cHA PTE R O.

U TLI NE

3.1 Board of Directors

3.2 Classification of Directors
3.3 Rules Regarding Directors
3.4 Powers of Directors
3.5 Duties and Responsibilities of Directors
3.6 Meetings of Board of Directors

3.1 BOARD OF DIRECTORS

the Board of Directors
The concept of corporate governance entails that
offulfilling company's
comprise the governing body of the company with. an objectivefunctionary with an
n
interest and shareholders' value. The board is the mai
rd of Dir~ctors comprise
objective of value creation for its stakeholders. The Boa
company. The Cad bury
the group of top executives and managers in the
re stage of governance
Committee, 1992 viewed the corporate board at the cent
ies are directed and
system which it described as one by which compan
governed.
tion is the separation
An essential attribute of the company form of organisa
dent from management.
of ownership from directorship that should be indepen
es inter-relationship
The board also serves as a linking factor that establish
iders and the managers
between-the shareholders, i.e., the equity capital prov
Corporate governance
who are responsible for managing the company affairs.
vidually or collectively,
reforms focus on the fact that the company directors, indi
in relation to their acts
~aboard, roles and responsibilities and independence
morder to strike a delicate balance between various
stakeholders and competing
pany is run efficiently
interests. The directors have to make certain that the com
widespread that it is not
and in best interest of the shareholders who are so
eholders delegate the
possible to oversee the management activities. The shar
The stakeholders in the
responsibility to manage the business to the managers.
erless and hence, the
form of equity holders are large, scattered and pow

(3.3)
 manag ement or the manage rs are responsible for the managi ng the O- - - -
of the company. J>erattons
The Board has its role and functions derived from the cornpanj
1956 that defines the proviaions for the strict fiduciary duties to be penes Act,
by the board of directo rs. The Directo rs of the compa ny are fllned
represe ntative s of the shareholders as per well-defined procedure toehected
the compan y's dealings. "The Board of Directors" is comprised of sh~rehoWdle
represe ntative s known as directors a·nd is the topmost administrative bod ers'
the corporation. Yof
"Key Managerial Personnel" (I<MP), in relation to a company, means_
(i) The Chief Executive Officer or the Managing Director or the Manager,
(ii) The Compa ny Secretary;
(iii) The Whole-time Director;
(iv) The Chief Financial Officer; and
(v) Such other officers as may be prescribed.
It is necessary to identify powers, roles, responsibilities and accountability
of the Board and its directors, the CEO and the Chairm an of the Board.
Meaning of 'Director'
Section 2(13) of the Companies Act, 1956 defines the term 'director' and
.. • states that 'director' includes any person occupying the position ofdirector, by whatever
name called.
In simple words, a director is someone who administers, controls or directs
something, especially a member of a commercial company; one who supervises,
controls or manages; a person elected by the shareho lders of a company to
direct compan y's policies; person appoin ted or elected accord ing to law,
authorised to manage and direct the affairs of a company. Section 2(6) of the
Companies Act elaborates that the directors are collectively referred to as "Board
of Directors" or just the '1Joard".
Every public compan y must have at least three directors. Every other
company must have at least two directors. This is the statuto ry limit and subject
to it, the articles of a comp~ y may prescribe the minim um and maximum
numbe r of directo ~ for its Board. Within the limit fixed by the articles, the
company can increase or decrease the numbe r of its directors by passing an
ordinary ~lutio n. •
'
3.2 CLASSIFICATION OF DIRECTORS
The types of directors in the board of the compan y are discussed below:
'Shadow• or 'Deemed' director
The Indian Companies Act, in addition of the formally appoin ted directors,
• also states the category of 'shadow directors' who can be any person, other
than professional advisor, with whose instructions the 'appoin ted' directors of
the company normally comply.
' ~'..,
-~
•I
~tos edio n303 (l)sa ysth atan yper soni nacc orda nce 'th dose
~ e
h -
,
EXP/a,tll fnStrUctions, the Board of directors of a company is 8
to
~ot tBi,;'~eeJlled to be a director ~f the company.
act ~ e rovisions of the C?mparues A~, 1956 also apply 'Shadow
director'
~Jn in accord~ce With whose directions or instructions the Board of
of directors
pe of the co,rnpany is accusto~ed ~o act. H~ever, if the Board will
~r s dvice given by a person m !rls professional capacity, he not be
,ctS·ott ~,.a s a deemed or shadow director of the compa ny..
i

