68 (6) provides a Declaration of Solvency is required to be filed by the

company with the Registrar in the prescribed Form SH-9signed by at least two
directors of the company, one of whom shall be the managing director, if any, and
verified by an affidavit before the buy-back is implemented to guarantee its solvency
for at least a year after the completion of buy-back

A company after the completion of buy-back is required to extinguish and physically destroy
its securities within 7 days of the last day on which the buyback process is completed.[U/s
68(7)]

A company buying back its securities is prohibited from making a further issue of securities
within a period of 6 months. It may however make a bonus issue and discharge its existing
obligations such as conversion of warrants, stock option schemes, sweat equity or conversion
of preference shares or debentures into equity shares.[U/s 68(8)]

How many types or Methods for buyback offers?

 a. Fixed price tender offer:
Shareholders have the option to sell or hold the fixed number of shares, offered by the
company at a fixed price. This process ensures all shareholders are treated equally,
doesn't matter if they hold majority or minority stake.

b. Buying from the open market:

The company buybacks its own shares from the market, repurchase program happens
for an extended period of time as a large block of shares needs to be bought.

Transfer of certain sum to Capital Redemption Reserve Account (CRR)

According to section 69 of the Companies Act, 2013, where a Company brought back shares
out of free reserves or out of the securities premium account, then an amount equal to the
nominal value of the shares need to be transferred to the Capital Redemption Reserve
Account. Such transfer detailed to be disclosed in the Balance sheet.

The Capital Redemption Reserve account may be utilized for paying unissued shares of the
company to the members as fully paid bonus shares.

Restrictions on Buy-back of Securities in certain circumstances

According to section 70 of the Companies Act, 2013, A Company should not buy-back its
securities or other specified securities , directly or indirectly:

 Company cannot directly or indirectly go to purchase its own shares and other
securities through any Subsidiary Company which includes Company's own
Subsidiary Companies;
 Company cannot directly or indirectly go to purchase its own shares and other
securities through any Investment Company or group of Investment Companies;
 When Company has defaulted in filing of Annual Return, declaration of dividend &
financial statement. Company cannot directly or indirectly purchase its own shares
and other securities in case the Company has made a default in the following:

1. Repayment of Deposits is accepted either before or after the commencement

of the Companies Act, 2013,
2. Payment of Interest thereon,
3. The payment of Dividend to any Shareholder,
4. Redemption of Debentures or Preference Shares of Company,
5. Repayment of any interest payable or any term loan thereon to any Banking
Company or Financial Institution.

 When Company has defaulted in repayment of deposits or interest payable thereon, or

in redemption of debentures or preference shares or repayment of any term loan. The
prohibition is lifted if the default has been remedied and a period of 3 years has
elapsed after such default ceased to subsist.
  After availing Company Registration, if the Company has not complied with the
provisions of Sections 92, 123, 127 and Section 129 of the Companies Act, 2013, the
Company cannot directly or indirectly purchase its own Shares and other Securities.

Conclusion
Thus, it can be concluded that Indian companies announce buyback in response to
undervaluation position of their stocks in capital markets and they are well supported by
availability of sufficient cash balance available for the same. Thus, on one hand, premium
offered in terms of buyback prices announced offers an exit opportunity for shareholders and
on the other hand, it offers an opportunity for the company to use its liquidity position to
extinguish its shares today and issue them again in future.

It prevents takeovers and mergers thus preventing monopolization and aiding the survival of
consumer sovereignty. On the other hand Buy back can help in manipulating the records in
flatting share prices Price-Earning Ratio, Earning per share, thus misleading shareholders.
Thus, knowledge of the impacts of Buy-back becomes vital and every shareholder must
reconsider all his views before purchasing the shares of companies involved in the process of
Buyback.
UNIT-III
1. Issue of Bonus Shares
The issue of bonus shares is one of the common features in the Corporate world.
When the Company has accumulated large surplus of profits and it decides to convert
this surplus into share capital, then the Company can issue bonus shares to its
shareholders in proportion to their respective holding.

Bonus Shares are issued by way of capitalisation of profits or reserves of the

Company. It is also popularly known as “Capitalisation Shares” as these shares are
issued on capitalisation of profits or reserves. The main purpose is to broad base the
share capital of the Company. The issue of bonus shares does not entail any cash
outflow.

Section 63 of the Companies Act, 2013 contains the provisions for issue of bonus
shares.

2. Conditions as specified for Issue of Bonus

Shares as per Section 63
Read with Rule 14 of Companies (Share Capital
& Debentures) Rules, 2014
2.1 Source of Issue of Bonus Shares
A company may issue fully paid-up bonus shares to its members, in any manner
whatsoever, out of—

(i) its free reserves;

(ii) the securities premium account; or

(iii) the capital redemption reserve account:

The Company cannot issue bonus shares by capitalising reserves created by the
revaluation of assets.

2.2 Authorization by its Articles of Association

The Bonus issue shall be authorized by Articles of Association. In case the Articles
of Association does not authorize the Issue of bonus shares, the same is required to be
amended by following the provisions of Section 14 of the Act.
2.3 Authorization of Bonus Issue in General Meeting
The issue of bonus shares shall be previously authorized in the General meeting of
the Company, by way of passing ordinary resolution, in case Articles of Association
provides for Special resolution, then by way of passing special resolution.

The above said resolution shall be passed on the recommendation of the Board of
Directors.

2.4 Bonus Shares are not allowed in case of Partly paid

shares
The Company cannot issue bonus shares to the Shareholders holding partly paid-up
shares, however the partly paid shares as outstanding on the date of allotment, are
made fully paid-up, before issuing bonus shares.

2.5 Prohibition on issue of Bonus Shares

The company can capitalise its profits or reserves for the purpose of issuing fully
paid-up bonus shares, only if:

(i) it has not defaulted in payment of interest or principal in respect of fixed deposits
or debt securities issued by it;

(ii) it has not defaulted in respect of the payment of statutory dues of the employees,
such as, contribution to provident fund, gratuity and bonus.

2.6 Bonus shares in lieu of Dividend

The bonus shares shall not be issued in lieu of dividend.

