Company Law

1 Incorporation of company

Formation of a company involves following procedures –

(a)     Approval of name.

(b)     Drafting of Memorandum of Association, typed on stamp paper and signed

(c)     Articles of Association duly typed on stamp paper and signed (not essential in case of public limited company limited by shares, but still almost invariably submitted).

(d)     E-filing of documents

(e)     Submission of required papers like Statutory declaration of compliance, Power of Attorney

(f)      Payment of filing Fees.

(g)     Correcting Memorandum and Articles if required by ROC by person holding Power of Attorney

(h)     Filing final copy of Memorandum and Articles in pdf format, if corrections were made.

(i)       Collect certificate of incorporation by holder of Power of Attorney.

1-1 Approval of name – The first step in formation of a company is getting the proposed name approved from Registrar of Companies of the State where the company is to be incorporated.  Availability of a name can be checked using the ‘Check Company Name’ service under ‘Other Services’ tab on homepage of MCA i.e. www.mca.gov.in. Once this is done, chances of rejection of proposed name will be much less.

Name should be indicative of the main object of the proposed company.

Purpose of application is to confirm that the proposed name is not undesirable as per section 20. Same procedure applies for change of name also.

The procedure for approval of name of company has been changed w.e.f. 16-11-2007. Application for approval of name should be made to regional ROC electronically in form 1A with fees of Rs 500.

If some key words or coined words are used, its significance should be stated. If proposed name is based on registered trade mark or application has been made for registration of trade mark, details should be furnished.

Two persons in case of a private company and seven persons in case of public company should be named as promoters/subscribers. They should have obtained DIN.

Registrar of Companies is required to inform approval of name / rejection of proposed name within seven days.

Six names are required to be submitted. If none of these names is found to be acceptable, ROC will give opportunity to propose new names. These are to be submitted within three days. Two opportunities will be given for re-submission of names. If despite this, none of the names is found to be acceptable by ROC, the fees paid will lapse. Then fresh application for name approval with fresh fees should be paid.

Name approved is valid for 60 days. The approval can be renewed once for a period of 30 days by paying fees of Rs 250. If the company is not incorporated within 60 days (or within further 30 days if extension s obtained), the name approved will lapse. Of curse, fresh application with fresh fees can be made  [Rule 4A as amended w.e.f. 16-11-2007].

As per circular No. 1/95, dated. 16-2-1995, the persons who have applied for approval of name as promoters should be subscribers to the memorandum and articles. If not, at least one person should be common and others should have no objection.

SRN after submission of application - Applicant will get SRN (Service Request Number), which can be used to trace position about approval of name.

Words private limited or Limited - Name of a company must contain the word 'Limited' or 'Private Limited' at the end. Exemption from this provision is given only to section 25 companies. Such company is termed as' licensed company'. The license is given to chamber of commerce, trade associations, charitable organisations etc. which are not for profits. A Government company formed as a private company can delete the word 'Private' from its name.

Criteria in approving a name - Name should be indicative of the main object of the proposed company. If some key words or coined words are used, its significance should be stated. If proposed name is based on registered trade mark or application has been made for registration of trade mark, details should be furnished. Name should not be identical or should not too nearly resemble the name of another registered company.

Name should not be considered undesirable by Central Government [section 20(1)] Offensive name or name suggesting unlawful activity is not permissible.

Name should not violate provisions of Emblems and Names (Prevention of Improper Use) Act, 1950.

Name misleading i.e. key word suggesting a great scale while company is with small resources. Thus, following are restrictions - word ‘Corporation’ permitted when authorised capital is Rs 5 crores. Words like International, Global, Asia etc. is permitted if authorised capital is Rs 1 crore. Words like Hindustan, India, Bharat permitted when authorised capital Rs 50 lakhs. Words like Industries/Udyog permitted if capital is Rs 1 crore. Words like ‘Enterprise’, ‘Business’ ‘Manufacturing’ permitted when capital is Rs 10 lakhs.

Change of name of company to reflect business of software (e.g. name containing words like Infosys, Software, Cyber, Cyberspace, Computers etc.) will be permitted only if a substantial portion of its income is derived from software business. - PIB press release dated 16-8-1999.

Consent of other companies in group for using group name in name of a company - If a company intends to use group name as part of its name (e.g. Kirloskar, Birla, Tata, Reliance etc.) it is standard practice of ROC to obtain no objection letters from other group companies.

1-2 Procedure after obtaining approval of name

Following  documents are to be submitted electronically as scanned attachment to e-form No. 1.  After submission, a SRN (Service Request Number) will be generated by system.

(a)     Memorandum of Association duly stamped as per State Stamp Act [section 33(1)(a)]  Memorandum and articles have to be signed by all signatories, writing (by hand) their names, address, occupation and number of shares they are subscribing to.

(b)     Articles of Association, if any, duly stamped as per State Stamp Act [compulsory for private company, optional for public company, but almost always filed]

(c)     If company proposes to appoint a person as Managing Director or wholetime director or Manager, a copy of agreement is to be enclosed [section 33(1)(c)]

(d)     Statutory Declaration of Compliance in form 1 u/s 33(2) on stamp paper. The declaration can be signed by Advocate, Practising Company Secretary, practising Chartered Accountant, or by a person named in the articles as Director, Manager or Secretary of the company. The stamp paper should be purchased in name of applicant-subscriber and not in name of company which is yet to be incorporated

(e)     Power of attorney to correct memorandum and Articles and to collect certificate of incorporation (PoA should be on stamp paper as per State Stamp Act. The stamp paper should be purchased in name of applicant-subscriber and not in name of company which is yet to be incorporated).

(f)      If Articles of public company having share capital specify names of directors, their written consent as attachment to e-from 32.

(g)     Original letter of ROC approving name of company

(h)     Notice of registered office as required u/s 146(1) – It can be filed within 30 days from incorporation in e-form 18. However, as per instructions to e-form 1, e-from 18 is to be filed along with form No. 1.

(i)       Proof of payment of filing fees. The fee payable is specified in Schedule X.

Submission of original papers in physical form - The original memorandum of association and articles of association duly stamped signed should be submitted to ROC of concerned State, giving reference to SRN. Original Statutory Declaration of Compliance in form 1 u/s 33(2) on stamp paper and Power of attorney should also be submitted.

1-3 Fees payable for registration of a company

Fees payable for registration of a company having share capital depends on nominal share capital and varies from Rs 4,000 to Rs 2,00,04,000. [Rs two crore and four thousand], as follows –

Company not having a share capital – Fee payable is Rs 5,000 when number of members as stated in Articles is unlimited. Fees for filing or registering a document is Rs 50.

Section 25 companies – Companies licensed under section 25 will have to pay same registration fees as above [Till 31-12-2007, they were required to pay nominal fee of Rs 50].

Fee for increase in nominal capital - If nominal share capital is increased, difference in fees is payable, while filing notice of increase in nominal capital. The differential fees payable is equal to fees payable on increased capital as per Schedule less the amount payable on share capital equal to nominal capital before the increase, at the rates prevailing on date of filing the notice. [Thus, if nominal share capital is increased from Rs 10 lakhs to Rs 50 lakhs, calculate fees payable on Rs 50 lakhs, calculate fees payable if nominal capital was Rs 10 lakhs and then pay the difference].

1-4 Procedure after e-filing and submission of original documents

The documents are scrutinised by ROC.  If the Memorandum/Articles is corrected as required by ROC, final soft copy in PDF format will have to be submitted.

After correction and completion of all requirements, certificate of incorporation will be issued by ROC with CIN (Corporate Identity Number).

Certificate of commencement of business - A private company can commence business immediately, while a public company can commence business only after obtaining certificate of commencement of business.

1-5 Alterations to Memorandum and Articles of Association

Any provision in Articles can be changed by a special resolution.

Provisions in respect of change of Memorandum are as follows.

Overall control of company by Shareholders

2 The body of members (shareholders) are real owners of the company. However, they have no authority to look after day to day affairs of the company or enter into contracts on behalf of company. They have limited powers. They must meet at least once a year at Annual General Meeting. (AGM).

Ordinary Business at AGM - Following is the ordinary business of the company. Normally, this business should be transacted at every AGM. [section 173(1)]—

·          Consideration of accounts - to receive and adopt annual accounts of the company.