oiredots •
ordill~ directors are also referred to as simple directors who attend Board
.
- ~company and parti~pate _in the matters put before the Board
::~ or s are neither whole time directors nor managing directors.
ging Director
the
Mait ~agi ng Directo~ is a director who,· by virtu~ of an agr~ment with
or of a resolution passed by the company m general meeti ng or by its
co111P;11{directors or, by virtue of its Memorandum or Articles of Association,
ise
= ~ d with sub~tantial P_OWers of ~ge men twh i~ would not otherw a
on of
be exercisable by him, and includes a director occupying the positi
managing director, by whatever name called.
Whole-time/Executive Directors
-
Whole-time Director or Executive Director includes a director in the whole
mana geme nt
time employment <:>f the company and who supervises the daily
tor
of the company. He can be designated as Managing Director, Marketing Direc
or Finance Director, as per his responsibilities. •

Non-Executive Directors
Non-executive Directors or 'Outside Directors' do not have ·inuch
any
involvement in daily management of the company and do not occupy
d
executive management position in the company. The rationale behin
the
appointing such directors is to encourage independent perspective into
working of family members who control the company by holdin•g sizeable shares
of the company.
Additional Directors r•
Additional Directors are appointed by the Board behve en the tw~ annual
of a
~eneral meetings subject to the provisions of the Articles of Association
ompany. Additional directors shall hold office only up to the date of the next
:::1 general meeting of the company. Number of directors and,additional
b th ors t~gether shall not exceed the maximum strength fixed for
the Board
J f e Articles. The powers and duties of the additional directors •are
0 other directors.
the same

AI~ate Director
by tti~; rern ate Director is a person appointed by the Board if so auth~rised
des of Association or by a resolution passed by the comp anym tfte
 general meeting to act for a director called "the original director" durin -
ab~ce for a period of not less than three months from the State·in
m~gs of the Board are ordinarily held. Generally, the alternate directors ch
his w1u
appointed for persons who are Non-resident Indians or for foreign collaborati are
of a company. An alternative director is not a representative or agent of~
absentee-director. Such a director enjoys similar rights and duties as the oth e
directors have as pet law. er
Professional Directors
The I director possessing professional qualifications and not having an
pecuniar y interest in the company are called as 11Professional Directors". In b{
size companies, sometimes1 the Board appoints professionals of different field~
as directors to utilise their expertise in the management of the company.
1

Nominee Directors
A nominee director is nominated by a major shareholder or contractual
stakeholders like the banks and financial institutions in order to protect their interests.
The_ public financial institutions which grant financial assistance to a company
like LIC, IFCI, UTI and even the public sector banks, generally impose a
condition as to appoinbnent of their representative on the Board of the concerned
company. These nominated persons are called nominee directors. Section ~7 of
the State Financial Corporations Act empowe rs the concern ed financial
institutions to appoint nominee directors, on the boards of assisted companies
and grants immunity to such directors from liabilities for the company's defaults.
The financial institutions are also empowered to decide matters pertainin~ to
their terms of employment, number of such directors, their removal from office,
their substitution by others etc.
Section 408 of the Companies Act grants powers to the central government
to nomina te one or more director s in the compan y, in extraord inary
circums tances, like oppress ion of minorit y shareho lders or .gross
mismanagement in the company. After instances of corporate frauds, especially
the Satyam Scandal that rocked India, the board of directors of such companies
were suspend ed and the government appointed its nominees on the board.
The objective of nominee director is to prevent the misdeeds of the companies
and to make sure that good corporate governance practices are endorsed by
the company. 11
Despite all these measures, there have been instances of corporate frauds
involving money of unfortun ate shareholders even when there had been
nominee·directors on the boards who choose not to act in such circumstances
due to vast immunities enjoyed by them.
Independent Directors
An independent director is a professional in corporate horizon with an eye on
better governance. Since the independent directors are non-executive on the board
of the ~ompany, they can pursue the decisions with objec;tivity without any
vested interest. The indepen dent directors have the objective to manage the
company in the interest of the shareholders of the company. The codes of
 c;overnance, across the world, stipulate a certain .

