1

Officers & Key Managerial Person

The definition of “Officer” in the new Act has been extended to include Key Managerial Personnel (KMP).

Key Managerial Persons (KMP) as defined in Section 2(51) of the Act, includes, inter alia, CEO, Managing Director, Manager, Whole-time Director and Chief Financial Officer (CFO).

Section 2(51) has been notified.

2

Appointment of KMP

The new Act provides for mandatory appointment of certain whole time KMP for every listed company and every other public company having a paid-up share capital of INR 10 crore or more [Rule 8 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 ]: Managing director, or chief executive officer or

manager and in their absence, a whole-time director

Company Secretary (CS) Chief Financial Officer (CFO)

3

Appointment of KMP

Further, the 2013 Act also states that an individual cannot be appointed or reappointed as the chairperson of the company, as well as the managing director or chief executive officer of the company at the same time except where the articles of such a company provide otherwise or the company does not carry multiple businesses.

If the office of any whole-time KMP is vacated, the same can be filled up at the Board Meeting within 6 months.

4

Appointment of MD, Whole-time Director or Manager

The eligibility criteria for the age limit has been revised to 21 years as against 25 years in the 1956 Act. Further, the 2013 Act lifts the upper bar for age limit which means an individual above the age of 70 years can be appointed as KMP by passing a special resolution.

The re-appointment of a managerial person cannot be made earlier than one year before the expiry of the term instead of two years as in the 1956 Act. However, the term for which managerial personnel can be appointed remains as five years.

5

Number of Directors

Private Company [Section 149] The maximum number of directors

(permissible without approval from Cent. Govt.) increased from 12 to 15.

Minimum 2 directors (except for OPC) Public Company

The maximum number of directors (permissible without approval from Cent. Govt.) increased from 12 to 15.

Minimum 3 directors.

6

Remuneration of KMP and Directors

The 2013 Act requires constitution of a Nomination and Remuneration committee which will formulate and recommend to the Board of Directors, the company’s policies, regarding remuneration for the directors and KMP and criteria for determining qualifications, positive attributes and independence of a director [Section 178(1)].

Approval of Central Government is now required for certain managerial remuneration.

The provisions relating to limits on managerial remuneration provided in the 1956 Act are retained.

7

Remuneration and Insurance MD or Whole-time Director of the company who

is in receipt of any commission from the company will not be disqualified from receiving any remuneration / commission from its holding company or subsidiary company subject to necessary disclosures in the Director’s report.

Insurance premium paid by company for indemnifying specified KMPs against the liabilities for negligence, breach of duty etc. of such specified KMPs will not be treated as part of remuneration of such KMPs.

8

Duties and Liabilities of Directors The duties of the directors were not specifically

provided in the old Act. Section 166 of the new Act provides certain duties of the directors. If a director contravenes the provisions of this section he/she can be penalized with fine of INR 1 lakh to 5 lakhs.

If any default is made in complying with the order of the Tribunal in Rectification of Register of Members, Officer-in-Default can be penalized by way of imprisonment up to 1 year or fine of INR 1 lakh to 3 lakhs or both. [Section 59(5)]

9

Officer-in-Default

Section 2(60) of the new Act defines “Officer-in-Default”. The meaning of this term has now been widened so as to include KMP as well as every director who is aware of any contravention by virtue of receipt of board proceedings or participation therein without raising any objection or where non-compliance has taken place with his consent or connivance. Such an officer can be penalized by way of imprisonment, fine or otherwise.

Also, when it is proved that the affairs of the company were conducted fraudulently, every officer in default can be penalized by way of imprisonment of 6 months to 10 years and also fine which will not be less than the amount involved in the fraud extending up to three times of the amount involved in the fraud. Also, where the fraud in question involves public interest, the term of imprisonment shall be minimum 3 years.