2.7 Bonus issue cannot be withdrawn

Rule 14 of Companies (Share Capital & Debentures) Rules, 2014, provides that the
Company which has once announced the decision of its Board recommending a bonus
issue, shall not subsequently withdraw the same.

3. Important issues relating to issue of bonus

shares
(i) Quantum of Bonus Shares

The quantum of bonus shares or the ratio of bonus share shall depend on the Reserves
and Surplus of the Company and also the intent of the management regarding
quantum of reserves and surplus to be capitalized.
(ii) Where authorized capital was exhausted

In the case of Sanjay Paliwal v. Paliwal Hotels P. Ltd. , (2007) 79 CLA 431 (CLB), it
was held that where the authorized capital was already exhausted on the date of the
alleged allotment, no further allotment of shares could take place.

Therefore, before initiating the process of the issue of shares, the Company should
first increase the authorized share capital, and then subsequently, the Company can
initiate the process of issue of shares. However, in the case of passing Shareholders
resolution for increase in Authorised Share Capital and resolution for issue of bonus
shares, can be passed simultaneously in the same general meeting.

(iii) Entitlement of Bonus Shares

The entitlement of bonus shares shall be to those persons who are the members on the
cut off date as decided by the Board of Director. A person who has transferred his
shares before the cut off date shall not be entitled for the bonus share [ Rajiv
Nag v. Quality Assurance Institute (India) Ltd. ]

4. Procedure & Practice

4.1 Procedure For Bonus Shares
1.

1. Before proceeding for the decision for issue of bonus shares, the management
should ensure that all the conditions or prohibitions as specified under
Section 63 of the Companies Act, 2013 and Rule 14 of Companies (Share
Capital & Debentures) Rules, 2014, are duly taken care of.

2. Convene a Board Meeting, after giving seven days notice as per section
173(3) to all the directors of the company, to approve the following:



 Issue of Bonus Shares to the shareholders

 Quantum of bonus shares to be issued and the ratio at which the shares
are to be offered as Bonus Shares.

 Decide the date, time and place to hold the Extraordinary General
Meeting (EGM).

1.
 3. File Form MGT-14 within 30 days of passing Board Resolution* for issue of
bonus shares as per sections 117 & 179(3)(c). The requirement to file MGT-
14 is exempt in case of private companies vide Notification No. GSR
464 ( E ) dt. 05.06.2015 and for IFSC Public Limited Company vide
notification GSR 8 ( E ) dated 04-01-2017.

4. Convene Extraordinary General Meeting for the following purposes:



 Pass Ordinary Resolution** (or Special Resolution, in case specified
in the Articles of Association of the Company) to approve the Bonus
Issue.

 Quantum of bonus shares to be issued and the ratio at which the shares
are to be offered as Bonus Shares.

1.

5. File Form MGT-14 with ROC within 30 days in case Company passes the
Special Resolution approving the Bonus Issue along with explanatory
statement***.

6. Convene a Board Meeting, after giving seven days notice as per section
173(3) to all the directors of the company, for the purpose of passing
resolution for allotment of Bonus Shares and issuing of Shares Certificates.

7. File the return of allotment in Form PAS-3 within 30 days from the date of
allotment made along with the following as its attachments:

– List of allottees**** which shall include the following information:




 the full name, address, Permanent Account Number and E-mail
ID of such shareholders;

 the class of shares held;

 the date of allotment of shares;

– the number of shares held, nominal value.

– Certified copy of the Board Resolution* passed for allotment of Bonus shares.
1.

8. In case of allotment of shares, issue fresh shares certificates in Form SH-1 or

to any other specified format to all such persons to whom shares have been
allotted within 60 days from the date of allotment.

9. Update the Register of Members on issue of share certificates to the

shareholders.
UNIT-IV

Meaning and definition of some important terms

Before starting a discussion about the appointment, qualification, disqualification, liability,
etc. of the directors and the relevant provisions under the company law in India, it is of
paramount significance to comprehend and develop an understanding of certain terms like
directors, board of directors, etc. Let’s have a look at the definitions of these important
terms.

Director

In simple terms, the ‘director’ is the supreme executive authority in the company, who is
entrusted with the management and control of the company’s affairs. Generally, a company
has a team of directors, which are ultimately responsible for the entire management of the
company’s state of affairs. These teams of directors are collectively known as the ‘Board of
Directors’. In ideal corporate governance practice, it is the team of directors that ensures the
protection of the stakeholders of the company and of other members of the company.

This institution of the formulation of a team of members, known as directors, was based on
the foundation that a company must have a team of faithful, trustable, and respectable
members who work for the betterment of the company. They are appointed to work for the
company’s best interests.

It is pertinent to mention here that the directors do not work in an individual capacity, unless
specifically said so, in any board resolution meeting. It means that all the directors have to
work collectively. The work done by any director in its individual capacity is not binding on
the company.

The term ‘director’ is defined under Section 2(34) of the Companies Act, 2013 (hereinafter
referred to as the 2013 Act). It states that a ‘director’, “means a director appointed to the
board of a company.” The definition provided under the 2013 Act is not an exhaustive one.
This section corresponds to Section 2(13) of the Companies Act, 1956. It defines a director
as “any person occupying the position of director by whatever name called”.

According to Section 5(2) of the Small Coins (Offences) Act, 1971 (repealed), the term
‘director’ in relation to a firm is said to be the partner of the firm. Whereas, if the term is used
in relation to a society or association, it connotes the person who has been conferred with the
management and control of the affairs of that particular society or association under the
concerned rules.

In the case of Agrawal Trading Corpn. v. Collector of Customs (1972), it was held by the
Apex Court that the meaning of the term ‘director’ in relation to a firm connotes to the
partner of that firm.
In conclusion, the term director connotes a person who has been elected or appointed in
accordance with the law and who has been conferred with the task or function of managing
and directing the affairs of a company. Directors are often regarded as the brains of a
company. They hold a pivotal position in a company’s structure as they make important
decisions for the company in board meetings or in special committee meetings organised for
certain particular purposes. Also, it is noteworthy that a director has to work in compliance
with the provisions of the 2013 Act.