f q,orate to consist of independent directors. An indepell dpr:of board

~ t s trector who is free from any business or other:t .
11
. Is ~n-
eeaitive d ·ally interfere with the exercise of his independ lat~onsdhip which
et. d !J\aten O f . en JU gement"
"°ol I has amended a~ 49 o the Listing Agreement to make •
sEB %of the board of directors of the listed companies ind sure that
at Jeast 59 where an executive chairman heads the board :d .ependent
directors,},eing a non-executive director, independent directo~ shouI~se.of
~ha~ third of the board. pnse
ca... tone-
at 1eas dependent director as per Clause 49 of the Listing Agreement shall mean
In tive director of the company who- ..
.,,execu • • d' ,
po,, ) apart from receiving tiirector s remuneration, does not have any
(a • 1 hi
material pecuruary re a ons ps or transactions with the company,
·ts di ct 'ts •
its promot~rs, i . r~ ?rs, i seruor _management or its holding
company, its subsidi~nes and associates which may affect the
independence of the director;
(b) is not related to promoters or persons occupying management
pcsitions at the Board level or at one level below the Board; .
(c) has not been an executive of the company in the immediately
preceding three financial years;
(d) is not a partner or an executive or was not partner or an executive
during the preceding three years, of any of the following:
(z) the statutory audit firm or the ~ternal audit firm that is associated
with the company;
(ii) the legal firm(s) and consulting firm(s) that have a material
association with the company.
(e) is not a material supplier, service provider or customer or a lessor or
lessee of the company which may affect the independence of the
director; and
(f) is not a substantial shareholder of the company, i.e., owning two
percent or more of the block of voting shares. •
Accor~g to Companies Bill, 2012, (passed by the Parliament in August,
~013), the listed companies shall have at least one-third of the Board as
mdependent directors. Such other class or classes of public companies as may
prescribed by the Central Government shall also be required to appoint
mdependent directors.
Y The independent director has been clearly defined in the Act,_
Y Nominee director nominated by any financial institution, ot 111
pursuance of any agreement, or appointed by any go~mment to
represent its shareholding shall not be deemed to be an independent
director.
• J\n independent director shall not be entitled to any remuneration
other than sitting fee reimbursement of expenses foi: participation
in the Board and other meetings and profit related couuni§ion as
may be approved by the members.
,/~f~
T
. . essentially a policy makin~ and controlling body. It is ari organ of
#ts iS aisa1 rather than of action. It delegates its powers of day-t<r
of ~eW aitd apprt of the company to the chief executive of the company.
,e'll a11ageJllen
dsY JJl f Directors • _
O
~&Jrf1t,er bliC company must have at lea~t three directors and a private
1
svetYt ;:_st two directors. However, a public company 1'aving (a) paid-up
iopaJlY a ·ve crore rupees or more, aQd (b) one thousand or more small
cOpital of fi may have a director elect~d by such small shareholders. A small .
~otdets, ans a shareholder holding shares of nominal value of twenty
sftareJtoider!:s or less. There is nothing provided in the Companies Act about
th0usan~ ~~umber of di~e~ors that a company may have. The Articles of a .
the ioaxitll Uy fix the nurumum and maxnnum number of directors of its
c0ioPaJ1Y usu;any in general meeting may, by ordinary resolution, increase or
IJ08fd, Aco1:mber of directors within the limits fixed by the articles. However,
re<fuce~~~ompanY, or a private company which.is a subsidiary of a public
a. publi wants to increase the number of its directors beyond the maximum
co!J_'Pan:d by-its Articles, the approval of the Central Government has to be
liIJUt fiXd But if the increase in number does not make the total number of
obtaine ·m·ore' than twelve, the approval of the Central Government would not
(iiredOts . •
be necessary.
Multiple Directorship
As per the Companies (Amendment) Act, 2000, a person cannot hold office
t the same time as a director in more than fifteen companies, excluding
~irectorships in private companies, unlimited companies, not-foi-profit
~tions and foreign companies; .