·          Consideration of report of Board of Directors and auditors - To receive and adopt Report of Board of Directors and Auditors

·          To declare dividend

·          To appoint directors in place of retiring directors

·          To appoint auditors for ensuring year and fix their remuneration.

Special Business - All business at the meeting other than the aforesaid ‘ordinary business’ is termed as ‘special business’.

2-1 Businesses in which the resolutions shall be passed through Postal Ballot only

As per rule 4, following business of public listed company shall be transacted through postal ballot. -

Alteration of Object clause - alteration in the Object Clause of Memorandum [section 17(1)] – Requires special resolution.

Alteration of Articles defining private company - alteration of Articles of Associations in relation to insertion of provisions defining private company.  [This is meaningless as the provision of postal ballot is only for listed company and a listed company cannot be a ‘private company’ ]. – Requires special resolution.

Buy back of shares - buy-back of own shares by the company under section 77A(1). [However, postal ballot is not required for buy back of ‘other specified securities’ which includes Employees Stock Option]. [Buy back of shares upto 10% of total paid up equity capital and free reserves can be made every year with resolution of Board, as per amendment to section 77(2)(b) w.e.f. 23-10-2001. In such cases, postal ballot will not be required]. – Requires special resolution.

Issue of sweat equity to promoters - Issue of Sweat equity shares to promoters u/s 79A(1)(d) in case of listed company – It should be by passing ordinary resolution through postal ballot. Promoters will not participate in such resolution, i.e. resolution shall be passed excluding the voting of promoters. [SEBI (Issue of Sweat Equity) Regulations, 2002].

Issue of shared with differential voting rights - issue of shares with differential voting rights as to voting or dividend or otherwise under section 86(a)(ii) – Requires ordinary resolution.

Change of registered office outside city but within State - change in place of Registered Office outside local limits of any city, town or village as specified in section 146(2) – Requires special resolution.

Sale of substantially whole undertaking - sale of whole or substantially the whole of undertaking of a company as specified under section 293(1)(a). [The words ‘lease or otherwise dispose of’’ are missing. Thus, postal ballot is not required for usufructuary mortgage of the undertaking. Lease of undertaking is also excluded from provision of postal ballot]. – Requires ordinary resolution.

Loans or guarantees in excess of limits - giving loans or extending guarantee or providing security in excess of the limit prescribed under section 372A(1). [The words inter corporate investment is missing. Thus, for making corporate investment exceeding the limit u/s 372A, postal ballot is not necessary] – Requires special resolution.

Election of small shareholders - election of a  small shareholders’ director under proviso to section 252(1) – Requires ordinary resolution

Variation of rights to class of shares or debentures - variation in the rights attached to a class of shares or debentures or other securities as specified under section 106 [In fact, section 106 only provides for variation of rights of shareholders. Thus, extending it to debentures by rules does not seem to be correct]. – Requires special resolution.

Waiver of public offer in case of takeover - Under SEBI code, in case of takeover, the acquirer is required to make public offer to purchase at least 20% of shares. Such public offer is not necessary if change in control takes place in pursuance to special resolution of target company. Such special resolution should be passed by postal ballot. [second proviso to regulation 12 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997] ) – Requires special resolution as per SEBI guidelines

2-2 Resolutions which are required to be passed as special resolutions

Some important sanctions requiring special resolution are as follows -

In addition, in some cases, approval of Central Government, Court or CLB is required.

2-3 Resolutions requiring special notice

Special notice is required for following resolutions - (a) Resolution appointing an auditor other than the retiring auditor or resolution that the retiring auditor shall not be appointed (section 225) (b) Resolution to remove director before expiry of his period and a resolution to appoint another director in place of removed director (section 284).  - - Interestingly, in both the cases, only ordinary resolution is required to pass the motion and not special resolution.

As per section 190 of Companies Act, a member intending to move such resolution has to give at least 14 days’ clear notice to the company before the general meeting. ‘Clear notice’ means date of giving notice and date of the general notice will have to be excluded for calculating period of 14 days. On receipt of such intimation, the company must give its members notice of the resolution in the same manner as notice of general meeting is given. If this is not practicable, notice should be given by advertisement or other mode as may be prescribed in Articles of Association. Such notice must be given at least seven clear days before the meeting.

2-4 Resolutions which can be passed as ordinary resolutions

Some important sanctions requiring ordinary resolution are as follows—

Board of Directors

3 Directors elected by members form a ‘Board of Directors’, which supervises and regulates the activities of the company. It exercises overall control over the affairs of the company. Section 291(1) makes it clear that the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to do.  The Board must meet at least once in every quarter, i.e. four times a year.

Quorum for the Board Meeting - Quorum for a Board meeting should be one-third of total strength of the Board, or two directors, whichever is higher. [section 287(2)].  If number of interested directors is two-third or more, it will be impossible to form a quorum of uninterested directors. In such case, the uninterested directors present will form the quorum. However, minimum two uninterested directors must be present. [proviso to section 287(2)].

3-1 Restrictions on Powers of Board

The Board of Directors has vast powers in management of the company. However, certain powers cannot be exercised by Board. These powers can be exercised only by members by resolution at a general meeting. [section 293(1)]. The  restrictions u/s 293 are applicable only to public company or a private company which is subsidiary of a public company. Some of these restrictions do not apply to a private company.

However, restrictions u/s 293A (political contributions) and 294 (Appointment of sole selling agent) apply to private company also.

Restrictions u/s 293(1) are –

Ø       Sale or lease of undertaking

Ø       Remitting or giving time for recovery of loan from director

Ø       Investment of compensation received after compulsory acquisition

Ø       Borrowing money in excess of paid up capital and free reserves

Ø       Contribution to charitable trusts

A company can make / give loans / investment / guarantee / security to another company only subject to restrictions as per section 372A.

Payment of commission or sitting fees to directors, payment of remuneration to MD / WD / Manager are as per limits prescribed under Companies Act.

A public company cannot appoint any firm or body corporate to any office or place of profit under the company for a term exceeding five years at a time [section 204(4)].

Sole selling agents - Central Government has issued notification No. GSR 272(E) dated 5-4-2007, prohibiting appointment of sole selling agents for bulk drugs, drugs and formulations (as defined in DPCO) for three years., i.e. upto 4-4-2010. There is no prohibition to appoint sole selling agents for sale of bulk drugs in export market. The prohibition will not apply to any bona fide preparation included in Ayurvedic (including Siddha) or Unani (Tibb) system of medicine or homeopathic system medicine (earlier notification No. GSR 130(E) dated 23-2-2004 which was valid upto 23-2-2007).

There is no other restriction at present on appointing sole selling agents.

Contributions than can be made by other companies - A non-Government company cannot make political contributions in first three financial years after it is incorporated. A non-Government company which is in existence for more than three years can contribute upto 5% of its average net profits during three preceding financial years. The profits should be calculated after allowing the expenditure and after making provisions of depreciation, as per sections 349 & 350. These restrictions are applicable to a private company also. Disclosure in balance sheet is required.

Limit on Board powers  in respect of investment / loan / guarantee

3-2 The overall limit of 60% of paid up capital of the company plus free reserves or 100% of free reserves, whichever is more has been prescribed for the following -

·          Making loan to any other body corporate.

·          Giving any guarantee, or providing security, in connection with a loan made by any other person to any body corporate (i.e. loan given to a body corporate)

·          Giving any guarantee, or providing security, in connection with a loan made to any other person by any body corporate (i.e. loan given by body corporate)

·          Acquiring by way of subscription, purchase or otherwise the securities of any other body corporate

It may be noted that the loan / investment / guarantee / security may be direct or indirect. All these will be covered in the overall ceiling.

The overall limit of all these together is 60% of paid up capital of the company plus free reserves or 100% of free reserves, whichever is more. [section 372A(1)]. Loan / guarantees / investment / security above this ceiling can be made / given only with previous approval by a special resolution in general meeting.

Unanimous Approval of Board - The investment / loan / security / guarantee should be approved by Board of Directors. The Board resolution should be passed at a meeting, circular resolution or resolution of a committee will not be permissible. All directors present at the meeting must vote in favour of the resolution. [section 372A(2)].