Board of Directors

As discussed above, a company, being an artificial person with no mind of its own, cannot
function without a human agency. Thus, the persons responsible for managing the affairs of a
company are known as directors, and collectively they are termed as ‘Board of Directors’.
The definition of the term is provided under Section 2(10) of the 2013 Act. It states that a
‘Board’ or ‘Board of Directors’ of a company refers to a collective body of the directors of
the company.

Board meetings

In simple layman’s language, as defined under Collin’s dictionary, the term ‘board meeting’
means a meeting held by the board of a company or any organisation. According to Section
173 of the 2013 Act, after the formulation of a company, a meeting of the board of directors
should be conducted within thirty days. Also, there should not be a gap of more than 120
days between two consecutive meetings. The mode of conducting such board meetings is
enumerated under Section 173(2) of the 2013 Act.

Classification of directors
As per the Companies Act 2013, directors can mainly be classified under two subheads,
namely, managing directors (one who has substantial powers of management and control of
the affairs of the company) and full-time directors (one who is in full-time employment).

Further, the classification of the directors based on the manner in which they are appointed,
the role they play, the duties they have, the powers they possess, etc. can be under the
following subheads, namely:

1. First Directors: As per the rules and norms laid down in the Article of
Association or any charter or constitution of the company, the ones who have
signed the Memorandum of Association of the company are considered to be as
first directors, and they hold the office until any other directors are officially
appointed by the company in the first annual general meeting.
2. Casual vacancies: The directors who are appointed for a short-term term when
any existing directors vacate the office.
 3. Additional Directors: If the Articles expressly provide, the Board of Directors has
the authority to appoint additional directors as they deem fit and necessary. These
additional directors will serve until the subsequent annual general meeting.
4. Alternate Director: the director who has been appointed by the Board through a
special resolution in place of the director who has been absent from his post.
5. Shadow Director: A person who isn’t officially appointed to the Board but whose
advice or directions the Board is accustomed to following is held accountable as a
director of the company. It is pertinent to note that this doesn’t apply if the
individual is providing advice in a professional capacity. Therefore, such a
‘shadow’ Director could be considered an ‘officer in default’ under the 2013 Act.
6. De Facto Director: A person who has not been officially appointed as a director
by the company but acts as a director and is also held out as a director by the
company is classified as a ‘de facto director’.
7. Rotational Directors: In a public company or a private company that is a
subsidiary of a public company, at least two-thirds of the directors are supposed to
retire by rotation, and the ones retiring through such a process are referred to as
“rotational directors”. Further, if the articles of the company provide so, they can
be reappointed.
8. Nominee Directors: These are the directors who have been appointed by the
shareholders, third parties through contract, or other parties as may be prescribed.

Position of directors : a legal perspective

As discussed above, directors are the key managerial personnel of a company. By far, it is
very clear that a company, be it private or public, is required to appoint a director. They are
entrusted with the entire management of the affairs of the company, and the same is done in
accordance with prevailing laws. The role played by the directors in the corporate governance
of a company is very significant and crucial.

The term ‘director’ has been defined under Section 2(34) of the 2013 Act; however, the
definition fails to provide clarity pertaining to the exact meaning of the term, duties,
responsibilities, functions, etc. the director is supposed to perform.

Defining and explaining the position that a director holds is a complex and herculean task.
The reasoning is that it varies according to the context and circumstances. There are no
precise words that can explain the position that directors hold in any corporate enterprise.
However, attempts have been made by various courts to explain the position that a director
holds. Let’s take a look at a few important case laws wherein this subject has been dealt
with.

In the case of Imperial Hydropathic Hotel Co. Blackpool v. Hampson (1883), the Court of
Appeal opined that the position that a director holds in a corporate body is very versatile.
Depending upon the circumstances and context, a director can be regarded as a trustee, an
agent, or a managing partner. It is pertinent to note that these terms are entirely indicative of
the various legal capacities that a director may hold in relation to a company.
While explaining the legal position a director holds, Justice Jessel M. R. In Re Forest of
Dean Coal Mining Ltd. Co. (1872), opined that “it does not matter much what you call them,
so long as you understand what their true position is, which is that they are merely
commercial men, managing a trading concern for the benefit of themselves and all other
shareholders in it.”

In the case of Albert Judah Judah v. Rampada Gupta And Anr. (1958), it was observed that
the directors are the persons appointed to manage the affairs of the companies that are
incorporated under the Companies Act. These are the ones whose appointments are done in
accordance with the prevailing law. The role that a director plays may vary from that of an
agent to that of a managing partner, a trustee, etc. However, one must understand that these
expressions are not meant to define the powers, functions, and duties conferred upon them
exhaustively. It is restrictive for the purpose of suggesting useful perspectives from which
they may be examined.

Section 152(1) of the 2013 Act provides that, in default and as per the contents of the Articles
of the Association of a company, the ones who are the subscribers of the Memorandum of
Association (provided they are individuals and not an association, enterprise, etc.) shall be
termed as directors. However, this shall only be applicable until the directors are duly
appointed according to the prevalent provisions and procedures provided in the Companies
Act.

Thus, from the above discussion, it is clear that the directors may sometimes act as an agent
of a company, whereas sometimes they act as trustees or managing partners. But one clear
thing is that they are indispensable organs of the company, responsible for the management
of affairs of the company.

A brief explanation of the various legal positions that a director may hold is as under;

Director as an agent

Put simply, a company is an artificial person, and thus it cannot function and work on its
own. Thus, a company needs someone to work for it and manage its affairs. So in this sense,
the director acts as the agent of the company for which they work. Hence, pursuant to this
proposition, the relationship between the director and the company is governed by the
principles of the law of agency.

The fact that directors also act as the agents of the company was also recognised by the
Scottish Court of Session in the case of Ferguson v. Wilson (1904). The court acknowledged
the fact that a corporation or a company, being an artificial person, cannot act on its own, and
hence the directors act as the agents of the company and manage the affairs of the company.
While considering this duty that a director is entrusted with, the court opined that the
relationship between a director and company is akin to the relationship that exists between a
principal and agent.
It is pertinent to note that, just as a director does not act as the trustee of the shareholders but
that of a company, similarly, the directors are not the agents of individual members but of the
institution as a whole.