Quallflcatlons of Directors
No academic or professional qualifications for directors have been
prescribed under the Companies Act. Nor does the Act require any qualification
shares for directors. But the Articles usually provide for a minimum number of
shares to be held by every director. The minimum share qualification may be
even one share in the company. w,here a share qualification is provided in the
Arti~es of a public company or ii private company which is a subsidiary of a
public company, the Act requires that:
(Q each director must take his qualification shares within two months
after his appointment;
(iQ the nominal va_lue of the qualification shares must not exceed
Rs. 5,000 or the nominal value of one share where it exceeds Rs. 5,000;
and
1
• (iii) Share warrants shall not be counted for the purpose of qualific~tion
shares.
pri\-a! Inay be ~oted that the above requirements do not apply to independ.ent
I ,companies.
 ,.. An Independent director shall not be entitled to any stock option. -
Only an independent director can be appointed as alternate director to
independent director. [Section 161(2)) an
The independent directors shall:
(l) Help in bringing an independent judgment to bear on the Board'
deliberations especially on issues of strategy, performance, r1s:
management, resources, key appointments and standards of conduct;
(~) bring an objective view in the evaluation of the performance of boarct
and management;
(3) scrutinise the performance of management in meeting agreed goais
and objectives and monitor the reporting of performance;
(4) satisfy themselves on the integrity of financial information; finandat
controls and the systems of risk management are robust and
defensible;
(5) safeguard the interests of all stakebolden, particularly the minority
shareholders;
(6) balance the incompatible interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors,
key managerial personnel and senior management and have aprime
role in appointing and where necessary; recommend removal of
executive directors, key managerial personnel and senior
management; _
(8) moderate and arbitrate in the interest of the company as a whole, in
situations of conflict between management and shareholder's interest.
3.3 RULES REGARDING DIRECTORS
The directors of the company collectively, elected by the shareholders are
referred to as the 'Board of Directors' or the Board. The Cadbury Report
established the supremacy of the board of directors in any company. The board
not only sets standards for the enterprise, but also, ensures that the company
achieves them.
The chairman of the board of directors is the leader of the board with the
responsibility of running the board in an effective manner. As the leader, he
must ~t standard essential for the board colleagues, establish link between
board and shareholders and ensure corporate reporting including the interim
and annual results, annual reports, the AGM and periodic reports especially
during takeovers. The chairman is elected from the directors of the board.
Notice of Board Meeting
The Board of Directors represents the top management of the company. It
consists of the elected representatives of the shareholders. The directors have
~o ~uthority as ind_ividuals, they exercise their powers collectively as a Board
m the Board meetings. The Board of Directors exercises the powe~ of the
company, formulates its policies and directs the company's affairs. The Board
 ~ n i n g of a contract in which any direct . .
(viii) Seu.recommend the rate of dividend to be dor is interested·' .
1
(it) topproval of shareholders at the Annual GeneecalaMred ~ubject to the
a .. . . r eeting;
t make Political contribution subject to the ceilin
(.t) l;id down in the Act. gs and conditions
ddftion, the foJlowing powers can be criticized by th 8
In .a ctor present and entitled to vote gives consent . e oard only if
dire •
evetY (i) to apPo~t a rerson as managing director or manager who is holdin
either office m another company; g
(ii) to invest in shares of any other body corporate.
ers be exercised by the Board only with the Approval of the
::rehofders In the General Meeting (Restrictions on the Powers of
the soard) . .
_'11le aoard of a public company or~ pnvate comp?11y, which is a subsidiary
ublic company, cannot exercJSe the following powers without th
of an~tof the shareholders in general meeting : . • e
conse (i) Sell/lease or otherwise dispose of the undertaking of the company;
(ii) Remit or give time for the repayment of any debt due by a director;
(iii1 Invest, otherwise than in trust securities, any compensation received
by the company for compulsory acquisition of any property or assets
of the company;
(iv) Borrow money exceeding the aggregate of paid-up capital and free
reserves of the company;
(v) Contribute to charitable or other funds exceeding the limits specified
in the Act;
(vi) Make political contribl,!tions exceeding specified limits.

