A NOTE ON THE WORKING OF

THE BOARD OF DIRECTORS

by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – PGPSE PARTICIPANTS
mobile : 91+9414430763

5 DECEMBER 09 www.afterschool.tk 1
 WHO IS A DIRECTOR?

SEC 2(13) : ANY PERSON WHO OCCUPIES

THE POSITION OF A DIRECTOR – BY
WHATEVER NAME CALLED

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 CASE STUDY : FERGUSON
V.S WILSON

Truely speaking the director of a company is

an agent of the company

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Case study : Smith v/s Anderson

Directors are truely the trustees of the property

fo the company

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 DEEMED DIRECTOR ???

As per sec. 5 , 303, 372A : if directors act on

advice of a person, that person is called
deemed director.
Sec. 7 : if that person is giving professional
advice – that person will not be called deemed
director.

5 DECEMBER 09 www.afterschool.tk 5
 Managing Director ???

Sec 2(26) : a person who has been given

substantial powers of management is called
managing director - he can be appointed – by
- board resolution / articles / AGM /
agreements

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 Minimum number of directors

Sec. 252 : public company : 3, private

company : 2
no maximum limit in law
these limits can be set in articles of association
sec. 259- when the number of direcors increase
beyond 12, it may require Govt. Permission
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 Directors representing small
shareholders
(only on public companies with Rs. 5 crore or
more)
As per Companies (appointment of small
shareholders' director) rules 2001 – there
should director / s representing small
shareholders.
Small shareholders : holding upto Rs. 20000
nominal value (face value) of shares.
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 First directors (sec. 254)

May be appointed by articles of association.

Regulation 64 of Table A of schedule I : the
first directors are appointed by subscribers of
MOA & AOA .

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 Subsequent Directors (sec. 255,
256)

They are appointed by AGM

2/3rd directors are retiring directors - 1/3rd may
be non-retiring directors. Thus if you have 12
directors, 8 directors have to retire by rotation.

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 Case study : S. Jabh Singh vs
Panesar Mech. Works P. Ltd.

Where no period for retirement is prescribed in

AOA, then directors will retire when they are
removed as per sec. 284.

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Case : Consolidated Nickel Mines
Ltd.

When AGM is not held, directors due to retire,

will retire on their due date – similarly when
AGM is adjourned, the directors due to retire,
will retire on that that day
retiring director may be reappointed.
FIFO in retirements

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How will you become a director?

At least 14 day notice of willingness to become

a director with fees of Rs. 500 (by the person
or the person who is proposing someone as
director).
The person must also submit his accent to
become a director to ROC at least 30 days
before appointment.
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 Can BoD (board of directors)
appoint additional directors?

Yes – IF AOA authorise it .

But this appointment will be till next AGM.
If AGM is not held, the director will retire on
the date of AGM.
(sec. 260)

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Casual Appointments (Sec. 262)

If there is a vacancy, the board may appoint a

director as per procedure in AoA. This is
casual appointment.

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ALTERNATE DIRECTOR (SEC.
313)

BoD may appoint alternate director in place of

a director who is going for a long vacation -
the alternate director will leave the position
when original director returns. It must be for 3
months or more.

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 Appointment by Central Govt.
(sec. 408)
If Company Law Board thinks it is necessary,
then Central govt. May appoint a director for a
period upto 3 years.
This director will not require qualification
shares (minimum number of shares to be held
by every director to be eligible to become a
director).
While counting 2/3rd, we will not take this
director into account.
5 DECEMBER 09 www.afterschool.tk 17
 rd
Appointment by 3 parties

Financial institutions like

IDBI/IFCI/ICICI/SBI etc. Can appoint
addional nominee directors – their particulars
have to be submitted in form no. 32.

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 Appointment in AGM

As per sec. 263 – a director is appointed by

shareholders – by simple majority. Each
director will require separate resolution.

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 Principle of Proportional
Representation (sec. 265)
In order to enable minority shareholders, this
principle has been introduced. The directors
appointed by this principle should hold office
for 3 years and cannot be removed by AGM as
per sec. 284.
(upto 2/3rd directors may be appointed by this
system – by single transferable vote /
cumulative voting).
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 MD / whole time director (sec.
269)

Every public company having 5 crore or more

capital must have an MD / whole time director.
It requires permission of Central Government /
or apply as per schedule XIII and submit return
in form 25C within 90 days of appointment.

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 Schedule XIII – part I

The person being appointed as MD must not

have violated any act like Central Excise,
Income Tax, Wealth Tax, Customs, FEMA etc.
Age – between 25 and 70 (A major with less
than 25 years age / more than 70 ,can also
become, if special resolution + govt.
Permission is obtained).
must not have violated COFEPOSA
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 Maximum period of term

The maximum period is 5 years -

reappointment is permitted.

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 Maximum remuneration (sec.
198)

5%
total managerial remuneration of the company
= 11% of profit (computed as per sec. 349 and
350)
for part time director : 1% (if MD is there, 3%,
if there is no MD)

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 Sitting fees (sec. 309)

Maximum fees : 20000 for each meeting

(when turnover is above 50 crore and capital +
reserves at least 10 crores).
Otherwise maximum : 10000 / per meeting.

