This article has been written by Ms.Sreejayaa Rajguru, a  1st year LLB (Hons) student of Amity Law School, Amity University college, Noida.

 

Abstract:

 

The Board of Directors (BoD) plays a pivotal role in the governance structure of corporations, entrusted with the responsibility of overseeing strategic decision-making and safeguarding the interests of stakeholders. This research abstract provides a detailed examination of the composition and functions of the BoD as mandated by the Companies Act.

 

The composition of the BoD, as stipulated by the Companies Act, typically includes a diverse group of individuals possessing requisite qualifications, skills, and experience to effectively discharge their duties. The Act often outlines specific requirements regarding the number of directors, their independence, and diversity considerations, ensuring a balance of perspectives and expertise.

 

Moreover, the functions of the BoD encompass a wide range of responsibilities aimed at promoting transparency, accountability, and sustainable business practices. These functions include but are not limited to, setting corporate objectives and policies, appointing senior management, monitoring financial performance, and ensuring compliance with legal and regulatory obligations.

 

Furthermore, the BoD serves as a crucial intermediary between shareholders and management, representing the interests of both parties while maintaining an objective oversight role. Through regular meetings, committees, and fiduciary duties, directors are tasked with making informed decisions that align with the long-term interests of the company and its stakeholders.

 

Overall, this research abstract underscores the significance of the BoD in corporate governance and highlights the key provisions outlined in the Companies Act pertaining to its composition and functions. By adhering to these regulations and best practices, companies can enhance transparency, mitigate risks, and foster sustainable growth in today’s dynamic business environment.

Introduction

 team of directors that administers the company’s affairs and exercises the highest executive authority does so collectively under the name Board of Directors. Fundamental to the corporate.

As part of its governance responsibilities, the Board of Directors ensures that the company’s management serves and safeguards the long-term interests of all of its stakeholders. The inception of the board of directors was predicated on the notion that a cohort of reputable and trustworthy individuals ought to safeguard the concerns of the numerous shareholders who do not have direct involvement in the company’s management.

The role of the board of directors is one of confidence, given that it is entrusted with the duty to act in the organization’s best interests.

While the Board is composed of individual directors, the company is not obligated to follow the actions and deeds of directors acting individually, unless a specific director has been authorized by a Board resolution to carry out particular responsibilities on the company’s behalf.

The phrase “director” is not defined in an exhaustive manner in the Companies Act of 2013. The Act’s Section 2 (34) defines “director” as an individual who has been appointed to the Board of Directors of a corporation.

An individual designated to execute the responsibilities and roles of a company’s director in compliance with the stipulations of the Companies Act, 2013 is referred to as a director. A corporation, despite being recognized as a legal person under the law, is merely an artificial person for the purposes of legal contemplation. It lacks a corporeal existence. It possesses neither a body nor a spirit. Therefore, it is unable to proceed.

Directorship entails the responsibility of overseeing the operational matters of a corporation. Collectively, they are referred to as the Board of Directors or the Board. The company’s directors serve as its intellectuals.

They hold a critical role within the organizational framework of the business.

The determination concerning the administration of an organization is reached by the board of directors in consolidated assemblies referred to as Board Meetings or through the deliberations of committees established for particular objectives.

According to Section 2 (10) of the Companies Act, 2013, the term “Board of Directors” or “Board” refers to the collective assembly of the company’s directors.

 

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

 

The Companies Act and SEBI regulations mandate the establishment of certain board committees to ensure compliance and uphold corporate governance standards.

 

1. Audit Committee and Nomination and Remuneration Committee:

Listed public companies and public companies meeting specific financial thresholds must form an audit committee and a nomination and remuneration committee. The audit committee should comprise a minimum of three directors, with a majority being independent directors, and at least one member possessing accounting or financial expertise. Its responsibilities include reviewing financial reporting processes, internal controls, audit procedures, and recommending auditor appointments. The nomination and remuneration committee must consist of at least three non-executive directors, with half being independent, and is responsible for matters related to director appointments and compensation.

 

1. Stakeholders’ Relationship Committee:

Companies with over 1,000 shareholders, debenture-holders, or deposit-holders are required to establish a stakeholders’ relationship committee. This committee, headed by a non-executive director, addresses and resolves the grievances of security holders.

