Corporate Governance Nihalkottalath

NOTES ON CORPORATE GOVERNANCE
BY NIHAL KOTTALATHYU
SL.NO. Contents Page

01. Introduction to Corporate governance 2
02. Reforms introduced to improve corporate governance in India 5
03. Companies act – different committees 9
04. Key managerial personnel (KMP) 15
05. Corporate social responsibility 17
06. Legal Framework on Corporate Governance 18
07. Landmark Cases on failure of Corporate Governance 19
08. Sources of corporate governance rules :
Internal sources :
1. Memorandum of Association 19
2. Articles of Association 25
3. Standing Orders 28
Constructive Notice and Indoor Management 29
External sources :
31
1. Companies Act and other statutes
31
2. SEBI guidelines
32
3. Standard Listing Agreement of Stock Exchanges
32
4. Accounting Standards Issued by The ICAI (Institute of Chartered Accountants of
India)
33
5. Secretarial Standards Issued by ICSI (Institute of Company Secretaries of India)
33
6. OECD principles
35
7. Judicial decisions
09. FOSS V. HARBOTTLE (1843) - Rule of majority 35
10. Minority Shareholders 41
11. External and Internal Control Over Corporate 43
12. Stakeholders 45
13. Board of Directors 46
14. Directors 47
15. Officers of Company 59
16. Officers in Default 60
17. Insider Trading 60
18. Law on Company meeting 62
19. Motion and Resolution 65
20. Related Party Transaction 69
21. Members in a Company 70
22. Corporate Membership Rights 71
23. Individual Shareholder Rights 73
24. Prevention of Oppression and mismanagement 75
25. Role of NCLT 77
26. Business Judgment Rule 81
27. Previous year question paper (2016,2017,2018,2019) 82
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NOTES ON CORPORATE GOVERNANCE BY NIHAL KOTTALATH | 1

INTRODUCTION TO CORPORATE GOVERNANCE
Corporate governance is the combination of rules, processes or laws by which businesses are operated,
regulated or controlled. The term includes the internal and external factors that affect the interests of
a company's stakeholders, including shareholders, customers, suppliers, government regulators and
management.
Theories: (Previous year question – PART A)

1. Agency Theory 4. Stakeholder Theory
2. Stewardship Theory 5. Managerial Hegemony Theory
3. Resource Dependency Theory
Agency Theory: Agency theory is a principle that is used to explain and resolve issues in the relationship
between business principals and their agents. Most commonly, that relationship is the one
between shareholders as principals and company executives as agents.
Stewardship Theory: Stewards are company executives and managers working for the shareholders,
protects and make profits for the shareholders. The steward theory states that a steward protects and
maximises shareholders wealth through firm Performance. The stewards are satisfied and motivated
when organizational success is attained.
Resource Dependency Theory: The Resource Dependency Theory focuses on the role of board of
directors in providing access to resources needed by the firm. It states that directors play an important
role in providing or securing essential resources to an organization through their linkages to the external
environment.
Stakeholder Theory: Stakeholders could be any groups or individuals in an organization and enable
effect or affected by a company’s operation. Stakeholder theory play an important role in corporate
governance and can serve company to balance various groups’ benefit. The aim of stakeholder theory
is to find what are the best interests based on different stakeholder groups.
Managerial Hegemony Theory: Managerial hegemony is that when corporate management members
directly run the day to day operations of the company and as a result directors lose control to a certain
extent. This not only weakens the influence of the directors, but also make the role of the directors
inactive, who become only the statutory bodies.
Need for Corporate Governance:
1. Corporate Governance deals with the manner in which the providers of finance guarantee getting a
fair return on their investment.
2. Corporate Governance clearly distinguishes between the owners and the managers. The managers
are the deciding authority.
3. In modern corporations, the functions or tasks of owners and managers should be clearly defined,
rather, harmonizing.
4. Corporate Governance deals with determining ways to take effective strategic decisions. It gives
ultimate authority and complete responsibility to the Board of Directors.

5. In today’s market- oriented economy, the need for corporate governance is arising. Also,
globalization is significant a factor urging corporate governance.
6. Corporate Governance is essential to develop added value to the stakeholders.
7. Corporate Governance ensures transparency which ensures strong and balanced economic
development.
8. This also ensures that the interests of all shareholders (majority as well as minority shareholders)
are safeguarded.
9. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes
their rights.
10. Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment
The Principles of Corporate Governance:
As evolved by the Institute of company secretaries of India (ICSI):
1. Sustainable Development of all Stakeholders-to ensure growth of all individuals associated with
or affected by the enterprise on sustainable basis.
2. Effective Management and Distribution of Wealth- to ensure that enterprises create maximum
wealth and use judiciously the wealth so created for providing maximum benefits to all the
stakeholders.
3. Discharge of Social Responsibility- to ensure that enterprise is acceptable to the society in which
it is functioning.
4. Application of best Management Practices- to ensure excellence in the functioning of enterprise
and creation of optimum wealth.
5. Compliance of law in Letter and Spirit- to ensure minimum return/benefits to all stakeholders
guaranteed by the law for maintaining socioeconomic balance.
6. Adherence to Ethical Standards- to ensure integrity, transparency, independence and
accountability in dealings with all stakeholders.
As evolved by The Organisation for Economic Co-operation and Development (OECD):
1. Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights. They can help shareholders exercise
their rights by openly and effectively communicating information and by encouraging shareholders
to participate in general meetings.
2. Interests of other stakeholders: Organizations should recognize that they have legal, contractual,
social, and market driven obligations to non-shareholder stakeholders, including employees,
investors, creditors, suppliers, local communities, customers, and policy makers.
3. Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.
4. Integrity and ethical behaviour: Integrity should be a fundamental requirement in choosing
corporate officers and board members. Organizations should develop a code of conduct for their
directors and executives that promotes ethical and responsible decision making.
5. Disclosure and transparency: Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide stakeholders with a level of accountability.
They should also implement procedures to independently verify and safeguard the integrity of the

company's financial reporting. Disclosure of material matters concerning the organization should
be timely and balanced to ensure that all investors have access to clear, factual information.
Elements of Good Corporate Governance
1. Rule of Law: Good governance requires fair legal frameworks that are enforced by an impartial
regulatory body, for the full protection of stakeholders.
2. Transparency: Transparency means that information should be provided in easily understandable
forms and media; that it should be freely available and directly accessible to those who will be
affected by governance policies and practices, as well as the outcomes resulting therefrom; and that
any decisions taken and their enforcement are in compliance with established rules and regulations.
3. Responsiveness: Good governance requires that organizations and their processes are designed to
serve the best interests of stakeholders within a reasonable timeframe.
4. Consensus Oriented: Good governance requires consultation to understand the different interests
of stakeholders in order to reach a broad consensus of what is in the best interest of the entire
stakeholder group and how this can be achieved in a sustainable and prudent manner.
5. Equity and Inclusiveness: The organization that provides the opportunity for its stakeholders to
maintain, enhance, or generally improve their well-being provides the most compelling message
regarding its reason for existence and value to society.
6. Effectiveness and Efficiency: Good governance means that the processes implemented by the
organization to produce favourable results meet the needs of its stakeholders, while making the
best use of resources – human, technological, financial, natural and environmental – at its disposal.
7. Accountability: Accountability is a key tenet of good governance. Who is accountable for what
should be documented in policy statements. In general, an organization is accountable to those who
will be affected by its decisions or actions as well as the applicable rules of law.
8. Participation: Participation by both men and women, either directly or through legitimate
representatives, is a key cornerstone of good governance. Participation needs to be informed and
organized, including freedom of expression and thorough concern for the best interests of the
organization and society in general.

REFORMS INTRODUCED TO IMPROVE CORPORATE GOVERNANCE IN INDIA
(Previous year question – PART C/2019)
The First Phase of India’s Corporate Governance Reforms: 1996-2008
The first phase of India’s corporate governance reforms were focused at making Audit Committees
and Boards more independent, focused and powerful supervisor of management. It also focused on
aiding shareholders, including institutional and foreign shareholders/investors in supervising
management. These reform were made possible with the support of the Ministry of Corporate Affairs
(MCA) and the Securities and Exchange Board of India (SEBI).
1. Confederation of Indian industry (CII—1996)
In 1996, CII taking up the first institutional initiative in the Indian industry took a special step on
corporate governance. The aim was to promote and develop a code for companies, both in the public
sectors and private sectors, financial institutions or banks, and all other corporate entities.
The steps taken by CII addressed public concerns regarding the security of the interest and concern of
investors, especially the small investors; the promotion and encouragement of transparency within
industry and business, the necessity to proceed towards international standards of disclosure of
information by corporate bodies, and through all of this to build a high level of people’s confidence in
business and industry. The final draft of this Code was introduced in April 1998.
2. Report of the Committee (Kumar Mangalam Birla) on Corporate Governance
Noted industrialist, Mr Kumar Mangalam Birla was appointed by SEBI—as Chairman to provide a
comprehensive perspective of the concern related to insider trading (refer page no.60) to secure the rights
of several investors. The suggestions insisted on the listed companies for initial and continuing
disclosures in a phased manner within specified dates, through the listing agreement. The companies
were made to disclose separately in their annual reports, a report on corporate governance describing
the steps they have taken to comply with the recommendations of the Committee. The objective was
to enable the shareholders to know the companies in which they have invested stand with, respect to
specific initiatives taken to ensure healthy corporate governance.
Mandatory Recommendations: (apply to the listed companies with paid up share capital of 3 crore
and above.)
1. Composition of board of directors should be optimum combination of executive & non- executive
directors.
2. Audit committee should contain 3 independent directors with one having financial and accounting
knowledge.
3. Remuneration committee should be formulated.
4. The Board should hold at least 4 meetings in a year with maximum gap of 4 months between 2
meetings to review operational plans, capital budgets, quarterly results, minutes of committee’s
meeting.
5. Director shall not be a member of more than 10 committee and shall not act as chairman of more
than 5 committees across all companies
6. Management discussion and analysis report covering industry structure, opportunities, threats,
risks, outlook and internal control system should be ready for external review.
7. Any Information should be shared with shareholders in regard to their investments.
Non-Mandatory Recommendations:
1. Companies should be encouraged to move towards a regime of unqualified financial statements.

2. Companies should be encouraged to train their Board members in the business model of the
company as well as the risk profile of the business parameters of the company, their responsibilities
as directors, and the best ways to discharge them.
3. The performance evaluation of non-executive directors should be by a peer group comprising the
entire Board of Directors, excluding the director being evaluated; and Peer group evaluation should
be the mechanism to determine whether to extend or continue the terms of appointment of non-
executive directors.
4. The committee also made several non-mandatory recommendations with reference to:
 Role of chairman
 Remuneration committee of board
 Shareholders’ right for receiving half yearly financial performance.
 Postal ballot covering critical matters like alteration in memorandum
 Sale of whole or substantial part of the undertaking
 Corporate restructuring
 Further issue of capital
 Venturing into new businesses
These recommendations were to apply to all the listed private and public-sector companies, their
directors, management, employees and professionals associated with such companies. The Committee
recognizes that compliance with the recommendations would involve restructuring the existing boards
of companies. It also recognizes that smaller ones will have difficulty in immediately complying with
these conditions.
3. Report of Task Force in May 2000

The Department of Corporate Affairs (DCA) formed a broad-based study group under the chairmanship
of Dr. P.L. Sanjeev Reddy, Secretary of DCA. The group was given the task of examining ways to
“operationalise the concept of corporate excellence on a sustained basis” so as to “sharpen India’s
global competitive edge and to further develop corporate culture in the country”. In November 2000
the Task Force on Corporate Excellence set up by the group produced a report containing a range of
recommendations for raising governance standards among all companies in India. It also recommended
setting up of a Centre for Corporate Excellence.
4. Report of the Committee (Naresh Chandra) on Corporate Audit and Governance Committee—
December 2002
The Committee took the charge of the task to analyse and suggest changes in different areas like—the
statutory auditor and company relationship, procedure for appointment of Auditors and determination
of audit fee, restrictions if required on non-auditory fee, measures to ensure that management and
companies put forth a true and fair statement of financial affairs of the company.
Naresh Chandra Committee report on 'corporate Audit & Governance' has taken forward the
recommendations of the Kumar Mangalam Birla Committee on corporate governance which was
set up by the Securities Exchange Board of India on the following counts:
■ Representation of independent directors on a company's board.
■ The composition of the audit committee.
The Naresh Chandra Committee has laid down strict guidelines defining the relationship between
auditors and their clients. In a move that could impact small audit firms, the committee has
recommended that along with its subsidiary, associates or affiliated entities, an audit firm should
not derive more than 25 per cent of its business from a single corporate client. The Committee has
further recommended the following:
1. Tightening of the noose around the auditors by asking them to make an array of
disclosures.
2. Calling upon CEOs and CFOs of all listing companies to certify their companies' annual
accounts, besides suggesting.
3. Setting up of quality review boards by the Institute of Chartered Accountants of India
(ICAI), Institute of Company Secretaries of India (ICSI) and Institute of Cost and Works
Accountants of India, instead of a Public oversight board similar to the one in USA.
4. The statutory auditor-company relationship so as to further strengthen the professional
nature of this interface.
5. The need, if any, for rotation of statutory audit firms or partners.
6. The procedure for appointment of auditors and determination of audit fees.
7. Restrictions, if necessary, on non-audit fees.
8. Independence of auditing functions.
9. Measures required to ensure that the management and companies actually present ‘true
& fair’ statement of the financial affairs of companies.
10. The need to consider measures such as certification of accounts and financial statement by
the management and directors.
11. The necessity of having a transparent system of random scrutiny of audited accounts.
5. SEBI Report on Corporate Governance (Narayana Murthy committee)—February 2003
Under the committee on corporate governance set up by SEBI under N. R. Narayana Murthy, the
terms of references were:
 to review the performance of corporate governance and

 to determine the role of companies in responding to rumour and other price sensitive
information circulating in the market.
The committee report expresses its total concurrence with the recommendations contained in the
Naresh Chandra Committee's report on the following counts:
 Disclosure of contingent liability
 Certification by CEO's and CFO's
 Definition of independent directors
 Independence of Audit committees

The committee came out with two sets of recommendations namely, mandatory recommendation
and non-mandatory recommendations.
Mandatory recommendation:
1. Strengthening the responsibilities of audit committees.
2. Improving the quality of financial disclosures, including those related to related party
transactions (refer page no.69) and proceeds from initial public offerings.
3. Requiring corporate executive boards to assess and disclose business risks in the annual
reports of companies.
4. Introducing responsibilities on boards to adopt formal codes of conduct.
5. The position of nominee directors.
6. Stock holder approval and improved disclosures relating to compensation paid to non-
executive directors.
Non-mandatory recommendation:
1. Moving to a regime where corporate financial statements are not qualified.

2. Instituting a system of training of board members.
3. Evaluation of performance of board members.
4. Clause 49 of Listing Agreement (2004) —Murthy Committee
In 2004, SEBI further brought about changes in Clause 49 in accordance with the Murthy Committee’s
recommendations. SEBI revised clause 49 of the listing agreement dealing with corporate governance.
The revised clause included eight sections relating to the Board of directors, audit committee,
remuneration of directors, Board procedure, management, shareholders report on corporate
governance, and compliances. Penal provisions (including de-listing) were also incorporated in case of
default of any of these provisions.
5. Dr. J. J. Irani Committee Report on Company Law, 2005
The Government of India constituted an expert committee on Company Law on 2 December 2004,
under the chairmanship of Dr. J. J. Irani. Set up to structurally evaluate the views of several stakeholders
in the development of the Company Law in India in respect of the concept paper promulgated by the
union ministry of company affairs. The J. J. Irani Committee has come out with suggestions that will go
a long way in laying strong base for corporate growth in the coming 43 years.
The main recommendations of the report are as follows:
 Number of Directors & their duration in company.

 Age of Directors.
 1/3rd of the board should be Independent Directors (along with definition of Independent
Director).
 Maximum No. of Directorship hold by Individual.
 Remuneration Policy.
 Sitting Fee Structure for Directors.
 Requisite Board Meetings in a year.
 Number of Independent Directors in Audit Committee.
 Constitution of Remuneration Committee.
 Protections of Minority shareholders rights.
 Appointment of Auditors.
 Certificate Issued by CEO & CFO.
 Subsidiary Company Transactions.
 Appointment of Regulators to monitor the end use of funds collected from the public.
 Credit Rating Mechanism should be followed by corporate.
 Whistle-blower concept.
The second Phase of India’s Corporate Governance Reforms: After Satyam Scam
India’s corporate community experienced a significant shock in January 2009 with damaging
revelations about board failure and colossal fraud in the financials of Satyam. The Satyam scandal also
served as a catalyst for the Indian Government to rethink the corporate governance, disclosure,
accountability and enforcement mechanisms in place. Industry response shortly after news of the
scandal broke, the CII began examining the corporate governance issues arising out of the Satyam
scandal. Other industry groups also formed corporate governance and Ethics Committees to study the
impact and lessons of the scandal. In late 2009, a CII task force put forth corporate governance reform
recommendations.
In its report the CII emphasised the unique nature of the Satyam scandal, noting that—Satyam is a
one-off incident. The overwhelming majority of corporate India is well run, well regulated and does
business in a sound and legal manner. In addition to the CII, the National Association of Software and
Services Companies (Nasscom, self-described as—the premier trade body and the Chamber of
Commerce of the IT-BPO industries in India) also formed a Corporate Governance and Ethics
Committee, chaired by N.R. Narayana Murthy, one of the founders of Infosys and a leading figure in
Indian corporate governance reforms. The Committee issued its recommendations in mid-2010.
THE COMPANIES ACT 2013
Companies Act brought a shift by introducing legislative provisions on corporate governance

rather than leaving it in the domain of the listing agreement. This led to corporate governance being
regulated by the Ministry of Corporate Affairs (MCA), Government of India, as well as SEBI. In addition,
Central Public-Sector Enterprises (CPSEs) are required to follow corporate governance guidelines issued
by the Department of Public Enterprises (DPE) from time to time (2007, 2010, and 2011 respectively).
There has been a huge change in companies Act, which has waved its way from principle of corporate
governance practices as the new key change in the act. It has taken a foot forward from SEBI’s Clause 49
of listing agreement by introducing provisions in the companies act 2013 which promotes corporate
governorship code in such a manner that it will no longer be restricted to only listed public companies
but also unlisted public companies. The new Companies Act, 2013 has introduced various key provisions
which have changed the corporate regime in such a way to run the corporate machinery in alignment
with the globalised corporate world by mandatory disclosure requirements for:
 Independent Director
 Audit committee
 Serious fraud investigation offence
 Corporate Social responsibility
(Detailed explanation in chapters below)

COMMITTEES UNDER THE COMPANIES ACT
Audit Committee:
The Audit Committees of the
Companies Act, 2013 has undertaken
both private and public companies
within its ambit to constitute audit
committees. The constitution of audit
committee has also seen change as
compared to clause 49 with minimum
with three independent directors on
the board along with the chairperson
who should be able to read and
understand the financial statement.
Section 177 of the Companies Act, 2013 and Rule 6 and 7 of Companies (Meetings of Board and its
Powers) Rules,2014 deals with the Audit Committee.
The Board of directors of every listed company and the following classes of companies, as prescribed
under Rule 6 of Companies (Meetings of Board and its powers) Rules, 2014 shall constitute an Audit
Committee.
1. All public companies with a paid-up capital of Rs.10 Crores or more;
2. All public companies having turnover of Rs.100 Crores or more;
Constitution of Audit Committee:
Section 177(1) of the Companies Act, 2013 read with rule 6 of the Companies (Meetings of the
Board and Powers) Rules, 2014 provides that the Board of directors of following companies are
required to constitute an Audit Committee of the Board-
(i) All listed companies
(ii) All public companies with a paid-up capital of 10 crore rupees or more;
(iii) All public companies having turnover of 100 crore rupees or more;
All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits
exceeding 50 crore rupees or more.
The paid-up share capital / turnover / outstanding loans / borrowings / debentures / deposits, as the
case may be, as existing on the date of last audited financial statements shall be taken into account for
the purposes of this rule.
Internal Audit:
Companies Act, 2013 has mandated the internal audit for certain classes of companies as specified
under Section 138 of the Companies Act, 2013.

Composition of the Audit Committee
Section 177(2) of the Companies Act, 2013
 Audit Committee shall consist of a minimum of three directors.

