A NOTE ON THE WORKING OF
THE BOARD OF DIRECTORS
DR. T.K. JAIN
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – PGPSE PARTICIPANTS
mobile : 91+9414430763
5 DECEMBER 09 www.afterschool.tk 1
WHO IS A DIRECTOR?
SEC 2(13) : ANY PERSON WHO OCCUPIES
THE POSITION OF A DIRECTOR – BY
WHATEVER NAME CALLED
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CASE STUDY : FERGUSON
Truely speaking the director of a company is
an agent of the company
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Case study : Smith v/s Anderson
Directors are truely the trustees of the property
fo the company
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DEEMED DIRECTOR ???
As per sec. 5 , 303, 372A : if directors act on
advice of a person, that person is called
Sec. 7 : if that person is giving professional
advice – that person will not be called deemed
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Managing Director ???
Sec 2(26) : a person who has been given
substantial powers of management is called
managing director - he can be appointed – by
- board resolution / articles / AGM /
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Minimum number of directors
Sec. 252 : public company : 3, private
company : 2
no maximum limit in law
these limits can be set in articles of association
sec. 259- when the number of direcors increase
beyond 12, it may require Govt. Permission
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Directors representing small
(only on public companies with Rs. 5 crore or
As per Companies (appointment of small
shareholders' director) rules 2001 – there
should director / s representing small
Small shareholders : holding upto Rs. 20000
nominal value (face value) of shares.
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First directors (sec. 254)
May be appointed by articles of association.
Regulation 64 of Table A of schedule I : the
first directors are appointed by subscribers of
MOA & AOA .
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Subsequent Directors (sec. 255,
They are appointed by AGM
2/3rd directors are retiring directors - 1/3rd may
be non-retiring directors. Thus if you have 12
directors, 8 directors have to retire by rotation.
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Case study : S. Jabh Singh vs
Panesar Mech. Works P. Ltd.
Where no period for retirement is prescribed in
AOA, then directors will retire when they are
removed as per sec. 284.
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Case : Consolidated Nickel Mines
When AGM is not held, directors due to retire,
will retire on their due date – similarly when
AGM is adjourned, the directors due to retire,
will retire on that that day
retiring director may be reappointed.
FIFO in retirements
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How will you become a director?
At least 14 day notice of willingness to become
a director with fees of Rs. 500 (by the person
or the person who is proposing someone as
The person must also submit his accent to
become a director to ROC at least 30 days
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Can BoD (board of directors)
appoint additional directors?
Yes – IF AOA authorise it .
But this appointment will be till next AGM.
If AGM is not held, the director will retire on
the date of AGM.
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Casual Appointments (Sec. 262)
If there is a vacancy, the board may appoint a
director as per procedure in AoA. This is
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ALTERNATE DIRECTOR (SEC.
BoD may appoint alternate director in place of
a director who is going for a long vacation -
the alternate director will leave the position
when original director returns. It must be for 3
months or more.
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Appointment by Central Govt.
If Company Law Board thinks it is necessary,
then Central govt. May appoint a director for a
period upto 3 years.
This director will not require qualification
shares (minimum number of shares to be held
by every director to be eligible to become a
While counting 2/3rd, we will not take this
director into account.
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Appointment by 3 parties
Financial institutions like
IDBI/IFCI/ICICI/SBI etc. Can appoint
addional nominee directors – their particulars
have to be submitted in form no. 32.
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Appointment in AGM
As per sec. 263 – a director is appointed by
shareholders – by simple majority. Each
director will require separate resolution.
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Principle of Proportional
Representation (sec. 265)
In order to enable minority shareholders, this
principle has been introduced. The directors
appointed by this principle should hold office
for 3 years and cannot be removed by AGM as
per sec. 284.
(upto 2/3rd directors may be appointed by this
system – by single transferable vote /
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MD / whole time director (sec.
Every public company having 5 crore or more
capital must have an MD / whole time director.
It requires permission of Central Government /
or apply as per schedule XIII and submit return
in form 25C within 90 days of appointment.
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Schedule XIII – part I
The person being appointed as MD must not
have violated any act like Central Excise,
Income Tax, Wealth Tax, Customs, FEMA etc.
Age – between 25 and 70 (A major with less
than 25 years age / more than 70 ,can also
become, if special resolution + govt.
Permission is obtained).
must not have violated COFEPOSA
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Maximum period of term
The maximum period is 5 years -
reappointment is permitted.
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Maximum remuneration (sec.
total managerial remuneration of the company
= 11% of profit (computed as per sec. 349 and
for part time director : 1% (if MD is there, 3%,
if there is no MD)
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Sitting fees (sec. 309)
Maximum fees : 20000 for each meeting
(when turnover is above 50 crore and capital +
reserves at least 10 crores).