Delegation of powers for investment - Section 292 permits delegation of powers of making loans or investment to Committee / MD / Manager / Principal Officer by specifying amounts, nature and purpose. The harmonious construction is that such delegation is permissible, but only after passing unanimous resolution of the Board. Any other interpretation will make provisions of section 292 redundant.

3-3 Powers that can be exercised by Board with consent of Central Government

Following powers can be exercised by Board only subject to consent of Central Government –

Amendment to Articles providing that a MD / WD / director will not be liable to retire by rotation in public company - In case of public company or its subsidiary private company, amendment providing that a MD / WD / director will not be liable to retire by rotation - section 268. It has been clarified that Government approval is required only for ‘amendment’ of provision of Articles in respect of non-rotational directors. Government approval is not required for insertion of a new provision in the Articles. – Letter No. 1(120)/(2001) 43 CLA –I/65 dated 4-11-1965. If permission is required, application should be made in Form No. 25B.

Appointment of sole selling agents if paid up capital exceeds Rs 50 lakhs - Appointment of sole selling agents if paid up capital exceeds Rs 50 lakhs or such person has a substantial interest in the company - section 294AA(2) and (3) [Restrictions apply to private company also]

Making loans to a director or providing guarantee - Making loans to a director or providing guarantee for loan taken by him - section 295 [Restrictions apply to private company also]

Contract with a director or his relative for purchase of goods or supply of services, if paid up share capital is Rs one crore or more - Entering into contract with a director or his relative for purchase of goods or supply of services, if paid up share capital is Rs one crore or more – proviso to section 297(1) [Restrictions apply to private company also]

Appointment to a place of profit of a relative or partner of director, firm in which director or relative is partner - Appointment to a place of profit of a relative or partner of director, firm in which director or relative is partner, or private company where director or his relative is director of member, place of profit in the company carrying a monthly salary of not less than Rs 20,000 - section 314(1B) [Restrictions apply to private company also].

3-4 Powers of Board that cannot be delegated by Board to Committee

Following powers cannot be delegated to the Committee –

All powers except above can be delegated.

3-5 Board Resolutions that cannot be passed by circulation

Some resolutions cannot be passed by circulation by Board. These must be passed only at the Board meeting. Such resolutions are as follows –

Excluding these, any other resolution can be passed by circulation e.g. - * Authorising officers to file suits, signing tax returns, sales tax forms * Fixing record date * Forming sub-committees (other than audit committee, shareholders’ grievance committee and nomination committee) * Appointing additional director, alternate director * Authorising officer to file criminal complaint for dishonour of cheque * Appointing cost Auditor/Practising company Secretary.

3-6 Resolutions requiring unanimous voting

All decisions of Board are by simple majority. However, in following cases, the resolution must be unanimously passed, i.e. all directors present must vote in favour of the resolution. If a director is present, he must vote in favour of resolution. If he abstains, the resolution cannot be treated as passed. If the director is interested in a resolution, he cannot vote. Hence, the resolution should be unanimously passed by remaining directors.

Appointment of MD/Manager in two companies - Appointment of a person as Managing Director or Manager of a public company or private company which is subsidiary of a public company, if the person is already MD / Manager of another public company or private company which is subsidiary of a public company. A specific notice of the meeting and proposed resolution has to be given to all directors in India. All directors present should vote in favour of resolution - sections 316(2) & 386(2)

Making of loan or investment or giving security or guarantee by the company - The resolution should be passed with consent of all directors present at the meeting - section 372A(2). [Power to make loans or investment can be delegated to Committee of directors / MD / Manager / Principal Officer of company / Principal officer of branch u/s 292(3) and 292(4) by specifying total amount, nature and purpose. The harmonious construction is that such delegation is permissible, but only by unanimous resolution of the Board. If this interpretation is not adopted, section 292(3) and 292(4) become redundant ].

4 Appointment of Directors

Every public company must have at least three directors. A private limited company or a ‘deemed public company’ should have minimum two directors. [section 252]. Maximum number of directors depends on Articles of the Company. If Articles do not provide number of directors, or specify number of maximum directors as less than 12, the number of directors can be increased upto 12 in the general meeting by ordinary resolution. If number of directors is to be increased beyond 12, approval of Central Government is necessary. [section 259].

A public limited company or a private company which is a subsidiary of a public company can appoint at the most 1/3 directors as permanent directors, but at least 2/3 of directors must retire by rotation. In case of private company, they need not retire by rotation. [section 255].

4-1 Formalities after appointment of director

Following formalities should be completed after appointment of director–

(a)     Obtain from the director details required to be entered in Register of Directors maintained u/s 303(1) – see form 32. Also obtain election commission identity card No (if issued) which is required to be given in Annual return.

(b)     Each director is required to intimate his DIN with copy of DIN allotment letter to company where he is director, in form DIN-2. This intimation should be obtained and details should be informed to ROC within one week in form DIN-3, as per section 266E of Companies Act.

(c)     Confirmation that his number of directorships are within the prescribed limits.

(d)     Obtain from him disclosure of his shareholding and debenture holding in company or subsidiary or holding company of the company in which he is appointed as director, to enable company to maintain prescribed register – section 308(1).

(e)     List of committees of various companies in which he is member and Chairman of any committee (excluding private limited companies, foreign companies and section 25 companies), to ensure that if he is appointed as member / chairman of any committee, SEBI guidelines are not violated  (A per clause 49I(C)(ii) of Listing Agreement, a director cannot be Chairman of more than five committees or member of more than 10 committees).

(f)      Obtain declaration from non-executive directors about shareholding in company held either on own or on beneficial basis [Clause 49IV(E)(v) of Listing Agreement].

(g)     Obtain declaration from director that he is not disqualified u/s 274(1)(g). Get declaration in form DD-A (if not obtained before appointment) [If possible, obtain confirmation letters from all companies in which he is director that that company has submitted all annual returns in time and is not defaulter in payment of deposit, interest on deposit, redemption of debentures or dividend].

(h)     Obtain general notice from him about his directorships or membership of firms and companies where he should be regarded as interested and place it before Board – section 299(3)(a).

(i)       List of his relatives as defined in section 2(41) read with section 6

(j)      Make entry in register of directors maintained u/s 303(1)

(k)     Make entry in register of directors’ shareholding maintained u/s 307(1)

Annual declaration from director - Companies (Central Government’s) General Rules and Forms prescribe form 24AA for giving declaration under section 299. Such declaration should be obtained every year in last month of financial year. It should be placed before Board at the next meeting and should be noted.

Change in directorship to be informed within 20 days - In addition to general disclosure every year, if a director, managing director, secretary or manager of any company becomes or ceases to be director, managing director, manager or secretary of other company, he must disclose the change to the company within 20 days. Any failure may entail penalty upto Rs 5,000/-. A ‘deemed director’ also has to submit these details to company. [section 305(1)]. The purpose is that this will enable company to maintain register of directors as required u/s 303(1).

4-2 Suggested form to obtain information from director

Information may be obtained in following form from director. In addition, declaration should be obtained every year in form 24AA. If required, both can be combined. The information should be updated every year.

Relative - Section 2(41) read with section 6 of Companies Act, 1956 defines ‘relative’ as follows : - A person shall be deemed to be a relative of another if, and only if, - (a) they are members of a Hindu undivided family; or (b) they are husband and wife; or (c) the one is related to the other in the manner indicated in Schedule I-A of Companies Act. This Schedule contains following relatives : (1) Father (2) Mother (including step-mother) (3) Son (including step-son) (4) Son’s wife (5) Daughter (including step-daughter) (6) Father’s father (7) Father’s mother (8) Mother’s mother (9) Mother’s father (10) Son’s son (11) Son’s son’s wife (12) Son’s daughter (13) Son’s daughter’s husband (14) Daughter’s husband (15) Daughter’s son (16) Daughter’s son’s wife (17) Daughter’s daughter (18) Daughter’s daughter’s husband (19) Brother (including step-brother) (20) Brother’s wife (21) Sister (including step-sister) (22) Sister’s husband.

4-3 Sitting fees to directors

Directors ( other than whole time directors and Managing Director) work only on part time basis. These directors are ‘Non Executive Directors’. These directors are entitled to get fees for attending the Board meetings or Committee meetings. Section 309(2) states that directors can be paid remuneration by way of fee for each meeting of Board or Committee attended by him. Proviso to Section 310 provides that increase in sitting fees upto prescribed limit will not require approval of Central Government.

