POWER OF BOARD UNDER COMPANIES ACT 2013

UPDATE: on 30^th August 2013: Companies Bill 2012 became the Companies Act, 2013 (Act 18 of 2013).

In February 2013, I wrote “FOOTSTEPS OF CORPORATE GOVERNANCE IN COMPANIES BILL 2012” and thereafter try to cover all relevant topics related to Corporate Governance. Even though, day-to-day management of company is function of KEY MANAGERIAL PERSONNEL (sometime designated as out of Board Directors); Board of Directors is indeed most Significant body, which virtually rule a company. Not only, APPOINTMENT AND QUALIFICATION OF DIRECTOR as well as their DUTIES, VACATION, RESIGNATION, REMOVAL are subject to close scrutiny by investors, professionals and regulators. Board of Directors has a set of Executive Directors who are APPOINTMENT  and MANAGERIAL REMUNERATION has some other significant aspect of Corporate Governance. The Appointment of INDEPENDENT DIRECTORS  is one of the most significant contributions of this Bill to Corporate Governance practices in India. This all-powerful company Board exercises its powers in BOARD MEETING but it has some statutory and other BOARD COMMITTEES. Now we will discuss Power of Board of Directors under present Bill.

POWER OF BOARD OF DIRECTORS (SECTION 179):

The Board of Directors of a company shall be entitled to exercise all powers, and to do all acts and things, as the company is authorised to exercise and do. The Board shall be subject to restrictions imposed under this Act or in Memorandum or Articles or any regulation of the Company. The Board shall not exercise any power which is required to be exercised by the company in general meeting.

No regulation made by the company in general meeting shall invalidate any act of the Board done prior to these regulations come into existence and effect.

Powers to be exercise in Board Meeting (Section 179, Sub – Section 3):

The Board shall exercise following powers only by means of resolution passed in its meeting:

(a) to make calls on shareholders in respect of money unpaid on their shares;

(b) to authorise buy-back of securities under section 68;

(c) to issue securities, including debentures, whether in or outside India;

(d) to borrow monies;

(e) to invest the funds of the company;

(f) to grant loans or give guarantee or provide security in respect of loans;

(g) to approve financial statement and the Board’s report;

(h) to diversify the business of the company;

(i) to approve amalgamation, merger or reconstruction;

(j) to take over a company or acquire a controlling or substantial stake in another company;

(k) any other matter which may be prescribed.

The Board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the powers specified in clauses (d) to (f) on such conditions as it may specify.

Clause (d) which deals with power to borrow money needs many explanations. Nothing in this clause (d) shall apply to borrowings by a banking company from other banking companies or from the Reserve Bank of India, the State Bank of India or any other banks established by or under any Act. In respect of dealings between a company and its bankers, the exercise by the company of the power specified in clause (d) shall mean the arrangement made by the company with its bankers for the borrowing of money by way of overdraft or cash credit or otherwise and not the actual day-to-day operation on overdraft, cash credit or other accounts by means of which the arrangement so made is actually availed of.

Company to restrict power of Board (Section 179, Sub – Section 4):

The company in general meeting has power to impose restrictions and conditions on the exercise by the Board of any of the powers specified in this section.

Restrictions on Power of Board (Section 180):

The Board of Directors may exercise particular powers only with the consent of the company given by way of special resolution passed in general meeting of the company.

These are:

(a)  To sell, lease or otherwise dispose of the undertaking;

(b) To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;

(c)  To borrow money; and

(d)  To remit, or give time for the repayment of, any debt due from a director.

No we will discuss some details.

To sell, lease or otherwise dispose of the undertaking (Section 180, Sub – section 1, clause a, and sub – section 3, 4):

The Consent of Company in General meeting by way of special resolution is required to sell, lease or otherwise dispose of the whole or substantially whole of the undertaking of the company. Where, the company owns more than one undertaking, than sell, lease or otherwise dispose of the whole or substantially the whole of any of such undertakings require such consent.

“Undertaking” shall mean an undertaking in which the investment of the company exceeds twenty per cent of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates twenty per cent of the total income of the company during the previous financial year.