The High Court of Delhi, in the case of Indian Overseas Bank v. RM Marketing (2001), held
that if a director has not given surety for a loan taken by the company in his personal
capacity, he cannot be solely held liable merely because he holds the directorship.

Director as trustee

It is pertinent to note that the directors are the trustees of the money of the company, which
they are duty-bound to handle as they act as agents in the transactions that are carried out on
behalf of the company. As the directors are entirely in control of the company’s funds in the
official capacity, which they are obligated to utilise and administer for the benefit and profit
of the company, in this sense, they can be regarded as the trustees of the company.

In a strictly literal interpretation, the directors have not been deemed trustees per
se; however, they are regarded as trustees of the company’s properties, which have been
entrusted to their hands. A similar proposition was laid down by the High Court of Madras in
the case of Ramaswamy Iyer v. Brahamayya & Co. (1965). In the aforesaid case, the court
held that directors can be held liable as trustees if they misuse the power conferred upon them
or if they disregard the power of applying the company’s funds. The court further went on to
say that even after the death of the accused director, the cause of action remains with the legal
representatives of the director.

It is pertinent to note that the reason behind treating directors as trustees is often due to the
nature of their office and the responsibilities that come with it. From the discussion we had in
previous paragraphs, one thing that is crystal clear is that the directors are bestowed with the
duty to manage and control the affairs of the company. However, it is noteworthy that the
directors are the company’s paid officers. They work for the benefit of the shareholders of the
company; they are not trustees in a literal sense. For instance, a trustee of a will or marriage is
entirely different from the role that the director plays as a trustee.

The Court of Justice, England, in the case of Percival v. Wright (1902), made it very clear
that the directors are the trustees of the company and not of the shareholders. This principle
was reiterated in the case of Bruce Peskin and another v. John Anderson (2000) by the Court
of Appeal of England and Wales. The court clarified that the directors hold no fiduciary duty
to the shareholders. Thus, even though the ultimate profit that a company makes goes to the
shareholders, it cannot be said that the directors are the trustees of the shareholders. They
owe their duty as trustees to the company.

Director as a managing partner

As the terms suggest, managing partner in a literal sense connotes the person who is
responsible for or who manages the day-to-day running of a company, enterprise, etc.
Further, as we have discussed, a director, before everything else, is the person responsible for
the management of the affairs of the company. Thus, his role as a managing partner needs no
explanation.

Furthermore, the shareholders’ will and their needs are entirely taken care of by the directors
of the company. They act as the agents of the shareholders’ and pursue their objectives. Also,
one must note that a director possesses extensive powers and exercises many proprietary
functions. The Article of the Association as well as the Memorandum of Association bestow
on the board of directors the ultimate authority to formulate policies and decisions for the
welfare of the company in accordance with the law.

Directors as an organ of the company

The transformation and evolution of the roles and responsibilities of modern-day corporate
entities, with time, have led to the emergence of a new theory called the ‘organic theory of
corporate life’. In terms of this theory, certain officials of the company are treated as the
organs of the company. As per this theory, the company is held liable for the actions of these
organs in a manner similar to the one where a natural person is held accountable for the
actions of his limbs. Put simply, in the modern era, the directors are much more than just
agents or trustees; they are often regarded as the organs of the company. Almost the entire
work of the corporate entities and companies is conducted by the directors and their
managerial personnel. They are conferred with enormous powers through the regulations
embodied in the Articles of Association. The courts in various judgements have opined that
the directors function like the brain of the company, and it is through the directors that the
company acts. The same observation was laid down by the Hon’ble Apex Court in the case
of the State Trading Corporation of India Ltd. and ors v. Commercial Tax Officer,
Visakhapatnam and ors. (1963).

Appointment of directors
The crucial role that the directors play in the management of the affairs of the companies is
unquestionable. Thus, the persons appointed to the post of director hold desirable qualities
and integrity. The 2013 Act has an ample body of provisions that deal with the appointment
of various directors in a very elaborate manner.

According to Section 149 of the 2013 Act, every company is required to have a Board of
Directors. The board shall have individuals as directors. Further, it provides the minimum
number of directors that a company is required to have, i.e., for a public company, the
minimum number is three, and for a private company, the minimum number is two. In the
case of a one-person company, the minimum number is one. Furthermore, the provision also
provides for a maximum number of directors, i.e., fifteen.

The proviso clause provides that a company can also appoint more than fifteen directors by
passing a special resolution. Also, having one woman director is an essential requirement.
Section 149(3) mandates the presence of at least one director who stays in India for a total of
182 days during the financial year. Whereas, sub-section 4 provides that every listed
company is to have at least one-third of the total independent directors. For public companies,
the Central Government may prescribe a limit on the minimum number of independent
directors.

Section 152 provides for the appointment of directors. Let’s have a brief overview of how
different classes of directors are appointed.

Appointment of the first directors

Generally, the first directors are appointed by the subscribers of the Memorandum of
Association (Section 152(1) of the 2013 Act). In case the appointments are not done in the
aforementioned way, the individual subscribers and signatories of the MOA become the
directors. Further, it is important to note that the first directors only hold the office until the
new ones are appointed in the first annual general meeting.

It is pertinent to note that no person shall be capable of being appointed as a director of a

public company (that has a share capital) unless he fulfils the below-mentioned points:

1. Allotment of a Director Identification Number (DIN) as per the provisions

of Section 154 of the 2013 Act.
2. The First Director has signed and filed a consent in writing for the appointment
with the Registrar of Companies (ROC). Provided this must be done within thirty
days of the appointment of the director.
3. He has signed the memorandum for his qualification shares, if any.
4. A written undertaking to the ROC if he has taken any qualification shares from the
company. He must also pay for that qualification share. Further, an affidavit is also
required to this effect, specifying that shares have been registered in his name.
5. In cases of independent directors appointed in the general meeting, it is mandatory
that an explanatory statement by the board be provided for such an appointment.
The statement must mention that the director fulfils the requirements as per the
2013 Act.