As per rule 10B of Companies General Rules (as amended on 24-7-2003), maximum sitting fees payable per meeting of Board of directors or its committee is as follows – (a)  Rs. 20,000 if paid up capital plus free reserves are Rs 10 crore or more or turnover is Rs 50 crore or more [Since word used is ‘or’, it is sufficient if one of the conditions is satisfied] (b) Rs 10,000 in other cases (i.e. company whose paid up capital plus free reserves is less than Rs 10 crores and turnover is less than Rs 50 crores). per meeting. Sitting fees more than Rs. 10,000/20,000 can be paid only with Government approval.

In addition, they are entitled to get reimbursement of all reasonable expenses incurred in attending the Board meeting, committee meetings and general meetings of company as per regulation 65(2)(a) as per model Articles Table A.

Expenses for Attending general meetings - Directors are not entitled to get sitting fees for attending general meetings but they can claim reimbursement of expenses incurred for attending general meeting as per regulation 65(2)(a) of model Articles as per Table A Articles. If company has not adopted Article A, directors will be entitled to get reimbursement of expenses  in attending general meetings, if company has made provision in Articles similar to regulation 65(2)(a) of model Articles Table A.

Approval for payment of sitting fees - Sitting fee is part of managerial remuneration. Proviso to section 310(1) makes it clear that sitting fee is part of managerial remuneration. As per section 198(1), managerial remuneration is payable on basis of percentage of profit. However, section 198(2) provides that the percentage shall be exclusive of sitting fees. Thus, sitting fees can be paid to directors even if company is making losses.

Model Articles as per Table A do not make any specific provision in respect of sitting fee. Hence, it will be necessary either to amend the Articles or approve payment of sitting fees in general meeting by way of ordinary resolution (unless Articles of company require special resolution for approval of managerial remuneration).  It is advisable that Articles are amended to provide that sitting fees upto to limit prescribed under Companies Act and rules/regulations made under the Act can be paid to directors, and sitting fees can be decided by Board within those limits. In such case, any further approval from shareholders is not required.

Approval in AGM not required for payment of sitting fees - As per clause 49I(B) of Listing Agreement, in case of listed company, managerial remuneration of non-executive directors should be fixed by Board and approved in general meeting. However, sitting fees paid to non-executive directors as authorized by the Companies Act, 1956 would not require the approval of shareholders – SEBI press release No. PR-182/2005 dated 30-12-2005 and circular dated 13-1-2006.

No sitting fee to MD/WD - A managing director or wholetime director who is getting remuneration as per schedule XIII, is not entitled to sitting fee - Department letter dated 18-8-1990. Even if sitting fee is paid, it will be treated as 'other allowance' and overall limit on salary will be subject to limit of managerial remuneration specified in schedule XIII.

Sitting fee and allowances for adjourned meeting – If meeting is adjourned for want of quorum, sitting fee is payable for adjourned Board meeting also, since fee and allowance is for ‘attending’ the meeting. Even if meeting was adjourned for want of quorum, it does not mean that the director did not attend the meeting – DCA circular No. 1 of 1972 dated 2-2-1972.

Ceiling of total managerial remuneration

4-4 The total managerial remuneration payable by a public company to its directors and manager shall not exceed 11% of net profits of that company, computed in accordance with sections 349 and 350, except that remuneration of the directors shall not be deducted from the gross profits. [section 198(1)]. Ceiling on remuneration payable to MD / WD together shall not exceed 5% if there is only one MD / WD. If there are more than one MD / WD, the remuneration shall not exceed 10% of net profits for all of them together.

Remuneration to non-executive (part-time) directors based on profits – In addition to sitting fees, the part time directors may be paid remuneration by way of share of ‘net profit’. Such remuneration is payable only if there is provision in the Articles of the company or by a resolution in the general meeting. All the non-executive directors together can get remuneration either (a) on monthly / quarterly / yearly basis with approval of Central Government, or (b) by way of commission. Remuneration by way of commission is payable only when special resolution is passed.

The upper ceiling on such remuneration is as follows - (a) upto 1% of ‘net profits’, if the company has Managing Director, whole-time Director or Manager. (b) Upto 3% of ‘net profits’, if the company does not have any MD, Whole-time director or Manager. Remuneration in excess of 1% / 3% is payable only with approval of Central Government [section 309(4)]. This percentage is exclusive of sitting fees. [section 198(2)].

No remuneration free of income tax - Company cannot pay remuneration which is free of income tax, i.e. the remuneration is subject to income tax at the hands of the director. [section 200]

Following chart gives a summary of provisions at a glance.

Managing and wholetime Director

5 The Board of Directors cannot look after day to day affairs of the company. They, therefore, appoint a Manager, Managing Director or wholetime Director to look after day to day affairs of the company. Such Manager, Managing Director or wholetime Director works under overall supervision and control of the Board of Directors.

Compulsory appointment in some cases - A company having paid-up share capital of Rs five crores or more must appoint a ‘Managerial Person’. ‘Managerial Person’ means a Managing Director, whole-time director or Manager. Appointment or re-appointment of any one of these ‘Managerial Person’ is enough. These provisions are applicable only to public company or a private company which is subsidiary of a public company [section 269(1)]. When his appointment or re-appointment is made, a return electronically in form 25C should be filed within 90 days with Registrar of Companies. [section 269(2)].

How MD acquires powers - As the aforesaid definition makes clear, the MD can acquire substantial powers by (a) Agreement with the company - naturally such agreement will have to be approved either in the general meeting or by Board of Directors (b) Resolution passed by a company in the general meeting (c) Resolution passed by Board of Directors or (d) Providing those powers in the Articles of the company itself. Model Articles in Table A do not provide any specific powers to Managing Director/Manager.

No approval or restrictions  in case of private company - No approval of Central Government is necessary for appointment or re-appointment of a ‘Managerial Person’ of a private company which is not a subsidiary of a public company. In such companies, there are no restrictions regarding remuneration or terms and conditions, as per section 269(2).

Age Limit for appointment - A person can be appointed as ‘Managerial Person’ when he has attained age of 25 years but is less than 70 years of age. A person above 18 years but below 25 years or even a person who is over 70 years of age can be appointed as ‘Managerial Person’ by a special resolution passed by the company in general meeting. If such special resolution is passed, further approval from Central Government is not necessary. If special resolution is not passed, approval of Central Government is necessary. [Schedule XIII Part I].

Residential status of Managerial Person - Following person can be appointed as ‘Managerial Person ‘ - * Resident of India * Person who has been staying in India for a continuous period of at least 12 months immediately preceding his appointment and who has come to stay in India for taking up employment or for carrying on business or vocation in India. If the person does not satisfy the criteria, approval of Central Government is required.

The aforesaid condition is not applicable for appointment of a non-resident as MD/WD in Special Economic Zone (SEZ). He should have a proper employment visa from Indian mission abroad and should furnish details of company, principal employer and terms of appointment along with visa application. In such case, approval of Central Government is not required. – GSR 670(E) dated 30-9-2002.

When approval of Central Government is necessary for appointing MD/WD - Appointment or re-appointment of ‘Managerial Person’ (Managing Director, Whole-time Director or Manager) requires approval only when the appointment or re-appointment is not according to terms and conditions specified in Schedule XIII. If the appointment or re-appointment is according to those terms, approval of Central Government is not necessary [section 269(2)].

Broadly, Approval or appointment of Managerial Person from Central Government is necessary only in following cases - (a) He has been convicted under economic offence (b) He has been detained under COFEPOSA (c) His age is over 18 but less than 25 or over 70 years of age and special resolution is not passed in the general meeting. (d) He is non-resident and was not staying in India for at least 12 months prior to his appointment. or (e) Remuneration proposed is more than the amount prescribed in Part II of Schedule XIII. In all other cases, approval of Central Government is not necessary.

Appointment of MD/Manager in more than two companies - Normally, a person is expected to be appointed as Managing Director/Manager in one company. However, if a person is appointed as MD/Manager in one company, he can be appointed as MD/Manager in another company. Such appointment has to be made or approved at a meeting of Board of Directors with the consent of all directors present. A specific notice of proposed resolution has to be given to all directors then in India [section 316(2) for appointment of MD and section 386(2) for appointment of Manager].