The expression “substantially the whole of the undertaking” in any financial year shall mean twenty per cent or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

Nothing contained in this clause shall affect—

(a)  The title of a buyer or other person who buys or takes on lease any property, investment or undertaking as is referred to in that clause, in good faith; or

(b) The sale or lease of any property of the company where the ordinary business of the company consists of, or comprises, such selling or leasing.

Any special resolution passed by the company consenting to the transaction as is referred to in clause (a) of sub-section (1) may stipulate conditions specified in such resolution, including conditions regarding the use, disposal or investment of the sale proceeds which may result from the transactions.

To borrow money (Section 180, Sub – section 1, clause c, and Sub – section 2):

The Consent of Company in General meeting by way of special resolution is required to money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

The expression “temporary loans” means loans repayable on demand or within six months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature.

Every special resolution passed by the company in general meeting shall specify the total amount up to which monies may be borrowed by the Board of Directors.

No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section (1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded.

CONTRIBUTION TO BONA FIDE CHARITABLE AND OTHER FUNDS (SECTION 181):

The Board of Directors of a company may contribute to bona fide charitable and other funds. The prior permission of the company in general meeting shall be required for such contribution in case any amount the aggregate of which, in any financial year, exceed five per cent. of its average net profits for the three immediately preceding financial years.

POLITICAL CONTRIBUTION (SECTION 182):

Political Contribution is one of the intense debates for years. To constitute Political Contribution, such contribution must be to Political Parties (other organisations of political nature are excluded). This section say that “political party” means a political party registered under section 29A of the Representation of the People Act, 1951.

Limit on Political Contribution (Section 182, Sub – section 1)

A company, other than a Government company and a company which has been in existence for less than three financial years may contribute any amount directly or indirectly to any political party. The aggregate of the amount which may be so contributed by the company in any financial year shall not exceed seven and a half per cent of its average net profits during the three immediately preceding financial years. No such contribution shall be made by a company unless a resolution authorising the making of such contribution is passed at a meeting of the Board of Directors and such resolution shall be deemed to be justification in law for the making and the acceptance of the contribution authorised by it.

Constituent of Political Contribution (Section 182, Sub – section 2)

In addition to direct donation, indirect donations and expenses are also constitute political donations.

(a)  a donation or subscription or payment caused to be given by a company on its behalf or on its account to a person who, to its knowledge, is carrying on any activity which, at the time at which such donation or subscription or payment was given or made, can reasonably be regarded as likely to affect public support for a political party shall also be deemed to be contribution of the amount of such donation, subscription or payment to such person for a political purpose;

(b) the amount of expenditure incurred, directly or indirectly, by a company on an advertisement in any publication, being a publication in the nature of a souvenir, brochure, tract, pamphlet or the like, shall also be deemed,—

1. where such publication is by or on behalf of a political party, to be a contribution of such amount to such political party, and
2. where such publication is not by or on behalf of, but for the advantage of a political party, to be a contribution for a political purpose.

Disclosure of Political Contribution (Section 182, Sub – section 3):

Every company shall disclose in its Profit and Loss Account any amount or amounts contributed by it to any political party during the financial year to which that account relates, giving particulars of the total amount contributed and the name of the party to which such amount has been contributed.

Contravention to this Section (Section 182, Sub – section 4):

If a company makes any contribution in contravention of the provisions of this section, the company shall be punishable with fine which may extend to five times the amount so contributed and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months and with fine which may extend to five times the amount so contributed.

CONTRIBUTION TO NATIONAL DEFENCE FUND ETC. (SECTION 183):

The Board of Directors of any company or any person or authority exercising the powers of the Board of Directors of a company, or of the company in general meeting, may contribute such amount as it thinks fit to the National Defence Fund or any other Fund approved by the Central Government for the purpose of national defence. Every company shall disclose in its Profits and Loss Account the total amount or amounts contributed by it to the Fund during the financial year to which the amount relates.

Please note: this blog post is not a professional advice but general information about the subject covered here. In case, you have specific query, please seek professional advice or contact author.

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