 Independent directors should form a majority.
 Majority of members of Audit Committee including its Chairperson shall be
persons with ability to read and understand the financial statement.
Functions of Audit Committee
(1) Under Section 177(4) of the Companies Act, 2013
Every Audit Committee shall act in accordance with the terms of reference specified in
writing by the Board. Terms of reference as prescribed by the board shall inter alia, include:
a) the recommendation for appointment, remuneration and terms of
appointment of auditors of the company;
b) review and monitor the auditor’s independence and performance, and effectiveness
of audit process;
c) examination of the financial statement and the auditors’ report thereon;
d) approval or any subsequent modification of transactions of the company with
related parties;
e) provided that the Audit Committee may make omnibus approval for related
party transactions
f) proposed to be entered into by the company subject to such conditions as
prescribed under rule 6A of the Companies (meetings of board and its Powers)
rules, 2014,
g) scrutiny of inter-corporate loans and investments;
h) valuation of undertakings or assets of the company, wherever it is necessary;
i) evaluation of internal financial controls and risk management systems; monitoring
the end use of funds raised through public offers and related matters.
Number of Meetings and Quorum:
SEBI Listing Regulations, 2015 provides for the minimum number of meetings and quorum
of the audit committee.
(i) The Audit Committee of a listed entity shall meet at least 4 times in a year and not
more than 120 days gap between two meetings. [Regulation 18(2)(a)]
(ii) The quorum for audit committee meeting shall either be
● 2 members or
● 1/3rd of the members of the audit committee, whichever is greater;
● with at least 2 independent directors. [Regulation 18(2)(b)]

(The requirement of minimum 2 independent directors in the meeting of Audit Committee is
new provision which must be complied by all the listed entities).
Disclosure in Board’s Report
Section 177(8) of the Act provides that the board’s report shall disclose following –
• Composition of an Audit Committee
• Where the Board had not accepted any recommendation of the Audit Committee, the
same shall be disclosed in the report along with the reasons therefor.
2.) NOMINATION AND REMUNERATION COMMITTEE (Previous year question – PART A)
The Companies Act, 1956 had not mandated any committee relating to the appointment,
nomination or remuneration of a director. However, there was a provision where public
companies having no profits or inadequate profits and would like to remunerate the directors
has to constitute a remuneration committee and such committee shall approve such
remuneration to directors. The Companies Act, 2013 has introduced the provision of
constitution of Nomination and Remuneration Committee.
Constitution of the Committee: Section 178(1) of the Act read with rule 6 of the Companies
(Meetings of the Board and its Powers) Rules, 2014, provides that the board of directors of
following companies are required to constitute a Nomination and Remuneration Committee
of the Board-
(i) All listed companies
(ii) All public companies with a paid-up capital of 10 crore rupees or more;
(iii) All public companies having turnover of 100 crore rupees or more;
(iv) All public companies, having in aggregate, outstanding loans or borrowings or
debentures or deposits exceeding 50 crore rupees or more.
Composition
 Section 178(1) of the Act

 Comprise of three or more directors;
 all directors shall be non-executive directors;
 not less than one-half shall be independent directors;
 The chairperson of the company (whether executive or non-executive) may be
appointed as a member of the Committee but he shall not chair such Committee.
Functions of the Committee: (1) Under Section 178(2), (3), and (4) of the Companies Act 2013
The Nomination and Remuneration Committee shall perform following functions:

 Identify persons who are qualified to become directors and who may be appointed in
senior management in accordance with the criteria laid down, recommend to the

Board their appointment and removal. Further it has been attached with a wider
responsibility of carrying out evaluation of every director’s performance.
 Formulate the criteria for determining qualifications, positive attributes and

independence of a director and recommend to the Board a policy, relating to the
remuneration for the directors, key managerial personnel (refer page no.15) and other
employees.
Disclosure in Board’s Report: The company shall disclose the remuneration policy and the
evaluation criteria in its Annual Report.
3.) STAKEHOLDERS RELATIONSHIP COMMITTEE
Constitution of the Committee: Section 178(5) of the Companies Act 2013 provides that
the Board of Directors of following companies shall constitute a Stakeholders Relationship
Committee –
 company which consists of more than one thousand shareholders, debenture-
holders, deposit holders and any other security holders at any time during a financial
year.
Composition of the Committee: Section 178(5) of the Companies Act 2013 and Regulation
20 of SEBI (LODR) Regulations, 2015 provides that-
 Stakeholders Relationship Committee shall consist of a chairperson who shall be a non-

executive director
 Other members of the committee shall be decided by the Board.
The chairperson of the committees or, in his absence, any other member of the committee
authorised by him in his behalf is required under the section to attend the general meetings
of the company.
Functions: The main function of the committee is to consider and resolve the grievances of
stakeholders of the company.
The role of the Stakeholders Relationship Committee shall be to consider and resolve the
grievances of the security holders of the listed entity including complaints related to transfer
of shares, non-receipt of annual report and non-receipt of declared dividends. [Part E of
Schedule II]
It may be noted that any non-consideration of resolution of any grievance by the Stakeholders
Relationship Committee in good faith shall not constitute a contravention of this section.

4.) CORPORATE SOCIAL RESPONSIBILITY COMMITTEE: Section 135 (1) read with
Rule 3 of Companies (Corporate Social Responsibility Policy) Rules, 2014, mandates that every
company which fulfils any of the following criteria during any of the three preceding
financial years shall constitute a CSR Committee –
○ Companies having net worth of rupees five hundred crore or more, or

○ Companies having turnover of rupees one thousand crore or more or
○ Companies having a net profit of rupees five crore or more
Composition of the Committee:

● The CSR Committee shall consist of three or more directors.
● At least one director shall be an independent director.
● Companies (Meetings of Board and Powers) Rules, 2014, however, provides that-
 an unlisted public company or a private company covered under sub-section (1) of

section 135 which is not required to appoint an independent director, shall have its CSR
Committee without such director.
 a private company having only two directors on its Board shall constitute its CSR
Committee with two such directors:
 with respect to a foreign company covered under these rules, the CSR Committee shall
comprise of at least two persons of which one person shall be as specified under clause
(d) of subsection (1) of section 380 of the Act, i.e. the person resident in India authorized
to accept on behalf of the company, service of process and any notices or other
documents and another person shall be nominated by the foreign company.
● The composition of the CSR Committee shall be disclosed in the Board’s Report.
Functions: In accordance with section 135 the functions of the CSR committee include:
a) Formulating and recommending to the Board, a CSR Policy which shall indicate
the activities to be undertaken by the company as specified in Schedule VII.
b) Recommending the amount of expenditure to be incurred on the CSR activities.
c) Monitoring the Corporate Social Responsibility Policy of the company from time to time.
d) Further the rules provide that the CSR Committee shall institute a transparent
monitoring mechanism for implementation of the CSR projects or programs or activities
undertaken by the company.
5.) RISK MANAGEMENT COMMITTEE
A company needs to have a proactive approach to convert a risk into an opportunity. It is

important for the company to have a structured framework to satisfy that it has sound
policies, procedures and practices in place to manage the key risks under risk framework of
the company. A risk management Committee’s role is to assist the Board in establishing risk
management policy, overseeing and monitoring its implementation.

KEY MANAGERIAL PERSONNEL
(Previous year question – PART A)
Key managerial personnel (KMP) are the employees of a company who hold key positions in
the company and greater responsibility of overall functioning of the company including the
duty to protect the interest of all stakeholders.
Section 2(51) of the Companies Act 2013, defines Key managerial personnel as follows:
“Key managerial personnel”, in relation to a company, means—
1. the Chief Executive Officer or the managing director or the manager
2. the company secretary
3. the whole-time director
4. the Chief Financial Officer
5. such other officer as may be prescribed
Classes of companies required to appoint Key managerial personnel: Rule 8 of the

Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes
the following classes of companies which are required to appoint whole-time KMPs:
 Every listed company and

 Every other public company having a paid-up share capital of Rs. 10 crores or more.
Board resolution for appointment of key managerial personnel [Sec. 203(2)]: Passing of a
board resolution containing terms and conditions of appointment and remuneration details of
a whole-time KMP is mandatory.
Whole-time key managerial personnel not to hold office in more than one company [Sec.
203(3)]: A whole-time key managerial personnel shall not hold office in more than one
company except in its subsidiary company at the same time. With the permission of the Board
of a company, key managerial personnel can act as a director of any other company.
Appointment of managing director in more than one company
A company may appoint or employ a person as its managing director, if he is the managing
director or manager of one, and of not more than one, other company, by fulfilling the following
conditions:
 such appointment or employment is made or approved by a resolution passed at a

meeting of the Board with the consent of all the directors present at the meeting
 specific notice has been given to all the directors
It has to be noted here that the appointment cannot be done by passing of a circular resolution.

Register of directors and key managerial personnel
In accordance with section 170(1) of the Act, every company is required to maintain a register
containing particulars of its directors and key managerial personnel, which shall include the
details of securities held by each of them in the company or its holding, subsidiary, subsidiary
of company’s holding company or associate companies. The register shall be kept at the
registered office of the company. Rule 17 of the Companies (Appointment and Qualification
of Directors) Rules, 2014, prescribes various particulars which the said Register shall contain.
Filing of Return with ROC: In accordance with section 170(2) of the Act and rule 18 of the
Companies (Appointment and Qualification of Directors) Rules, 2014, every company is
required to file form DIR-12 with the Registrar of Companies, within 30 days from the
appointment of every key managerial personnel and within 30 days of any change taking place.
Filling of casual vacancy: If the office of any whole-time key managerial personnel is vacated,
the resulting vacancy shall be filled-up by the Board at a meeting of the Board within 6 months
from the date of such vacancy. (Filling of casual vacancy through circular resolution is not
allowed)
Key managerial person also holding Chairperson position: A person shall not be appointed
or reappointed as the chairperson as well as the managing director or Chief Executive Officer
of the company at the same time, unless, —
(a) the articles of such a company provide otherwise; or
(b) the company does not carry multiple businesses:
The above provision will not apply to such class of companies engaged in multiple businesses
and which has appointed one or more Chief Executive Officers for each such business as may
be notified by the Central Government.
Penalty for non-compliance: Contravention of the provisions of section 203, will lead to the
following punishable actions:
 company punishable with fine which shall not be less than Rs. 1 lakh but which may
extend to Rs. 5 lakhs
 every director and key managerial personnel of the company who is in default shall be
punishable with fine which may extend to Rs. 50,000
 where the contravention is a continuing one, with a further fine which may extend to Rs.
1000 for every day after the first during which the contravention continues.
Serious Fraud Investigation Offence (SFIO): (Previous year question)

Section 211 (1) of the Companies Act, 2013 shall establish an office called the Serious Fraud
Investigation office to investigate fraud relating to Company. The powers are given to SFIO under the
act as mentioned that he can investigate into the affairs of the company or on receipt of report of
Registrar or inspector or in the public interest or request from any Department of Central Government
or State Government.

CORPORATE SOCIAL RESPONSIBILITY
The concept of CSR rests on the good corporate citizenship where corporate contributions to the growth
of society as a part of their corporate responsibility for utilizing the resources of the society for their
productive use.
Ministry of Corporate Affairs has recently notified Section 135 and Schedule VII of the Companies Act
as well as the provisions of (CSR Rules) which has come into effect from 1 April 2014.
Applicability:
Section 135 of the Companies Act provides the threshold limit for applicability of CSR to a Company:
1. Net worth of the company to be Rs 500 crore or more;
2. Turnover of the company to be Rs 1000 crore or more;
3. Net profit of the company to be Rs 5 crore or more.
Further, as per the CSR Rules, the provisions of CSR are not only applicable to Indian companies but also
applicable to branch offices of a foreign company in India.
CSR Committee and Policy:

Every company as prescribed in Section 135 of the Act and Company (Corporate Responsibility)
Rules,2014 within the threshold limit requires spending of at least 2% of its average net profit for the
immediately preceding 3 financial years on CSR activities.
Further, the company will be required to constitute a committee (CSR Committee) of the Board of
Directors (Board) consisting of 3 or more directors.
The CSR Committee shall formulate and recommend to the Board, a policy which shall indicate the
activities to be undertaken (CSR Policy); recommend the amount of expenditure to be incurred on the
activities referred and monitor the CSR Policy of the company. The board shall take into account the
recommendation made by the CSR committee and approve the CSR Policy of the company.
The new CSR regime is based on “Comply or explain” approach to stringently push big corporate
giants to take initiative towards their duty to contribute towards their CSR activities. Companies failing
to do so would be required to explain why they have not included such information, in the annual report
as under Section 92 of the Companies Act, 2013 as part of “comply or explain” approach for large
companies.
The Companies Act, 2013 empowers independent directors with proper checks and balances so that
such extensive powers are not exercised in an unauthorized manner but in a rational and accountable
way. The changes are a step forward in the right direction to smoothly run the management and affairs
of the companies in the interest of stakeholders. These are all welcome changes in the globalised
corporate world of today and they will strengthen the core corporate machinery by instilling strong
corporate governance norms in a company leading to economic efficiency and higher ethical standards
which will always inspire the company’s management to work in the direction to uphold its goals of
maximization of wealth of stakeholders backed with good corporate repute.

LEGAL FRAMEWORK ON CORPORATE GOVERNANCE
1. The Companies Act, 2013 — consists of law provisions concerning the constitution of the board,
board processes, board meetings, independent directors, audit committees, general meetings,
party transactions, disclosure requirements in the financial statements and etc.
2. SEBI Guidelines—SEBI is a governing authority having jurisdiction and power over listed companies
and which issues regulations, rules and guidelines to companies to ensure the protection of
investors.
3. Standard Listing Agreement of Stock Exchanges—is for those companies whose shares are listed
on the stock exchanges.
4. Accounting Standards Issued by the Institute of Chartered Accountants of India (ICAI) — ICAI is an
independent body, which issues accounting standards providing guidelines for disclosures of
financial information. In the new Companies Act, 2013, Section 129 provides that the financial
statements would give a fair view of the state of affairs of the companies, following the accounting
standards given under Section 133 of the Companies Act, 2013. It is further given that the things
contained in such financial statements should be in compliance with the accounting standards.
5. Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI) —ICSI is an
independent body, which has secretarial standards in terms of the provisions of the new Companies
Act. ICSI has issued secretarial standards on “Meetings of the Board of Directors” (SS-1) and
secretarial standards on “General Meetings” (SS-2). Given secretarial standards have come into
force from 1-7-2015. Companies Act, 2013, Section 118(10) provides that every company (other
than one Person Company) shall observe secretarial standards specified as such by the ICSI with
respect to general and Board meetings.
LANDMARK CASES ON FAILURE OF CORPORATE GOVERNANCE
Satyam Case:
Satyam Computer Services scandal was a corporate scandal affecting India-based company
Satyam Computer Services in 2009, in which Chairman Ramalinga Raju admitted that the company’s
accounts had been manipulated. The Satyam scandal was a Rs 7000 crore corporate scandal in which
accounts had been manipulated. On 7-1-2009, Ramalinga Raju sent an e-mail to SEBI, wherein he
confessed to falsify the cash and bank balances of the company. Weeks before the scam began to
unravel with his popular statement that he was riding a tiger and did not know how to get down without
being killed. Raju had said in an interview that Satyam, the fourth largest IT company, had a cash balance
of Rs 4000 crore and could leverage it further to raise another Rs 15,000-20,000 crore.
Ramalinga Raju was convicted with 10 other members on 9-4-2015. Ramalinga Raju and three others
were given six months jail term by Serious Fraud Investigation Office (SFIO) on 8-12-2014.
Ricoh Case:
The Ricoh scene was almost a replica of the Satyam episode in terms of accounting fraud and
resultant fraud of stock prices interestingly without any promoter being in the saddle.
ICICI Bank Scam Case:

It was the role of the Board in hurriedly giving a clean chit to its CEO without the results of an
independent investigation released in the public domain in an apparent case of alleged nepotism, and
its refusal to take any questions on the matter.

Kingfisher Airlines and United Spirits Case:
Mainly regarding illegal internal corporate funding to parties, falsifying accounts. It was entirely
evident that assets had been transferred from United Spirits Ltd. (USL) to subsidise Kingfisher, that
United Breweries (UB) Holdings was utilised as a channel for raising loans and giving them to his group,
that intercorporate credits were given to related groups without the Board’s approval, accounts were
inappropriately expressed, reviews were stage overseen, etc. during the period Mr Vijay Mallya was
responsible for USL.
Sad but true. The list is getting longer by each passing month and newer corporate frauds are being
detected at companies and banks which used to be torchbearers of good corporate governance.
SOURCES OF CORPORATE GOVERNANCE RULES
There are both internal as well as external sources of corporate governance rules.
I. Internal sources are:
1.Memorandum of Association /Rules contained in Table a of Companies Act.

2.Articles of Association
3.Standing Orders
II. External sources are:
1.Companies Act and other statutes

2.SEBI guidelines
3.,Standard Listing Agreement of Stock Exchanges
4.Accounting Standards Issued by The ICAI (Institute of Chartered Accountants of India)
5.Secretarial Standards Issued by ICSI (Institute of Company Secretaries of India)
6.OECD principles
7.Judicial decisions
INTERNAL SOURCES
I. MEMORANDUM OF ASSOCIATION (Previous year question – PART C)
It is the fundamental constitution of a company which contains the most important details of a
company like Company's name, Objects, Liability, Capital, Registered office.
The extent of a Company's power is limited by the contents of MOA (a company cannot do anything
which is not expressly or impliedly stated in the MOA). So. MOA is the source as well as limitation of the
company's powers.
The Memorandum of a company is the constitution of the company. It defines the relation of
the company with outside world and the scope of its activities. In Ashbury Railway Carriage and Iron
Co. V. Riche (1857), the Court held that the Memorandum of a Company is its charter and defines the
limitations of powers of the Company.
The Memorandum of a Company shall be printed, divided into Paragraphs, numbered
consecutively and signed by seven subscribers in the case of a public company. If it is a private
company, at least two subscribers must sign the Memorandum. In the case of One Person
Company the person registering the company should sign it.
There are five tables in Schedule I; they are table A, B, C, D and E. The forms of Memorandum of
different companies are given in these tables. The Memorandum of a company is to be prepared as
provided in Schedule -I
 Table A is the form of Memorandum of Association of a Company limited by shares.
 Table B is the form of Memorandum of Association of a Company limited by guarantee and
not having a share capital.
 Table C is the form of Memorandum of Association of a company limited by guarantee and
having a share capital.
 Table D is the form of Memorandum of Association of an unlimited company and not having
a share capital.
 Table E is the form of Memorandum of Association of an unlimited company and having share
capital.
Contents of Memorandum:
It contains the following 6 clauses: (As laid down in Rules of Table A of schedule 1, Section 4 and 5
of Companies Act, 2013
1. Name Clause: The name of the company is its first unique identity - Consists of the authentic
name of the company approved by the registrars.
The Memorandum of a company shall state the name of the company with the last word “Limited"
in the case of a public limited company, or the last word “Private Limited" in the case of a private
limited company.
The name stated in the Memorandum shall not -
1) be identical with or resemble too nearly to the name of an existing company.
2) be such that its use by the company is undesirable in the opinion of the Central Government
3) be such that Its use by the company will constitute an offence under any law for the time being
in force.
A company shall not be registered with a name which contains any word or expression which is
likely to give the impression that the company is in any way connected with, or having the
patronage of,
(i) the Central Government,
(ii) any State Government or
(iii) any local authority corporation or body constituted by the Central Government or any State
Government.
However, a company using such a name can be registered if it has obtained previous approval of the
Central Government for the use of such word or expression.
If a Company is registered with a name which resembles the name of an existing company, the old