5-1 Appointment of MD/WD

Appointment and fixation of remuneration of a ‘Managerial Person’ (MD / WD / Manager) is subject to approval in the general meeting by ordinary resolution. [Schedule III Part III]. If such approval is not accorded in the first general meeting after his approval, he ceases to act as MD / WD / Manager. However, special resolution u/s 314 is not required, as appointment of MD / WD is not considered as a 'place of profit'.

Appointment of MD only five years at a time - A person can be appointed as ‘Managing Director’ only for five years at a time. He can be re-appointed, re-employed or his term may be extended, but only for five years at a time. Such re-appointment or extension cannot be sanctioned earlier than two years from the date when earlier appointment is expiring and new appointment will come into force, i.e. after three years of his initial appointment. [section 317]. This section does not apply to private company which is not a subsidiary of a public company. [section 317(4)].

This section mentions only Managing Director and not ‘wholetime director’. However, as per definition of Managing Director in section 2(26), any director who is entrusted with substantial powers of management, by whatever name called,  will be ‘Managing Director’. Hence, it will not be proper to appoint a wholetime director for more than 5 years at a time. Even a director appointed as ‘Manger’ may come under definition of ‘Managing Director’. In that case, he cannot be appointed for more than 5 years at a time.

5-2 Remuneration to MD/WD

Remuneration upto following limits can be paid to a Managerial Person (MD/WD/Manager). Remuneration above these limits require approval of Government. [section 310]. Remuneration of MD/WD/Manager can be increased by company within the ceilings prescribed. Remuneration above those limits require approval of Government. [section 311]. Provisions of remuneration to MD / WD are applicable to remuneration of Manager also. [section 387].

Part II of Schedule XIII contain guidelines for remuneration of MD/WD/Manager. If the remuneration is within these limits, approval of Central Government is not necessary.

Private company exempted - This provision is applicable only in respect of public company or a private company which is subsidiary of a public company. Thus, these provisions do not apply to a private company, which is not a subsidiary of a public company.

Remuneration when company is making profits - If the company is a profit making company, remuneration payable is 5% of net profits, calculated as per calculations under sections 198 & 309 of Companies Act. The remuneration may be by way of salary, Dearness allowance, perquisites, commission and other allowances. [The term 'perquisites' includes contribution to PF, superannuation fund, gratuity and encashment of leave as these have been clearly specified as 'perquisites' in section II, part II of schedule XIII].

If there are more than one MD/WD/Manager, total managerial remuneration shall not exceed 10% of net profits of the company. A MD/WD/Manager can draw remuneration from two companies, but total remuneration received by him shall not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person.

5-3 Minimum Remuneration when profit is inadequate or company is in loss

MD/WD/Manager is entitled to minimum remuneration if company is making losses or if the profit is inadequate. The ceiling on minimum remuneration has been prescribed in Part II of Schedule XIII. Company can pay remuneration to a MD/WD/Manager lower than the ceiling but not more. A person can draw remuneration from two companies, but total remuneration received by him shall not exceed the higher maximum limit admissible from any one of the companies of which he is a MD/WD/Manager.

If the requirements are not satisfied, approval of Central Government will be required to pay minimum remuneration to a MD/WD/Manager.

Basis of minimum remuneration - The remuneration is based on ‘effective capital’ of the company, and whether the remuneration is (a) approved by Remuneration Committee and passed as ordinary resolution in general meeting or (b) approved by remuneration committee and in general meeting by special resolution for period upto 3 years (c) approved by remuneration committee, special resolution in general meeting by special resolution for upto 3 years and approval by Central Government.

Normal Minimum Remuneration - The normal minimum remuneration that can be paid without approval of Central Government is as per the following slabs - (a) Effective capital less than Rs 1 crore - Maximum Remuneration Rs 75,000 per month. (b) Effective capital Rs 1 crore and above but less than Rs 5 crores - Maximum Remuneration Rs 1,00,000 per month. (c) Effective capital Rs 5 crores and above but less than Rs 25 crores - Maximum Remuneration Rs 1,25,000 per month. (d) Effective capital Rs 25 crores and above but less than Rs 50 crores - Maximum Remuneration Rs 1,50,000 per month (e) Effective capital Rs 50 crores and above but less than Rs 100 crores  - Maximum Remuneration Rs 1,75,000 per month (f) Effective capital Rs 100 crores or more - 2,00,000 per month.

The conditions for payment of above remuneration are (a) The remuneration should be approved by Remuneration Committee of Board and (b) The company should not have made any default in repayment of any debts (including public deposits) or debentures or interest payable thereon for a continuous period of 30 days in the preceding financial year before the date of appointment of the managerial person. [In other words, a sick company which is in default in payment of interest or repayment of debt cannot pay any ‘minimum remuneration’ at all without approval of Central Government. – a very hard step indeed].

Higher i.e. upto double the normal remuneration with special resolution - The aforesaid ‘normal’ minimum remuneration in absence of profits can be increased upto double the amount, as per following higher slabs - (a) Effective capital less than Rs 1 crore - Maximum Remuneration Rs 1,50,000 per month. (b) Effective capital Rs 1 crore and above but less than Rs 5 crores - Maximum Remuneration Rs 2,00,000 per month. (c) Effective capital Rs 5 crores and above but less than Rs 25 crores - Maximum Remuneration Rs 2,50,000 per month. (d) Effective capital Rs 25 crores and above but less than Rs 50 crores - Maximum Remuneration Rs 3,00,000 per month (e) Effective capital Rs 50 crores and above but less than Rs 100 crores  - Maximum Remuneration Rs 3,50,000 per month (f) Effective capital Rs 100 crores or more - 4,00,000 per month.

The conditions for payment of above i.e. upto double the normal minimum remuneration are (a) The remuneration should be approved by Remuneration Committee of Board and (b) The company should not have made any default in repayment of any debts (including public deposits) or debentures or interest payable thereon for a continuous period of 30 days in the preceding financial year before the date of appointment of the managerial person and  (c) A special resolution should be passed in general meeting. [provisions of ‘special resolution’ and ‘Remuneration Committee’ are discussed later] and (d) Such special resolution cannot be passed for a period exceeding three years and (e) Required disclosures in the Corporate Governance Section of Directors Report, if Directors’ Report has such a section.

Remuneration above double normal limit with Government approval - Minimum remuneration even higher than the aforesaid limits can be paid. The company has to comply with all the five conditions specified above, i.e. remuneration committee, no default in debt repayment and interest, special resolution for three years and disclosure in Corporate Governance Section of Directors’ Report. In addition, Central Government approval will be required. However, such higher remuneration (i.e. more than double the normal remuneration) cannot be paid if the effective capital of the company is negative. [There is drafting mistake in the Schedule, and exact intention is not clear].

Special provisions in respect of units in SEZ – Restrictions in respect of managerial remuneration under Companies Act have been relaxed in case of companies in Special Economic Zones. The remuneration can be upto Rs 20 lakhs per month (Rs 2.40 crores per annum) without approval of Central Government. The relaxation is applicable if (a) The company has not raised any money by public issue of shares or debentures in India. (b) The company has not made any default in India in repayment of any of its debts (including public deposits) or debentures or interest payable thereon for a continuous period of 30 days in any financial year. [GSR 565(E) dated 14-8-2002].

Perquisites allowable - In addition to above remuneration, a managerial person is entitled to following perquisites - (a) Contribution to Provident Fund, superannuation fund or annuity fund to the extent not taxable under Income-tax Act (b) Gratuity at rate not exceeding half month’s salary for each completed year of service and (c) Leave encashment at the end of tenure.

Leave encashment - There are no provisions in respect of leave and encashment of leave. It is expected that the company will have standard rules in this regard applicable to all employees and the same will be applicable to the managerial person. Similarly, in case of foreign or NRI director, rules of LTC (Leave Travel Concession) framed by the company will be applicable.

Reimbursement of travel expenses after expiry of tenure - Though there is no provision for reimbursement of expenses of travel of MD / WDs, his family members and transportation of his personal luggage from his place of duty to his home town after expiry of his tenure, department has clarified that reimbursement of such expenses is permissible, if relevant travelling rules of company so provide. Approval of Central Government is not required - Circular No. 9/93 dated 28-7-1993.

