Ravi Kulkarni | Khaitan & Co FICCI|New Delhi|12 September 2013 COMPANIES ACT, 2013 Corporate Governance Key Changes and Takeaways

Copyright © Khaitan & Co 2013 | 2 Contents 1.Board Composition 2.Independent Directors 3.Powers of the Board 4.Duties of Directors 5.Liability of Directors and Officers 6.Board Committees 7.Related Party Transactions

Copyright © Khaitan & Co 2013 | 3 Board Composition TYPE OF COMPANY INDEPENDENT DIRECTORWOMAN DIRECTOR SMALL SHAREHOLDER DIRECTOR RESIDENT DIRECTOR Private Company 1 Independent Director on Corporate Social Responsibility (CSR) Committee if CSR requirement is triggered Rule 11.1 Required if paid-up share capital > INR 100 crores (to be appointed within 5 years) from the commencement of the Act Section 151 Rule 11.5 Not applicable 1 director required to be resident in India for at least 182 days in a calendar year Section 149(3) Public Unlisted Company 1/3 rd of the Board to be Independent if the Company has: Paid-up share capital of INR 100 crores or more; or Aggregate outstanding loans, borrowings, debentures or deposits exceeding INR 200 crores Required if paid-up share capital > INR 100 crores (to be appointed within 5 years) from the commencement of the Act Not applicable Listed Company All listed companies to have 1/3rd of the Board comprised of Independent Director Requirement increases to half of the Board if there is an executive chairman [Clause 49, Listing Agreement] All listed companies to have a woman director (to be appointed within 1 year) from the commencement of the Act Mandatory? Suo motu option Request of 1/10 th the number of small shareholders or 500 small shareholders (whichever is lower)

Copyright © Khaitan & Co 2013 | 4 Independent Directors  Term Restrictions [Section 149]: –2 consecutive terms of 5 years each; –3 year cool-off (no association with the company) before becoming eligible again.  Board’s Report [Section 134]: –To provide statements that the Independent Director possesses the appropriate balance of skills, experience and knowledge

Copyright © Khaitan & Co 2013 | 5 Independent Directors  Impact –Investor Nominee Directors cannot be regarded as Independent Directors [Section 149 (7)]  Definition [Section 149 (6)]: A director other than a Managing Director, Whole-Time Director or Nominee Director, who: –in the opinion of the Board, is a person of integrity, with relevant experience and expertise;

Copyright © Khaitan & Co 2013 | 6 Independent Directors  is or was not a promoter or director of the company or any holding, subsidiary or associate company;  is not related to a promoter or director of the company, or any holding, subsidiary or associate company;  does not have and has not had any pecuniary relationship with the company and its promoters or directors, including any holding company, subsidiary or associate company (no materiality threshold, unlike Listing Agreement)

Copyright © Khaitan & Co 2013 | 7 Independent Directors  whose relatives do not have any pecuniary relationship or transaction with the company or its holding, subsidiary or associate company, or their promoters or directors amounting to 2% or more of the gross turnover of the relevant entity, or INR 50 lakhs (subject to change), whichever is lower, during the current financial year or the two preceding financial years  who neither himself nor any of his relatives: –holds or has held the position of Key Managerial Personnel or has been an employee of the company, or its holding, subsidiary or associate company in the preceding 3 financial years;

Copyright © Khaitan & Co 2013 | 8 Independent Directors  is or has been an employee, proprietor or partner (in the preceding 3 financial years) of: –any firm of auditors, company secretaries or cost auditors of the company or its holding, subsidiary or associate company; or –any legal or consulting firm that has or has had any transaction with the company, or its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such company  holds, together with his relatives, 2% or more of the total voting power;

Copyright © Khaitan & Co 2013 | 9 Independent Directors –is a Chief Executive Officer or director of any non-profit organisation that receives more than 25% of its receipts from the company, its promoters, directors or any holding, subsidiary or associate company, or holds more than 2% of the company; and –who possesses such other qualifications as may be prescribed.

Copyright © Khaitan & Co 2013 | 10 Independent Directors Qualifications [Rule 11.3]  Independent Director must possess appropriate balance of skills, experience, and knowledge in one or more fields of finance, law, management, sales, marketing, administration, corporate governance, technical operations or other disciplines related to the company’s business.  Board to furnish a statement in its first report after such appointment that in its opinion the Independent Director possesses the appropriate balance of skills, experience and knowledge as required.

Copyright © Khaitan & Co 2013 | 11 Independent Directors  Independent Directors may be drawn from a data-bank of persons ‘eligible and willing’, maintained by any body, institute or association as may be prescribed by the Central Government [Section 150 and Rule 11.4]  Appointment has to be approved by members in general meeting and the explanatory statement to the notice should indicate justification of such appointment

Copyright © Khaitan & Co 2013 | 12 Independent Directors  No retirement by rotation  Independent Directors are eligible for sitting fees, commission from profits and reimbursement of expenses  Independent Directors are not entitled to any stock options. This is contrary to the Listing Agreement, where the maximum limit can be fixed by shareholders resolution

Copyright © Khaitan & Co 2013 | 13 Independent Directors  The law now prescribes a code of conduct (“Code”) to be complied with by the Independent Directors (Schedule IV)  The Code provides for the following: –Guidelines of professional conduct; –Specific roles, functions and duties; –Manner of appointment, re-appointment, resignation and removal; –Separate meetings of Independent Directors; and –Evaluation mechanisms.

Copyright © Khaitan & Co 2013 | 14 Powers of the Board Key Changes [Section 179]  There has been an addition to the list of powers which can be exercised only at a meeting of the Board of Directors: –Approval of financial statements and Board reports; –Diversification of business; –Approval of amalgamation, merger or reconstruction; –Approval of takeover of another company or acquisition of a substantial stake in another company.