company can apply to the court for an injunction to restrain the new company from adopting the
identical name. If the names of two companies contain any word which is in common use, it’s use cannot
be restrained.
In Asiatic Govt. Security Life Insurance Co. Ltd vs. New Asiatic Insurance Co. Ltd. A Company was
incorporated under the name New Asiatic Insurance Co. Ltd. Another Company, Asiatic Government
Security Life Insurance Company, which was registered earlier, filed a suit for restraining the new
company from using the name on the ground that two names resembled to a large extent. The Court
held that the two names were not identical and the suit was dismissed.
Change of Name : The right of a Company to alter its Memorandum is contained in section 13 of the
Companies Act, 2013. A company can change its name at any time. The formalities required are:
1) A special resolution (a resolution passed by three-forth majority in the general
meeting of the members of the company)
2) The approval of the Central Government in writing.
If a Company changes its name, the registrar shall enter the new name on the Register and shall issue a
fresh certificate of Incorporation. A change of name will not affect any right or obligation of the
Company. The company continues as if no change has taken place, as in the case of the “old wine in
new bottle”.
Rectification of name of Company: By section 16(1) of the Act, 2013, if, by lack of attention or any other
reason, a company on its first registration or on its registration by a new name, shall rectify its name
which,
 in the opinion of the Central Government, is identical with or too nearly resembles the name
by which a company in existence had been previously registered, it may direct the company
to change its name and the company shall change its name or new name within a period
of three months from the issue of such direction, after adopting an Ordinary Resolution for
the purpose.
 On an application is made to the Central Government by a registered proprietor of a trade
mark alleging that the name of a company is identical with or too nearly resembles to the
registered trade mark of such proprietor the Central Government may direct the company
to change its name. If such a direction is given, the company shall change its name after
adopting an Ordinary Resolution for the purpose.
 After changing the name, the company shall within a period of fifteen days from the date
of change, give notice of the change to the Registrar along with the order of the Central
Government. The Registrar shall carry elect out necessary changes in the certificate of
incorporation and the memorandum.
 If the company makes default in complying with any direction given by the Central
Government, the company shall be punishable with fine of one thousand rupees for every
day during which the default continues and every officer who is in default shall be
punishable with fine which shall not be less than five thousand rupees but which may extend
to one lakh rupees.
2. Office/Situation Clause: Contains all possible details - name of the state, exact address of the
registered office and names of the registrars enrolled.
The Memorandum of Association must mention the State in which the registered office of the company
is to be situated. The situation of the registered office of the company determines its domicile and
nationality.
In the Memorandum of Association of the company, the office address need not be shown.
However, by section 12 of the Act, a company shall, on and from the fifteenth day of its incorporation
and at all times thereafter, have a registered office capable of receiving and acknowledging all
communications and notices as may be addressed to it.
The company shall furnish to the Registrar “verification” (address and some documents) of its
registered office within a period of thirty days of its incorporation. The verification of the registered
office is to filed in the Form No INC-22. The following documents are to be attached along with the form:
(a) The registered document of the title to the premises of the registered office in the name
of the company.
(b) The notarized copy of lease or rent agreement in the name of the company along with a
copy of rent paid receipt not older than one month.
(c) The authorization from the owner to use the premises by the company as its registered
office and proof of ownership.
(d) The proof of evidence of any utility service like telephone, electricity etc., showing the
address of the premises in the name of the owner which is not older than two months.
Every company shall paint or affix its name and the address of its registered office and keep the same
painted or affixed, on the outside of every office or place in which its business is carried on, in a
conspicuous position. The name shall be engraved in legible characters on its seal, if any (Now seal is
not compulsory. If there is a seal, the name should be engraved in legible characters on it).
In the case of “One Person Company", the words “One Person Company” shall be mentioned in brackets
below the name of such company, wherever its name is printed, affixed or engraved.
Change of Registered Office: The registered office of a Company may -

1) Change from one place to another place in the same City, Town or Village.
2) Change from one Town to another Town in the same State
3) Change from one State to another State.
In the each of change of office from one place to another place in the same city, town or village, after
changing the office, a verification is to be given to the Registrar within 15 days of the change.
In the case of change of office from one town to another town, a special resolution is required
to be passed at a general meeting of the shareholders and verification (showing address and documents
of title) is to be filed with the Registrar within 15 days.
If the change of office has the effect of shifting the office from the jurisdiction of one Registrar of
Companies to that of another within the same State, permission of the Regional Director must be
obtained by filing an application in the prescribed form. The Regional Director has to confirm the
company's application within a period of 30 days. After getting the confirmation of the Regional
Director, the company must file a copy of the confirmation with the Registrar of Companies within sixty
days. The Registrar has to register the same and issue a certificate to the company within thirty days
from the date of filing of confirmation.
In case of shifting of office from one state to another state, a special resolution is required to be
passed at the general meeting of the shareholders. In order to effect the alteration, the confirmation
of the Central Government is to be obtained. When the confirmation is given by the Central
Government, a certified copy of the order confirming the alteration shall be filed with the Registrars
of both the states. All the records of the Company shall be transferred to the registrar of the State in
which the registered office of the Company is transferred.
3. Object Clause: (Previous year question – PART A)
(Main body of the memorandum). It provides every motives and list of all the operations of the
company. Also, any such operation which is not mentioned in the object clause is considered to
be beyond the reach of the company. (Doctrine of Ultravires).
The Memorandum of Association of every Company shall clearly state the objects of the Company.
The object clause shall state: -
(a) The objects for which the company is proposed to be incorporated (main objects).
(b) Matters considered necessary for furtherance of main object (incidental or ancillary
matters to the attainment of main objects).
Doctrine of Ultravires (Previous year question – PART A)
A Company has power to do all acts which are recognized by the Companies Act and the Memorandum
of Association.
If a Company does an act beyond the powers centered under the Companies Act or Memorandum of
Association, the act will be ultra vires. Such an act is absolutely void. Even the whole body of the
shareholders cannot ratify it and make it binding on the Company.
In Ashbury’s case, the company was formed with the object of carrying on business as
"Mechanical Engineers and General Contractors". The directors of the company entered into an
agreement with Riche to finance the construction of the Railway line in Belgium. The contract was
repudiated by the Company subsequently. Riche filed a suit for breach of contract. The House of Lords
held that the contract was beyond the scope of the Memorandum (ultra vires) and thus it is not binding
on the company even though it was ratified by the shareholders.
Effect of ultra vires Transactions:
1) Injunction: Whenever an ultra vires act is about to be done, any member of the
company can obtain an injunction against the company to restrain it from proceeding
further.
2) Personal liability of the Directors: If the capital of the company is used by the directors
for ultra vires purposes they will be personally liable.
3) Breach of Warranty: If an outsider is induced to enter into a contract with the
company by the directors, the outsider can file a case against the directors for his loss
resulted from the ultra vires contract.
4) Property Acquired under Ultra Vires Act.: If the capital of the company is used to
purchase some property, the company’s right over such property will be declared valid
even though the purchase is ultra vires the object of the company.
5) Ultra -vires Contracts: If a company has lent money to an outsider it can recover it
from the debtor even though the contract is ultra vires. If an outsider tends money to
the company under an ultra vires contract he has only the remedy of restitution.
Change of Objects:
By Section 13(8) of the Act, a company which has raised money from public through prospectus
and still has any unutilized amount out of the money so raised shall not change its objects for
which it raised the money through prospectus unless a special resolution is passed by the
company. The special resolution is to be passed through postal ballot. The notice of the resolution
for altering the objects shall contain the following matters:
i. The total money received;
ii. The total money utilized for the objects stated in the prospectus.
iii. The unutilized amount of the money so raised through prospectus.
iv. The particulars of the proposed alteration or change in the objects
v. The justification for the alteration or change in the objects.
vi. The amount proposed, to be utilized for the new objects.
vii. The estimated financial impact of the proposed alteration on the earnings and cash flow of the
company.
viii. The other relevant information which is necessary for the members to take an informed
decision on the proposed resolution.
ix. The place from where any interested person may obtain a copy of the notice of resolution to
be passed.
As per section 13 (8) of the Act, 2013 the details of the proposed resolution shall also be published in
the newspapers (one in English & one in vernacular language) which is in circulation at the place where
the registered office of the company is situated and shall also be placed on the website of the company,
if any, indicating therein the justification for such change.
The dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders
having control in accordance with regulations to be specified by the Securities and Exchange Board.
The Registrar shall register any alteration of the memorandum with respect to the objects of the
company and certify the registration within a period of thirty days from the date of filing of the special
resolution.

4. Liability Clause: The Memorandum must contain a statement of liability of members of the company.
The liability of members may be limited by shares or unlimited or limited by guarantee. In the case of
a company limited by shares, it is to be stated in the Memorandum that the liability of its members
is limited to the amount unpaid, if any, on the shares held by them. In the case of a company limited
by guarantee, it is to be stated in the Memorandum, the amount which each member undertakes to
contribute to the assets of the company in the event of its being wound up.
5. Capital Clause: The Memorandum shall contain the amount of Share Capital with which the company
is proposed to be registered and the division of it into shares of a fixed amount. The capital with
which the company is registered is called Registered Capital or Authorized Capital or Nominal Capital.
Alteration of Capital Clause

By section 61 of the Act, 2013, a company limited by shares can alter its share capital if so authorized
by the Articles of Association. The share capital can be altered by increasing its authorized capital or
consolidate and divide all or any part of its share capital into shares of larger amount or convert fully
paid shares into stock.
6. Association Clause / Subscription Clause: In the Association and subscription clause of a public
company, there should be at least seven subscribers and they should have signed and it should be
attested by witnesses. In the Case of a Private company, at least two persons should subscribe and
put their signatures. The names and addresses of the subscribers should be mentioned in this clause.
The Subscribers should have given an undertaking to take shares from the company. The number of
shares each subscriber has undertaken to take should be mentioned in this clause. Even though a
subscriber has not taken the agreed share he will be liable to pay the value of such shares at the
time of company's winding up.
II. ARTICLES OF ASSOCIATION (Previous year question – PART B)
In corporate governance, a company's articles of association (AOA / articles of incorporation ) is a

document which, along with the memorandum of association (in cases where the memorandum exists)
form the company's constitution, defines the responsibilities of the directors, the kind of business to be
undertaken, and the means by which the shareholders exert control over the board of directors.
Moreover, the rights and duties of its members and the company are to be recorded. This is why Articles
of Association are necessary
Section 5(1) of the Companies Act,2013 says that the articles of a company shall contain regulations for
management of the Company.
By section 5(6) of the Act, the articles of a company shall be in respective forms specified in Tables F,
G, H, I and J in Schedule I, as may be applicable to such company.
Tables F to J are model articles of association of different kinds of companies.

 Table F is the form of articles of association that is applicable to a company limited by shares.
 Table G is the form of articles of association that is applicable to a company limited by
guarantee and having a share capital.
 Table H is the form of articles of association that is applicable to a company limited by
guarantee and not having a share capital.
 Table I is the form of articles of association that is applicable to an unlimited company and
having a share capital.
 Table J is the form of articles of association that is applicable to an unlimited company and
not having a share capital.
By section 5(7) of the Act, a company may adopt all or any of the regulations contained in the model
articles applicable to such company.
The Articles of Association should be printed and divided into paragraphs and consecutively numbered.
It must be signed by the subscribers to the Memorandum and the signatures are to be attested by
witnesses.
An Articles of Association shall contain provisions for the following:
1) Share Capital and Variation of 13) Adjournment of meeting
Rights 14) Voting rights of members
2) Underwriting Commission 15) Proxy
3) Lien on Shares 16) Board of Directors
4) Calls on Shares 17) Proceedings of the Board
5) Transfer of Shares 18) Chief Executive Officer, Manager,
6) Transmission of Shares Company Secretary or Chief
7) Forfeiture of Shares Financial Officer
8) Alteration of Capital 19) The Seal of the Company
9) Capitalization of profits 20) Dividends and Reserve
10) Buy-back of shares 21) Accounts
11) General Meetings 22) Winding up
12) Proceedings at general meetings
23) Indemnity - In this clause the right of officers of the company to be indemnified out of
the assets of the company against any liability incurred by him in defending any
proceedings, whether civil or criminal, in which judgment is given in his favor or in
which he is acquitted or in which relief is granted to him by the court or Tribunal will
be provided.
Alteration of Articles (Previous year question – PART A)

By section 14 of the Act,2013, the Articles of Association of a Company can be altered only by a special
resolution. Alteration should not be contrary to the provisions of Memorandum of Association or the
Companies Act.
The alteration of articles by special resolution may be to the effect of conversion of

a) a private company into a public company, or
b) a public company into a private company.

 If a private company alters its articles in such a manner that they no longer include the restrictions
and limitations which are required to be included in the articles of a private company under the Act,
the company shall, as from the date of such alteration, cease to be a private company.
 Any alteration having the effect of conversion of a public company into a private company shall not
take effect except with the approval of the Tribunal.
 Every alteration of the articles and a copy of the order of the Tribunal approving the alteration shall
be filed with the Registrar, together with a printed copy of the altered articles, within a period of
fifteen days, who shall register the same.
 Any alteration of the articles registered shall be valid as if it were originally in the articles.
Provisions for Alteration of the articles (Previous year question – PART A)

The power to alter the articles is a statutory power and any provision in the articles making
the articles unalterable is void.
 If the articles of a company contain any restriction that the company shall not alter its
articles, it Will be contrary to the companies Act and therefore inactive.
 However, by section 5(3), the Articles may contain provisions for entrenchment to the
effect that specified provisions of the articles may be altered only if conditions and
procedures as that are more restrictive than those applicable in the case of a special
resolution, are met or complied with.
 The provisions for entrenchment shall only be made either on formation of a company, or
by an amendment in the articles agreed to by all the members of the company in the case
of a private company and by a special resolution in the case of a public company.
 If the articles containing provisions for entrenchment, whether made on formation or by
amendment, the company shall give notice to the Registrar of such provisions in the
prescribed form.
 In Malleson v. National Corporation (1894), it was held that a provision in the Articles
depriving the company of its power of alteration would be void.
 A company may alter its articles at any time by passing a special resolution. The provisions
of articles cannot be altered by an ordinary resolution. Even clerical errors in the articles
should be set right by a special resolution. Any alteration having the effect of conversion
of a public company into a private company shall not take effect except with the approval
of the National Company Law Tribunal. (Previous year question – PART B)
 In Mathrubhumi Printing and Publishing Co. vs. Vardhavamar Publishing Ltd, (1992), the
Kerala High Court held that the power conferred on the Company under section 31 to alter
articles by special resolution should not be abused by the majority of shareholders in order
to oppress the minority.
 The alteration must not sanction anything which is illegal. The alteration must be made
bonafide for the benefit of the Company. The alteration must not constitute an oppression
or a fraud on the minority shareholders.

 In Brown v. British Abreasive Wheel Co. Ltd (1919), a company was in financial difficulties.
The majority of the shareholders were willing to provide more capital if the remaining
shareholders (about 2% of the whole) would sell them their shares. The majority then
passed a special resolution altering the articles so as to enable 98% of the shareholders to
buy out any other shareholder. The Court held that the alteration was not made bonafide
for the benefit of the Company: It is an oppression on the minority shareholders.
 The alteration must not in any way increase the liability of the existing members to
contribute to the share capital of the company unless they agree in writing.
 If the company is a club or association, formed for the purpose of promoting art, the
articles may be altered to provide for subscription at a higher rate. The alteration must
not cause a breach of contract with an outsider. A company cannot by altering the articles
justify a breach of contract. (Previous year question – PART B)
 In Southern Foundaries Ltd V. Shirlaw (1940), the plaintiff was appointed as a Managing
Director of the company. The appointment was for 10 years. After 2 years, the company
was amalgamated with another company and the new articles empowered the dismissal
of the Managing Director. The plaintiff was dismissed from the service. He claimed
compensation for dismissal. The court held that a company cannot justify a breach of
contract by altering the Articles.
If articles of association is altered by a special resolution, the altered articles is to be registered with
the Registrar of companies. It is to be done within fifteen days of passing of resolution. In case
approval of Tribunal is required, the copy of the approval order is also to be produced along with
the altered articles for registration.
III. STANDING ORDERS
Industrial Employment (Standing Orders) Act, 1946 is to require employers in industrial

establishments to formally define conditions of employment under them and submit draft
standing orders to certifying Authority for its Certification. It applies to every industrial
establishment wherein 100 (reduced to 50 by the Central Government in respect of the
establishments for which it is the Appropriate Government) or more workmen are employed.
And the Central Government is the appropriate Government in respect of establishments
under the control of Central Government or a Railway Administration or in a major port, mine
or oil field. Under the Industrial Employment (Standing Orders) Act, 1946, all RLCs(C) have
been declared Certifying Officers to certify the standing orders in respect of the
establishments falling in the Central Sphere.

CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT
Constructive Notice of Memorandum & Articles (Previous year question – PART A)
The Memorandum and the Articles of Association of a company are to be registered with registrar of
companies. On registration, they become public documents. They are open for public inspection in the
office of Registrar of Companies on payment of the prescribed fee.
Every person dealing with the company is presumed to have read the Memorandum and Articles of
Association and is deemed to have knowledge of the contents of these documents. This imputation of
knowledge is known as Constructive Notice of Memorandum and Articles of Association.
Kotla Venkata Swamy vs. Ramamoorthy (1934): The Articles of Association of a company required that
all deeds should be signed by the Managing Director, the Secretary and a working director on behalf of
the company. The plaintiff accepted a deed of mortgage executed by the Secretary and a working
director. The Court declared the mortgage invalid. The Court held that the plaintiff had constructive
notice of the contents of Articles.
Rajendra Nath Datta vs. Shibendra Nath Mukherjee (1982): In this case, the Court held that the Articles
of Association of a company is a public document and anyone who deals with a registered company
must have taken notice of the Articles. By operation of the doctrine of constructive notice, every person
dealing with the company is presumed to have knowledge of the contents of Memorandum and Articles
of Association.
The Doctrine of Constructive Notice operates against outsiders who are dealing with the company. This
doctrine prevents them from alleging that they have no knowledge that the Memorandum and Articles
of the company rendered a particular act ultra vires. However, this doctrine is subject to the limitation
contained in the principle of “indoor management”.
Doctrine of Indoor Management:
The Doctrine of Indoor Management is a limitation on the doctrine of constructive notice. The doctrine
of indoor Management allows outsiders who are dealing with the company to assume that as far as the
internal proceedings of the company are concerned, everything has been properly done. Anyone who
is dealing with the company is bound to read the registered documents. They must see that the
proposed dealing is not inconsistent with the Memorandum and Articles of the company. However, they
need not enquire into the regularity of internal proceedings as required by the Memorandum and
Articles. This limitation to the doctrine of constructive notice is known as Doctrine of Indoor
Management or the Rule in Turquand’s Case.
The doctrine of constructive notice imposes a duty upon those who are dealing with company
to know the constitution of the company. It pries to protect the company against outsiders. The
doctrine of Indoor [Management, on the other hand; allows those who are dealing with company
to dispense with the knowledge of what is taking place within the doors that are closed to them.

They can assume that the company’s internal regulations which are necessary to implement a
contract have been complied with. The doctrine of indoor management seeks to protect outsiders
against the company.
Royal British Bank vs. Turquand (1856)

‘R’ lent 2000 pounds to a company. The Director of the Company gave a bond to ‘R’. The Articles
of the company had empowered them to issue such bonds provided they were authorized by a
resolution passed by the shareholders at a general meeting of the company.
‘R’ sued ‘T’, who was the Managing Director of the company for the amount due on the bond. The
company claimed that the resolution authorizing the directors to issue bonds had not been passed
and thus the bond was issued without authority.
The Court held that ’R’ could recover the amount of the bond from the company on the ground that
‘R’ was entitled to assume that the required resolution has been passed. The Doctrine of Indoor
Management is based on public convenience and justice.
Exceptions to the Doctrine of Indoor Management:
There are certain exceptions to the Doctrine of Indoor Management. They are:
1. Knowledge of Irregularity
If a person who is dealing with a company has actual or constructive notice of the irregularities
regarding the internal management, he is not allowed to claim the benefit under the Doctrine
of Indoor Management.
Howard vs. Patent Ivory Co. (1888): The Articles of a company empowered the directors to borrow up
to 1000 pounds without approval of the shareholders in the general meeting. But for any amount
beyond 1000 pounds, they had to obtain consent of the shareholders. ‘H’ was a director of the
company.' He lent to the company an amount of 2000 pounds without consent of the shareholders.
The court held that the director had notice of the internal irregularity and hence the company was liable
to pay only 1000 pounds.
2. Negligence
If a person who is dealing with a company could discover the irregularities by proper enquiry,
he cannot claim benefit of the rule of Indoor Management.
Anand Biharilal V. Dinshaw and Co. (1942): The accountant of a company sold company’s
property to A. The transaction was apparently beyond the scope of the accountant’s
authority. The court held that ‘A’ could not claim the benefit of Turquand rule. He ought to
have made proper enquiry as to the authority of the accountant.
3. Forgery
The protection of Indoor Management will not be available in the case of forgery committed
by the company’s officials. If the Secretary of a company has forged signatures of directors in
the share certificate and issued it to an outsider under the seal of the company, the outsider
cannot claim protection of Indoor Management. Forgery makes a document void.