Section 162: Voting on the appointment of director

It is important to note that the appointment of every director in a public company or its
subsidiary and the passing of an ordinary resolution in this context in the general meeting are
mandatory. According to Section 162 of the 2013 Act, it is mandatory that each candidate
must be voted individually. Thus, if two or more directors are appointed by a single
resolution, then it will be invalid and void in the eyes of the law. However, if in the meeting it
has been unanimously decided, more than one director can be appointed by a single
resolution. Further, if such an appointment is made, it is necessary that first a resolution is
passed which authorises such an appointment.
One must note that this provision does not apply to private companies that are not
subsidiaries of public companies.

Appointment by proportional representation

The basic or traditional method for appointment is an election by a simple majority of the
shareholders. However, it has been observed that this method of appointment frequently fails
to appoint even a single director on the board. Thus, Section 163 of the Companies 2013 Act
allows the minority to place their representative and enables minority shareholders to appoint
directors through the method of proportional representation. The very purpose of enumerating
this provision of voting through proportional representation is to amplify the method of
minority voting. This method can be followed by different methods, namely, a single
transferable vote, voting by way of cumulative voting or any other means. This system of
appointment by way of proportional representation is also called a ‘cumulative voting
system’. Put simply, this provision allows companies to appoint directors through the method
of proportional representation. One must note that this method can only be adopted if the
Articles of Association (AOA) provide for it.

Rights of the persons to stand for directorship apart from the retiring directors

Section 160(1) of the 2013 Act provides that a person who is not retiring from the post of
director (appointed as per Section 152 of the 2013 Act) is eligible to be appointed a director,
provided he fulfils all the requirements of the 2013 Act.

Appointment of directors by the board

As per the provisions of the 2013 Act, the board has the power to appoint any person as
director if he fulfils the requirements in a general meeting. As per Section 162 of the 2013
Act, the following directors can be appointed by the board, namely:

1. Additional director (Section 161(1) of the 2013 Act)

2. Alternate director (Section 161(2) of the 2013 Act)
3. Nominee director (Section 161(3) of the 2013 Act)
4. To fill in vacancies of directors (Section 161(4) of the 2013 Act)

Appointment by tribunal

The Company Law Tribunal has been given the power to appoint directors, and the provision
for the same has been enumerated under Section 242(j) of the 2013 Act.

Appointment of directors through election by small shareholders

As enunciated under Section 151 of the 2013 Act, it is mandatory that at least one director
should be elected by small shareholders. The term ‘small shareholders’ connotes those
shareholders who possess a maximum of Rs. 20,000 shares in the company.

Independent directors and their appointments

The provisions pertaining to the independent directors are laid down under Section 149(4) of
the 2013 Act. It enumerates that at least one-third of the total number of directors in every
listed company should be independent directors. However, as far as the public companies are
concerned, the central government has the power to prescribe the minimum number of
independent directors.

Who is an independent director?

Section 149(6) of the 2013 Act provides for the definition of an independent director. It states
that an independent director is a director other than a managing director, a whole-time
director, or a nominee director. It further lays down certain characteristics and other
circumstances that must be fulfilled in order to be an independent director. The following are
the points that need to be considered:

1. A person with integrity who has the desired expertise and experience.
2. A person who has never been a promoter of the company, its subsidiary or any
other holding company in the past or present.
3. A person who does not have a pecuniary relationship with the company, its
subsidiary, or any other holding company, directors, or promoters.
4. A person whose relative or he himself does not hold any post of key managerial
personnel. Further, he must also not be an employee of the company.
It is pertinent to note that every independent director is required to clarify and declare his
independence at the very first board meeting and shall continue to do so every year at the first
board meeting of every financial year. It is to be noted that an independent director holds the
office of directorship for a period of five years. Also, an independent director can be
reappointed, provided the same shall be done after the passing of a special resolution.
However, an independent director can only hold office for two consecutive terms.

Section 150 of the 2013 Act provides for the manner in which independent directors are to be
appointed. Further, it also provides for keeping and maintaining a data bank for the
independent directors. As per the aforesaid provision, the independent directors are to be
selected from the data bank, which comprises pertinent information stating the name, address,
and qualifications of the individuals who have the eligibility to become independent directors
and who are willing to serve as independent directors. This data bank is maintained by any
body, institute, or association that has expertise in such matters and that has been officially
recognised by the Central Government. It is pertinent to note that the company making such
an appointment from a databank must practise due diligence under the provisions of the 2013
Act and the requirements for appointing a director.
One must note that the appointment of an independent director must be approved in a general
meeting. Also, the manner and procedure as laid down under Section 149 of the 2013 Act
must be complied with.

Disqualifications
Section 164 of the 2013 Act provides for the eligibility criteria for the directors of the
company. Under the following circumstances, a person will not be eligible for the
appointment of director if,

 He is of unsound mind and has been declared as a person of unsound mind by the
competent court.
 He is an undischarged insolvent.
 A person who has applied to be adjudicated as an insolvent or whose application
for adjudicating him as an insolvent is pending.
 A person charged for any offence, whether involving moral turpitude or otherwise
and has been sentenced for that offence to imprisonment for not less than 6
months, and a maximum of 5 years has not been passed after that imprisonment.
Provided that if a person has been convicted of any offence and sentenced in
respect thereof to imprisonment for a period of seven years or more, he shall not
be eligible to be appointed as a director in any company.
 If he has been disqualified by any tribunal for the concerned position. Provided
that if a person has been convicted of any offence and sentenced in respect thereof
to imprisonment for a period of seven years or more, he shall not be eligible to be
appointed as a director in any company.
 A person who has been convicted of the offence dealing with related party
transactions under Section 188 at any time during the last preceding five years.
 The concerned person has not made any calls relating to the shares of the company
he holds.
 If he has not complied with the provisions of Section 152(3) and Section 165(1) of
the 2013 Act.
Further, if the person who has been previously appointed as a director has not a filed financial
statement and paid returns for up to 3 financial years, continuously failed to repay the
accepted deposits, payment of interest, or pay any declared dividend, he or she shall not be
eligible to be re-appointed as director in any other company for a period of 5 years.

