BOARD AND SUB

COMMITTEES OF THE
BOARD
 Directors’ Fiduciary Duties
• A legal concept that is pillar in Anglo-American corporate governance
• A legal concept that does not exist per se in many developed markets
In India
Section 166 of the 2013 Act provides for fiduciary duties of directors such as the duty
to act in good faith, the duty to act in the best interests of the company, its
employees, the shareholders, and the community and for the protection of the
environment, etc. As per Section 166(5) a director is prohibited from making any
undue gain or advantage by virtue of its directorship in the company and is liable
repay any undue gains to the company.
Convergence of Duties ?

• Global investors’ expectations & demands

• Media exposure: domestic & international

• Competing for funds: domestic investors

• Corporate governance codes

• Laws (voting, proxies, etc)

 Why is Independence Important?

• Conflicts of interest hinder judgment and affect decision-making

• Judgment and decision-making are what directors are asked to do
• Directors must feel free to think, express, question and decide in the
interest of those they represent
 Importance of Selection
• Who selects directors?
• How are they selected (pool, resources, interviews)?
• Who determines their independence?
• Who elects directors?
• Who evaluates directors?
• Who removes directors?
 Box-Ticking vs. Effective Independence
• Current definitions are based on
• Ownership of shares
• Contracts and services rendered
• Relationships
• Family ties

• What about effective independence?

• “Independent minded”
• Commitment (time and knowledge)
 Independence of Directors
• Disclosing conflicts of interest:
• Does the Board have clear guidelines of conflicts that must be disclosed?
• Who discloses conflicts?
• To whom are conflicts disclosed?
• What happens if conflicts are not disclosed?

• How is independence enforced?

• What if conflicts are disclosed later?
• good faith vs. bad faith
• What is disclosed to the Board and/or to shareholders?
 The Companies Act, 2013 ('CA 2013')
• The Companies Act, 2013 ('CA 2013') for the first time has laid down the duties of directors in
unequivocal terms in section 166. In summary, the general duties of directors under the CA 2013 are
as follows:
• to act in accordance with the articles of the company, in other words, to act within powers;
• to act in good faith in order to promote the objects of the company for the benefit of its members
as a whole;
• to act in the best interest of the company, its employees, shareholders, community and for the
protection of environment;
• to exercise due and reasonable care, skill and diligence and independent judgment;
• to avoid direct or indirect conflicts of interest;
• to avoid undue gain or advantage either to himself or relatives, partners or associates; and
• not to assign his office to any other person;
 Board’s role, responsibilities and duties
• A Director is part of a collective body of Directors called the Board, which is responsible for the
superintendence, control and direction of the affairs of the company.
• Under common law rules and equitable principles, director's duties are largely derived from the law of agency
and trusts (i.e., set of contractual, quasi-contractual and non-contractual fiduciary relationships with the
Company).
• Under the law of agency, duties of skill, care and diligence are imposed on directors.
• On the other hand, law of trusts impose fiduciary duties on directors. Accordingly, directors are the trustees of
the company's money and property, and also act as agents in the transaction which they enter into on behalf
of the company.
• Directors are liable as trustees for breach of trust, if they misapplied the funds or committed breach of byelaws
of the company.
• A director is expected to perform his duties as a reasonably diligent person having the knowledge, skill and
experience both of as person carrying out that director's function and of that person himself.
• A director, therefore plays various roles in the company, may that be of an agent, an employee (when
appointed on the rolls of the company), an officer and/or a trustee of the Company. 
 Liabilities of Directors under CA 2013.
• Under CA 2013, directors may be held liable as "officers" of the company.
• The word "officer" has been defined to include, inter-alia, directors of the company. CA 2013 contains the concept of an
'officer who is in default' for the purposes of affixing liability on such person in respect of any contravention of the provisions of the CA
2013 by the company.
The ambit of 'officer who is in default' is quite wide and includes, inter alia:
• every whole-time director;
• every Key Managerial Personnel ('KMP');
• if no KMP then such director(s) as specified by the Board in its behalf or all directors, if no director is so specified;
• any person who is charged with any responsibility by the board or any KMP, actively participates in, knowingly permits, or knowingly fails
to take active steps to prevent any default;
• any person in accordance with whose advice, directions or instructions the Board of the company is accustomed to act, other than a
person who gives advice to the Board in a professional capacity;
and every director, in respect of a contravention of any of the provisions of the CA13, who is aware of such contravention
by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to
the same, or where such contravention had taken place with his consent or connivance.
 Liability for fraud
• A director can also be made liable for fraud. "Fraud" in relation to affairs of a company
includes "any act, omission, concealment of any fact or abuse of position committed by
any person or any other person with the connivance in any manner, with intent to deceive,
to gain undue advantage from, or to injure the interests of, the company or its shareholders
or its creditors or any other person, whether or not there is any wrongful gain or wrongful".

• Limited Liability of Independent director and non-executive directors: CA 2013,

however, limits the liability of an independent director or of non-executive directors
(not being a promoter or KMP), who are to be held liable, only in respect of such acts of
omission or commission by a company, which
• (i) occurs with his knowledge, attributable through board processes, and
• (ii) with their consent or connivance or where they had not acted diligently.
Liability of Non-Executive Directors
• Compoundable
• Non- compoundable
Scenarios
• A company T Ltd, invents a driverless car. The company gets production license. Y, buys the car
from the dealer Sanjay. One day while the car is being driven, it meets with an accident and kills
X. Who will be liable for the death of X in this case.