EXTERNAL SOURCES
I. THE COMPANIES ACT, 2013
The new Companies Law contains many provisions related to good corporate governance like:
Committee
 Composition of Board of
Directors  Internal Audit
 Admitting Woman Director,  Risk Management Committee

Admitting Independent
Director  SFIO Purview
 Directors Training and  Subsidiaries Companies

Evaluation Management
 Constitution of Audit  Compliance center etc.
All such provisions of new Company Law are instrumental in providing a good Corporate
Governance structure.
Few provisions are: -
 Section 134: It is important to attach a report to every Financial statement by Board

of Directors. It must contain all the details of the matter (including the statement
containing director’s responsibility).
 Section 177: It provides the manner to constitute an Audit Committee.
 Section 184: It mandates the Director to disclose his interest in any company or
companies at the first meeting of the board. And if there is any change in the interest,
then disclose it in the next meeting.
II. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) GUIDELINES
SEBI is a regulatory authority established on April 12, 1992. It was established with the main
purpose of restraining the malpractices and protecting the interest of its investors. Its main
objective is to regulate the activities of Stock Exchange and at the same time ensuring the healthy
development in the financial market. SEBI came up with detailed Corporate Governance Norms in
order to ensure good corporate governance
 The companies are required to get shareholders’ approval for RPT (Related Party
Transactions)
 It established whistle blower mechanism
 It is important to have at least one-woman director in the Board
 It elaborated disclosures on pay packages.
 Under Clause 35B of the Listing Agreement (It is the basic document which is executed
between companies and the Stock Exchange when companies are listed on the stock
exchange),

 Listed companies are required to provide the option of e-voting to its
shareholders
 Those who do not have access to e-voting facility, they should be provided to
cast their votes in writing on Postal Ballot.
 Under Clause 49 of the Listing Agreement,
 It forbids the independent directors from being eligible for any kind of stock option.
 Whistle blower policy, whereby the directors and employees can report any
unethical behaviour, fraud or any violation of Code of Conduct of the company.
 Audit Committee which includes evaluation of risk management system and
internal financial control. It keeps a check on inter-corporate loans and
investments.
 It requires all the companies to form a policy on ‘material subsidiaries’ and that
will be published online.
 SEBI also implemented various regulations for effective working of the companies, such as
regulations for Issue of Capital and Disclosure Requirements (2009), Listing obligations and
Disclosure Requirements (2015), Prohibition of Insider Trading, (2015), Fraudulent and
Unfair Trade Practices, Substantial Acquisition of Shares and Takeovers, Issue of Sweat
Equity etc.
III. STANDARD LISTING AGREEMENT OF STOCK EXCHANGES
It is for all those companies whose shares are listed on Stock Exchange. It is the basic
document which is executed between companies and the Stock Exchange when companies
are listed on the stock exchange
Listing Agreement is executed only by the Director on behalf of the Company and the signature
of party representing the Stock exchanges is not found. Listing means admission of the
securities to dealings on a recognized stock exchange. Listing Department monitors the
compliance of the companies.
IV. ACCOUNTING STANDARDS ISSUED BY THE ICAI (INSTITUTE OF CHARTERED

ACCOUNTANTS OF INDIA)
ICAI is a statutory body established by Chartered Accountants Act, 1949. It issues accounting standards
for disclosure of financial information.
Section 129 of the Companies Act, 2013 states that financial statements of a company shall comply with
the accounting standards notified under section 133 of the Act. it also states that the financial
statement shall give true and fair view of the state of affairs of the company. Section 133 states that
Central government may prescribe the accounting standards as recommended by ICAI. accounting
standards are provided so that good corporate governance can be ensured in a company.
Some accounting standards issued by ICAI are:
 Disclosure of Accounting policies followed in preparation of Financial statement,
 Determination of values at which the inventories are carried in a financial statement

 cash flow statements for assessing the ability of an enterprise in generating cash
 standard to ensure that appropriate measurement bases are applied to provisions and
contingent liability
 Standard prescribing accounting treatment of cost and revenue associated with

construction contracts.
V. SECRETARIAL STANDARDS ISSUED BY ICSI (INSTITUTE OF COMPANY SECRETARIES OF

INDIA)
It is an autonomous body constituted by the Company Secretaries Act, 1980. It is a body to regulate and
develop the profession of Company Secretaries in India. It issues secretarial standards as per the
provision of the Companies Act,2013.
Section 118(10) of the Companies Act states that every company shall observe secretarial standards
specified by Institute of Company Secretaries of India with respect to General and Board meetings.
1. Secretarial Standard-1
It prescribes a set of principles for conducting meetings of Board of Directors of all companies except
one-person company. These principles are equally applicable to the meetings of committees as well
2. Secretarial Standard-2
It prescribes a set of principles for conducting and convening to all types of General meetings of all
companies except one-person company incorporated under the act. This standard also deals with the
procedure for conducting e-voting and postal ballot.
The principles in SS-2 are applicable mutatis-mutandis to meetings of creditors and debenture holders.
It also prescribes that any meeting of members or creditors or debenture-holders of a company under
the direction of CLB (Company Law Board), NCLT (National Company Law Tribunal) or any other
authority shall be governed by the provisions of this standard.
(Mutatis mutandis is a Medieval Latin phrase meaning "with things changed that should be changed")
VI. OECD PRINCIPLES
The Organization of Economic Cooperation and Development (OECD) released its first set of corporate
governance principles in 1999. A revised version was then released in 2004. The principles were
developed and endorsed by the ministers of OECD member countries in order to help OECD and Non-
OECD governments in their efforts to create legal and regulatory frameworks for corporate governance
in their countries.
The six OECD Principles are:
1. Ensuring the basis of an effective corporate governance framework

2. The rights of shareholders and key ownership functions
3. The equitable treatment of shareholders
4. The role of stakeholders in corporate governance
5. Disclosure and transparency
6. The responsibilities of the board
1. Ensure the basis of an effective corporate governance framework: The corporate governance
framework should promote transparent and efficient markets, be consistent with the rule of law and
clearly articulate the division of responsibilities among different supervisory, regulatory and
enforcement authorities.
2. The rights of shareholders and key ownership functions: The corporate governance framework
should protect and facilitate the exercise of shareholders’ rights.
Basic shareholder rights should include the right to:
 Secure methods of ownership registration;

 Convey or transfer shares;
 Obtain relevant and material information on the corporation on a timely and regular
basis;
 Participate and vote in general shareholder meetings;
 Elect and remove members of the board; and
 Share in the profits of the corporation.
3. The equitable treatment of shareholder: The corporate governance framework should ensure the
equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders
should have the opportunity to obtain effective redress for violation of their rights. The principles also
state that:
All shareholders of the same series of a class should be treated equally

Insider trading and abusive self-dealing should be prohibited
Members of the board and key executives should be required to disclose to the board
whether they, directly, indirectly or on behalf of third parties, have a material interest
in any transaction or matter directly affecting the corporation.
4. The role of stakeholders in corporate governance: The corporate governance framework

should recognize the rights of stakeholders established by law or through mutual agreements
and encourage active co-operation between corporations and stakeholders in creating wealth,
jobs, and the sustainability of financially sound enterprises.
5. Disclosure and transparency: The corporate governance framework should ensure that timely
and accurate disclosure is made on all material matters regarding the corporation, including the
financial situation, performance, ownership, and governance of the company.
6. The responsibilities of the board: The corporate governance framework should ensure the
strategic guidance of the company, the effective monitoring of management by the board, and the
board’s accountability to the company and the shareholders.

VII. JUDICIAL DECISIONS
Several leading judgments of both Indian and foreign Courts have thrown light on various
aspects of Corporate governance.
Ashbury Railway carriage and Iron Co. Ltd vs. Riche : (Previous year question – PART B/2019)
Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653 is a UK company law case,
concerned with the objects clause of a company. Its importance has been diminished as a result of S
31 the Companies Act 2006, which allows for unlimited objects for which a company may be run.
Furthermore, any limits a company does have in its objects clause has no effect whatsoever for
people outside a company (s 39 CA 2006), except as a general issue of authority of the company's
agents.
Facts: the Ashbury Railway Carriage and Iron Company Ltd. was Incorporated "to make and sell,
or lend on hire, railway-carriages…" as mentioned under clause 3 of Objects clause of MOA. And
clause 4 said activities beyond needed a special resolution. But the company agreed to give Riche
and his brother a loan to build a railway in Belgium. Later, the company refused the agreement.
Riche sued, and the company pleaded the action was ultra vires
Judgement: The House of Lords held that if a company pursues objects beyond the scope of the
memorandum of association, the company's actions are ultra vires and void.
FOSS V. HARBOTTLE (1843) - Rule of majority (Frequently asked question )

In case Foss v. Harbottle, the directors of the company misapplied the company’s property. Two
shareholders then took legal action against them on behalf of the company. Court rejected the suit
made by the shareholders. It was held that a shareholder/member cannot maintain a legal action on
behalf of the company. A company may sue and be sued in its own name. If the company suffered the
injury, it alone could take action against the person who had misapplied its property, not any other
person.
The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any
wrongs done to the company and that if an action is to be brought in respect of such losses, it must be
brought either by the company itself (through management) or by way of a derivative action."
The rule (in Foss v. Harbottle) is the consequence of the fact that a company is a separate legal entity.
Other consequences are limited liability and limited rights. A company is liable for its contracts and
torts; the shareholder has no such liability. A company acquires causes of action for breaches of contract
and for torts which damage the company. No cause of action vests in the shareholder. When the
shareholder acquires a share, he accepts the fact that the value of his investment follows the fortunes
of the company and that he can only exercise his influence over the fortunes of the company by the
exercise of his voting rights in general meeting.
The law confers on him the right to ensure that the company observes the limitations of its
memorandum of association and the right to ensure that other shareholders observe the rule, imposed
on them by the articles of association. If it is right that the law has conferred or should in certain
restricted circumstances confer further rights on a shareholder the scope and consequences of such
further rights require careful consideration. “If the company is a legal person separate from its
members, it follows that for a wrong done to it the company itself is the only proper plaintiff."
The old common law position was based on the principle of the ‘Majority Rule' laid down in Foss v
Harbottle (1843). The majority rule stands for the proposition that the decisions and choices of the
majority will always prevail over those of the minorities. In practice, the greater the amount of
shareholding of an individual member, the greater rights and powers accrued to that individual member
within the company. Thus, it appears that a substantial amount of power has been placed in the hands
of the majority shareholders and that by virtue of the majority rule, the minority shareholders are
required to accept the decisions made by the majority shareholders.
In such circumstances, the minority shareholder cannot ask for court intervention because Foss
v Harbottle does not care for minority members who complain of a wrong done to the company provided
that the majority shareholders do not wish to take any action against the wrong committed. As a general
principle laid down in this case, where it is alleged that a wrong has been done to the company then
proper claimant in such an action is the company itself and where the company is competent to settle
the alleged wrong itself or, the company is competent to rectify an irregularity by its own internal
procedure, then no individual member may bring action.
Advantages of the Rule in Foss v. Harbottle :

1. Recognition of the separate legal personality of company: If a company has suffered
some injury; not the individual members, it is the company itself that should seek to redress.
2. Need to preserve right of majority to decide: The principle in Foss v. Harbottle preserves
the right of majority to decide how the affairs of the company shall be conducted. It is fair that
the wishes of the majority should prevail.
3. Multiplicity of futile suits avoided: Clearly, if every individual member were permitted to
sue anyone who had injured the company through a breach of duty, there could be as many
suits as there are shareholders. Legal proceedings would never cease, and there would be
enormous wastage of time and money.
4. Litigation at suit of a minority futile if majority does not wish it: If the irregularity
complained of is one which can be subsequently ratified by the majority it is futile to have
litigation about it except with the consent of the majority in a general meeting.
In Mac Dougall v. Gardiner, (1875), the articles empowered the chairman, with the consent
of the meeting, to adjourn a meeting and also provided for taking a poll if demanded by the
shareholders. The adjournment was moved and declared by the chairman to be carried; a poll
was then demanded and refused by the chairman. A shareholder brought an action for a
declaration that the chairman‘s conduct was illegal. Held, the action could not be brought by
the shareholder; if the chairman was wrong, the company alone could sue.

Application of Foss v. Harbottle Rule in Indian context
The Delhi High Court in ICICI v. Parasrampuria Synthetic Ltd. SSL, July 5, 1998 held that an automatic
application of Foss v. Harbottle Rule to the Indian corporate realities would be improper. Here the
Indian corporate sector does not involve a large number of small individual investors but predominantly
financial institutions funding at least 80% of the finance. It is these financial institutions which provide
entire funds for the continuous existence and corporate activities. Though they hold only a small
percentage of shares, it is these financial institutions which have really provided the finance for the
company’s existence and, therefore, to exclude them or to render them voiceless on an application of
the principles of Foss v. Harbottle Rule would be unjust and unfair.
Exceptions to the rule in foss v. Harbottle — protection of minority rights and shareholders
remedies
The rule in Foss v. Harbottle is not absolute but is subject to certain exceptions. In other words, the
rule of supremacy of the majority is subject to certain exceptions and thus, minority shareholders
are not left helpless, but they are protected by:
(a) the common law
(b) the provisions of the Companies Act, 2013.
I. Actions by Shareholders in Common Law
The cases in which the majority rule does not prevail are commonly known as exceptions to the
rule in Foss v. Harbottle and are available to the minority. In all these cases an individual member
may sue for declaration that the resolution complained of is void, or for an injunction to restrain
the company from passing it. The said rule will not apply in the following cases;
(1) Ultra Vires Acts
Where the directors representing the majority of shareholders perform an illegal or ultra vires act for
the company, an individual shareholder has right to bring an action. The majority of shareholders have
no right to confirm an illegal or ultra vires transaction of the company. In such case a shareholder has
the right to restrain the company by an order or injunction of the court from carrying out an ultra vires
act.
In Bharat Insurance Ltd. v. Kanhya Lal, the plaintiff was a shareholder of the Bharat Insurance Company.
One of the objects of the company was: ―To advance money at interest on the security of land, houses,
machinery and other property situated in India... The plaintiff complained that ―several investments
had been made by the company without adequate security and contrary to the provisions of the
memorandum and therefore, prayed for perpetual injunction to restrain it from making such
investments‖. The Court observed:
―In all matters of internal management, the company itself is the best judge of its affairs and the Court
should not interfere. But application of assets of a company is not a matter of internal management. As
directors are acting ultra vires in the application of the funds of the company, a single member can
maintain a suit.

It means that the rule in Foss v. Harbottle will operate in full force only when the majority of
shareholders through their chosen directors act within the extent of the powers of the company.
(2) Fraud on Minority
Where an act done by the majority amounts to a fraud on the minority, an action can be brought by an
individual shareholder. This principle was laid down as an exception to the rule in Foss v. Harbottle in
a number of cases. In Menier v. Hooper’s Telegraph Works, 1874, it was observed that it would be a
shocking thing if the majority of shareholders are allowed to put something into their pockets at the
expenses of the minority. In this case, the majority of members of company 'A' were also members of
company 'B', and at a meeting of company 'A' they passed a resolution to compromise an action against
company 'B', in a manner alleged to be favourable to company 'B', but unfavourable to company 'A'.
Held, the minority shareholders of company 'A' could bring an action to have the compromise set aside.
Though there is no clear definition of the expression “fraud on the minority”, but the court decides a
particular case according to the surrounding facts. The general test which is applied to decide whether
a case falls in the category of fraud on the minority or not, is whether a resolution passed by the majority
is bona fide for benefit of the company as a whole. [Allen v. Gold Reefs of West Africa, (1900)].
(3) Wrongdoers in Control
If the wrongdoers are in control of the company, the minority shareholders’ representative action for
fraud on the minority will be entertained by the court [Cf. Birch v. Sullivan, (1957)]. The reason for it is
that if the minority shareholders are denied the right of action, their grievances in such case would
never reach the court, for the wrongdoers themselves, being in control, will never allow the company
to sue [Edwards v. Halliwell, (1950)].
(4) Resolution requiring Special Majority but is passed by a simple majority: (Previous year question –
PART B)
A shareholder can sue if an act requires a special majority but is passed by a simple majority. Simple or
rigid, formalities are to be observed if the majority wants to give validity to an act which purports to
impede the interest of minority. An individual shareholder has the right of action to restrain the
company from acting on a special resolution to which the insufficient notice is served [Baillie v. Oriental
Telephone and Electric Co. Ltd., (1915) refer also Nagappa Chettiar v. Madras Race Club].
(5) Personal Actions
Individual membership rights cannot be invaded by the majority of shareholders. He is entitled to all the
rights and privileges deserving as a member. An individual shareholder can insist on the strict compliance
of the statutory provisions with the legal rules. Provisions in the memorandum and the articles are
mandatory in nature and cannot be waived by a bare majority of shareholders [Salmon v. Quin and
Aztens, (1909)].
In Nagappa Chettiar v. Madras Race Club, (1949), it was observed by the Court that ―An individual
shareholder is entitled to enforce his individual rights against the company, such as, his right to vote,
the right to have his vote recorded, or his right to stand as a director of a company at an election.
Where the candidature of a shareholder for directorship is rejected by the Chairman, it is an individual

wrong in respect of which a suit is maintainable [Joseph v. Jos, (1964)].
(6) Breach of Duty
The minority shareholder may bring an action against the company, where although there is no fraud,
there is a breach of duty by directors and majority shareholders to the detriment of the company.
In Daniels v. Daniels, (1978), the plaintiff, who were minority shareholders of a company, brought an
action against the two directors of the company and the company itself. In their statement of the claim
they alleged that the company, on the instruction of the two directors who were majority shareholders,
sold the company’s land to one of the directors (who was the wife of the other) for £ 4,250 and the
directors knew or ought to have known that the sale was at an under value. Four years after the sale,
she sold the same land for £ 1,20,000. The directors applied for the statement of claim to be disclosed
on reasonable cause of action or otherwise as an abuse of the process of the Court. Court dismissed the
application.
(7) Prevention of Oppression and Mismanagement
The minority shareholders are empowered to bring action with a view to preventing the majority from
oppression and mismanagement. These are the statutory rights of the minority shareholders and find
detailed discussion later in the study.
In Bennet Coleman & Co. and Ors. v. Union of India & Ors., (1977), the Division Bench of the Bombay
High Court held that Sections 397 and 398 of the Companies Act, 1956 are intended to avoid winding
up of the company if possible and keep it going while at the same time relieving the minority
shareholders from acts of oppression and mismanagement or preventing its affairs from being
conducted in a manner prejudicial to public interest. Thus, the Court has wide powers to supplant the
entire corporate management by resorting to noncorporate management which may take the form of
appointing an administrator or a special officer or a committee of advisers etc., who will be in charge of
the affairs of the company.
The exceptions to the rule in Foss v. Harbottle are not limited to those covered above. Further
exceptions may be admitted where the rules of justice require that an exception to the rule should be
made.
It should be noted that the ordinary civil courts are not deprived of the jurisdiction to decide the matters
except where the Companies Act expressly excludes it such as matters relating to winding up [Panipat
Woollen & General Mills Co. Ltd. v. R.L. Kaushik, (1969)].
II. The provisions of the Companies Act, 2013.
Though the shareholders’ democracy is supreme the Companies Act and the decided cases suggest that
the majority shall not be allowed to act in an unfair, fraudulent, or oppressive way against the interests
of the minority shareholders. The Companies Act, 2013, extends protection to minority by granting
various rights to minority shareholders which are discussed as below:
a. The variation of class rights: The rights attached to the shares of any class can be varied under
Section 48 of the Act with the consent in writing of the holder of not less than three- fourths of the
issued shares of that class or with the sanction of a special resolution passed at a separate meeting
of the holders of the issued shares of that class. But the holders of not less than 10% of the shares
of that class who had not assented to the variation may apply to the Tribunal for the cancellation
of the variation under Section 48 of the Act.
b. Schemes of reconstruction and amalgamation: The minority is accorded protection in cases where
they dissent to the scheme of reconstruction or amalgamation. Companies Act, 2013 under Section
235 grants the power to acquire the shares of shareholders dissenting from the scheme approved
by the majority not less than 9/10 in value of the shares and Transferee Company may give notice
to dissenting shareholder for acquiring his shares. Therefore, under Section 235 it is made
mandatory for the shareholders to notify the company regarding their intention of buying the
remaining equity shares or by a group of persons holding 90% consent of the registered holder of
the company. The Companies Act, 2013 further provides the shares need to be acquired at a price
determined on the basis of valuation by a registered value in accordance with the rules and the
regulations.
c. Oppression and mismanagement: The principle of majority rule does not apply to cases where Sec
241 to sec 246 of the Companies Act 2013 (Sections 397 and 398 of 1956 Act) are applicable for
prevention of oppression and mismanagement.
The relief from the oppression and mismanagement has been provided under Section 241-246
where the relief can be sought from the tribunal in case of mismanagement and oppression
through section 244(1) which provides the right to apply to tribunal with the same minority limit
mentioned in Companies Act, 1956 but however, the tribunal, while exercising discretionary
powers, may allow any numbers of shareholders and to be considered as minority.
d. Alternative remedy to winding up: Any member or members, who complain that the affairs
of the company are being conducted in a manner oppressive to some of the members including
themselves, may apply to the Tribunal (Section 244).
e. Investigation by the Government: (Previous year question – PART A) Under Section 210 of
the Act Where the Central Government is of the opinion, that it is necessary to investigate into
the affairs of a company,
a. on the receipt of a report of the Registrar or inspector under section 208
b. on intimation of a special resolution passed by a company that the affairs of the company
ought to be investigated
c. in public interest, it may order an investigation into the affairs of the company.
 Where an order is passed by a court or the Tribunal in any proceedings before it that the
affairs of a company ought to be investigated, the Central Government shall order an
investigation into the affairs of that company.
 For the purposes of this section, the Central Government may appoint one or more persons
as inspectors to investigate into the affairs of the company and to report thereon in such
manner as the Central Government may direct.