Apart from this, a private company may provide in its Articles of Association for any
disqualifications along with the ones provided in the aforementioned provision.
Removal of director
Section 169 of the 2013 Act, provides for the removal of the director. As per the said
provision, a director can be removed from his office by any of the two below-mentioned
authorities;

1. Company
2. Tribunal

Removal by company

Section 169(1) of the 2013 Act provides that a person can be removed from his directorship
prior to the expiration of the term of his office by passing an ordinary resolution. However,
the aforesaid section does not apply to the below-mentioned circumstances.

1. If the director is appointed by the tribunal in pursuance of Section 242.

2. If the company has adopted the system of electing two-thirds of its directors by the
method of proportional representation.
In order to remove a person from his directorship, furnishing him with a special notice is
mandatory. In the aforesaid notice, an intimation regarding the intention to remove the
director must be there. Further, it should be served at least 14 days prior to such a meeting.

As soon as the company receives such notice, a copy of such notice is furnished to the
director concerned. Then the concerned director has the right to make a presentation against
the resolution at the general meeting. If a director makes a representation, then its copy needs
to be circulated among the members.

Removal by the Tribunal

Clause (h) of Section 242(2) confers the power to remove a managing director, manager, or
any other director of the company. When an application is made to the tribunal for relief from
oppression or mismanagement, it may terminate any agreement of the company that has been
made with a director. When the appointment of a director is terminated, he cannot serve the
managerial position of any company for five years without leave of the Tribunal.

Resignation by the director

The provision for resignation by the director is provided under Section 168 of the 2013 Act.
A director of a company may resign from the position of directorship as per the norms or
rules or in the manner provided in the Articles of Association of the company. In case the
articles do not contain any rules or provisions in this respect, then the director may give his
resignation after providing a notice for the same to the board and the company. Further, the
company, after taking notice of the resignation, is required to inform the Registrar of
Companies in the manner and within the time as prescribed. The report of such resignation by
the director should also be placed forward in the general meeting of the company.

As per the proviso to Section 168(1) of the 2013 Act, the director may also forward a copy of
his resignation within thirty days to the registrar, along with mentioning the reasons for the
same. Further, as per Section 168(2), the resignation shall be effective as soon as the
company receives the intimation of the same by the notice or on any specific date as provided
in the notice. Section 168(3) of the 2013 Act provides that if all the directors vacate their
offices under Section 167, then, for the time being, the promoters or the Central Government,
in the absence of any promoter, shall appoint the required number of directors, who shall hold
office till the directors are appointed by the company in a general meeting.

In the case of Mother Care (India) Pvt. Ltd. v. Ramaswamy P. Aiyar (2003), the Karnataka
High Court held that the resignation of a director would be effective even if he was the only
director in the office.

It is important to note that even after resignation, the director can be held liable for any wrong
associated with him or that has been done in his personal capacity during the period in which
he served as the director.

Liability of directors
The directors can be held liable for the acts done by them without the company’s authority.
Such acts may also be called ultra vires acts. Furthermore, they can also be held liable, in
their personal capacity, for the acts that are intra vires the company; however, those acts are
beyond a director’s scope or power, provided they are not ratified by the company. The
liability of directors can be divided into two subheads, namely, criminal and civil liability.

Below is a detailed explanation of each of the classifications.

Criminal liability

If the directors perform any act in an official capacity that is not in compliance with the
provisions of the Companies Act, they can be held criminally liable for default or breach of
certain provisions of the Companies Act, apart from being held liable for the offences
enumerated in the Indian Penal Code, 1860 (hereinafter referred to as IPC). As far as the
offences under IPC are concerned, a director can be held liable for fraud, perjury,
misappropriation of funds, embezzlement of funds, etc.

Apart from the sections in the Companies Act that expressly deal with the imposition of
penalty on a director by holding him liable, many sections or provisions in the 2013 Act
impose a fine or imprisonment, or as the case may be, on the company and every officer who
is in default. So first, let’s understand exactly what the term ‘officer who is in default’
means.
As per Section 2(60) of the 2013 Act, the term ‘officer who is in default’ means:

1. A whole-time director;
2. Key managerial personnel of the company;
3. In the absence of any key managerial personnel, the director or directors who have
been appointed by the Board itself;
4. Any person who has been authorised by the Board and who is under the immediate
authority of the Board or any key managerial and is given any responsibility like
maintenance, filing, or any other thing, knowingly allows or actively participates,
or knowingly fails to take appropriate steps to prevent any default;
5. Any person on whose advice the directors or the board of directors of the company
are supposed to act;
6. Any director who willingly contravenes the provisions of the 2013 Act;
7. In relation to the issue or transfer of shares, any registrar, agent, merchant banker,
etc.
Further, it is pertinent to note that mens rea (intention) is an essential ingredient to hold
somebody liable unless the statute expressly or impliedly states otherwise.

Furthermore, Section 450 of the 2013 Act provides for punishment where no specific
provision is provided. It provides that if a director or any other officer of the company is in
default of any provision of the 2013 Act or the rules made thereunder, shall be punishable
with a fine, which may extend up to Rs. 10,000/- or if the contravention is done repeatedly,
Rs. 1000/- for every day. Also, if a director of the company, which is being wound up,
destroys, falsifies, or alters any books or any other valuable documents relevant to the
company, he shall be liable for imprisonment, which may extend up to 7 years, along with a
fine.

Civil liability

Apart from the above-discussed criminal liability, directors can also be held liable for acts
done by them that are outside the powers of the company as defined in the Memorandum of
Association. For instance, a director can be held liable if there is any misapplication of the
funds of the company, and in such a case, he may be obligated to replace such funds. A
director may be asked to replace the funds by buying up shares of the company (Section
337 of the 2013 Act), payment of dividends out of the capital, payment of bonuses to the
promoters, buying a property in which the company had no power to purchase, and returning
the capital without reducing.

One must understand that if a director acts malafidely and misuses the powers conferred upon
him by the company, he will incur civil liability for breaching warranty.