Otherwise maximum : 10000 / per meeting.
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Qualification of directors (sec.
Qualifications are not mentioned, but
disqualifications are mentioned in the law. A
person of unsound mind, undischarted
insolvent, a person imprisoned for moral
turpitude for 6 months or more is not eligible
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Case : Oriental Metal Pressing
works P. Ltd vs. Bhaskar
The court held that only individual can be
director, a firm or association cant be director,
as it is a position of trust.
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Case : People's bank of northern
Articles of association may exempt persons of
technical / professional qualification from
having qualification shares. Otherwise the
articles may require the director to have
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Qualification shares (sec. 270)
Director must have qualification shares in 2
months from appointment
the nominal value of qualification shares
should not be more than Rs. 5000
bearer of share warrant cant be said to be
holding qualification shres.
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Penalty : sec 272
If a director doesnt acquire qualification shares
in 2 months, he shall pay penalty Rs. 500 per
day. (all these provisions are applicable only
on public companies)
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Number of directorship (max.)
No person can become director of more than
15 companies (public companies)
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Sec. 278 – what to exclude from
Following are not counted in 15 companies :
a company in which the person is alternate director
association not for profit
penalty : (sec. 279) : upto 50000 if you become director
of more than 15 public companies
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Vacation of post of director (sec.
A director has to vacate if :
he is of unsound mind, he doesnt acquire
qualification shares in 2 months, he is judged
insolvent, convicted for moral turpitude &
imprisoned for 6 months or more, absents the 3
consecutive meetings or for 3 months (without
leave), he doesnt disclose his interest in a
contract (sec. 299), by court (sec. 203), when
he is there as an employee, but he retires.
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Removal of director (sec. 284,
388B, 402, )
Shareholders can remove a director by
ordinary resolution. They have to send a
special notice (14 day notice) for this meeting
and pass the resolution. They cant remove a
director appointed by Govt / financial
institution. (sec. 284)
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Removal by govt. In case of fraud
If the director is engaged in fraud, mal-
practices, anti-social activities etc. Or the
company is not managed properly or the
company is working against the interest of
lenders / financers, or the company is
following unsound business practices, The
director can be removed by government as per
sec. 388B to 388E.
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Removal by company law board
In order to prevent oppression and
mismanagement, CLB can remove director
(sec. 397,398,402) – that director cant become
director of another company for 5 years.
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Loans to director (sec. 295)
Without prior permission from government, no
company can give loan to its director / firm
(where the director of this company is a partner
/ proprietor ) / company of its director (its
director is holding 25% voting power in that
however, these provisions dont apply to private
/ banking / holding company
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WHO MAY CALL BOARD
Any director can call a board meeting or he
may make a requisition for a board meeting as
per Regulation 73 of table A of schedule I.
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NUMBER OF BOARD
At least one in 3 months and at least 4
meetings in a year. At least 15 notice of the
board meeting must be given at the address of
the director / fax.
There must be at least 7 days notice of agenda /
notes to agenda of the board meeting.
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QUORUM (SEC. 287)
It means the minimum number of persons who
must be present in the board meeting. At least
1/3rd must be present (or two = whichever is
more). Only those who are disinterested can
come and participated. Those who are
interested in the matters, cannot vote. If
quorum is not present, adjourn the meeting for
same day, next week. A fresh notice is required
if it is sine de adjournment.
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Validity of the act of directors
The powers of directors are defined in law and
also in articles of association. They can act in
their powers. Even if a director is disqualified
or later on it is discovered that he was not
appointed properly, his acts done earlier will
remain valid and binding on the company.
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Minutes of the meeting of the
board of directors
Minutes of the board meetings must be
prepared in 30 days of the meeting and must be
preserved in minutes book – duly serial
numbered. The chairman must sign each page
of the minutes book. The minutes book should
not have loose leaves. The chairman may
remove the material which is irrelevant.
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Minutes book as evidence
Minutes book is a legal evidence as per sec.
194, so it should be properly kept. Any director
can inspect the minutes book.
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Chairman of the board of directors
Chairman can be elected by the board of
director. If there is no chairman or he is absent,
the meeting may select its chairman in 5
minutes of the meeting.
As per regulation 74 of Table A of Schedule I,
chairman has a casting vote.
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Sudha Soni has said that she will not be able to attend
board meetings as she is going to the USA. Will you
still send her notice for board meetings (she being a
director). If alternate director is appointed, will you
still send her a notice of the meeting?
Yes – in both the cases, notice has to be sent to
the director. In the second case, to both the
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Is it necessary that the notice of
BOM must specify the business to
No – it can be sent separately. (we have
discussed - it requires only 7 days notice, but
board meeting requires 15 day notice).