MINORITY SHAREHOLDERS
(Previous year question – PART B)
A strict application of the general principle laid down in Foss v Harbottle appears to be harsh and
unjust with regard to minority shareholders, as although a substantive right has been accrued to
them, still they are barred from obtaining justice under the rule and have to submit to the wrongs
done by the majority because at the end of the day it is the majority of the members that control
the company and the minority members have no say due to their small strength of number.
However, in order to mitigate this harshness, four exceptions to the general principle have been
laid down.
• Ultra vires and illegality

The directors of a company, or a shareholding majority may not use their control over the company
which is ultra vires or illegal.
• Actions requiring a special majority
There are several decisions which shareholders of a company cannot take by a simple majority.
For such decisions, they are to be ratified by special majority i.e. they require the vote of three-
fourths of the members present and voting. For e.g. modification in Memorandum of association
or Articles of the company. If the majority purport to do any such act by passing only an ordinary
resolution or without passing a special resolution in the manner required by law, any member or
members can bring an action to restrain the majority.
• Invasion of individual rights
The third exception relates to an alleged act which has caused the invasion of the claimant's personal
and individual rights in his capacity as a member
• "Frauds on the minority"

The fourth exception deals with a situation where a ‘fraud on the minority' has been
committed by the majority who themselves control the company. There are various examples
of fraud on the minority.
TURQUAND RULE (ROYAL BRITISH BANK V. TURQUAND)
Royal British Bank v Turquand is a UK company law case that held people transacting with
companies are entitled to assume that internal company rules are complied with, even if they are
not. This "indoor management rule" or the "Rule in Turquand's Case" is applicable in most of the
common law world. It originally mitigated the harshness of the constructive notice doctrine, and
in the UK, it is now supplemented by the Companies Act 2006 sections 39
Facts: Mr Turquand was the official manager (liquidator) of the insolvent Cameron's Coalbrook
Steam, Coal and Swansea and Loughor Railway Company. It was incorporated under the Joint Stock
Companies Act 1844. The company had given a bond for £2,000 to the Royal British Bank, which
secured the company's drawings on its current account. The bond was under the company's seal,
signed by two directors and the secretary. When the company was sued, it alleged that under its
registered deed of settlement (the articles of association), directors only had power to borrow up
to an amount authorised by a company resolution. A resolution had been passed but not specifying
how much the directors could borrow.
Judgment: Sir John Jervis CJ, for the Court of Exchequer Chamber ruled that the bond was valid,
so the Royal British Bank could enforce the terms. He said the bank was deemed to be aware that
the directors could borrow only up to the amount resolutions allowed. Articles of association were
registered with Companies House, so there was constructive notice. But the bank could not be
deemed to know which ordinary resolutions passed, because these were not registrable. The bond
was valid because there was no requirement to look into the company's internal workings. This is
the indoor management rule, that the company's indoor affairs are the company's problem.
Kotala Venkata Swamy v. Ramamoorthy

The Madras High Court discussed the scope of the rule of constructive liability. The dispute in this
case was whether the mortgage bond was validly executed as per the company’s articles of
association so as to make the company liable. Article 15, of the Company's Articles of Association
provides that all deeds, hundies, cheques, certificates and other instruments shall be signed by the
Managing director, the Secretary and the working Director on behalf of the Company and shall be
considered valid.
In the instant case, the plaintiff accepted a deed of mortgage executed by the secretary and a
working director only. The court held that the plaintiff could not claim under this deed. The Court
further observed that if the plaintiff had consulted the articles she would have discovered that a
deed such as she took required execution by three specified officers of the company and she would
have refrained from accepting a deed inadequately signed. Notwithstanding, therefore, she may
have acted in good faith and her money may have been applied to the purposes of the company,
the bond is nevertheless invalid. One of the effects of the rule of constructive liability is that a
person dealing with the company is considered not only to have read those documents but to have
understood them according to their proper meaning. He is presumed to have understood not
merely the company’s powers but also those of its officers.

EXTERNAL & INTERNAL CONTROL OVER CORPORATE
EXTERNAL CONTROL OVER CORPORATE
External stakeholders play an important role in ensuring proper corporate governance processes in a
business organization. Some of the key external corporate governance controls include:
1. Government regulations
2. Media exposure
3. Market competition
4. Takeover activities
5. Public release and assessment of financial statements
• Government regulations: Government regulations are the most effective external controls on
the governance of a company. Companies are required to comply with these or face penalties
for violations. Most corporate governance regulatory requirements are based on the OECD
Principles of Corporate Governance (already mentioned above)
• Media Exposure: Media scrutiny of the workings and processes of a company ensures, to a
certain degree, the proper governance in an organization. Whistle-blowers often expose
wrongdoing within a company to the government and media organization.
Whistle-blower Protection Laws: Whistle-blower protection has become an area of concern for
government regulators around the world. Whistle-blowers were responsible for exposing
instances of major corporate fraud and have also become the targets of retaliation by businesses for
doing so.
• Market Competition: Companies with the best corporate governance practices have the best
standing in the market. Reputation, credibility and positive public perception all play a vital
role in boosting a company’s image and thus help it trump its competition and best its peers.
• Takeover Activities: Takeover activities lay a company’s internal processes and workings open
to public scrutiny. Both government regulators and the media will focus on the internal
policies and governance structures, thus acting as an effective external control.
• Public Release and Assessment of Financial Statements: The public release of financial
statements by listed companies exposes them open to assessment or scrutiny by regulators,
investors, members of the public and so on. This acts as an external control as companies have
to be scrupulous and careful about the details included in these statements and in ensuring
that they are properly prepared and audited.
INTERNAL CONTROL OVER CORPORATE
Internal corporate governance controls (internal controls) play a vital role in ensuring the success of a
business organization and preventing corporate fraud. Internal control activities that ensure proper

corporate governance include:
I. Monitoring by board IV. Performance based remuneration

V. Monitoring by large shareholders
II. Internal audits and robust policies and other stakeholders
III. Proper balance of power
1.) Monitoring by board: The board should monitor the corporate governance of the company
through continuous review of its internal structure. This ensures that there are clear lines of
accountability for management throughout the company. The board should also monitor and
review:
 major capital expenditures,
 corporate strategy
 acquisitions and divestitures
 major plans of action
 governance practices and changes
 risk policy
 annual budgets and business plans  selection, compensation and succession
planning of executives
 corporate performance
 key executive and board remuneration
2.) Internal audits and robust policies: Regular internal audits have to be carried out by auditors
employed by the organization in order to assess the health of governance processes, operational
health and financial reporting.
Robust internal control policies should also be implemented to ensure that the company lives up
to its obligations to investors, stakeholders, employees, the environment, the government and the
public at large.
3.) Proper balance of power: A separation of powers and responsibilities between management
groups ensures that there’s a proper system of checks and balances in place, with one group
implementing policies and another ensuring that these are implemented and functioning in the
right manner.
4.) Performance based remuneration: Executive pay, a contentious topic following the 2007- 08
financial crisis, is expected to be linked to performance in order to ensure that management is
rewarded for operating the company keeping in mind the rights of investors and other
stakeholders.
5.) Monitoring by large shareholders and other stakeholders: Individuals and institutions that
have large shareholdings (and financial institutions such as banks who are creditors) have the right
to monitor the performance of the management, acting as an effective internal control measure.

STAKEHOLDERS
A stakeholder is a party that has an interest in a company and can either affect or be affected by the business.
The primary stakeholders in a typical corporation are its investors, employees, customers, and suppliers. In
a corporation, a stakeholder is a member of "groups without whose support the organization would cease
to exist".
INTERNAL EXTERNAL
Board of
Directors Regulators
Managers Customers
STAKEHOLDERS
Community
Employees
Shareholders Suppliers
or Owners
Corporate governance specifies: the relationships between, and the distribution of rights and responsibilities
among, the main groups of participants:
INTERNAL SOURCES
a) The Board of Directors: A board of directors is a group of individuals, elected to represent

shareholders.
b) The Managers: An individual who is in charge of a certain group of tasks, or a certain subset of
a company.
c) The Employees: The employees are the important stakeholders of the corporate and their
growth is directly related to the growth of the corporate. The unity and hard work of manpower
would result in converting all material resources into economic resources.
d) The Shareholders or Owners: A shareholder, commonly referred to as a stockholder, is any
person, company, or institution that owns at least one share of a company’s stock.
EXTERNAL SOURCES
a) The Regulators: The Regulators comprising of various governments, local authorities,

statutory corporations engaged in implementing various statutes and rules with a view to
ensure compliance by the corporate
b) The Customers: The entire focus of the Corporates operations at all levels must be customer
oriented. The application of good corporate governance has received urgent attention in meeting
the expectations of the customers in a time bound and cost effective service.
c) The Community: People affected by the actions of the organization
d) The Suppliers: The suppliers supply materials to the corporate entity.
BOARD OF DIRECTORS
(Frequently asked question)
A board of directors is a group of people who jointly supervise the activities of an organization.
Consists of elected individuals who serve as advisors to a company and act as a representative for
shareholders.
Corporate governance is mainly vested in the Board of Directors. Corporate governance refers to the
accountability of the board of Directors to all other stakeholders of the corporation that is shareholders,
employees, suppliers, customers and society in general; towards giving the corporation a fair, efficient and
transparent administration. It gives ultimate authority and complete responsibility to Board of Directors.
The board delegates to the CEO and through him or her to other senior management, the authority and
responsibility for managing the everyday affairs of the corporation. Directors monitor management on
behalf of the corporation’s stockholders.
Roles and Functions
a) Planning for management succession: The board should plan for CEO and senior management
succession and when appropriate, replace the CEO or other members of senior management.
b) Understanding, reviewing and monitoring Implementation of the corporation’s strategic plans:
Once the board reviews a strategic plan, the board should regularly monitor implementation of the
plan to determine whether it is being implemented effectively and whether changes are needed.
c) Understanding and reviewing annual operating plans and budgets: The board should monitor
implementation of the annual plans to assess whether they are being implemented effectively and
within the limits of approved budgets.
d) Focusing on the corporation’s financial statements and financial reporting: Ensure that the
corporation’s financial statements and other disclosures accurately present the corporation’s
financial condition and results of operations to stockholders.
e) Engaging outside auditors and considering independence issues: The board, through its audit
committee, bears responsibility for an ongoing communication with an outside auditor to audit the
financial statements
f) Advising management on significant issues facing by the corporation: Directors can offer
management a wealth of experience and a wide range of perspectives.
Reviewing and approving significant corporate actions: the board reviews and approves specific
corporate actions, such as the election of executive officers, declaration of dividends and
appropriate major transactions. The board and senior management should have a clear
understanding of what level or types of decision.
g) Require specific board approval.
h) Business resiliency can include such items as business risk assessment and
management, business continuity, physical and cyber security, and emergency
communications.
i) Nominating directors and committee members and overseeing effective corporate
governance: It is the responsibility of the board and its corporate governance
committed to nominate directors and 'committee members and to oversee the
composition, structure, practices and evaluation of the board and its committees.
DIRECTORS
A director is one of those persons, who are responsible for directing, governing, and
controlling the policy or management of a company. All directors are collectively called as
board of directors. They are the top administrative organ and the company can operate only
through them.
Legal Position of Directors (Types of Directors)
I. Directors as Agents: A company as an artificial person acts through directors who

are elected representatives of the shareholders and who execute decision making for
the benefit of shareholders.
II. Directors as employees: When the director is appointed as whole-time

employee of the company then that particular directors shall be considered as
employee director or whole-time director.
III. Directors as officers: Director treated as officers of a company. They are liable
to certain penalties if the provisions of the companies act are not strictly complied
with.
IV. Director as trustees: (Previous year question – PART A)
Directors are trustees of the company’s money and property. They safeguard them and use
them for and on behalf of the company. According to Law of Trust, a trustee holds legal
ownership over the trust property of which the equitable ownership lies with the cestui que
trust, i.e. the beneficiary. From this viewpoint directors are not full- fledged trustees.
A trustee can make contracts in respect of the trust property in his own name but the
directors cannot do so. They can make such contracts under the common seal of the
company. The company is the legal owner. In the Companies Act, the duties and rights of a
trust are not defined as they are defined in the Law of Trust.
In fact, the position of directors is of fiduciary nature with power delegated on them by the
members. The directors, as trustees in limited sense, shall act in good faith. The directors do
not hold any fiduciary relationship with individual members of the company. The directors

are not trustees of a debt due to a company or for the company’s creditors. The directors are,
as such, quasi-trustees.
V. Director as “Officer” : “officer” includes any director, manager or key managerial

personnel or any person in accordance with whose directions or instructions the
Board of Directors are accustomed to act.
APPOINTMENT OF DIRECTORS:
According to Section 2(34) of Companies Act, 2013 a director is a person who is appointed as
director in the company. Only an individual shall be eligible to be appointed as director
because in case of corporates and firms it will be difficult to fix duties and responsibilities.
Minor cannot be a director because of the ineligibility to obtain Director Identification
Number (Section 152(3)). As per Section 149(3), at least one director has to be an Indian
resident.
In Indian States Bank Ltd. v. Sardar Singh, it was held that it is necessary that management
of companies should be in proper hands.
Minimum number of directors - In case of public company it is 3, private company 2 and one
Person Company 1.
Maximum number of directors - It is 15 but more can be appointed by passing a special

resolution. Requirement of special resolution is not needed in Government Company and
company licensed under section 8 subject to condition.
No person shall hold directorship in more than 20 companies and 10 in case of public company
as per section 165 of the Companies Act. For counting the limit, dormant company and
company licensed under section 8 subject to condition are excluded.
Types of Directors:
 Executive Director– A director who is employed in the company and closely witness daily
affairs of the company are known as executive directors. They possess deep knowledge of
the company. This class includes managing directors and whole time directors also.
 Non- Executive directors– Directors who are neither employed nor are they closely involved
in the day to day management of the company are known as non-executive directors. This
class majorly includes professional directors, nominee directors etc. who have unbiased
attitude towards the company.
Rotational Directors– In case of companies other than private company and certain
government company, not less than two third of the directors shall retire by rotation. Articles
of Association may specify retirement of all the directors by rotation. Not less than one third
of rotational directors are liable to retire either by lots or agreement. Retiring director cannot
hold office beyond the last date of AGM. While counting the total number, independent
directors and nominee director appointed by financial institution are not included.

 Non-rotational directors– Directors other than rotational are non-rotational directors.
 First director– Directors specified in the articles at the time of incorporation. If not specified
then shall be selected by majority of memorandum subscribers as per Table F and if Table F
is not applicable then all the subscribers are first directors. They are appointed till the
company appoints subsequent directors.
 Manager/ Managing Director/ Whole time directors–
As per section 203, every listed company or any public company having paid up share capital
of more than 10 crores or a company not falling under above two but having paid up share
capital of more than 5 crores is required to appoint managing director/manager/whole time
director, company secretary and chief executive officer.
A person who fits in the definition provided in the section 2(54) of the Act is known as
managing director of the company. Similarly Manager is defined under section 2(53) and
whole time director in section 2(94). No such person can be appointed for a period of more
than 5 years although such restriction is not applicable on private company. Section 196
provides with the appointment of such key managerial persons. Such person must be
resident of India, aged between 21 to 70 years (subject to condition for above 70 years) and
all other eligibility criteria as per schedule V.
 Independent directors (Previous year question – PART A) – As the name suggests such
directors are not related in certain ways with the company. They are not Managing directors,
whole time directors or nominee directors, such directors have to comply with the criteria
given in section 149(6). An independent director can be appointed for a consecutive period
of not more than 2 years then a gap of 3 years is required before their reappointment in the
same company for the same position.
Every listed public company shall have not less than one third of its directors as independent.
Following prescribed public companies shall have minimum of 2 independent directors:-
1. whose paid up share capital is of 10 crores or more
2 whose turnover is of 100 crores or more
3. whose outstanding loans, debentures, and deposits in aggregate exceeds 50 crores.
A joint venture, wholly owned subsidiaries and dormant companies need not have such
directors. If a company has audit committee then, more than half shall be independent
directors.
For example, if a public company has paid up share capital of Rs. 12 crores and has 7 members
in audit committee then minimum number shall be 4 i.e. more than half of 7.
 Nominee director– Such directors are appointed by third party subject to the articles of
the company in pursuance with the law or any provisions for the time being in force. For
example a director appointed by bank.

 Woman director- (Previous year question – PART A)
As per the Companies Act, 2013, it is mandatory to appoint at least one woman director as a
board member in certain types of companies. The penalty for non-compliance of provision
extends to a fine of Rs.10,000 with a further fine of Rs.1000 per day if the contravention
continues.
Criteria:
A company, whether a public company or a private concern, will be required to mandatorily

appoint at least one woman director if it fulfils any of the following criteria:
1. It is a listed company whose securities are listed on any stock exchange.

2. It is a company having paid-up capital of Rupees one hundred crore or more, and a
turnover of Rupees three hundred crores or more.
Procedure for Appointment of Woman Director
A Woman Director can be appointed during the time of company registration or after
incorporation by the Board Members and the Shareholders.
Roles of Women Directors
Women director has to play the role like any other director. Women can take up a role of
Nominee Director who will be nominated by a party in the company to take care of its
interest. Also, Women can take up a role of Independent Director who is not liable to retire
by rotation.
Women Directors can hold a maximum of twenty directorships that includes the sub-limit of
ten public companies. Any contravention on this part shall be subjected to a fine ranging
between Rs.5000-Rs.25000.
Vacancy in the Position of a Women Director
A Woman Director may leave the company on any reasons such as resignation, removal,
automatic vacation or retirement by rotation before the expiry of her term as a Director.
The Board of Directors must fulfill this vacancy known as intermittent vacancy within a
period of three months.
A company can also have more than one woman director and the vacancy caused by one of
them will not be considered as an intermittent vacancy, as the company still satisfied the
Companies Act of 2013 with respect to Women Directors.