Also, negligence on the part of the director, if it causes loss to the company in his individual
capacity, will attract civil liability. If a director makes personal gains from the company, he
will be asked to pay damages to the company. In such a case, the liability arises from the
principle called ‘unjust enrichment’. It refers to a situation where a director enriches himself
unjustly by abusing or misusing his fiduciary position.

Generally, a director is not held liable to third parties for transactions that they enter on
behalf of the company; however, in certain situations, they are held liable. Some of these are
mentioned below.

1. When directors have entered into a contract knowingly and expressly in their
name, have willingly hidden the fact that they are acting on behalf of the
company.
2. In a situation where directors have acted fraudulently in collusion with third
parties.
3. In case of the issuance of a prospectus that does not fulfil the statutory
requirements.
4. Acts that are outside the authority of the director.
5. Directors who make use of the company’s official seal or signature on a document
without the knowledge of the company and without mentioning the name of the
company.
In the above-mentioned cases, the directors are supposed to pay damages. The amount of
damages that is required to be paid depends upon the losses suffered in each of the cases.

Powers of directors
Generally, the powers conferred upon the directors are expressly or otherwise outlined in the
Articles of Association of the company. Once these powers mentioned in articles are
delegated and vested in the Board of Directors, only they can exercise them. It is pertinent to
note that the shareholders cannot order or direct the board as to how the powers are to be
exercised. Provided, the board exercises these powers within the prescribed scope.

General powers vested under Section 179

Section 179 of the 2013 Act provides that the Board of Directors will be entrusted with all the
powers conferred upon them by the company. The board is entitled to exercise all the powers
that the company has authorised. However, it is pertinent to note that these powers are subject
to certain restrictions.

The powers of directors are co-extensive with the powers of the company itself. The director,
once appointed, has almost total power over the operations of the company.

There are two limitations on the exercise of the power of directors, which are as follows:
 1. The board of directors is not competent to do the acts that the shareholders are
required to do in general meetings.
2. The powers of directors are to be exercised in accordance with the memorandum
and articles.
The individual directors have powers only as prescribed by memorandum and articles.

The intervention of shareholders in exceptional cases

In the following exceptional situations, the general meeting is competent to act on matters
delegated to the board:

1. When directors have acted malafide.

2. When directors have due to some valid reason become incompetent to act.
3. The shareholders can intervene when directors are unwilling to act or there is a
situation of deadlock.
4. The general meetings of shareholders have the residuary powers of a company.

Powers to be exercised with general meeting approval

Section 180 of the 2013 Act mentions certain powers that can be exercised by the Board only
when they are approved in the general meeting:

1. To sell, lease, or otherwise dispose of the whole or any part of the company’s
undertakings.
2. To invest otherwise in trust securities.
3. To borrow money for the purpose of the company
4. To give time or refrain the director from repayment of any debt.
When the director has breached the restrictions imposed under the sections, the title of lessee
or purchaser is affected unless he has acted in good faith along with due care and diligence.
This section does not apply to companies whose ordinary business involves the sale of
property or putting a property on lease.

Power to constitute an audit committee

Section 177 of the 2013 Act provides power to the board of directors to formulate an audit
committee. It is to be noted that the committee should be constituted of at least three
directors, including independent directors. Further, it is mandatory that the committee should
have independent directors in the majority. The chairperson and members of the audit
committee should be persons with the ability to read and understand the financial statements.

The audit committee is required to act in accordance with the terms of reference specified by
the board in writing.
Power to constitute nomination and remuneration committees and stakeholder

relationship committee
The Board of Directors can constitute the Nomination and Remuneration Committee and
Stakeholder Relationship Committee under Section 178 of the 2013 Act. The Nomination and
Remuneration Committee should consist of three or more non-executive directors out of
which one-half are required to be independent directors.

The Board can also constitute the Stakeholders Relationship Committee, where the board of
directors consists of more than one thousand shareholders, debenture holders, or any other
security holders. The grievances of the shareholders are required to be considered and
resolved by this committee.

Power to make a contribution to charitable or other funds

The Board of Directors of the company is empowered under Section 181 to contribute to
bona fide charitable and other funds. The prior permission of the company in a general
meeting is required when the aggregate amount of contribution, in any case, exceeds 5% of
the average net profit of the company for the immediately preceding financial years.

Power to make a political contribution

Under Section 182 of the 2013 Act, the companies can make a political contribution. The
company making a political contribution should not be other than a government company or a
company that has been in existence for less than three years.

Also, the amount of contribution should not exceed 7.5% of the company’s net profit in the
three immediately preceding financial years. The contribution needs to be sanctioned by a
resolution passed by the Board of Directors.

Power to contribute to the national defence fund

The Board of Directors is empowered to make contributions to the national defence Fund or
any other fund approved by the Central Government for the purpose of National Defence
under Section 183 of the 2013 Act. The amount of contribution can be the amount as much as
the company thinks fit. This total amount of contribution made is mandated to be revealed in
the profit and loss statement during the financial year to which it pertains.

Restrictions on powers under the statutory provision

The Companies Act 2013 also lays out the manner in which the powers of the company are to
be exercised. There are certain powers that can be exercised only when their resolution has
been passed at the board’s meetings. Those powers, such as the power:
 1. To make calls.
2. To borrow money.
3. To issue funds for the company.
4. To grant loans or give guarantees.
5. To approve financial statements.
6. To diversify the business of the company.
7. To apply for amalgamation, merger, or reconstruction.
8. To take over a company or to acquire a controlling interest in another company.
The shareholders in a general meeting may impose restrictions on the exercise of these
powers.

Conclusion
From the above discussion, it is clear that the directors are the most significant and supreme
controlling authority responsible for the management of the affairs of the company. The
directors together are collectively known as the Board of Directors. The directors of the
company serve as the supreme executive authority, or, we may say, the cerebral entity,
playing a significant role in the management and control of the company’s affairs. Their
ultimate goal is to make the company progress. The position of director is considered to be a
post of great responsibility within the corporate structure. In order to work for the benefit of
the company, they have been conferred with enormous powers according to the provisions
enshrined in the Companies Act, 2013. They have been equipped with these powers in order
to work for the fulfilment of the corporation’s or any enterprise’s objectives. Further, it is
clear that even though the directors are bestowed with enormous powers, they cannot go
beyond the scope of their powers, and their actions should not be in contravention of the
provisions of the 2013 Act.