Corporate Social Responsibility (CSR) Committee:

Companies meeting specific financial criteria and having CSR obligations exceeding a defined threshold must constitute a CSR committee. The committee should comprise at least three directors, including one independent director, and is tasked with formulating CSR policies, identifying activities, and monitoring implementation.

 

These committees ensure effective oversight and governance within companies, promoting transparency and accountability in their operations.

 

Other Committees 

Furthermore, among other requirements, the top 500 listed companies in India, along with certain other entities, are obligated to establish risk management committees. These committees are tasked with developing policies to identify and mitigate risks, particularly in areas such as finance, operations, cyber operations, and governance.

 

Additionally, the board has the discretion to establish additional committees comprised of directors or experts from relevant fields. These committees are empowered to assist the board in fulfilling its responsibilities effectively.

SEBI’s regulations impose certain restrictions and requirements on listed entities regarding board appointments and composition. Regulation 17(1A) prohibits the appointment or retention of non-executive directors aged 75 years or older without a special resolution. Regulation 17(1B) stipulates that, starting April 1, 2022, the Chairperson of the board for the top 500 listed entities must be a non-executive director and should not have a familial relationship with the managing director or CEO. Regulation 17(1C) mandates that listed entities obtain shareholder approval for a board member’s appointment either at the next general meeting or within three months from the appointment date.

 

Fiduciary Duties and Legal Responsibilities of Directors

Directors are bound by fiduciary duties to uphold the best interests of the company and its shareholders. These duties comprise:

 

1. Duty of Care: Directors are required to demonstrate prudence, skill, and diligence when making decisions and supervising the company’s operations.

 

1. Duty of Loyalty: Directors must prioritize the company’s welfare over their personal interests and steer clear of conflicts of interest.

 

1. Duty of Good Faith: Directors are obligated to act with honesty and sincerity, operating under the genuine belief that their actions serve the company’s best interests.

 

Ensuring Board Effectiveness and Independence

An efficient board is vital for promoting good corporate governance. To ensure effectiveness, boards should:

1. Independence: It’s essential to have a significant portion of the board comprised of independent directors who are devoid of conflicts of interest, enabling impartial assessment of company matters.
2. Regular Assessment: Boards should consistently evaluate their performance along with that of individual directors to pinpoint areas necessitating improvement.
3. Diverse Expertise: The board should encompass a varied range of skills and expertise that resonate with the company’s strategic objectives and challenges.
4. Committee Structure: Committees, like audit, compensation, and nomination committees, are pivotal in delving into specific governance facets comprehensively.

 

Director Qualification Standards and Criteria

The following overarching principles shall guide the initial assessment of Director nominees for the Board:

1. Capability to comprehend and analyze fundamental financial statements.
2. Minimum requirement of a college degree or equivalent practical experience in business management.
3. Demonstrated comprehension of the Corporation’s business operations.
4. Age requirement of at least 21 years.
5. Demonstrated track record of integrity and ethical conduct.
6. Unwavering commitment to the highest standards of personal integrity and ethics.

 

Board Evaluation Process

Best practices emphasize four fundamental principles that guide effective board assessments, addressing the following inquiries:

Timing of Board Evaluation:

 

It is recommended to conduct a board evaluation at least once annually. However, in instances of emergencies, crises, or exceptional circumstances, more frequent evaluations may be necessary.

 

• Scope of Evaluation:

 

Most regulatory frameworks advocate for the evaluation of the board, its members (including executives, non-executives, and independents), and board committees. Key areas integral to every evaluation encompass: i) Monitoring and risk management effectiveness; ii) Provision of strategic and business-related advice quality; iii) Assessment of board dynamics and members’ active involvement; iv) Emphasis on board diversity.

 

• Conducting the Evaluation:

 

Responsibility for the evaluation process typically falls on the chairperson, lead independent director, or a designated board committee (commonly the nominating committee). A questionnaire, featuring both multiple-choice and open-ended questions, addressing the aforementioned areas is often distributed to each board member. Committee members and the board chairman may receive additional tailored questions. Subsequently, individual interviews, led by the evaluator, allow board members to express their views openly.