Term of Women Director
A woman director can hold the position of Director until her next Annual General
Meeting from the date of appointment. She is also entitled to seek for reappointment at the
general meeting. The tenure of women director is liable to retirement by rotation similar to
other directors. Like any other director, a Woman Director can also tender her resignation
any time before the expiry of her term by giving a notice to the company.
 Additional director– All public or private companies can appoint additional director but the
articles should allow for the same and such person shall not fail to be appointed as director in
general meeting. Such director can be appointed in board meeting or passing resolution by
circulation. Such director cannot hold office beyond the next AGM or the due date on which
such AGM is ought to be conducted.
For example, a company did not organise AGM till 30th September but the additional director
in any case cannot hold office beyond 30th September. In case company acquires permission
from prescribed authority to hold AGM at a later date then that date shall be the last date for
additional director which should not be any date later than 31st December.
 Alternate director– When a director is leaving India for a period of 3 months then Board may
appoint an alternate director (who is not director in the same company nor holding alternate
directorship for anyone else in the same company) by articles or passing special resolution.
He/she shall have same position as of original director. He shall hold the post till the director
in place of whom he is appointed returns back or the period of holding office of the original
director comes to an end.
 Directors by small shareholders– Only listed companies whose shareholders having nominal
value of less than 20000 proposes to appoint a small shareholder’s director have to give
notice atleast 14 days before the meeting. 1000 small shareholders or 10% of total number
of shareholders whichever is lower is required to give such notice. Such a director shall not
be appointed for a period of more than 3 consecutive years then a cooling period of 3 years
before such appointment in the same company. A person can hold such directorship in two
companies maximum, second one not being the competitor of the first one. Grounds of
disqualifications, vacation of office, independent director are as it is applicable on such
directors as well.
Casual vacancy– Such vacancy can be filled by board if the director vacating the position was
appointed in general meeting. Although there is no obligation to fill such vacancy. Term of
such director shall not exceed the term of director for whom such vacancy was filled.
Proportional representation– Except for the government companies, to avoid the situation
of dominance of majority voting hands over the minor ones a company can appoint not less
than 2/3rd of directors by proportional representation so that minority shareholders are not
deprived of their powers and rights in the company.
Every person has right to showcase his ability to stand in the position of director in the public
company. As per section 160 of the Act, any person can give his signed candidature at the
registered office of the company atleast 14 days prior to the meeting with a deposit of Rs. 1

lakhs (Rs. 10000 in case of Nidhi company). Such amount is refunded if the person acquires
such position or he gets atleast 25% of votes in favour.
General points:
 Director cannot assign his office even though articles provide.
 Any director wishing to attend board meeting through video conferencing has to
inform the company of his intentions in the beginning of the year.
 Sitting fees for all the directors irrespective of gender or position shall be decided
indiscriminately which shall not exceed Rs.1 lakh per meeting.
 As per section 162 a separate resolution at general meeting has to be passed for
appointment for every director. No single resolution can be passed for appointment
of more than 1 director unless a resolution has been passed with all votes casted in
favour of passing a single resolution subject to other conditions specified in section
162.
 Notice of any meeting shall be given to every director whether he is in abroad, has
informed about his absence or any reason.
 BR Kundra v. Motion Pictures Assn, it has been held by the Delhi High Court that
directors cannot prolong their tenure by not holding a meeting in time. They
would automatically retire from office on the expiry of the maximum permissible
period within which a meeting ought to have been held.
 Swapan Dasgupta v. Navin Chand Suchanti it was held that where a director to
be rotated out is also holding the office of managing director, the latter office will
also vacate with the former, but expiry of the term of, or removal from managing
directorship, does not entail the cessation of his office as a director
 In S. Pazhamalai v. Aruna Sugars Ltd. it was held that it is not necessary for
proposing a candidate by a special notice that the requirements of section 111
relating to circulation of member’s resolution be complied with.
 Namita Gupta v. Cachar Native Joint Stock Co Ltd. it was held that non-
compliance with the requirements of procedure renders the appointment void. In
this case the members were not informed.
 Prakash Roadlines Ltd. v. Vijaykumar Narang it was held that on receiving a
notice the company becomes bound to inform the members and has no discretion
in the matter.
Types of Appointment:
1.) Appointment of Director by Nomination (S.161)
Every holder of 10% shares shall have the right to nominate a director on the board the
Board may appoint any person as a director nominated by any institution in pursuance

of the provisions of any law for the time being in force, or of any agreement or by the
Central Government or the State Government by virtue of its shareholding in a
Government company.
2.) Appointment by Voting on Individual Basis (S. 162)
At a general meeting of a company, a motion for the appointment of two or more

persons as directors of the company by a single resolution shall not be moved unless a
proposal to move such a motion has first been agreed to at the meeting without any
vote being cast against it. A motion for approving a person for appointment, or for
nominating a person for appointment as a director, shall be treated as a motion for his
appointment. A person who has been appointed as a director for the first time is required
to submit within 30 days of his appointment a written consent to act as a director to the
Registrar of companies.
3.) Appointment by Proportional Representation (S. 163)
It is apparent from that the basic method adopted for the appointment of directors is
election by simple majority. All the directors of a company can, therefore, be appointed
by a simple majority of shareholders and a substantial minority cannot succeed in placing
even a single director on board. Section 163 provides opportunity to the minority to
place their representatives on the board. This provision enables a company to provide
in its articles the system of voting by proportional representation for the appointment
of directors. It is devised to make minority votes effective.
4.) Appointment by Board (S.161)
While the general power to appoint directors is vested in the general meeting of
shareholders, there are at least two cases when the board can also appoint new
directors. Firstly, articles may empower the directors to appoint additional directors
subject to the maximum number fixed therein. In BN Viswanathan v. Tiffins Baryt
Asbestos (P) Ltd. there was conflict between the general meeting and the directorate it
was held that at the time of general meeting there was no director validly in office and,
therefore, the members had the right to elect.
In Ram Kissendas Dhanuka v. Satya Charan Law held that the articles may, however, be
so expressed as to delegate the power of appointing new directors to the board to the
exclusion of the general meeting.
5.) Appointment by the Tribunal (S. 242(j))
The Company Law Tribunal has power to appoint directors for prevention of oppression
and mismanagement. In Rolta India Ltd. v. Venire Industries Ltd. an agreement between
groups of shareholders not to increase the number of directors and capital of the
company and also not to do anything disturbing the existing pattern of management was

held to be not binding on the company so as to prevent it from doing any of those things.
Disqualification of directors
(Section 164)- Following are not eligible to be a director-

1. A person of unsound mind
2. Undischarged insolvent
3. Person applied for to be adjudicated as an insolvent and his application is pending.
4. A person who has been imprisoned for more than 6 months and 5 years have not
elapsed.
5. Court or Tribunal disqualifying such person
6. A person who has not paid any call on share and 6 months have elapsed.
7. Convicted in offence of related party transaction in preceding 5 years.
8. A person who has not been allotted with DIN (Director Identification Number.
REMOVAL OF DIRECTORS (Previous year question – PART C)
I. Removal by shareholders
A company may, by ordinary resolution, remove a director before the expiration
of his period of office. The English Companies Act, after providing same
provision, adds “notwithstanding anything in its (company’s) articles or any
agreement between it and him.” These words are not provided in the Indian
provision, but same effect would follow as any provision in the company’s
articles or in any agreement between a director and the company by which the
director is rendered irremovable by an ordinary resolution would be void, being
contrary to the Act. This provision intended to do away with arrangements
under which directors were either irremovable or removable only by
extraordinary resolutions.
As held in Tarlok Chand Khanna v. Raj Kumar Kapoor Power to remove directors has
always been bestowed on shareholders, as we all know that at the end of the day, directors
are answerable to shareholders. Nothing has changed in the procedural aspect under
Companies Act, 2013 as well. Shareholders can remove any director before the expiry of
his tenure, except any director appointed by Tribunal for prevention of oppression and
mismanagement (S.242) and a director appointed under principle of proportional
representation. (S. 163)
 Section 115, 169 and deals with the procedure of removal of director by
shareholders as follows:
a.) Special Notice to Company: Only shareholder/s holding not less than 1% of total
voting power or holding shares on which an aggregate sum of not less than Rs. 5,00,000

has been paid up as on the date of notice, can send special notice to the Company for
removal of director. The same should be signed by the concerned shareholder/s.
b.) Date of meeting: Above mentioned shareholders have the right to decide the date of
meeting. However, the special notice shall be sent not earlier than three months but at
least 14 clear days before the date of the meeting (Gopal Vyas v. Sinclair Hotels &
Transportation Ltd), at which the resolution is to be moved.
c.) Intimation to Director: The Company shall forthwith send a copy of the notice to the
concerned director.
d.) Reasonable Opportunity of being heard: The Director may request to send his
representations along with the notice to the members and to be heard at the meeting.
However, the rights may not be available, if on the application either of the Company
or of any other person who claims to be aggrieved, the Tribunal is satisfied that the rights
conferred by this subsection are being abused to secure needless publicity.
e.) Intimation by Company to all shareholders: Company shall take immediate steps to
send the notice to its members, at least 7 clear days before the meeting. The notice has
to be sent in the same manner as in case of any other general meeting of the Company.
f.) Publication in Newspapers: If it is not practicable to give the notice as

aforementioned, then notice shall be published in English language in English newspaper
and in vernacular language in a vernacular newspaper, both having wide circulation in
the State where the registered office of the Company is situated. At the same time, the
notice shall also be posted on the website, (if any). However, it shall be published at least
7 clear days before the meeting.
g.) Convening of General Meeting: Members may pass remove the director by passing
ordinary resolution.
h.) Appointment of director in place of removed director: The shareholder/s may

recommend appointment of any other director in place of removed director through
special notice. Such a director can only hold office till the tenure of removed director.
i.) Casual Vacancy: If a new director is not appointed as aforementioned, then Board may
fill the position through casual vacancy, however the removed director shall not be re-
appointed as a director by Board.
j.) Vacation of Office: When a director is removed as aforementioned, his office vacates
automatically.
II. Removal by Company Law Tribunal - S. 242(2)(h)
When, on an application to the Tribunal for prevention of oppression or

mismanagement, it finds that a relief ought to be granted, it may terminate or set aside
any agreement of the company with a director or managing director or other managerial

personnel. When the appointment of a director is so terminated he cannot, except with
the leave of the Tribunal, serve any company in a managerial capacity for a period of 5
years. (S.243 (1)(b)). It is necessary that the Central Government should be notified of
the intention to apply for such leave. This is to enable the Tribunal to hear the Central
Government’s point of view on the matter of leave. Neither can he sue the company for
damages or compensation for loss of office.
III. Resignation by Director (S.168)
A director may resign from his office by giving a notice in writing to the company. On
receiving it, the board has to take notice of the same. The company has then to intimate
the Registrar in such manner, within such time and in such form as may be prescribed.
The company has to place the fact of such resignation in the report of directors laid in
the immediately following general meeting of the company. The director has also to
send a copy of his resignation with detailed reasons to the Registrar within 30 days of
the resignation in the prescribed manner. The resignation takes effect on the date on
which it is received by the company or the date specified in the notice whichever is later.
IV. Vacation of Office by Directors (S.167)
The office of directors is vacated in the following cases:
i. when he incurs any of the disqualifications specified in section 164;
ii. he absents himself from all the meetings of the Board of Directors held during a
period of twelve months with or without seeking leave of absence of the Board;
iii. he acts in contravention of the provisions of section 184 relating to entering into
contracts or arrangements in which he is directly or indirectly interested;
iv. he fails to disclose his interest in any contract or arrangement in which he is

directly or indirectly interested, in contravention of the provisions of section 184;
v. he becomes disqualified by an order of a court or the Tribunal;
vi. he is convicted by a court of any offence, whether involving moral turpitude or

otherwise and sentenced in respect thereof to imprisonment for not less than six
months: Provided that the office shall be vacated by the director even if he has filed
an appeal against the order of such court;
vii. he is removed in pursuance of the provisions of this Act;
viii. he, having been appointed a director by virtue of his holding any office or other
employment in the holding, subsidiary or associate company, ceases to hold such
office or other employment in that company.
A director is obliged at the pain of penalty to leave office when he incurs any of the
disqualifications. If a person, functions as a director even when he knows that the

office of director held by him has become vacant on account of any of the
disqualifications specified in sub- section (1), he shall be punishable with
imprisonment for a term which may extend to one year or with fine which shall not
be less than one lakh rupees but which may extend to five lakh rupees, or with both.
Where all the directors of a company vacate their offices under any of the
disqualifications specified in sub-section (1), the promoter or, in his absence, the
Central Government shall appoint the required number of directors who shall hold
office till the directors are appointed by the company in the general meeting. A
private company may, by its articles, provide any other ground for the vacation of
the office of a director in addition to those specified in sub-section (1).
POWERS OF DIRECTORS (S.179)
 to make calls on shareholders in respect of money unpaid on their shares;

 to authorise buy-back of securities under section 68;
 to issue securities, including debentures, whether in or outside India;
 to borrow monies; v. to invest the funds of the company;
 to grant loans or give guarantee or provide security in respect of loans;
 to approve financial statement and the Board’s report;
 to diversify the business of the company;
 to approve amalgamation, merger or reconstruction;
 to take over a company or acquire a controlling or substantial stake in another
company;
 any other matter which may be prescribed.
DUTIES OF DIRECTORS
The Companies Act, 2013 has in section 166 made a statutory formulation of director’s
duties. They are mentioned as follows:
1. Director to act in accordance with articles of the company.

2. A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, the community and for the protection of
environment.
3. A director of a company shall exercise his duties with due and reasonable care, skill
and diligence and shall exercise independent judgment.
4. A director of a company shall not involve in a situation in which he may have a direct
or indirect interest that conflicts, or possibly may conflict, with the interest of the
company. A director of a company shall not achieve or attempt to achieve any undue
gain or advantage either to himself or to his relatives, partners, or associates and if
such director is found guilty of making any undue gain, he shall be liable to pay an
amount equal to that gain to the company.

5. A director of a company shall not assign his office and any assignment so made shall
be void.
Fiduciary Duties (Previous year question – PART A)
Directors are regarded as having ‘fiduciary duties’ owed to the company. Fiduciary duties
underpin the important legal relationship between the director and company. They are
based on notions of trust and good faith and cannot be compromised.
Directors must not place themselves in a position where they are unable to make
decisions in the best interests of the company.
A list of the fiduciary duties owed to the company follows:
 the duty to act in the interests of a company as a whole;

 the duty not to act for an improper purpose;
 the duty of care and diligence;
 the duty to retain discretion;
 the duty to avoid conflicts of interest;
 the duty not to disclose confidential information.
LIABILITIES OF DIRECTORS
Director liability in India can be divided into two principal areas:
(1) liability under the Companies Act of 1956 which has now transitioned to the
Companies Act of 2013
(2) liability under other Indian statutes. There has been a seminal shift in the Indian
corporate legal regime with the enactment of the 2013 Act and more recent
amendments. For instance, penalties under the 1956 Act that were seen as
ineffective have been significantly amplified under the 2013 Act.

OFFICERS OF COMPANY
The officers handle the day-to-day operations of the business, Officers of a company are
appointed by the Board to Directors to hold various top level roles and responsibilities within
the company. There is no statutory requirement for appointment of officers in a company.
However, Directors are statutorily required to be appointed for all company by its
shareholders. Some of the most popular types of officers of a company are:
Chief Executive Officer: Chief Executive Officer (CEO) is the highest-ranking person in a
company who is ultimately responsible for taking managerial decisions for the day to day
operation of the company.
Chief Operating Officer: Chief Operating Officer (COO) is a senior executive who oversees
ongoing business operations within the company. COO reports to the CEO (Chief Executive
Officer) and is usually second-in-command within the company.
Chief Financial Officer: Chief financial officer (CFO) is a senior financial executive with
responsibility for the financial affairs of a company. Typical responsibilities of the CFO include
planning, budgeting, bookkeeping, accounting, setting up of internal controls, fund raising
and other accounting/financial matters.
Chief Technology Officer: Chief Technology Officer (CTO) is a senior technology
executive within a company who oversees current technology development and maintenance
aspects. Typical responsibilities of a CT include aligning of technology-related decisions with
the company’s goals, managing technology development, maintaining technology assets and
create technology policies.
Chief Marketing Officer: Chief Marketing Officer (CMO) is a senior marketing executive within
a company who is involved in a wide variety of tasks like increasing revenue, improving brand
image and managing marketing campaigns. CMO works directly with sales, marketing, and
development departments to integrate marketing strategies in all divisions of the company.
Chief Legal Officer: Chief Legal Officer (CLO) is a senior legal executive within a company who
helps the company reduce its legal risks by advising the company and its employees or
stakeholders on major legal and regulatory issues the company confronts and manage
litigation risks.
Company Secretary: The Company Secretary is in charge of maintaining and keeping
company records, documents, and "minutes" from shareholder meetings.

OFFICER IN DEFAULT
One of the key concepts of the Companies Act is the meaning of the term “officer who
is in default.” Under the act, liability for default by a company has been imposed on an
officer who is in default. By virtue of their positions in the company, the managing
director, the whole-time director, and the company secretary directly fall within the
scope of this term.
The 2013 Act corrects this anomaly and significantly expands the scope of the expression
“officer in default.”
1. Any individual who, under the superintendence, control, and direction of the
board of directors, exercises the management of the whole, or substantially the
whole, of the affairs of a company;
2. Any person on whose advice, directions, or instructions the board of directors is

accustomed to act, other than persons giving advice in a professional capacity; and
3. Every director aware of wrongdoing by virtue of knowledge of or participation

in proceedings of the board without objection.
INSIDER TRADING
Insider trading is defined as a malpractice wherein trade of a company's securities is

undertaken by people who by virtue of their work have access to the otherwise non-public
information which can be crucial for making investment decisions.
When insiders, e.g. key employees or executives who have access to the strategic information
about the company, use the same for trading in the company's stocks or securities, it is called
insider trading and is highly discouraged by the Securities and Exchange Board of India to
promote fair trading in the market for the benefit of the common investor.
Insider trading is an unfair practice, wherein the other stock holders are at a great
disadvantage due to lack of important insider non-public information. However, in certain
cases if the information has been made public, in a way that all concerned investors have
access to it, which will not be a case of illegal insider trading.

Type of Insider Trading
The insider trading is of two types:
a) Legal Insider Trading
b) Illegal Insider Trading
a) Legal Insider Trading : Insider trading takes place legally every day, when corporate
insider- officers, directors or employees - buy or sell securities of their companies within
the confines of company policy and the laws governing insider trading. Such kind of
trading does not involve the misuse of price sensitive unpublished information of
company by insiders (The persons who receive any unpublished price sensitive
information from the insiders also called as tippees). Insiders are not common investors
as such but are under statutory duty to report their trading to the companies who forward
the same to stock exchanges and securities regulatory bodies.
b) Illegal Insider Trading: Illegal insider trading occurs when a person in possession of price
sensitive information about the company, buys or sells shares in that company and so
obtains better terms in contracts of sale than would have been the case, had the
counterparty been aware of the information in question. In this way the insider can either
make a profit or avoid a loss depending on, whether information once public will drive
the share price up or down. Since insiders cannot be permitted to do indirectly what they
cannot do directly, the communication or counselling or procurement, directly or
indirectly of any unpublished price sensitive information to any person is also prohibited.
The Tippees are prohibited from dealing on the basis of inside information.