10

Officer-in-Default: Liabilities

If a company issues shares at discount, the Officer-in-Default can be penalized by way of imprisonment up to 6 months or fine of INR 1 lakh to 5 lakhs or both. [Section 53]

Any violation of section 68 regarding purchase its own securities or any regulation made by SEBI for the purposes of clause (f) of sub-section(2) can make Officer-in-Default liable for imprisonment up to 3 years or fine of INR 1 lakh to 3 lakhs or both.

11

KMP Holding Office in more than one Company

A Whole-time KMP cannot hold office in more than one company at the same time unless (a) one of the companies is a subsidiary company, and (b) he is MD of both companies and has been so appointed with the consent of all the directors present at the Board meeting.

A Whole-time KMP holding such positions at the commencement of the new Act will be required to choose one company for their appointment within six months.

Contravention of this provision can result in fine up to INR 50,000 and where the contravention is continuing one with a further fine which may extend to INR 1000 for every day after the first violation during which the contravention continues.

12

Purchase of Shares by KMP

KMP of a company cannot buy in the company, its holding, subsidiary or associate company –a. a right to call for delivery or a right to make

delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures; or

b. a right, as he may elect, to call for delivery or to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures.

13

Insider Trading & Prohibition on Forward Dealings

The new Act, vide S. 195, for the first time defines “insider trading” and “price-sensitive information” and prohibits any person including the director or KMP from entering into insider trading. Violation of S. 195 can result in imprisonment up to five years  or fine from INR 5 lakhs to 25 crores or three times the amount of profits made from such act, whichever higher, or both.

The new Act, vide S. 194, also prohibits directors and KMP from forward dealings in the company or its holding, subsidiary or associate company. This section has been notified. Violation of S. 194 can result in imprisonment up to two years or fine from INR 1 lakh to 5 lakhs or both.

14

Deposit

One would have to examine the Companies (Acceptance of Deposits) Rules, 2014 and identify the amounts which will not be regarded as a deposit.

If a non-exempted company has accepted a deposit, it will have to organize for its repayment within 1 year from the date of commencement of the new Act. The penalties for non-compliance are severe for the KMPs and such personnel should take adequate steps to ensure adequate compliance.

15

Loans to Directors & Investment by Company

As per Section 185(2) of the new Act, no company can, directly or indirectly, advance any loan to any of its directors or to any other person in whom the director is interested. Any contravention of this provision will make Officer-in-Default liable for imprisonment up to 6 months or fine of INR 5 lakhs to 25 lakhs or with both.

Any investments of Company has to be held in its own name. Any violation of the same can make Officer-in-Default liable for imprisonment up to 6 months or fine of INR 25,000 to 1 lakh or with both.

16

Annual Returns, Books of Accounts, Financial Statement

The new Act requires remuneration of directors and KMP and any penalty or punishment imposed on the directors or officers to be included in the Annual Return. [Section 92(1)].

In case a company fails to file its annual return, the Officer-in-Default can be penalized by way of imprisonment up to 6 months or fine of INR 50,000 to 5 lakhs or both.

Similarly, if the Company fails to keep the Books of Accounts, the Officer-in-Default can be penalized by way of imprisonment up to 1 year or fine of INR 50,000 to 5 lakhs or both.

At every AGM, the BoD is required to lay financial statements for the financial year and any contravention or it can make make Officer-in-Default liable for imprisonment up to 1 year or fine of INR 50,000 to 5 lakhs or both.

17

General Meetings

The 2013 Act intends to improve corporate governance by requiring disclosure of the nature of concern or interest of every director, manager, any other KMP and relatives of such director, manager or any other KMP in each item of special business in the notice of the meeting [Section 102 (1)].

Where any benefit accrues to promoter, director, manager, KMP, or their relatives, either directly or indirectly as a result of non-disclosure or insufficient disclosure then such persons will hold such benefit in trust for the company and can be held liable to compensate the company to the extent of the benefit received by him/her.

18

General Meetings

Also, the threshold of disclosure of share holding interest in the company to which the business relates of every promoter, director, manager and KMP has been reduced from 20% to 2% [Section 102 (2)]

Section 173(2) of the new Act allows directors to attend the meetings even by way of video conferencing/ audio visual conferencing.