No payment for past services - It has been clarified that no payment should be made to retired directors or managers for their past services - Department press note dated 9-8-1963.

Sitting fees within overall remuneration only - Managing Director / Wholetime directors are not entitled to sitting fees. If any sitting fee is paid, it will be treated as 'other allowances' and the overall managerial limit shall be including such sitting fees.

Special resolution of minimum remuneration above ‘normal’ limits – As explained above, minimum remuneration above ‘normal remuneration’ can be paid, for which approval in general meeting by special resolution is required. While sending notice of general meeting for purpose of passing a special resolution approving minimum remuneration, a statement giving prescribing information shall be sent. The prescribed details, in brief are – (a) General information about industry, financial performance, export performance (b) Information about appointee about his background, past remuneration, job profile, pecuniary relationship with company, remuneration proposed (c) Reasons for loss or inadequate profits and steps taken for improvement and expected profits (d) Disclosure of remuneration package.

Disclosure in Directors report if remuneration above normal remuneration - In addition to the prescribed disclosures in notice to shareholders, specified disclosures should be made in Directors’ Report in the section on ‘Corporate Governance’.

5-4 Company Secretary

Every company having prescribed paid-up share capital (presently prescribed as Rs two crores w.e.f. 11-6-2002) must appoint a whole-time Secretary. [section 383A(1)].

Where the appointment is compulsory based on paid-up share capital, the Secretary must be a member of the Institute of Company Secretaries of India [ICSI]. He should be wholetime Secretary. A person can be whole-time Secretary of only one company at a time.

Penalty for not appointing qualified Secretary is Rs 500 per day, payable by every officer who is in default. No penalty will be imposed if company proves that (a) It took all reasonable efforts to comply with the requirement of appointing a whole- time Secretary, but could not appoint one or (b) It is beyond the financial capacity of the company to engage a full time Secretary. [section 383(1A)].

Companies having less than prescribed capital for compulsory appointment of Secretary can also appoint a secretary. Such appointment is optional.

6 Contracts in which directors are interested

Since directors in nature of trustees of company, restrictions have been placed in respect of contracts in which directors are interested.

Restrictions on loans to directors - There are prohibitions in granting loans or giving guarantees or providing security to directors directly or indirectly, without previous approval of Central Government. [section 295].

Sanction of Board essential when director is interested in a contract  - If a director is interested in a particular contract, the contract cannot be entered into unless it is approved in the meeting of Board of Directors. [section 297].

This provision is applicable when the contract is with * Director * Relative of Director * Firm in which the director or his relative is partner * Any other partner in the firm in which the director is partner * Any private company of which the director is a member or director. Thus, if the company is entering into contract with another public limited company this section is not applicable ! {good and useful loophole}. The consent must be obtained in the Board meeting and not otherwise. i.e. circular resolution is not permissible to approve the contract or arrangement. [section 297(4)].

The section is not applicable in following situations - (a) Purchase or sale of goods and materials for cash at prevailing market prices or (b) Purchase of goods when such director/his relative/firm/partner/private company regularly deals or trades in that product, provided that the value of goods or services is Rs 5,000 or less than Rs 5,000 or (c) In the case of transaction of any banking or insurance company in the ordinary course of business. [section 297(2)].

If the contract is for more than Rs 5,000 in a year, it is enough if contract is entered into in case of urgent necessity and consent of Board is obtained within 3 months. [section 297(3)].

However, if such consent is not accorded by Board within 3 months, anything done in pursuance of contract is voidable at the option of the Board. [section 297(5)]. Thus, the contract is valid till it is voided by the Board.

Non-applicability of section 297 – Section 297 is applicable when the contract is (a) for sale, purchase or supply of any goods, material or services or (b) for underwriting the subscription of any shares or debentures to be issued by the company.  Thus, section 297 is not applicable for contracts other than these contracts, e.g. section 297 is not applicable to following contracts -

·          Giving or taking loans

·          Contract in respect of immovable property (as it is not ‘goods’) – DCA letter No. 9/41/90-CL-X dated 27-3-1990.

·          Contract between two public companies.

·          Contracts between A Ltd. and B Pvt. Ltd. where directors of A Ltd. are not members or directors of B Pvt. Ltd. , but only relatives of directors of A Ltd. are members/directors of B Pvt. Ltd.

·          Hiring of office premises on rent as the transaction is in immovable property - Department clarification dated 10.9.1990 - CS October, 1990 page 877.

·          Contract for professional services [As per DCA circular No. 8/11/75-CL-V dated 5-6-1975 (No. 13 of 75), services of advocates and solicitors are obtained on basis of professional expertise and not on tender basis. Such services cannot be bracketed with supply of goods and materials. - - This principle should equally apply to professional services like accounting, management, taxation, valuation etc., if provided by qualified professionals]

·          Employment of MD/WD, since supply of service s not the same as ‘rendering of personal service’ [DCA circular No. 8/11/75-CL-V dated 5-6-1975 (No. 13 of 75)].

·          Contract for employment of relative of director [see note below]

Contract for employment is not contract for services – There is distinction between ‘contract of service’ and ‘contract for service’. The employment is ‘contract of service’ and hence not covered u/s 297. However, provisions of section 299 and 314 will apply.

Previous approval of Central government if paid up capital exceeds Rs one crore - If the paid up capital of company is Rs one crore or more, previous approval of Central Government is necessary. [proviso to section 297(1)].  The powers have been delegated to Regional Director.  Application should be made electronically in e-form 24A.

6-1 Disclosure of interest in contract or arrangement

A director must disclose his interest or concern in any contract or arrangement or any proposed contract or arrangement by or on behalf of the company. Such interest should be disclosed to Board of Directors. [section 299(1)]. If the contract or arrangement is between companies, i.e. the company in which the person is director and the other company, the director is deemed to be interested in the contract only if he singly, or along with other directors, hold 2% or more shares in other company. [section 299(6)]. While calculating the 2% shares in other company, only investment of directors is considered. Investment of his relatives is not to be considered.

If the director is a partner in any firm, the provisions in respect of interest apply irrespective of the investment of the director in the firm or the ratio of profit in such partnership firm, i.e. even if his share of profit is less than 2% in partnership firm, or his investment is less than 2% in the firm, he is regarded as interested in the contract with that partnership firm.

6-2 Restrictions on holding office of profit by director or his relative / partner etc

Section 314 provides for restrictions on holding office or place of profit by director or his relative or firm in which he is partner etc. Provisions of sections 297 and 299 (in respect of disclosure of interest, etc. will also have to be complied with.

Approval in general meeting to appoint director to hold place of profit - A director cannot hold office of profit in the company without approval in general meeting by a special resolution, irrespective of the quantum of remuneration drawn.

Approval in general meeting in certain cases - Following persons cannot hold office of profit in the company without approval in general meeting by a special resolution, if the total monthly remuneration is Rs 10,000 or more - # Director [The lower ceiling of Rs 10,000 does not apply to director. Thus, a director cannot hold office of profit, irrespective of remuneration drawn by him] # Partner or relative of such director # Firm in which such director or his relative is a partner # Private company in which the director is a director or member # Director or manager of such private company (i.e. director or manager of the private company in which the director of company is a member or director). [section 314(1)(b)]. [The provision does not apply if the person is director in a public limited company. Thus, the section can be overcome by the director forming a limited company instead of a private limited company. For example, ‘X’ is director of company ‘A’. He is also director in company ‘B’. Now, if ‘B’ is a private company, that private company cannot hold office or place of profit in A company. However, if ‘B’ is a public company, the ‘B’ company can hold office or place of profit in the ‘A’ company. Good loophole !]

Provision applies only in cases where director himself is holding place of profit - In AR Sundaram v. The Madras Purasawal Kam Hindu Nidhi Ltd. (1987) Comp LJ 402 = 57 Comp Cas 776 (Mad), it was held that section 314(1) applies only to a partner or relative of a director who is holding some office of profit, in view of the term used 'such director' in section 314(1)(b). In other words, restriction of section 314 in respect of appointment of partner or relative apply only when the director himself is holding office of profit. Thus, section 314(1) does not apply where relative, partner etc. of an ordinary sitting director (i.e. director who does not hold office of profit) holds an office or place of profit in the company.