LAW ON COMPANY MEETINGS
Meetings of a company are powerful business processes through which a company can
keep its organization on track, increase and create new network and help to arrive at a
consensus on crucial or urgent matters related to the company through personal or
online interaction.
Company meetings can be categorized to meeting of Directors, Shareholders and
Creditors & Debenture holders meeting.
COMPANY MEETING
DIRECTORS SHAREHOLDERS CREDITORS & DEBENTURE

HOLDERS
BOARD MEETING
BOARD COMMITTEE MEETING
EXTRA-ORDINARY GENERAL
CLASS MEETING
ANNUAL GENERAL MEETING
DEBENTURE HOLDERS MEETING

STATUTORY MEETING
CREDITORS’ MEETING IN
COMPANY’S LIFETIME
CREDITORS’ MEETING
DURING WINDING UP
MEEETING
From the above chart, it can be understood that a company meeting can be convened
by both members as well as non-members.
MEETING OF DIRECTORS
a) Board Meeting
Directors are collectively called “Board”. Board has power of management of a
company. Their powers can be exercised at the board meeting. Eg: Power to make
calls on shares, issue debentures, borrow money, invest, make loans, delegate the
power to invest, borrow or make loans, etc:
Board meeting can be called by any director directly or through the company

secretary. At least 4 Board meetings must be held in a year.
b) Board committee meeting
Sometimes the board delegates some of its power to two or more directors. Such
delegates may themselves form a committee and hold meetings. They recommend their
resolutions to the board.
Meeting of Shareholders (Previous year question – PART C)
• Statutory Meeting (Previous year question – PART A)
It is he first meeting of the shareholder. Object of this meeting is to discuss the statutory
report. Statutory report is prepared and verified and presented by the director. It contain full
details regarding shares, expenses related to the shares, details of the directors, secretary,
agents etc: Details set out in the statutory report should be certified by the company auditors.
Public limited company and limited company must compulsory hold statutory meeting after
one month before 6 months from the date on which the company was allowed to start
business.
• Annual General Meeting (Previous year question – PART A)
Every company must hold a yearly called Annual General Meeting (AGM) of shareholders. The
object of the AGM is to review and evaluate the overall progress, financial condition and
working of the company during the year. Only one AGM can be held in a year. In an AGM,
decision taken can be passed by ordinary resolution or special resolution. Decisions requiring
only ordinary resolutions are Annual Accounts, Report of the Board, Auditors, Appointment
of Auditors, Declaration of dividends, and Appointment of directors. AGM must be held at the
registered office of the company. It must be held every year within 6 months of the closing of
the financial year. There shouldn’t be any interval of 15 months between 2 AGMs.
If AGM couldn’t be held in time, then the registrar of company may extend time upto 3
months.
Kastur Mal bandhiya V. State (1951)
Where there was only 2 members of a company, and AGM couldn’t be held due to the
illness of one member, it was held to be genuine reason.
PSNSA Chettiyar & Co. V. ROC (1966)
Failure to hold AGM was due to non-preparation of important account books due
to criminal case against the company secretary. It was held that it cannot be
considered as genuine reason.
• Extra Ordinary General Meeting
Any Meeting of shareholders other than AGM or statutory meeting. Object is to disclose
and decide some urgent special business. It can be called at any time by the board. The

board can also call an EGM on the request of at least 1/10 of the members. Such members
should be having paid up shares and the right to vote. EGM is usually called for the
removal director, alteration of MOA and AOA, alteration share capital and issue of
Debenture.
Cricket club of India V. Madhav Apte (1975)
Directors cannot refuse to hold EGM on any ground. In this case, the director refused to
hold the EGM on the ground that the resolution to be part at the meeting would be
contrary to the companies Act. Court rejected this view and held that such matters are to
be decided by the court. The directors are bound to call an EGM when required to do so.
If the board or any of the directors refused to hold EGM, the other directors and/or the
members/shareholders can themselves call an EGM within 3 months from the date of
request if it is not possible to do so, then they may be apply to the company law board
(CLB) to pass an order to hold the EGM. Company law board may also suo moto order to
hold EGM.
Baptist Church Association case
CLB must use this power to order the holding of EGM very carefully only when it is
impracticable to hold EGM by other ways. Eg: Due to serious disputes and indifference
between Directors and shareholders or between Directors themselves etc:
• Class Meeting
There are difference classes of shares like Equality Shares, preference shares, Cumulative
preference shares etc. Meeting of a particular class of shareholders is called class meeting. It
is usually called when the company proposes to make some changes in a particular class of
shares which will affect the right of shareholders. Eg: If the company proposes to cancel some
dividends on cumulative preference shares, then a class meeting of cumulative preference
shareholders must be called and then consent by ¾ th majority must be obtained (special
resolution). In a class meeting, only the shareholders of that particular class has the right to
participate.
Meeting of Creditors & Debenture holders

Meeting of debenture holders can be held for changing or modifying any rights
related to debentures like right of interest, security etc.
Meeting of creditors can be held during the lifetime of the company when the
company wants to make some compromise 9or settlements with its creditors. Such
compromise must be passed by special resolution and approved by the company Law
Board. The CLB also has the power to order the holding of such meetings on an
application by a creditor or shareholder.
Meeting of creditors can be held during the winding up of the company. Also
object of the company is to determine the total amount due by the company to its

creditor and to appoint liquidators or inspection committees. Such meetings can be
called by the company or by its liquidator.
MOTIONS & RESOLUTIONS

Motion means a proposal to be discussed at a meeting by the members. A resolution
may be passed accepting the motion, with or without modifications or a motion may be
entirely rejected. A motion, on being passed as a resolution becomes a decision. A
motion must be in writing and signed by the mover and put to the vote of the meeting by
the chairman. Only those motions which are mentioned in the agenda to the meeting
can be discussed at the meeting. However, motions incidental or ancillary to the matter
under discussion may be moved and passed. Generally, a motion is proposed by one
member and seconded by another member.
Resolutions mean decisions taken at a meeting. A motion, with or without amendments

is put to vote at a meeting. Once the motion is passed, it becomes a resolution. A valid
resolution can be passed at a properly convened meeting with the required quorum.
Ordinary and special resolutions. —
(1) A resolution shall be an ordinary resolution if the notice required under this Act has
been duly given and it is required to be passed by the votes cast, whether on a show of
hands, or electronically or on a poll, as the case may be, in favour of the resolution,
including the casting vote, if any, of the Chairman, by members who, being entitled so to
do, vote in person, or where proxies are allowed, by proxy or by postal ballot, exceed the
votes, if any, cast against the resolution by members, so entitled and voting.
(2) A resolution shall be a special resolution when—
(a) the intention to propose the resolution as a special resolution has been duly
specified in the notice calling the general meeting or other intimation given to
the members of the resolution;
(b) the notice required under this Act has been duly given; and
(c) the votes cast in favour of the resolution, whether on a show of hands, or
electronically or on a poll, as the case may be, by members who, being entitled
so to do, vote in person or by proxy or by postal ballot, are required to be not less
than three times the number of the votes, if any, cast against the resolution by
members so entitled and voting.
Resolutions requiring special notice. —
Where, by any provision contained in this Act or in the articles of a company, special

notice is required of any resolution, notice of the intention to move such resolution shall
be given to the company by such number of members holding not less than one per
cent. of total voting power or holding shares on which such aggregate sum not
exceeding five lakh rupees, as may be prescribed, has been paid-up and the company
shall give its members notice of the resolution in such manner as may be prescribed.
Resolutions passed at adjourned meeting. —
Where a resolution is passed at an adjourned meeting of—
(a) a company; or
(b) the holders of any class of shares in a company; or
(c) the Board of Directors of a company,
the resolution shall, for all purposes, be treated as having been passed on the date
on which it was in fact passed and shall not be deemed to have been passed on any
earlier date.
Resolutions and agreements to be filed. —
 A copy of every resolution or any agreement, in respect of matters specified in sub-section

(3) together with the explanatory statement under section 102, if any, annexed to the
notice calling the meeting in which the resolution is proposed, shall be filed with the
Registrar within thirty days of the passing or making thereof in such manner and with such
fees as may be prescribed within the time specified under section 403:
Provided that the copy of every resolution which has the effect of altering the articles and
the copy of every agreement referred to in sub-section (3) shall be embodied in or annexed
to every copy of the articles issued after passing of the resolution or making of the
agreement.
 If a company fails to file the resolution or the agreement under sub-section (1) before
the expiry of the period specified under section 403 with additional fees, the company
shall be punishable with fine which shall not be less than five lakh rupees but which may
extend to twenty-five lakh rupees and every officer of the company who is in default,
including liquidator of the company, if any, shall be punishable with fine which shall not
be less than one lakh rupees but which may extend to five lakh rupees.
The provisions of this section shall apply to—
(a) special resolutions;
(b) resolutions which have been agreed to by all the members of a

company, but which, if not so agreed to, would not have been effective for
their purpose unless they had been passed as special resolutions;
(c) any resolution of the Board of Directors of a company or agreement

executed by a company, relating to the appointment, re-appointment or
renewal of the appointment, or variation of the terms of appointment, of
a managing director;
(d) resolutions or agreements which have been agreed to by any class of

members but which, if not so agreed to, would not have been effective for
their purpose unless they had been passed by a specified majority or
otherwise in some particular manner; and all resolutions or agreements
which effectively bind such class of members though not agreed to by all
those members;
(e) resolutions passed by a company according consent to the exercise by

its Board of Directors of any of the powers under clause (a) and clause (c)
of sub-section (1) of section 180;
(f) resolutions requiring a company to be wound up voluntarily passed in

pursuance of section 304;
(g) resolutions passed in pursuance of sub-section (3) of section 179
Provided that no person shall be entitled under section 399 to inspect or

obtain copies of such resolutions; and
(h) any other resolution or agreement as may be prescribed and placed in

the public domain.
Audit Committee Meeting
Audit committee has formation, rights and liabilities have been provided under
section 177 of the Act. It consists of a minimum of three directors along with
independent directors forming a majority. They can hold a meeting with respect to
the discussion of audit reports.
AUDIT COMMITTEE MEETING (Sec 177 read with rule 6 of Companies (meeting of
Board and its power)
Applicability:
- All Listed Companies
- All public Companies with a paid-up capital of 10 crore or more
- All public Companies having turnover of 100 crore rupees or more
- All public companies, having in aggregate, outstanding loans or borrowings or

debentures or deposit exceeding 50 crores or more as existing on the date of last
audited financial statements.

Composition: Minimum 3 directors with majority of directors shall be independent.
Majority of members of audit committee including chairperson shall have ability to
read and understand the financial statement.
Timeline: Every audit committee of a company existing before the commencement

of this Act shall be reconstituted as per the provisions of this Act within one year form
the commencement of this Act.
Power & Function
Audit committee shall accordance with the terms of reference specified in writing by board
which shall include:
a) The recommendation for appointment, remuneration and terms of appointment of

auditors;
b) Receive and monitor the auditor’s independence and performance and effectiveness of
audit;
c) Examination of financial statement and the report of auditors;
d) Approval of any subsequent modification of transactions of the Company with related

parties;
e) Scrutiny of inter corporate loans and investments;
f) Valuation of undertakings or assets of Company wherever necessary;
g) Evaluation of internal control and risk management systems;
h) Monitoring of end use of funds raised through public offers and related matters.
i) Audit Committee shall have authority to investigate into any matters in relation to matters
above mentioned ‘a to h’ or any other matters refereed to it by Board and for these purpose
to obtain external professional advice and full access to the information and records.
 Audit Committee may call comments of auditors about internal control systems, the
scope of audit, including observation of auditors and review of financial statement
before their submission to the Board and may also discuss any related issues
internal or statutory auditors and management of company.
Disclosure in Board Report Board report shall disclose the composition of audit committee
and shall also disclose the fact of not accepting its recommendation and the reason thereof.

VIGIL MECHANISM:
(Sec 177 with rule no. 7 of Companies (Meeting of Board and its Power) rules, 2014
Applicability:
- Every Listed Company
- Every Company which accept deposit from public or which have borrowed money
from Banks and PFIs in excess of Rs. 50 crores
Shall establish a vigil mechanism for their Directors and employees to report their
genuine concerns or grievances. The vigil mechanism shall provide adequate
safeguard and mechanism against victimization of persons who use such
mechanism and make provision to direct access to chairperson of Audit Committee
in appropriate and exceptional cases.
Companies which are required to constitute audit Committee shall oversee the
mechanism through the committee and if any of the members of the committee
have a conflict of interest in a given case they should rescue themselves and the
others on the committee would deal with the matter on hand.
RELATED-PARTY TRANSACTION
The term related-party transaction refers to a deal or arrangement made between two parties
who are joined by a pre-existing business relationship or common interest. Companies often
seek business deals with parties with whom they are familiar or have a common interest.
Although related-party transactions are themselves legal, they may create conflicts of
interest or lead to other illegal situations. Public companies must disclose these transactions.
 A related-party transaction is an arrangement between two parties that have a

preexisting business relationship.
 Some, but not all, related party-transactions carry the innate potential for conflicts of
interest, so regulatory agencies scrutinize them carefully.
 Unchecked, the misuse of related-party transactions could result in fraud and financial
ruin for all parties involved.
 American regulatory bodies ensure that related-party transactions are conflict-free
and do not affect shareholders' value or the corporation's profits negatively.

MEMBERS IN A COMPANY
WHO ARE MEMBERS? (Previous year question – PART A)
A company is composed of members, though it has its own separate entity. The
members of a company are the persons who, for the time being, constitute the company,
as a corporate entity.
In the case of a company limited by shares, the shareholders are the members. The
terms “members” and “shareholders” are usually used interchangeably. Thus, generally
speaking every shareholder is a member and every member is a shareholder.
However, there may be exceptions to this statement, e.g., a person may be a holder of
share(s) by transfer but will not become its member until the transfer is registered in the
books of the company in his favour and his name is entered in the register of members.
Similarly, a member who has transferred his shares, though he does not hold any shares
yet he continues to be member of the company until the transfer is registered and his
name is removed from the register of members maintained by the company under
Section 88 of the Companies Act, 2013.
In Herdilia Unimers Ltd. v. Renu Jain [1995], it was held that the moment the shares
were allotted and share certificate signed and the name entered in the register of
members, the allottee became the shareholder, irrespective of whether the allottee
received the shares or not.
In a company limited by guarantee, the persons who are liable under the guarantee
clause in its Memorandum of Association are members of the company.
In an unlimited company, the members are the persons who are liable to the company,
each in proportion to the extent of their interests in the company, to contribute the sums
necessary to discharge in full, the debts and liabilities of the company, in the event of its
being wound-up.
Definition of “Member‟
According to Section 2(55) of the Companies Act, 2013, member in relation to a company
means—
(i) the subscriber to the memorandum of the company who shall be deemed to
have agreed to become member of the company, and on its registration, shall be
entered as member in its register of members
(ii) every other person who agrees in writing to become a member of the company
and whose name is entered in the register of members of the company

(iii) every person holding shares of the company and whose name is entered as a
beneficial owner in the records of a depository
Accordingly, there are two important elements which must be present before a
person can acquire membership of a company. They are:
• agreement to become a member; and
• entry of the name of the person so agreeing,
in the register of members of the company. Both these conditions are cumulative.
[Balkrishan Gupta v. Swadeshi Polytex Ltd. (1985)].
The person desirous of becoming a member of a company must have the legal capacity
of entering into an agreement in accordance with the provisions of the Indian Contract
Act, 1972. Section 11 of the Indian Contract Act lays down that every person is
competent to contract who
 is of the age of majority according to the law to which he is subject.
 is of sound mind.
 is not disqualified from contracting by any law to which he is subject.
CORPORATE MEMBERSHIP RIGHTS

Members of a company have certain rights which can be exercised by members
collectively by means of democratic process. Corporate rights are the rights, which each
member has agreed to be exercised by majority at general body meetings. This involves
the principle of submission by all members to the will of the majority, provided that the
will is exercised in accordance with the law and the Memorandum and Articles of
Association of the company. Thus, the shareholders in majority determine the policy of
the company and exercise control over the management of the company.
Section 213 confers right to apply to Tribunal for relief in cases of oppression when the
majority becomes oppressive or is accused of mismanagement of the affairs of the
company to not less than one hundred members of a company or not less than one-tenth
of the total number of its members whichever is less or any member or members holding
not less than one-tenth of the issued share capital of the company (but they must have
paid all calls and others sums due on their shares) and in the case of a company not having
a share capital, not less than one-fifth of the total number of its members.
Section 100 of the Companies Act confers on members, holding not less than one-tenth
of the paid-up share capital of a company, right to requisition an extraordinary general
meeting of the company. The section also confers on members having not less than one-
tenth of the total voting power in a company not having a share capital, to requisition
an extraordinary general meeting of the company. If the Board of directors of the

company does not, within twenty-one days from the date of the deposit of a valid
requisition in regard to any matters, proceed to call a meeting for the consideration of
those matters on a day not later than forty-five days from the date of deposit of the
requisition, the meeting may be called by the requisitionists themselves.
It may be noted that mere appointment of a receiver in respect of certain shares of a

company without anything further cannot deprive the holder of the shares, whose name
is entered in the register of members of a company, the right to vote at the meetings of
the company or right to issue notice under Section 169 of the Companies Act. Such rights
are not affected by the attachment of the shares also.
In the event of a pledge of shares, the pawnee cannot be treated as the holder of the
shares, pledged in his favour and, therefore, the pledger continues to be a member and
can exercise his voting right and the rights under Section 100 [Balkrishan Gupta v.
Swadeshi Polytex Ltd., (1985)]
Voting Rights of Members
The right of attending shareholders’ meetings and voting there at is the most important
right of a member of a company, as shareholders’ meetings play a very important role in
the company’s life. Directors are appointed by the shareholders, who direct the affairs
of the company, formulate short-term plans and long-term policies of the company,
appoint management personnel to constitute organisation to implement their plans and
policies in order to achieve the objects of the company.
In view of the importance of the general meetings of a company, the Companies Act has
not left the members to the will of the directors to call general meetings. If the members
feel that the affairs of the company are not being properly managed by the directors and
the directors are avoiding to call a general meeting of the company, Section 100 of the
Companies Act confers right on its members to deposit a requisition and subsequently
to call a meeting within forty-five days by themselves.
Section 47 of the Act provides that every member of a public company limited by shares,
holding equity shares, shall have votes in proportion to his share of the paid-up equity
share capital of the company.
Preference shareholders ordinarily vote only on matters directly relating to rights

attached to preference share capital. A resolution for winding up of the company or for
the reduction of the share capital, will be deemed to affect directly the rights attached
to preference share and so they can vote on such resolutions.
In case of a public company where preference shares are cumulative as to dividend and
the dividend thereon has remained unpaid for an aggregate period of two years before
the date of any meeting of the company, the preference shareholders shall have right to

vote on every resolution before the meeting.
In the case of non-cumulative preference shares, preference shareholders have the right
to vote on every resolution if the dividend due on their capital remains unpaid either in
respect of a period of not less than two years ending with the expiry of the financial year
immediately preceding the commencement of the meeting or in respect of the aggregate
period of not less than three years comprised in the six years ending with the expiry of
the financial year aforesaid (Section 47).
Section 50 of the Act lays down that a company may, if authorised by its articles, accept
from any member the whole or a part of the amount remaining unpaid on any shares
held by him although no part of the amount has been called up. Such advance payment,
however, shall not confer on the member concerned any voting rights.
INDIVIDUAL SHAREHOLDER RIGHTS

Individual Rights – Companies Act-2013
Members of a company enjoy certain rights in their individual capacity, which they can enforce
individually. These rights are contractual rights and cannot be taken away except with the
written consent of the member concerned. These rights can be categorised as under:
1. Right to receive copies of the following documents from the

company:
i. Abridged balance-sheet and profit and loss account in the case of a listed
company and balance-sheet and profit and loss account otherwise (Section
136).
ii. Report of the Cost Auditor, if so directed by the Government.
iii. Contract for the appointment of the managing director/manager (Section

190).
iv. Notices of the general meetings of the company (Sections 101-102).
2. Right to inspect statutory registers/returns and get copies thereof on

payment of prescribed fee. The members have been given right to inspect the
following registers etc.:
i. Debenture trust deed (Section 71);

ii. Register of Charges (Section 87);
iii. Register of Members, Register of Debenture holders, Index of Members, Index of
Debenture holders and Annual Returns (Section 94);
iv. Shareholders’ Minutes Book (Section 119);

v. Register of Contracts, Companies and Firms in which directors are interested
(Section 189);
vi. Register of directors (Section 170);
vii. Register of Directors’ Shareholdings (Section 170); and
viii. Copy of agreement of appointment of the managing director/manager (Section
190)
The members can also get the copies of the aforesaid registers/returns on payment
of prescribed fee except those of Register of Directors and Register of Directors’
Shareholdings. Members can also get copies of memorandum and articles of
association on payment of a fee of Re. One (Section 17).
3. Right to attend meetings of the shareholders and exercise voting rights at

these meetings either personally or through proxy (Sections 96, 100, 105 and 107).
4. Other rights. Over and above the rights enumerated at Item Nos. 1 to 3
above, the members have the following rights:
i. To receive share certificates as title of their holdings [Section 46 read with the
Companies (Issue of Share Certificates) Rules, 1960].
ii. To transfer shares (Sections 44 and 56 and Articles of Association of the

company).
iii. To resist and safeguard against increase in his liability without his written
consent.
iv. To receive dividend when declared.
v. To have rights shares (Section 62).
vi. To appoint directors (Section 152).
vii. To share the surplus assets on winding up (Section 272).
viii. Right of dissentient shareholders to apply to court (Section 107 of 1956 Act).
ix. Right to be exercised collectively in respect of making application to the Central