Copyright © Khaitan & Co 2013 | 15 Powers of the Board Key Changes – Restrictions [Section 180]  Powers which can only be exercised subject to a special (not ordinary) resolution of the shareholders: –Sell or otherwise dispose off whole or substantially the whole of an undertaking; –Invest proceeds of a merger or amalgamation; –Borrow money in excess of the paid-up share capital and free reserves (other than temporary loans) and the limit of such borrowing should be specified in the special resolution;

Copyright © Khaitan & Co 2013 | 16 Powers of the Board  Temporary loans must be: (a) from the company’s bankers; (b) in the ordinary course of business; and (c) repayable within 6 months.  Special resolutions may include conditions.  This section has been extended to private companies.  Definition of the term “Undertaking” and “substantially the whole undertaking” has been introduced

Copyright © Khaitan & Co 2013 | 17 Powers of the Board  ‘Undertaking’ means: –An undertaking in which the company’s investment exceeds 20% of its net worth as per the last audited balance sheet –An undertaking which generates 20% or more of the company’s total income in the previous year  ‘Substantially the whole undertaking’ means 20% or more of the value of the undertaking as per the last audited balance sheet

Copyright © Khaitan & Co 2013 | 18 Powers of the Board  Political contribution limits enhanced to 7.5% of average net profits of the company for the immediately 3 preceding financial years  Charitable contribution, permission required where contribution exceeds the limit of 5% of the average net profits for the immediately preceding 3 financial years. The limits of monetary value have been dispensed with

Copyright © Khaitan & Co 2013 | 19 Duties of Directors [Section 166]  To act in accordance with the articles of association of the company;  To act in good faith to promote the objects of the company for the best interests of the company and for the benefit of the members as a whole and in the best interests of the employees, shareholders, the community and the environment;  To exercise his duties with due and reasonable care, skill, diligence and independent judgment;  To avoid situations where he may have a direct or indirect interest which conflicts or may conflict with the interests of the company;  To avoid any undue gain to himself or his relatives, partners, or associates (if found guilty of this, the director may be required to pay an amount equal to such gain to the company);  Not to assign his office, such assignment being void.

Copyright © Khaitan & Co 2013 | 20 Liability of Directors and Officers Key Changes  Liability of Directors under Section 166 relating to duties;  Liability under Section 172 of the company and any officer in default for any contravention;  Independent and non-executive Directors only face liability for an act or omission where they have knowledge (attributable through the Board process) or if there is consent, connivance or a lack of diligence.

Copyright © Khaitan & Co 2013 | 21 Board Committees: Applicability TYPE OF COMPANY AUDIT COMMITTEE NOMINATION & REMUNERATION COMMITTEE CSR COMMITTEE STAKEHOLDER RELATIONSHIP COMMITTEE Private Company Not applicable Independent Director required on CSR Committee if: Net worth ≥ INR 500 Crores Turnover ≥ INR 1000 Crores Net profit ≥ INR 5 crores Not applicable Public Unlisted Company Both committees required if the company has: Paid-up share capital of INR 100 crores or more; or Aggregate outstanding loans, borrowings, debentures or deposits exceeding INR 200 crores Applies if the company has 1000 or more shareholders Public Listed Company Applicable Applies if the company has 1000 or more shareholders

Copyright © Khaitan & Co 2013 | 22 Board Committees: Composition, etc. TYPE OF COMMITTEECOMPOSITIONOTHER REQUIREMENTS Audit Committee [Section 177] 3 Directors Majority Independent Directors Roles stipulated Decisions no longer binding on the Board Whistle-blower policy required, providing direct access to the chairman of the Audit Committee Nomination & Remuneration Committee [Section 135] 3 Directors Majority Independent Directors CSR Committee [Section 178] 3 Directors 1 Independent Director Stakeholder Relationship Committee [Section 178] Strength and composition determined by the Board Chairman to be non- executive Purpose – to solve the grievances of security holders

Copyright © Khaitan & Co 2013 | 23 Related Party Transactions RELATED PARTY - DEFINITION Director, key managerial personnel or relative of such person Firm in which a director, manager or relative is a partner Private company in which a director or manager is a member or director A public company in which a director or manager is (a) a director; or (b) along with relatives holds more than 2% Any body corporate whose Board, Managing Director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager Any person on whose advice, directions or instructions a director or manager is accustomed to act Any a holding, subsidiary or an associate company of such company a subsidiary of a holding company to which it is also a subsidiary

Copyright © Khaitan & Co 2013 | 24 Related Party Transactions  Prior consent of the Board and no Central Government permission  Interested Director not to remain present at the Board meeting  A related party transaction can be entered into only if it is approved by a special resolution at the general meeting: –where the company has paid-up share capital, which is not less than INR 1 crore; –Transactions amount (individually or taken together with previous transactions during a financial year)exceeds 5% of the annual turnover or 20% of the net worth of the company as per last audited financial statements, whichever is higher; –Transaction relating to appointment to any office or place of profit in the company, its subsidiary or associate company at a monthly remuneration exceeding INR 1 lakh; or –Is for a remuneration for underwriting the subscription of any securities or derivatives exceeding INR 10 lakhs.  No member of the company who is a related party can vote on the special resolution

Copyright © Khaitan & Co 2013 | 25  The scope of existing provisions has been widened to include selling, buying and leasing  An arms length transaction entered into in the ordinary course of business of the company is an exception to the related party transaction rule  Related party transactions including the reasons for entering into the relevant transactions are to be included in the Board’s report to the shareholders  Shareholder’s approval for non-cash transactions with Directors of the company, its holding, its associated company, or a person connected with him would be required  Company should not acquire assets from such directors Related Party Transactions