Since post of MD/WD is not considered a ‘place of profit’, this section should not apply where relative or partner of MD/WD is to be appointed.

Further, if remuneration is Rs 20,000 or more, special resolution and approval of Central Government will be required u/s 314(1B).

Restriction does not apply if person was already employed - The restriction is not applicable if the relative of director or firm in which such relative is a partner, holds office of profit before the director becomes director of the company. [section 314(1A)].

Restrictions apply to appointment in subsidiary company also - The restrictions are applicable in respect of office of profit held in the company or in its subsidiary company.

Provision does not apply to appointment of MD, WD, manager, banker or trustee - The restrictions do not apply to appointment of managing director, manager, banker or trustee for the holders of debentures of the company, either under the company or under subsidiary of such company. [section 314(1)].

Provision does not apply to appointment of wholetime director - The section does not make specific provision in respect of appointment of relative/partner of director as a whole-time director (WD). However, department has clarified that section 314(1) only precludes a director to hold office or place of profit other than a 'director'. The restriction u/s 314(3)(a) is not applicable to remuneration drawn by a person as director. Hence, the restrictions u/s 314 do not apply to appointment of whole-time director. - circular No. 4/76 dated 11-2-1976. Department, vide further letter dated 29-5-1989 to Thane Manufacturers' Association, has confirmed that section 314(1) does not apply for appointment of relative of a director as a whole time director.

No restriction in appointing director as solicitor or advocate - Provisions of section 314(1B) do not apply for appointment of solicitors and advocates, as the advocate or solicitor appears before Court as an officer of court in pleading cause of justice. Receiving fees on this account cannot lead to an inference of an office or place of profit u/s 314. However, if such solicitor/advocate is appointed on a regular basis for rendering legal advice other than appearance in Courts, provisions of section 314 will be applicable. – DCA circular No. 14/75 dated 5-6-1975.

Not applicable to director appointed by Central Government u/s 408 - Provisions of section 314 are not applicable if a person who is holding office of profit in the company, is appointed as director by Central Government under section 408.

Central Govt. approval if remuneration is above prescribed limits - If the remuneration is not less that the sum prescribed,  prior consent of members by a special resolution and approval of Central Government is necessary. [section 314(1B)]. The sum prescribed is Rs 20,000, vide rule 10C(2) of Companies (Central Government) General Rules & Forms.

This provision applies to following –

·          Partner or relative of a director or manager

·          Firm in which such director or manager, or relative of either, is a partner

·          Private company of which such a director or manager, or relative of either, is a director or member.

Procedure for obtaining approval - Application for his appointment should be made in Form No 24B. Since the term used is ‘approval’ and not ‘prior approval’, it can be argued that application for approval to Central Government can be made even after appointment.

Special procedure if monthly remuneration exceeds Rs 50,000 – Special procedure has been prescribed vide Director’s Relatives (Office or Place of Profit) Rules, 2003. The procedure applies if monthly remuneration exceeds Rs 50,000.

Is Government approval required if remuneration is between Rs 20,000 to Rs 50,000? – Section 314(1B) read with rule 10C(2) requires approval of Central Government if remuneration is Rs 20,000 or more, while Director’s Relatives (Office or Place of Profit) Rules, 2003 prescribes procedure only when remuneration exceeds Rs 50,000. The question is whether Government approval is required when remuneration is between Rs 20,000 to Rs 50,000. It can be argued that the limit of Rs 20,000 [prescribed in Rule 10C(2)] has been impliedly repealed by 2003 Rules and approval of Central Government is not required. Another interpretation is that approval is required, but the special procedure prescribed in Director’s Relatives (Office or Place of Profit) Rules, 2003 is not to be followed when remuneration is between Rs 20,000 to Rs 50,000. The later view is a safe view and I would support that view.  In any case, special resolution will have to be passed u/s 314(1), but that can be done at first AGM after appointment, while section 314(1B) requires prior consent in general meeting.

7 Annual Accounts and Annual General Meeting

Every company must keep proper books of account on accrual basis as per Accounting Standards. Every company is required to prepare a balance sheet at the end of ‘financial year’ and profit and loss account for the period of ‘financial year’. In case of company not carrying on business for profit, it will prepare ‘Income & Expenditure Account’ instead of ‘Profit & Loss’ account. The duty audited annual accounts should be presented at the annual general meeting (AGM) of members. [section 210(1)]. Annual accounts should be accompanied by report of Board of Directors.

The annual accounts must be presented within 6 months from close of ‘financial year’. This period can be extended by further 3 months (i.e. total 9 months) by Registrar of Companies.

Requirements and presentation of accounts - The balance sheet and P&L account has to be prepared as per requirements in Schedule VI to Companies Act. [given later]. The details required may be given in the form of notes.

Financial Year - A ‘financial year’ of a company can be less or more than 12 months, but the ‘financial year’ cannot be for more than 15 months. The ‘financial year’ can be extended to 18 months by obtaining special permission from Registrar of Companies. [section 210]. Application for extending the period of annual accounts upto 18 months should be submitted electronically in e-form No. 61.

Income Tax Act requires that all companies must submit their income-tax returns on the basis of ‘Uniform Financial Year’ closing on 31st March every year. All companies have to prepare their accounts for income tax purposes on 31st March every year. Hence, now most of the companies close their accounting year on 31st March, both for income-tax purposes as well as for Companies Act purposes. This avoids duplication of work. Hence, last date of holding AGM is usually 30th September. 4 Authentication of the balance sheet & P&L account - Every balance sheet and P&L account of the company shall be signed, on behalf of the Board, by Manager or Secretary and at least two directors of the company. One of the directors should be Managing Director if the company has one. [section 215(1)(ii)]. If there is only one director available in India, he can sign the account with a statement giving reasons why two directors have not signed the accounts. [section 215(2)].

7.1 Normal schedule of accounts and AGM

7-2 Accounts as per Accounting Standards

Accounting Standards have been notified vide Companies (Accounting Standards) Rules, 2006 on 7-12-2006. AS1 to AS-7 and AS-9 to AS-29 have been notified. Earlier, Institute of Chartered Accountants of India (ICAI) had issued various accounting standards. All of these standards have been reproduced almost verbatim in the Rules notified by Central Government on 7-12-2006.

The standards are as follows -

The effective dates indicated are as per ICAI announcements. Now, w.e.f. 7-12-2006 they have become mandatory as per Rules notified by Central Government. All the aforesaid standards are ‘specified accounting standards’, except AS-3 and AS-25, as these are not with reference to P&L account or balance sheet.

Relaxations to small and medium sized companies – SMC means a company * which is not listed * which is not a bank, FI or an insurance company * turnover (excluding other income) is less than Rs 50 crores in preceding accounting year * Borrowings (including public deposits) do not exceed Rs 10 crores * Which is not holding or subsidiary of a large company. In case of small and medium sized enterprises, AS-3, AS-17, AS-18 and AS-24 will not apply. Relaxations form some clauses of AS-19, AS-20 and AS-29 have been given.

If SMC does not disclose certain information pursuant to relaxation or exemption, this should be disclosed by way of a note. However, it can voluntarily comply with some of the standards even where relaxation/exemption is available.

7-3 Audit of accounts by auditor

A person who is a Chartered Accountant within the meaning of Chartered Accountants Act can only be appointed as an auditor. A firm of Chartered Accountants can be appointed as auditors, but all partners of the firm must be Chartered Accountants. The Chartered Accountant must hold a ‘Certificate of Practice’ issued by Institute of Chartered Accountants of India. [section 226(1)].

An auditor is appointed at the annual general meeting. He holds office from conclusion of that meeting till the conclusion of next annual general meeting. After his appointment, company must inform him of his appointment within seven days. [section 224(1)]. The auditor, in turn, should inform in writing to the Registrar of Companies within 30 days from receipt of intimation from the company, whether he has accepted or refused to accept the appointment. [section 224(1A)]. Appointment of auditor for more than one financial year at a time is not permissible, though same person can be re-appointed.

Disqualifications of Auditors - Following person/s cannot be appointed as Auditor/s, even if he/they are chartered accountants –

·          A body corporate [section 226(3)(a)].