Government for investigation of the affairs of the company (Section 210), and
for appointment of Government directors (Section 408 of 1956 Act).
x. Right to make application collectively to the Company Law Board for oppression
and mismanagement (Sections 397 and 398 of 1956 Act).
xi. Right of Nomination

PREVENTION OF OPPRESSION AND MISMANAGEMENT
The words oppression and mismanagement are not defined in the Act. The meaning of these
words for the purpose of Company Law should be used in a broad generic sense and not in any
strict literal sense.
The meaning of the term oppression as explained in Elder v. Elder & Western Ltd.,
(1952) which has been cited in Shanti Prasad v. Kalinga Tubes, (1965) is as under:
“The essence of the matter seems to be that the conduct complained of should at the lowest,
involve a visible departure from the standards of fair dealing, on which every shareholder who
entrusts his money to the company is entitled to rely.”
That is, there should be a visible distinction between the matter of oppression before the
court and the fair dealing the shareholder is entitled to get from the company
A similar relief was allowed by the House of Lord in Scottish Co-operative Wholesale Society
v. Mayer (1959). In this case, the society created a subsidiary company to enable it to enter
in the rayon industry. Subsequently when the need for the subsidiary ceased to exist, the
society adopted a policy of running down its business which depressed the value of its shares.
The two petitioners who were managing directors and minority shareholders in the company
successfully pleaded ―oppression. The court ordered the society to purchase the minority
shares at the value at which they stood before the oppressive policy started [This decision has
also been followed in Re. H.R. Harmer Ltd., (1959).
Minor acts of mismanagement, however, are not to be regarded as oppression. As far
as possible shareholders should try to resolve their differences by mutual readjustment.
Moreover, the courts will not allow these special remedies to become a vexatious source of
litigation. For example, in Lalita Rajya Lakshmi v. Indian Motor Co., the petitioner alleged that
the Board of directors were guilty of certain acts detrimental to the minority of the
shareholders. The allegations were that the income of the company was deliberately shown
less by excessive expenditure; that passengers travelling without ticket on the company’s
buses were not checked; that petrol consumption was not properly checked; that second-
hand buses of the company had been disposed of at low price, that dividends were being
declared at too low a figure. It was held that even if each of these allegations were proved to
the satisfaction of the court, there would have been no oppression.
The legal representatives of a deceased member whose name is still on the register of
members are entitled to file a petition under Sections 397 and 398 of the Companies Act, 1956,
for relief against oppression or mismanagement, Worldwide Agencies Pvt. Ltd. and Another
v. Mrs. Margaret T. Desor and Others.
A shareholder dies and his heirs apply for transmission of shares while their application for
succession certificate was pending before the Civil Court. The legal heirs alleged illegal
allotment of shares by respondent to themselves, reducing the legal heirs to minority. It has
held that the legal heirs are entitled to file a petition alleging oppression and
mismanagement. [Rajkumar Devraj & Aur. v. Jai Mahal Hotels Pvt. Ltd. & Others]

These special remedies against oppression or mismanagement are not only
available to minorities. In an appropriate case, if the court is satisfied about the act of
oppression or mismanagement, relief can be granted even if the application is made by
a majority, who have been rendered completely ineffective by the wrongful acts of a
minority group.
Accordingly, a relief under the section was allowed to a majority group In Re.
Sindhri Iron Foundry (P) Ltd. (1963). The court observed that ―if the court finds that the
company’s interest is being seriously prejudiced by the activities of one or the other
group of shareholders, that two different registered offices at two different addresses
have been set up, that two rival Boards are holding meetings, that the company‘s
business, property and assets have passed to the hands of unauthorised persons who
have taken wrongful possession and who claim to be the shareholders and directors
there is no reason why the court should not make appropriate order to put an end to
such matters.
Oppression must be of a Continuous Nature:
Oppression must be a continuous process. This is suggested by the words, 'are being
conducted in a manner...‘used in Section 397. Hence isolated acts of oppression or
mismanagement will not give rise to an action under Section 397 of the Act. In Shanti
Pd. Jain’s Case, the court said: "events have to be considered not in isolation but as a
part of a consecutive story”. There must be continuous acts on the part of the majority
shareholders, continuing up-to-date of petition.
Prejudicial to Public Interest
Relief under Section 241 will also be available if the affairs of the company are being
conducted in a way prejudicial to public interest. Public interest is a very broad term
involving the welfare not only of the individual shareholders but also of the country
according to the economic and social policies of the State. The concept of Social
profitability is very much akin to public interest.
Winding up Order under Just and Equitable Clause
The other requirement is that the facts justify the making of a winding up order under
just and equitable clause. The principle is that if there is persistent violation of the
regulations and statutes and an appeal to general body is not likely to put an end to the
matters complained of by reason of the fact that those responsible for the violations
control the affair of the company, then it will be just and equitable to wind up the
company, [Ramjilal Baisiwala v. Baiton Cables Ltd.,].
Though it is necessary that facts should justify winding up, instead of winding up an
alternative relief is provided if the facts are such that the winding up would unfairly
prejudice the interest of the complaining members.

Prevention of Mismanagement
A very clear illustration of mismanagement contemplated by the section is

Rajahmundry Electric Supply Corporation v. A. Nageswara Rao, in this case, a
petition was brought against a company by certain shareholders on the ground of
mismanagement by directors. The court found that the vice chairman grossly
mismanaged the affairs of the company and had drawn considerable amounts for his
personal purpose that large amounts were owing to the Government for charges
for supply of electricity. And the directorate of the company were irreparably
damaged, and that the shareholders outside the group of the chairman were
powerless to set matters right. This was held to be sufficient evidence of
mismanagement. The Court accordingly appointed two administrators for the
management of the company for a period of six months vesting in them all the
powers of the directorate.
ROLE OF NATIONAL COMPANY LAW TRIBUNAL

(Previous year question – Part C ):
Section 245 permits members and depositors to file a petition against the company,
its directors, auditors or advisors with the National Company Law Tribunal (“NCLT”)
in case they commit any act which is prejudicial to the interest of the company.
Banking companies are excluded from its purview. Section 245 contains ten
different sub clauses and the framework of the section covers the procedure as well
as the reliefs which can be sought. The ambit of the section is very wide because it
permits shareholders to seek relief where the interests of the company may lead to
trouble or loss.
To avoid potential suits, a company has to
a. Ensure that, it operates within the confines of its charter documents
b. It should not suppress material facts from its shareholders or misrepresent to

them or the depositors
c. Operate in accordance with all applicable law.
There is a high degree of responsibility on NCLT to assess and scrutinize, the

bonafide of the suit and the applicants at threshold levels, in order to minimize
misuse by them. While reviewing the evidence to substantiate that no personal
interest or gain is present, NCLT will act as a watch dog over the minority
shareholders as well and protect the company and its directors from becoming a
victim of their personal interest. The shareholders need to prove that their rights
have been affected and such suit would benefit the company.

Further, the ambit of liability is widened and now it can be affixed on “any other
person” and not merely the management. This, eventually, means that all third
parties will have to exercise caution when dealing with companies
Application to Tribunal for relief in cases of oppression, etc.—
(1) Any member of a company who complains that—
(a) the affairs of the company have been or are being conducted in a
manner prejudicial to public interest or in a manner prejudicial or
oppressive to him or any other member or members or in a manner
prejudicial to the interests of the company; or
(b) the material change, not being a change brought about by, or in the
interests of, any creditors, including debenture holders or any class of
shareholders of the company, has taken place in the management or
control of the company, whether by an alteration in the Board of Directors,
or manager, or in the ownership of the company‘s shares, or if it has no
share capital, in its membership, or in any other manner whatsoever, and
that by reason of such change, it is likely that the affairs of the company
will be conducted in a manner prejudicial to its interests or its members or
any class of members,
may apply to the Tribunal, provided such member has a right to apply under section
244, for an order under this Chapter.
(2) The Central Government, if it is of the opinion that the affairs of the company
are being conducted in a manner prejudicial to public interest, it may itself apply to
the Tribunal for an order under this Chapter.
241. Powers of Tribunal. —
(1) If, on any application made under section 241, the Tribunal is of the opinion—
(a) that the company’s affairs have been or are being conducted in a manner
prejudicial or oppressive to any member or members or prejudicial to
public interest or in a manner prejudicial to the interests of the company;
and
(b) that to wind up the company would unfairly prejudice such member or
members, but that otherwise the facts would justify the making of a
winding-up order on the ground that it was just and equitable that the
company should be wound up, the Tribunal may, with a view to bringing to
an end the matters complained of, make such order as it thinks fit.

(2) Without prejudice to the generality of the powers under sub-section (1), an
order under that subsection may provide for—
(a.) the regulation of conduct of affairs of the company in future;
(b.) the purchase of shares or interests of any members of the company by
other members thereof or by the company;
(c.) in the case of a purchase of its shares by the company as aforesaid, the
consequent reduction of its share capital;
(d.) restrictions on the transfer or allotment of the shares of the company;
(e.) the termination, setting aside or modification, of any agreement, howsoever
arrived at, between the company and the managing director, any other
director or manager,upon such terms and conditions as may, in the opinion
of the Tribunal, be just and equitable in the circumstances of the case;
(f.) the termination, setting aside or modification of any agreement between
the company and any person other than those referred to in clause ( e) :
Provided that no such agreement shall be terminated, set aside or modified
except after due notice and after obtaining the consent of the party
concerned;
(g.) the setting aside of any transfer, delivery of goods, payment, execution or
other act relating to property made or done by or against the company
within three months before the date of the application under this section,
which would, if made or done by or against an individual, be deemed in his
insolvency to be a fraudulent preference;
(h.) removal of the managing director, manager or any of the directors of the
company;
(i.) recovery of undue gains made by any managing director, manager or
director during the period of his appointment as such and the manner of
utilisation of the recovery including transfer to Investor Education and
Protection Fund or repayment to identifiable victims;
(j.) the manner in which the managing director or manager of the company
may be appointed subsequent to an order removing the existing managing
director or manager of the company made under clause (h);
(k.) appointment of such number of persons as directors, who may be required
by the Tribunal to report to the Tribunal on such matters as the Tribunal
may direct;
(l.) Imposition of costs as may be deemed fit by the Tribunal; (m) any other
matter for which, in the opinion of the Tribunal, it is just and equitable that
provision should be made.
(3) A certified copy of the order of the Tribunal under sub-section (1) shall be filed
by the company with the Registrar within thirty days of the order of the Tribunal.
(4) The Tribunal may, on the application of any party to the proceeding, make any

interim order which it thinks fit for regulating the conduct of the company’s affairs
upon such terms and conditions as appear to it to be just and equitable.
(5) Where an order of the Tribunal under sub-section (1) makes any alteration in
the memorandum or articles of a company, then, notwithstanding any other
provision of this Act, the company shall not have power, except to the extent, if any,
permitted in the order, to make, without the leave of the Tribunal, any alteration
whatsoever which is inconsistent with the order, either in the memorandum or in
the articles.
(6) Subject to the provisions of sub-section (1), the alterations made by the order
in the memorandum or articles of a company shall, in all respects, have the same
effect as if they had been duly made by the company in accordance with the
provisions of this Act and the said provisions shall apply accordingly to the
memorandum or articles so altered.
(7) A certified copy of every order altering, or giving leave to alter, a company‘s
memorandum or articles, shall within thirty days after the making thereof, be filed
by the company with the Registrar who shall register the same.
(8) If a company contravenes the provisions of sub-section (5), the company shall be
punishable with fine which shall not be less than one lakh rupees but which may
extend to twenty-five lakh rupees and every officer of the company who is in default
shall be punishable with imprisonment for a term which may extend to six months
or with fine which shall not be less than twenty-five thousand rupees but which may
extend to one lakh rupees, or with both.
BUSINESS JUDGMENT RULE

The Business Judgment Rule helps to guard a company’s board of directors against frivolous
legal allegations about the way it conducts business. A legal staple in common law countries,
the rule states that boards are presumed to act in "good faith"—that is, within
the fiduciary standards of loyalty, prudence, and care directors owe to shareholders. In
absence of evidence that the board has violated some rule of conduct, the courts will not
review or question its decisions.
 The business judgment rule protects companies from frivolous lawsuits by assuming
that, unless proved otherwise, management is acting in the interests of
shareholders.
 The rule assumes that managers will not make optimal decisions all the time.
 Unless it's clear that directors have violated the law or acted against the interests of
shareholders, courts will not question their decisions.

The business judgment rule acknowledges that the daily operation of a business, as well
as its long-term strategy, requires making controversial decisions or taking actions that put
the company at risk. All business decisions are to some extent risky, whether they involve
starting a new line of business or buying another company. Generally speaking, higher profits
require taking greater risks.
The principle underlying the rule is that the board of directors should be allowed to make
such decisions without fear of prosecution by shareholders who might object. The rule
assumes that it is unreasonable to expect managers to make optimal decisions all the time.
As long as a court believes that directors are acting rationally and in good faith, it will take no
action against them.
Exception: By contrast, there are instances in which director decisions can end up in the
courts. For example, a director sells a company asset to a family member for an unjustifiably
low price. This would be an example of self-dealing that the rule would not insulate from
prosecution.
In order to challenge the presumption that is the heart of the rule, plaintiffs must show
evidence that directors have acted in bad faith. This might include engaging in fraud,
committing a breach of trust or creating a conflict of interest, abdicating corporate
responsibility, or failing to investigate unethical corporate behavior that is obvious when
committed.
***

PREVIOUS YEAR QUESTIONS NCLT. The petition is rejected on the ground that the
company should approach as the proper plaintiff. Decide
PART A (2016, 2017, 2018, 2019) 7. The board of directors of XYZ Company leased companies
property in favour of Mr. A, discuss the validity of the
1. Doctrine of Ultravires transaction.
2. Statutory meeting 8. A special resolution was passed altering the AOA of a
3. Independent directors company enabling board of directors to acquire shares of
4. Remuneration committee minority shareholders at fair value. X, a shareholder
5. Business Judgment rule challenges the resolution stating that it is a freeze-out
6. Directors duty of care and skill technique. Decide
7. Officers-in-default 9. X company ltd. was wound up. An investigation showed
8. Related party transaction that collapse of company was due to bad investments and
9. Corporate social responsibility misappropriations by Mr. A, the managing director. A is
10. Rule in Foss v Harbottle convicted for fraud. The other directors of the board are
11. Doctrine of constructive Notice sued for negligence in not detecting frauds. Decide.
12. Annual General Meeting 10. The directors of a company diverted a profitable contract
13. Nominee Directors opportunity of a company to themselves and by their votes
14. Nomination Committee as holders of three-forth Majority resolved that the
15. Entrenchment clause company had no interest in the contract. The shareholders
16. Circulation of resolutions of the company challenged their action. decide
17. Women Directors 11. Mr.A, a director of the company has been removed by the
18. Insider Trading company before the expiry of his period of office by
19. Quorum of meeting passing an ordinary resolution in general meeting. Can the
20. Directors as Trustees director claim compensation from the company for loss of
21. Key Managerial Personnel his office? Advise him.
22. Stake holder theory 12. An injury was caused to a company by the actions of the
23. Fiduciary Duty directors. The company immediately convened a meeting
24. Powers of directors in a company of the board of directors and ratified the actions of the
25. Provisions relating to investigations into affairs of a directors. One share holder of the company, Mr.P brings an
company action against the company and the directors. Will they
26. Role of members and shareholders in a company succeed?
27. Object clause
28. Procedure for alteration of article of association
PART C (2016, 2017, 2018, 2019)
PART B (2016, 2017, 2018, 2019)
1. Discuss the procedure for constituting the board of
1. Tata Services Ltd is a listed company. The shareholders of directors of a company and for removal of directors.
the company propose voting by electronic mode. Chairman 2. Critically examine the reforms introduced to improve
of the meeting rejected the meeting. Discuss validity of the corporate governance in India.
rejection of the proposal. 3. Discuss the legal position and duties of directors of a
2. ABC Ltd. was incorporated to produce and export rubber company with supporting case laws.
mats. The company entered into a 10 year contract with 4. Discuss the binding nature of internal rules of governance.
Kerala Cashew Corporation for purchase and sale of 5. Examine the scheme of division of corporate powers
cashew nuts. Later the company repudiated the contract between board of directors and the general meeting
saying that it is ultravires. Cashew Corporation sues the 6. Explain the provisions for protecting the rights of minority
company. Decide shareholders.
3. The board of directors resolved not to declare dividend due 7. Discuss the restrictions imposed on the powers of the
to inadequacy of profits. Certain shareholders files a board of directors under companies act 2013.
petition before NCLT alleging mismanagement of affairs of 8. Discuss the significance of different kinds of meetings of
the company. Decide shareholders in a company.
4. The AOA of a company provided that X, a majority 9. Examine the safe guards against abuse of powers by
shareholder shall be appointed as a director and shall not corporate directors.
be removed for 10 years. However he was removed earlier. 10. What is the position of directors in a company? Examine
He sued the company against removal. Decide the process of appointment and removal of directors.
5. TATA services ltd. conducted a meeting of the board of 11. Examine the role of memorandum of association in
directors through video conferencing. X a shareholder files managing the affairs of a company.
a petition to invalidate decisions taken at the meeting. 12. Discuss the role of National Company Law Tribunal in
Decide regulating corporate governance.
6. Raju, the managing director of a company misappropriated
large sum of money. X a shareholder files a petition before

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NOTES ON CORPORATE GOVERNANCE

SL.NO. Contents Page

NOTES ON CORPORATE GOVERNANCE BY NIHAL KOTTALATH | 1

Theories: (Previous year question – PART A)

Need for Corporate Governance:

NOTES ON CORPORATE GOVERNANCE BY NIHAL KOTTALATH | 2

The Principles of Corporate Governance:

As evolved by the Institute of company secretaries of India (ICSI):

As evolved by The Organisation for Economic Co-operation and Development (OECD):

NOTES ON CORPORATE GOVERNANCE BY NIHAL KOTTALATH | 3

Elements of Good Corporate Governance

NOTES ON CORPORATE GOVERNANCE BY NIHAL KOTTALATH | 4

The First Phase of India’s Corporate Governance Reforms: 1996-2008

1. Confederation of Indian industry (CII—1996)

2. Report of the Committee (Kumar Mangalam Birla) on Corporate Governance

1. Companies should be encouraged to move towards a regime of unqualified financial statements.

3. Report of Task Force in May 2000

■ Representation of independent directors on a company's board.

■ The composition of the audit committee.

5. SEBI Report on Corporate Governance (Narayana Murthy committee)—February 2003

 to review the performance of corporate governance and

 Disclosure of contingent liability

 Certification by CEO's and CFO's

 Definition of independent directors

 Independence of Audit committees

1. Strengthening the responsibilities of audit committees.

1. Moving to a regime where corporate financial statements are not qualified.

4. Clause 49 of Listing Agreement (2004) —Murthy Committee

5. Dr. J. J. Irani Committee Report on Company Law, 2005

The main recommendations of the report are as follows:

 Number of Directors & their duration in company.

THE COMPANIES ACT 2013

Companies Act brought a shift by introducing legislative provisions on corporate governance

(Detailed explanation in chapters below)

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Section 177(2) of the Companies Act, 2013

 Audit Committee shall consist of a minimum of three directors.

Functions of Audit Committee

(1) Under Section 177(4) of the Companies Act, 2013

Number of Meetings and Quorum:

(ii) The quorum for audit committee meeting shall either be

● 1/3rd of the members of the audit committee, whichever is greater;

● with at least 2 independent directors. [Regulation 18(2)(b)]

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Disclosure in Board’s Report

• Composition of an Audit Committee

2.) NOMINATION AND REMUNERATION COMMITTEE (Previous year question – PART A)

 Section 178(1) of the Act

The Nomination and Remuneration Committee shall perform following functions:

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 Formulate the criteria for determining qualifications, positive attributes and

3.) STAKEHOLDERS RELATIONSHIP COMMITTEE

 Stakeholders Relationship Committee shall consist of a chairperson who shall be a non-

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○ Companies having net worth of rupees five hundred crore or more, or

Composition of the Committee:

 an unlisted public company or a private company covered under sub-section (1) of

5.) RISK MANAGEMENT COMMITTEE

A company needs to have a proactive approach to convert a risk into an opportunity. It is

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“Key managerial personnel”, in relation to a company, means—

1. the Chief Executive Officer or the managing director or the manager

2. the company secretary

3. the whole-time director