19

Related Party

As per the new Act, related party will inter alia include- a. Director or his relative;b. KMP or his relative;c. A firm in which director, manager or his relative is a partner;d. A private company in which a director or manager is a member

or director;e. A public company in which a director or manager is a director or

holds along with his relatives more than 2% of its paid-up share capital;

f. Any body corporate whose BoD, MD or manager is accustomed to act in accordance with the advice, directions or instructions of a director or a manager (except in professional capacity);

g. Any person on whose advice, directions, or instructions a director or manager is accustomed to act (except in professional capacity).

20

Related Party

The definition of related party is very wide and so is the definition of relative and these two read together will make it extremely difficult for KMP and directors to keep track of the business dealings of not only their relatives but also the relatives of their partners (in case of firms) and KMP (in case of companies).

21

Related Party Transaction

For entering into any related part transaction, every company will require the consent of its BoD or Audit Committee, vide a resolution passed at a board meeting

Related party transactions to also require prior shareholder’s approval by special resolution for companies having prescribed paid up capital or transactions exceeding prescribed amounts.

Requirement of obtaining Central Government approval for related party transactions no longer necessary.

The concept of Arm’s Length Transaction has been introduced which means that transaction between two related parties should be conducted as if they were unrelated, so that there is no conflict of interest.

22

Resident Director

As per Section 149(3) of the new Act, every company shall have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year.

23

Independent Director

As per Section 149(12) of the new Act, Independent Directors can be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

IDs can be reappointed after a gap of 3 years, however, he/she should not be associated with the company directly or indirectly in this gap.

24

Independent Director

An independent director shall not be entitled to any remuneration other then sitting fee, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

Central Govt. may prescribe different sitting fees for different classes of companies and fees in for attending meeting of BOD or committee thereof.

An independent director will not be eligible to get stock options.

25

Woman Director

The following category of companies now need to have at least one woman director: a. Every listed company (within one year

from the commencement of second proviso to sub-section (1) of section 149) .

b. Every other public company having paidup share capital of INR 100 crore or more, or a turnover of INR 300 crore or more within 3 years from the commencement of second proviso to sub-section (1) of section 149.

26

Nominee Director

Nominee director nominated by any financial institution , or in pursuance of any agreement, or appointed by any government to represent its shareholding shall not be deemed to be an independent director.

27

Board Committee

Companies Act 2013 [clause 177 and 178] Besides Audit Committee, the constitution of Nomination and

Remuneration committee has also been made mandatory in the case of listed companies and certain other class(es) of companies;

The Audit Committee shall consist of a minimum 3 directors with independent directors forming a majority of members, including its chairperson, shall be persons with ability to read and understand the financial statement.

The Nomination and Remuneration Committee shall have 3 or more non- executive directors out of which not less than one half should be independent director.

Where the combined membership of the shareholders, debenture holders, deposit holders and any other security holders is more than 1000 at any time during the financial year, the company shall constitute a stakeholders Relationship committee.

28

CSR Committee

Companies Act 2013 [clause 135] Every company having net worth of Rs 500 Crore or

more , or turnover of Rs 1000 crore or more or a net profit of Rs 5 crore or more during any financial year will have to constitute a Corporate Social Responsibility Committee.

Such committee shall consist of three or more directors , out of which at least one director will be an independent director.

The Board of every such company shall ensure that the company spends in every financial year at least 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance of its CSR policy.

29

Resignation of Directors

Companies Act 2013 Director who has resigned shall be liable even after

his resignation for offences which occurred during his tenure.

Where all the directors of company resign from their offices, or vacate their offices under section 167, 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 general meeting.

Companies Act 1956 No such provision existed in the old Act.

30

Political Contribution

Similarly, punishment prescribed to an Officer-in-Default for Punishment for not complying with rules laid down in section 182 regarding political contributions is imprisonment up to 6 months and fine to the tune of five times of the amount of contribution.