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 Qualification of directors (sec.
274)

Qualifications are not mentioned, but

disqualifications are mentioned in the law. A
person of unsound mind, undischarted
insolvent, a person imprisoned for moral
turpitude for 6 months or more is not eligible
for directorship.

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 Case : Oriental Metal Pressing
works P. Ltd vs. Bhaskar
kashinath

The court held that only individual can be

director, a firm or association cant be director,
as it is a position of trust.

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 Case : People's bank of northern
India

Articles of association may exempt persons of

technical / professional qualification from
having qualification shares. Otherwise the
articles may require the director to have
qualification shares.

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 Qualification shares (sec. 270)

Director must have qualification shares in 2

months from appointment
the nominal value of qualification shares
should not be more than Rs. 5000
bearer of share warrant cant be said to be
holding qualification shres.

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 Penalty : sec 272

If a director doesnt acquire qualification shares

in 2 months, he shall pay penalty Rs. 500 per
day. (all these provisions are applicable only
on public companies)

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 Number of directorship (max.)
sec. 275

No person can become director of more than

15 companies (public companies)

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 Sec. 278 – what to exclude from
15 companies

Following are not counted in 15 companies :

private company
unlimited company
a company in which the person is alternate director
association not for profit
penalty : (sec. 279) : upto 50000 if you become director
of more than 15 public companies

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 Vacation of post of director (sec.
283)
A director has to vacate if :
he is of unsound mind, he doesnt acquire
qualification shares in 2 months, he is judged
insolvent, convicted for moral turpitude &
imprisoned for 6 months or more, absents the 3
consecutive meetings or for 3 months (without
leave), he doesnt disclose his interest in a
contract (sec. 299), by court (sec. 203), when
he is there as an employee, but he retires.
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 Removal of director (sec. 284,
388B, 402, )

Shareholders can remove a director by

ordinary resolution. They have to send a
special notice (14 day notice) for this meeting
and pass the resolution. They cant remove a
director appointed by Govt / financial
institution. (sec. 284)

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Removal by govt. In case of fraud

If the director is engaged in fraud, mal-

practices, anti-social activities etc. Or the
company is not managed properly or the
company is working against the interest of
lenders / financers, or the company is
following unsound business practices, The
director can be removed by government as per
sec. 388B to 388E.
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Removal by company law board

In order to prevent oppression and

mismanagement, CLB can remove director
(sec. 397,398,402) – that director cant become
director of another company for 5 years.

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 Loans to director (sec. 295)

Without prior permission from government, no

company can give loan to its director / firm
(where the director of this company is a partner
/ proprietor ) / company of its director (its
director is holding 25% voting power in that
company),
however, these provisions dont apply to private
/ banking / holding company
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 WHO MAY CALL BOARD
MEETING ?

Any director can call a board meeting or he

may make a requisition for a board meeting as
per Regulation 73 of table A of schedule I.

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 NUMBER OF BOARD
MEETINGS?

At least one in 3 months and at least 4

meetings in a year. At least 15 notice of the
board meeting must be given at the address of
the director / fax.
There must be at least 7 days notice of agenda /
notes to agenda of the board meeting.

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 QUORUM (SEC. 287)
It means the minimum number of persons who
must be present in the board meeting. At least
1/3rd must be present (or two = whichever is
more). Only those who are disinterested can
come and participated. Those who are
interested in the matters, cannot vote. If
quorum is not present, adjourn the meeting for
same day, next week. A fresh notice is required
if it is sine de adjournment.
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 Validity of the act of directors
(sec. 290)

The powers of directors are defined in law and

also in articles of association. They can act in
their powers. Even if a director is disqualified
or later on it is discovered that he was not
appointed properly, his acts done earlier will
remain valid and binding on the company.

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 Minutes of the meeting of the
board of directors

Minutes of the board meetings must be

prepared in 30 days of the meeting and must be
preserved in minutes book – duly serial
numbered. The chairman must sign each page
of the minutes book. The minutes book should
not have loose leaves. The chairman may
remove the material which is irrelevant.
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 Minutes book as evidence

Minutes book is a legal evidence as per sec.

194, so it should be properly kept. Any director
can inspect the minutes book.

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Chairman of the board of directors
meetings

Chairman can be elected by the board of

director. If there is no chairman or he is absent,
the meeting may select its chairman in 5
minutes of the meeting.
As per regulation 74 of Table A of Schedule I,
chairman has a casting vote.

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Sudha Soni has said that she will not be able to attend
board meetings as she is going to the USA. Will you
still send her notice for board meetings (she being a
director). If alternate director is appointed, will you
still send her a notice of the meeting?

Yes – in both the cases, notice has to be sent to

the director. In the second case, to both the
directors

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 Is it necessary that the notice of
BOM must specify the business to
be discussed?

No – it can be sent separately. (we have

discussed - it requires only 7 days notice, but
board meeting requires 15 day notice).