·          An officer or employee of the company [section 226(3)(b)].

·          A person who is in employment of an officer or employee of the company [section 226(3)(c)].

·          A person who is a partner of an officer or employee of the company [section 226(3)(c)].

·          A person who is indebted to company for more than Rs 1,000 [section 226(3)(d)].

·          A person who has given any guarantee or security in connection with indebtedness of any third person to the company for amount exceeding Rs 1,000. [section 226(3)(d)].

·          A person who holds any security of the company, which carries voting rights. [Thus, holding of security which does not carry any voting right is not a disqualification. Further, there is no restriction if security is held in name of wife or other relative]. [section 226(3)(e)].

·          If a person is disqualified to be auditor under any of the aforesaid clause, he will also be disqualified to be auditor of subsidiary or holding company of that company or subsidiary of that company’s holding company. [section 226(4)]

·          An auditor has restrictions on number of audits he can accept. He cannot accept audits beyond prescribed limit on number of audits. [section 224(1B)]

If a person becomes disqualified after his appointment, he shall be deemed to have vacated his office. [section 226(5)].

As per Chartered Accountants Act, a member is disqualified if (a) he ceases to be a member of the Institute (b) His certificate of practice is cancelled (c) He is adjudged as having unsound mind (d) He is un-discharged insolvent.

Limit on number of audits - Limit on number of audits is 20 companies per Chartered Accountant, out of which only 10 companies can be having share capital of Rs 25 lakhs or more. In other words, an Auditor can audit maximum 10 companies which are having paid up share capital of Rs 25 lakhs or more and remaining companies may have paid up capital less than Rs 25 lakhs. [Explanation I to section 224].  The restriction does not apply to a private company. [Fourth proviso to section 224(1B)]. As per ICAI notification dated 8.5.2001, a Chartered Accountant can accept maximum 30 audit assignments including audits of private companies.

7-4 Requirements of Report of Board

The Annual Accounts of company must be accompanied by a report of Board of Directors. The report of Board of Directors shall be in respect of following -

Signing of report of Board of Directors - Report of Board of Directors has to be approved in the meeting of Board. The Board can authorise any director to sign the report on its behalf. Usually, Chairman of the company or Chairman of the meeting or Managing Director is authorised to sign the report of Board of Directors.

7-5 Details in Board report as required under listing agreement

Listing agreement requires following disclosures/information in annual accounts. This obviously applies only to listed companies.

Compliance Report on Corporate Governance - Detailed compliance report on corporate governance should be given [clause 49VI(i) of Listing Agreement]. Non-compliance of any mandatory requirement with reasons and extent of deviation should be specifically highlighted - - In addition to disclosures as specified in clause 49 of Listing Agreement, disclosures should be made in Directors’ Report in the section on ‘Corporate Governance’, if company intends to pay minimum remuneration to the managerial personnel in case of inadequacy of profits [See Part II, Section II of Schedule XIII to Companies Act]

Compliance certificate regarding corporate governance - Compliance Certificate from auditors/practising company secretary regarding compliance of conditions of Corporate Governance. This certificate should be annexed to Directors’ Report [clause 49VII(1) of Listing Agreement]

Disclosure of remuneration to non-executive directors - Disclosure of remuneration to non-executive directors and pecuniary relationships or transactions with company, as required in clause 49(IVE) of listing agreement.

Management discussion and analysis - Management discussion and analysis report as required in clause 49(IVF) of listing agreement.

Affirmation about compliance to code of conduct - Declaration by CEO in Annual Report that Board Members and senior management have affirmed their compliance to Code of Conduct laid down by Board [clause 49I(D) of Listing Agreement].

Deviations in projected utilisation and actual utilisation of funds - If company had raised funds by issue of prospectus, the director's report should explain deviations in projected utilisation of funds and actual utilisation [clause 43 of Listing Agreement].

Cash flow statement - A cash flow statement along with balance sheet is to be given by listed companies. The cash flow statement will be prepared as per ICAI accounting standard AS-3, under indirect method as given in AS-3. - - Consolidated financial statements shall be published in the annual report in addition to the individual financial statements. These will have to be audited by statutory auditors and filed with stock exchange. Disclosures as per ‘Related Party Disclosures’ Accounting standard shall be made in Annual Report. It also has to make disclosure about loans/advances and investments in its own shares by subsidiaries, associates etc. Both parent and subsidiary company has to make the disclosure [Clause 32 of Listing Agreement].

Deviations from accounting standards - If company has deviated from accounting standards, reasons for same and justification why alternate treatment is more representative for true and fair view of underlying business transaction [clause 49(IVB) of Listing Agreement].

Details of ESOS/ESPS - If company has implemented Employees Stock Option Scheme (ESOS) or Employees Stock Purchase Scheme (ESPS), details about the same should be given as given in SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

Details if name was changed - If company has changed name suggesting new line of business (including software business), turnover and income from such activity shall be disclosed separately in annual results.

Details if issue of security was made - If company has made issue of security, company in its balance sheet should give details of utilisation of money received under promoters’ contribution and from allotments and reservations, indicating purpose for which it is utilised. If funds were unutilised, form in which it has been invested should be disclosed [para 6.5.7.2 of SEBI(DTP) Guidelines, 2000 [The details may be given in Corporate Governance Section or in Cash Flow Statement]

7-6 Cost Records and Cost Audit

Section 209(1)(d) makes it compulsory for certain class of companies specified by Central Government, engaged in production, manufacturing or mining activity to maintain cost records pertaining to utilisation of material and labour and other items of cost. Under these powers, Central Government has issued Cost Accounting Record Rules for maintenance of cost records, in respect of various types of industries. 41 industries for which Cost Accounting Record Rules have been prescribed are –

(1) Aluminium (2) Batteries other than dry cell batteries (3) Bearings (4) Bulk drugs  (5) Cement  (6) Chemical Industry ( 44 specified chemicals) (7) Cosmetics and toiletries (8) Cycles (9) Dry battery cell  (10) Dyes

(11) Electric cables and conductors (12) Electric lamps # Electric fans # Electric motors (13) Electric Industry  (14) Electronic Products (Consumer Electronics, Industrial Electronics, Computers and peripherals, communication and broadcasting equipment etc.) (15) Engineering industries (namely power driven pumps and diesel pumps, automotive parts and accessories, electric generator, power transformers, machine tools, IC engines etc.) (16) Fertilizers (17) Footwear (18) Formulations (All formulations under any system of medicine) (19) Industrial Alcohol (20) Industrial gases

(21) Insecticide (22) Jute goods (23) Milk Food (24) Mining and metallurgy – 14 metals and non-metals, ores and alloys are covered (25) Motor Vehicles (including tractors and heavy earth moving equipment) (26) Nylon  (27) Paper (28) Petroleum Industry (29) Plantation (tea, coffee and other commercial plantation) (30) Rayon

(31) Refrigerators (32) Room air conditioners (33) Rubber tyres and tubes (34) Shaving systems (35) Soaps & detergents (36) Steel Plant – Production, processing or manufacture of steel and allied products (37) Steel tubes and pipes (38) Sugar (39) Telecommunication Industry (40) Textiles (cotton / art silk / rayon / wool - yarn / cloth) (41) Vanaspati

Cost audit of cost records of companies is to be conducted if order is issued by Central Government u/s  233B.

Small Scale Industries as defined under IDR Act and Companies whose aggregate value of turnover of company of all its products is less than Rs 10 crores - are exempt from provision of compulsory maintenance of cost records.

8 Some special types of companies

A company be public or private. A public company can be listed or unlisted. Company incorporated abroad is ‘foreign company’. Companies Act also makes special provisions for Government companies and nidhi companies. A ‘producer company’ which is substitute for Multi-State Cooperative Society can also be formed.

8-1 Private company

A private company is generally considered as a 'glorified partnership', formed as a company, mainly to get benefit of 'limited liability' and easy transferability of interests in the company. It has limited restrictions, regulations and controls compared to a public company. It is a blend of partnership and a limited liability body corporate. It enjoys advantages and benefits of both, i.e. it maintains close control within a small group, and at the same time enjoys the advantage of corporate entity and limited liability. Distinctions between private company and public company are given below.