• Vikas, a manager work in the F&A department of the ABCD Ltd company. The company buys
goods worth INR 100 crs from EFG Ltd. The cheque bounces because of insufficiency of funds.
EFG Ltd, files a notice against the company Directors. Are the Directors of ABCD Ltd liable ?

• The management brings an agenda in the board meeting for approval of related party
transaction. The Chairperson of the company, Shweta is a Non Executive, Independent Director.
She is a retired IAS office. On the day of board meeting, she is much hurry and asks the rest of
the board to rush with the meeting. The board passes all the agenda items. Later on, the
external auditors of the company bring an audit point that RTP is not as per the arms length
principle, who should be made liable ?
Board Committees
• What is their purpose?

• What is their power?

• How are members selected, renewed or removed?

 How Committees Operate
• Process:
• Setting the agenda
• Discussion, debate, vote, minutes
• Recommendation, decision, report

• Constraints:
• Budgetary and resources
• Access to outsiders: management, advisors, suppliers, etc.

• What happens to committee findings and recommendations?

SUB-COMMITTEES OF THE BOARD

CA 2013 envisages 4 (four) types of committees to be constituted by the board- But these committees are required
only for some specified companies-
Board Composition
SMALL SHAREHOLDER RESIDENT
TYPE OF COMPANY INDEPENDENT DIRECTOR WOMAN DIRECTOR
DIRECTOR DIRECTOR

Rule 11.1
Required if paid-up share Section 151
1 Independent Director on Corporate capital > INR 100 crores
Private Company Social Responsibility (CSR) Committee if (to be appointed within 5 Rule 11.5
CSR requirement is triggered years) from the Not applicable
commencement of the
Act

1/3rd of the Board to be Independent if

the Company has: Required if paid-up share 1 director required to
capital > INR 100 crores be resident in India
• Paid-up share capital of INR 100 crores (to be appointed within 5 for at least 182 days in
Public Unlisted Company or more; or years) from the Not applicable a calendar year
• Aggregate outstanding loans, commencement of the Section 149(3)
borrowings, debentures or deposits Act
exceeding INR 200 crores

Mandatory? Suo motu

• All listed companies to have 1/3rd of All listed companies to option
the Board comprised of Independent have a woman director
Director (to be appointed within 1 Request of 1/10th the
Listed Company number of small
• Requirement increases to half of the year) from the
commencement of the shareholders or 500 small
Board if there is an executive chairman shareholders (whichever is
[Clause 49, Listing Agreement] Act
lower)
Board Committees: Applicability
NOMINATION & STAKEHOLDER
TYPE OF COMPANY AUDIT COMMITTEE REMUNERATION CSR COMMITTEE RELATIONSHIP
COMMITTEE COMMITTEE

Private Company Not applicable Not applicable Not applicable

Optional for Pvt
Companies
Independent Director
Both committees required if the company has: required on CSR
Committee if: Applies if the company
Public Unlisted • Paid-up share capital of INR 100 crores or more; or
Company • Net worth ≥ INR 500 has 1000 or more
• Aggregate outstanding loans, borrowings, Crores shareholders
debentures or deposits exceeding INR 200 crores
• Turnover ≥ INR 1000
Crores
• Net profit ≥ INR 5
crores Applies if the company
Public Listed Company Applicable has 1000 or more
shareholders
 TYPE OF COMMITTEE
Audit Committee [Section 177]
Nomination & Remuneration
Committee [Section 135]
CSR Committee [Section 178]
Stakeholder Relationship Committee
[Section 178]
COMPOSITION OTHER REQUIREMENTS
• Roles stipulated
• Decisions no longer binding on the
Board
• 3 Directors
• Whistle-blower policy required,
• Majority Independent Directors providing direct access to the chairman
of the Audit Committee
• Related party transactions
• 3 Directors
• Majority Independent Directors
• 3 Directors • Optional for Pvt. Ltd
• 1 Independent Director
• Strength and composition determined by • Purpose – to solve the grievances of
security holders
the Board
• https://scores.gov.in/scores/Welcome.h
• Chairman to be non-executive Director tml
Scenario 1
• There was an audit objection by the auditors of ABC Ltd, that before logging in sale invoice on
ERP, agreements were not in place. The management response to the Board was that
agreements were not negotiated upon during time of sale and hence sales and marketing
department could not upload the same on the ERP.

•  Define the role and responsibility of the audit committee in this situation?
• Which type of an auditor can raise this objection.
• What is the difference between different types of auditors.
• Should this reply suffice for the comfort of the Board and Auditors.
• Provide a solution to the Company.
 
Scenario 2
• In an only profitable media company of India company XYZ Ltd, a wholly owned subsidiary, a
print media company was in total losses. One of the programmes of the media company’s was
very popular which was based on the name of the print media newspaper. Some consultants
proposed to the company management of a demerger of the print media subsidiary and list it
independently. Before the plan was put for Board’s approval, the media somehow managed to
get the news of demerger. The shares of the holding company tanked by 20%.

• Is the management at fault by not taking the plan for board’s approval?
• What should be Boards reply for the shareholder’s comfort on insider trading?
• What are related party transactions?
• What should be a check list on mergers and acquisitions driven by good governance norms?