3.5 DUTIES AND RESPONSIBILITIES OF DIRECTORS

Statutory Duties
The Companies Act has laid down several duties of directors, which may
be regarded as their statutory duties. The more important duties are as follows:
(i) Duty to file return of allotments with the Registrar within a period of
thirty days. They may be liable to a fine upto Rs. 5,000 per day if
there is default;
(ii) Not to issue irredeemable preference shares or shares redeemable
after twenty years. Directors making such issue may be subject to a
fine upto Rs. 10,000.
, {iii) Duty to disclose interest in a transaction of the company. An interes~
' director should not take part in the discussion on the matter of his
interest.
(iv) Duty to disclose receipt of any money from the transferee in
conrtection with the transfer of property of the company.
....._
 ·'!"·
Dlaquallflcatlona of Directors
As per provisions of the Companies A~ the following persons
eligible for being appointed as directors of any company: are '\Qi
(i) a person of unsound mind;
(ii) an undischarged insolvent;
(iii) a person who has applied to be adjudged an insolvent;
(iv) a person who has been convicted of an offence involvin
turpitude and sentenced to imprisonment for not less Illorai i
months, and a period of five years has not elapsed from the ;n s~
expiry of the sentence; ate Of
(v) a person who has not paid any call in respect of shares of the co
held by him and six months have elapsed from the last date :l'any
the payment of the call; ed for
(vi) a person who has been disqualified by a Court or Compan la
Tribunal to restrain fraudulent persons from managing com/ . W
(viz) a person who is a director of a public company which- illties;
(a) has not filed the annual accounts and annual reports for any three
consecutive years after 1st April, 1999; or
(b) has failed-to repay its deposits or interest theorem on due date
redeem its debentures on due-date or pay dividend for one ye:
or more.
A private company, which is not a subsidiary of a public comP-any, ma
provide for disqualifications in addition to the above. But, any such additioJ
disqualification besides those laid down under the Act will not be valid in the
case of public companies.
3.4 POWERS OF DIRECTORS
Under the Companies A~ individual directors of a company do not have
any general powers. The Act provides for general powers of the Board of
Directors. Individual directors shall have only such powers as are vested in
them by the Memorandum and Articles of the company.
..
Powers to be Exercised by theJBoard by Passing Necessary
Resolutions
The following powers can be exercised by the Board, subject to the
provisions of the Act by means of resolutions passed at meetings of the Board:
(i) to make calls on shareholders with respect to money unpaid;
(ii) to buy back its shares;
(iii) to issue debentures;
(iv) to borrow money otherwise than on debentures;
(v) to invest funds of the company;
(vi) to make loans;
(vii) filling casual vacancies in the Board;
 be present at the meeting. However . ~