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 Can board meeting be held on
public holiday / after business
hours?

Yes

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Case : as per law you have to have one meeting
at least in every quarter. However, due to lack
of qorum (as your directors are mostly in the
USA), no meeting is held. Have you violated
the law?

No – you made an efforts – the meeting was

not held due to lack of quorum.

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Board held a meeting on 31 Jan, as every
year you have a meeting on 31 Jan. No
notice was given. Is it a valid meeting?

Yes, it is still a valid meeting.

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 Audit committee ? ? ?

Sec. 292 A and clause 49 of listing agreement

requires every company to appoint an audit
committee of directors. It will look into the
working of the company.

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 Clause 49

It requires that audit committee must be

appointed by all those companies which are
listed companies. Audit committee can have
only independent directors. The company
secretary will be the secretary of the audit
committee also. It must have meetings just like
board of directors.
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 Registers of directors (sec. 303)
Every company must keep a register of the
directors. The register must be a bound book. It
will also prepare a form no. 32 and file with
the registrar of the companies about the
directors. (in 30 days of appointment of the
dreictors) comapny must keep a resiter of all
the contracts in which director is interested
(sec. 301) register of shareholding of directors
(sec. 307) is also necessary .
5 DECEMBER 09 www.afterschool.tk 52
 Offences and penalties (sec. 630,
621A, 633)

If directors commit any mistake / offence, he is

punishable by Rs. 10000 / with / without
imprisonment upto 2 years as per sec. 630,
however, court can grant relief as per sec. 633.

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 Case : Rohit Samsukha wants to
resign from the post of MD, can
he do so ?

No, he has to follow the terms and conditions

of the contract. He can resign only as per
terms. However, other directors can resign any
time – even orally – whether the company
accepts it or not, but Rohit is MD, he cant.

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Pankaj is not a member of our company,
but he wants to inspect our register of
directors, can he do so ?

Yes – during business hours. For members it is

free, but for others (Pankaj), there is a fee of
Re. 1.

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ABC ltd and XYZ ltd. Make a contract, Sudha
has interest in the contract, but she doesnt
disclose it in the board meeting or in form
24AA , she holds .1% in both the companies.
What will happen?

Ordinarily fine of 50000 , however, there are

exceptions - so probably Sudha will escape
due to these exceptions – like she has very
small holding (less than 2%)

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5 DECEMBER 09 www.afterschool.tk 57
 Case : MR electronics
components

Advance salary to the wife of a director will

not come in sec. 295

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 Case : Dr. Fredie Ardeshir

Sale of flat on instalment to the director will

not come under sec. 295

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 Contract with firms related to
director (sec. 297)
A company cannot enter into a contract with
another firm / company in which its own
director is a partner / owner, unless it has been
approved by the board.
Exemptions : if it is cash transaction, or it is a
ordinary transaction in banking / insurance
firm or if the value of transaction is less than
Rs. 5000 per annum.
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 Case study

Professional services (like auditing,

consultancy) dont come in sec. 297.

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 Notice by director

A director has to give notice in form 24AA

when a company is about to enter into contract
in which director is interested. The notice must
be given to the board of directors when they
meet. (sec. 299)
penalty : Rs. 50000

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Case : fire stone tyre & rubber co
v/s synthetics and chemicals co.

Interest here means personal interest – not

official interest and includes closeness of
relatives (like father – son).

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Director not to participate in some
meetings (sec. 300)

A director cannot participate in a meeting in

which a matter / contract related to his issue /
in which he is interested, is discussed.

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 Office of profit Sec. 314

Director / his relatives cannot hold an office of

profit having remuneration of Rs. 10000 or
more per month – without special resolution.
Any firm / company in which director is a
partner / owner also cant hold a place of profit
without special resolution

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 Restriction on the powers of the
board

Sec. 293 restricts the powers of the board : it

cant remit loan due to director or his firm, it
cant invest compensation received otherwise
than as per law, it cant dive charity of more
than 5% of profit (or 50000) it cant borrow
more than equity + reserves without
permission.
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Can the directors keep accounts in
other places than registered
office?
Yes – the board of directors have to take a
decision and communicate it in 7 days to ROC
(registrar of companies) in form23 AA.
It can keep its accounts of branch offices at
branch office – but a summarised report should
be sent to the registered office at intervals of 3
months.
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Can a director inspect any book of
accounts?

Yes - during business hours ( sec. 209 (4) )

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 How long should the directors
keep the books of accounts
preserved?

For 8 years.

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 How should directors get the
accounts and reports approved
from shareholders?

Within 6 months of date of closure of financial

year,it must be adopted by AGM as per sec.
210
financial year can be extended upto 15 months
and with permission of ROC, upto 18 months.

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 Signing of annual accounts
Annual accounts must be signed by 2
direcotrs / manager / secretary
if you have MD, he must sign it.

Sec. 216 : P & L as per format must be

attached with balance sheet.
Sec. 217 : board of director must add his report
on working of company with the annual
account.
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