Terms of Appointment
The guidelines for appointing Directors within the Company are as follows:

1. Only natural individuals are eligible for Director roles.

2. Prospective Directors must have a Director Identification Number (DIN) before
nomination.
3. Individuals being considered for Directorship must hold a Digital Signature
Certificate (DSC) issued by an authorized body.
4. Any person assuming the position of Director must furnish their DIN and declare their
qualification for Directorship under the Companies Act, 2013.
5. Prior to or subsequent to their appointment, every appointee must submit Form DIR-
2, confirming their willingness to act as a Director.
6. Eligibility for Directorship is void if the individual isn’t registered under Section
164(1) of the Companies Act, 2013.
 7. The aggregate directorships held by an individual, including any other directorial
roles, must not exceed twenty entities concurrently. Moreover, the count of public
companies where an individual serves as Director must not surpass ten.

Qualifications of Directors
The Companies Act of 2013 does not prescribe specific educational or professional
qualifications of directors. Additionally, the Act does not enforce any mandatory
qualifications to directors. In the absence of relevant provisions within a company’s articles
of association, there is no obligatory requirement for a director to hold shares in the company,
unless they choose to do so willingly. However, articles generally support a minor percentage
of eligibility.

Share qualification
The company’s articles provide that each director must hold a specific quantity of shares,
referred to as “qualification shares.” It is mandatory for a director to acquire the required
number of these shares within two months of their appointment. If an individual is not
appointed as a director, there is no obligation for them to acquire these qualifying shares.
Additionally, the director cannot be compelled to obtain share qualification within a period
shorter than two months after their appointment. The cost of the eligible shares cannot exceed
five thousand rupees, unless the nominal value of the name exceeds the share value. Directors
are allowed to possess shares only and are not required to provide any warranties.

Failure to acquire the required qualification shares as directed can have consequences for the
director. He can suffer in two ways:

 The director post may become vacant.

 He could get in trouble and have to pay a fine if he continues to serve as a director.
It’s mandatory for the director to hold the shares himself.

Disqualifications
The rules for becoming a director are explained in Section 274. There are certain situations
where someone cannot become a director:

1. If a person is not mentally well and a court acknowledges this.

2. When a director is declared financially unstable.
3. If a director doesn’t pay for the required shares within 6 months of becoming a
director.
4. If a director is sentenced to at least 6 months in prison for misbehavior, and this
sentence doesn’t go beyond 5 years from the end of their sentence.
5. If a director is proven to be involved in fraudulent activities under Section 203.
 6. If a person is unable to repay their debts that are more than what they own. Or if a
company has taken legal action against the director.

If a private company isn’t an assistant of a public company, it can be more lenient with
certain disqualifications. In simpler words, a public company and its leaders don’t have the
same freedom to be lenient with other disqualifications.

Applicability: Public companies( not applicable to Government companies and its

subsidiaries) if the articles of association provided for retirement of all directors in the annual
general meeting, then all the directors are liable to directors.

According to sec 152(6) of the companies act,2013 2/3 of the total directors

(*) are liable to retire by rotation and those directors are called as Retiring directors. out of
the retiring directors (2/3rd of Total number of directors) 1/3rd of directors is liable to vacate
the office. So, we need to understand how to calculate the total directors

(*) Total directors in the company xxx

(-)Nominee director appointed by central govt and third party

(xxx) (-)Additional directors

(xxx) (-)Alternate directors

(xxx) (-)Independent directors

(xxx) (-)Small Shareholders directors (

xxx) Total number of directors on

xxx(#) which 2/3rd to be calculated Retiring directors= 2/3rd of # Once the retiring directors
are known we have to calculate the directors to actually retire from the office that calculation
is as follows Actual directors to retire from office=1/3rd of Retiring directors.

EX: There are 10 directors in the company out of which 2 are independent directors and 1
director appointed by C.G Please calculate the directors to retire in AGM. Total directors of
the company 10 -Independent directors -2 -Nominee director -
1 Total number of directors on which 2/3rd to be calculated 7 Retiring directors=
7*2/3=4.67=5(Rounded to next digit)

Read more at: https://taxguru.in/company-law/rotation-directors-section-1526-companies-act-

2013.html
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  LLP
 LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership.
• The LLP can continue its existence irrespective of changes in partners. It is capable
of entering into contracts and holding property in its own name.
• The LLP is a separate legal entity, is liable to the full extent of its assets but liability
of the partners is limited to their agreed contribution in the LLP.
• Further, no partner is liable on account of the independent or un-authorized actions
of other partners, thus individual partners are shielded from joint liability created by
another partner’s wrongful business decisions or misconduct.
• Mutual rights and duties of the partners within a LLP are governed by an agreement
between the partners or between the partners and the LLP as the case may be. The
LLP, however, is not relieved of the liability for its other obligations as a separate
entity.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership
firm structure’ LLP is called a hybrid between a company and a partnership.
 2
Structure of an LLP

LLP shall be a body corporate and a legal entity separate from its partners. It will have
perpetual succession.

LLP form is a form of business model which:

(i) is organized and operates on the basis of an agreement.
(ii) provides flexibility without imposing detailed legal and procedural requirements
(iii) enables professional/technical expertise and initiative to combine with financial risk
taking capacity in an innovative and efficient manner

Under “traditional partnership firm”, every partner is liable, jointly with all the other partners
and also severally for all acts of the firm done while he is a partner.
• Under LLP structure, liability of the partner is limited to his agreed contribution. Further, no
partner is liable on account of the independent or un-authorized acts of other partners, thus
allowing individual partners to be shielded from joint liability created by another partner’s
wrongful acts or misconduct.
 A basic difference between an LLP and a joint stock company lies in that the internal
governance structure of a company is regulated by statute (i.e. Companies Act, 1956)
whereas for an LLP it would be by a contractual agreement between partners.
• The management-ownership divide inherent in a company is not there in a limited
liability partnership.
• LLP will have more flexibility as compared to a company.
• LLP will have lesser compliance requirements as compared to a company.