11
ttY, slta director from _such a meeting, the decis' ' m the absence of any
if:epettdenalt onlY on ratification thereof by at least ~nse !"ken
indep
at such meetmg
enden t A:--..._r.
ifl be till3(3)). '-"'~
~ 17
secnott
f . 0f the soard .
19
1101 • wets, roles and ~sponsibilities of the board h
'flte Povoid any sort of conflict. The powers are ~u ld be explicitly
defiJled to by means of resolution passed at meetings of th t>! beThe exercised
bf t}le ~ :to carry out the following: e _rd. board
i5 requife To define the vision, mission and values of the com
• ·necessary changes, as and when _required. pany and make
• To give ultimate direction to the company.
y ,..
!10
develop and renew board strategy of the company.
• To approve financial statement and the boar~'s reports.
• To perform duty as a custodian of company's assets.
• To establish go~eman~ practices of the company and make required
changes from time to time.
• To implement policies, strategies and busi n~ plans.
• To diversify the business of the company.
y To approve amalgamation, merger or
reconstruction.
y To take over a company or acquire a controlling
or substantial stay in
another company.
y To ensure effective communication with the
stakeholders and monitor
the relationship with them.
y To ensure company's compliance with laws
and adherence to ethical
standards.
y To ensure that company has proper inform
ation, internal control and
audit system and fulfils the business objectives wjth due compliance.
3.6 MEETINGS OF BOARD OF DIRECTORS
1. Frequency of Meeting. Not more than 120 days gap between two Board
Meetings (Oause 173)
A director can participate in the Board meeting either in person or ~ug
h
video conferencing or other audio visual means as may be prescribed
which
and
are capable of recording and recognising the participation of the ~ r s
~d
of recording and storing the proceedings of such m~ gs along with date
time. The Central Government may, by notification, specify such matters
which
not be dealt with in a meeting through video conferencing or other audio
••
Visual means (Clause 173)
2. Notice of Meeting. A notice of not less than seven days in writin
g is
required to call a board meeting and notice of meeting to all directors
shall be
or by
given, W~ er he is in India or outside India by hand delivery or by post
to
electronic means. A meeting of the Board may be called at sllorter notice I
 (t1) Duty to disclose receipt of any compensation from the transferee
shares where the transfer results in loss of office unless it has
approved by the company in general meeting.
(t1i) ~ty attend Board meetings. The office of director will fall vacan
if h~ falls to attend three consecutive meetings or all meetings i t
penod of three months whichever is longer. . or a
(t1ii) Duty to convene the statutory meeting, Annual General Meetin
well as Extraordinary General Meeting. g as
(t1iii) Duty to prepare and place at the Annual General Meeting al~ng With
the Balance Sheet and Profit and Loss Account, a report on th
company's
. state of affairs including the report of the Board ef
0
D1rectors.
(ix) Duty to approve and authenticate the annual financial statements.
(x) Duty to appoint first auditors of the company.
(xi) Duty to appoint cost auditor, where necessary.
General Duties
The general duties of directors are stated below:
(a) Duty to act in good faith and in the best interest of the company. A
director should not make any secret profits. He should not exploit
any corporate opportunity for his ~wn benefit.
(b) Duty to display due care in the performance of work entrusted to
him as a director.
(c) Duty not to delegate his work to anyone else except where permitted
by the Companies Act or Articles of the company.
Rights of Directors
The rights of directors are as follows :
(1) Right to Attend Board Meetings. The Directors are entitled to attend
the meetings of the Board of Directors.
(ii) Right to Acquire Right Shares. Directors have the right to purchase
right shares in proportion to the shares held by them.
(iii) Right to Inspect Books of Accounts. Directors have the right to
inspect the books of accounts and other documents of the company
during business hours.
(iv) Right to Receive Remuneration. Directors are entitled to receive
remuneration fixed by the Articles of Association, subject to the
provisions of the Companies Act.
(v) Right to Receive Compensation. A whole-time Director and a
Managing Director are entitled to receive compensation for premature :
termination of their services. •
At least seven days' notice is required_ to be given for a Board meeting,
The notice may be sent by electronic means to every director at his address
registered with the company. [Section 173(3)]. A Board Meeting may~ called
at shorter notice subject to the_ condition that at least one independent diredor,
 one independent
transact urgent business subject to the condition that at least of independent
nce
director, if any, shall be present at the meeting. In case of abse
n at such a meeting
directors from such a meeting of the Board, decisions take
only on ratification
shall be circulated to all the directors and shall be final
thereof by at l~ast one independent director, if any. (Clause
173)
d meeting.
Agenda : It means the list of items to be discussed at the boar
ting or at least seven
The agenda must be sent along with the notice of the mee
tors come prepared
days before the meeting. This helps to ensure that all direc
anatory notes. The
for the meetings. The items on the agenda should have expl
re speedy conduct
proposed draft resolution, if any, should also be given to ensu
of meeting. •
total number
Quorum: The quorum for a Board meeting is one-third of the
could not be held
directors or two directors whichever is higher. Ha meeting
rwise provide, .
: want of quorum, then unless the Articles of Association othe in the next
day
"1e meeting shall automatically stand adjourned till the same
week, at the same time and place.
the board. The
Chairman : Each meeting is presided by the.chairman ·of
prop erly and
chairman must ensure that the meeting has been convened
er manner·and in
the required quorum. He must conduct the meeting in a prop
Generally, decisions
accordance with the prescribed law, rules and regulations.
.
in meetings are made on the basis of majority or unanimity
ngs of every ••
Minutes. : The chairman must' ensure·that the proceedi
meetings are correctly recorded in the form of 'minutes'.