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Can board meeting be held on
public holiday / after business
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Case : as per law you have to have one meeting
at least in every quarter. However, due to lack
of qorum (as your directors are mostly in the
USA), no meeting is held. Have you violated
No – you made an efforts – the meeting was
not held due to lack of quorum.
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Board held a meeting on 31 Jan, as every
year you have a meeting on 31 Jan. No
notice was given. Is it a valid meeting?
Yes, it is still a valid meeting.
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Audit committee ? ? ?
Sec. 292 A and clause 49 of listing agreement
requires every company to appoint an audit
committee of directors. It will look into the
working of the company.
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It requires that audit committee must be
appointed by all those companies which are
listed companies. Audit committee can have
only independent directors. The company
secretary will be the secretary of the audit
committee also. It must have meetings just like
board of directors.
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Registers of directors (sec. 303)
Every company must keep a register of the
directors. The register must be a bound book. It
will also prepare a form no. 32 and file with
the registrar of the companies about the
directors. (in 30 days of appointment of the
dreictors) comapny must keep a resiter of all
the contracts in which director is interested
(sec. 301) register of shareholding of directors
(sec. 307) is also necessary .
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Offences and penalties (sec. 630,
If directors commit any mistake / offence, he is
punishable by Rs. 10000 / with / without
imprisonment upto 2 years as per sec. 630,
however, court can grant relief as per sec. 633.
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Case : Rohit Samsukha wants to
resign from the post of MD, can
he do so ?
No, he has to follow the terms and conditions
of the contract. He can resign only as per
terms. However, other directors can resign any
time – even orally – whether the company
accepts it or not, but Rohit is MD, he cant.
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Pankaj is not a member of our company,
but he wants to inspect our register of
directors, can he do so ?
Yes – during business hours. For members it is
free, but for others (Pankaj), there is a fee of
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ABC ltd and XYZ ltd. Make a contract, Sudha
has interest in the contract, but she doesnt
disclose it in the board meeting or in form
24AA , she holds .1% in both the companies.
What will happen?
Ordinarily fine of 50000 , however, there are
exceptions - so probably Sudha will escape
due to these exceptions – like she has very
small holding (less than 2%)
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Case : MR electronics
Advance salary to the wife of a director will
not come in sec. 295
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Case : Dr. Fredie Ardeshir
Sale of flat on instalment to the director will
not come under sec. 295
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Contract with firms related to
director (sec. 297)
A company cannot enter into a contract with
another firm / company in which its own
director is a partner / owner, unless it has been
approved by the board.
Exemptions : if it is cash transaction, or it is a
ordinary transaction in banking / insurance
firm or if the value of transaction is less than
Rs. 5000 per annum.
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Professional services (like auditing,
consultancy) dont come in sec. 297.
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Notice by director
A director has to give notice in form 24AA
when a company is about to enter into contract
in which director is interested. The notice must
be given to the board of directors when they
meet. (sec. 299)
penalty : Rs. 50000
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Case : fire stone tyre & rubber co
v/s synthetics and chemicals co.
Interest here means personal interest – not
official interest and includes closeness of
relatives (like father – son).
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Director not to participate in some
meetings (sec. 300)
A director cannot participate in a meeting in
which a matter / contract related to his issue /
in which he is interested, is discussed.
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Office of profit Sec. 314
Director / his relatives cannot hold an office of
profit having remuneration of Rs. 10000 or
more per month – without special resolution.
Any firm / company in which director is a
partner / owner also cant hold a place of profit
without special resolution
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Restriction on the powers of the
Sec. 293 restricts the powers of the board : it
cant remit loan due to director or his firm, it
cant invest compensation received otherwise
than as per law, it cant dive charity of more
than 5% of profit (or 50000) it cant borrow
more than equity + reserves without
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Can the directors keep accounts in
other places than registered
Yes – the board of directors have to take a
decision and communicate it in 7 days to ROC
(registrar of companies) in form23 AA.
It can keep its accounts of branch offices at
branch office – but a summarised report should
be sent to the registered office at intervals of 3
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Can a director inspect any book of
Yes - during business hours ( sec. 209 (4) )
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How long should the directors
keep the books of accounts
For 8 years.
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How should directors get the
accounts and reports approved
Within 6 months of date of closure of financial
year,it must be adopted by AGM as per sec.
financial year can be extended upto 15 months
and with permission of ROC, upto 18 months.
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Signing of annual accounts
Annual accounts must be signed by 2
direcotrs / manager / secretary
if you have MD, he must sign it.
Sec. 216 : P & L as per format must be
attached with balance sheet.
Sec. 217 : board of director must add his report
on working of company with the annual
5 DECEMBER 09 www.afterschool.tk 71
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