 

• Reporting the Evaluation:

 

Individual assessments of board members should not be disclosed, maintaining confidentiality of personal information. However, stakeholders, including investors, have an interest in understanding the rationale, process, and outcomes of evaluations. They seek insights into the board’s journey – past, present, and future trajectories – to comprehend the board’s evolution and direction.

 

Descriptions of Job profile :

 

1. Small Shareholders Directors:

A listed company, upon the notice of a minimum of 1000 small shareholders or 10% of the total number of small shareholders, may elect a director chosen by small shareholders.

 

1. Women Director:

Companies, whether private or public, must appoint at least one woman director if they meet specific criteria, including being listed or having a certain level of paid-up capital and turnover.

 

1. Additional Director:

A person can be appointed as an additional director and holds the position until the next Annual General Meeting, or in the absence of an AGM, until the date when it should have been held.

 

1. Alternate Director:

An alternate director is appointed by the Board to fill in for a director absent from the country for more than three months.

 

1. Nominee Directors:

Nominee directors can be appointed by specific classes of shareholders, banks, financial institutions, or third parties based on contracts, or by the Union Government in cases of oppression or mismanagement.

 

1. Executive Director:

An executive director is a full-time working director responsible for managing the company’s affairs diligently.

 

1. Non-executive Director:

A non-executive director does not engage in the day-to-day operations but may participate in planning or policy-making, challenging executive decisions in the company’s best interest.

 

1. Managing Director:

A managing director is entrusted with significant management powers by virtue of the company’s articles, agreements, resolutions, or board decisions.

 

Qualities to appoint a Director

Here are the qualifications required to be appointed as a director in a company:

 

• Age: The individual should be above 21 years and below 70 years of age.
• Mental Soundness: The individual should have a sound mind.
• Financial Status: The individual should not be an undischarged insolvent or have applied for insolvency.
• Criminal Record: The individual should not have been convicted of an offense and sentenced to imprisonment for more than six months, with at least five years elapsed since the sentence’s expiry.
• Disqualification: There should be no court or tribunal order disqualifying the individual from directorship.
• Call Payments: The individual should have paid any calls on company shares held by them within six months from the last date fixed for call payment.
• Related Party Transactions: The individual should not have been convicted of offenses related to related party transactions under section 188 within the preceding five years.
• Director Identification Number (DIN): The individual must have a Director Identification Number (DIN).
• Limits on Directorships: The individual cannot be appointed as a director in more than 20 companies or 10 public companies simultaneously.
• Restrictions on Company Associations: The individual cannot be a director in companies that have not filed financial statements or annual returns for three consecutive financial years, or companies that have failed to meet various financial obligations such as repayment of deposits, debenture redemption, or dividend payments for more than one year.

 

Conclusion

 

In essence, directors play a crucial role in company management, with their appointment being mandatory during incorporation. A one-person company requires at least one director, while a private company must have a minimum of two directors and a public company at least three. A company can have a maximum of 15 directors.

 

Directors are tasked with fulfilling all duties and functions outlined in the Companies Act 2013 upon appointment. An individual assumes an executive role within the company’s board of directors, which collectively oversees company operations. The Board of Directors (BOD) is responsible for making decisions regarding the company’s affairs. The Act delineates provisions regarding the appointment, rights, and obligations of executives. Directors are free to hold directorial positions in multiple companies concurrently.

 

References 

• Companies Act, 2013 (India)
• “Directors’ Qualification, Appointment and Compensation Rules, 2014” – Ministry of Corporate Affairs, Government of India
• “Director Identification Number (DIN) Rules, 2006” – Ministry of Corporate Affairs, Government of India
• “Insolvency and Bankruptcy Code, 2016” – Government of India
• “Companies (Appointment and Qualification of Directors) Rules, 2014” – Ministry of Corporate Affairs, Government of India
• “The Indian Penal Code, 1860” – Government of India
• “Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014” – Ministry of Corporate Affairs, Government of India
• “Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015” – Ministry of Corporate Affairs, Government of India
• “Companies (Acceptance of Deposits) Rules, 2014” – Ministry of Corporate Affairs, Government of India
• “Companies (Registration Offices and Fees) Rules, 2014” – Ministry of Corporate Affairs, Government of India
• “Companies (Meetings of Board and its Powers) Rules, 2014” – Ministry of Corporate Affairs, Government of India
• “Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2021” – Ministry of Corporate Affairs, Government of India