This article has been written by Subhadeepa Sen, a BA LLB (Hons.) student from the School of Law, Christ (Deemed to be University), Bangalore. This article aims to provide a detailed understanding of the powers of the Board of Directors provided under Section 179 of the Companies Act, 2013.
This article has been published by Sneha Mahawar.
Table of Contents
Section 179 lays down the powers of the Board of Directors of a company. The Board of Directors, or Boards (BoD), as they are usually referred to, forms one of the most crucial units of a company. They play a vital role in the overall management and governance of the company.
Section 149(1) of the Companies Act, 2013 mandates a company to have a minimum of three directors and a maximum of fifteen directors. The primary responsibility of the BOD is to provide strategic direction and guidance and ensure that the organisation is managed to keep in mind the best interests of the stakeholders. The Board also monitors the company’s performance and ensures that the company is functioning in compliance with all relevant statutory requirements. Major decisions such as mergers, acquisitions, investments, changes in capital structure, etc. rest in the hands of the Board of Directors.
This article shall discuss in length about the various powers conferred upon the directors of a company. The readers get an understanding of the composition of the Board, their role in the functioning of a company and the powers conferred upon them under Section 179 and Rule 8 of the Companies (Meeting of Board and its Powers) Rules, 2014.
Board of Directors in a company under the Companies Act, 2013
The term Board of Directors has been defined under Section 2(10) as the collective body of the directors of the company. In general terms, it may be understood as a group of individuals elected by the company’s shareholders to oversee the company’s management and functioning. Section 149 of the Companies Act 2013 states that the BoD can comprise only individuals. That is to say that no artificial person can become a member of the board. The Board of Directors is aimed at ensuring that the interests of the stakeholders are taken care of in the best possible manner and the company is being run in an efficient manner.
The Board of Directors typically comprises executive as well as non-executive members. The executive members may include individuals like Chief Executive Officers (CEOs), Chief Financial Officers (CFO), etc. Independent members are not employees of the organisation; they are external individuals appointed based on their expertise, skills, and experience.
Section 149 prescribes that for a private company, the minimum number of directors would be 2; for a public company, the minimum requirement is 3 directors, whereas, an One Person Company (OPC) is required to have 1 director.
The number of directors generally ranges between 5 to 15 members. The elected directors generally serve for a period ranging between one to three years and have a provision for re-election if they can meet the board’s requirements.
Section 165 of the Companies Act, 2013 also prescribes that an individual person can be the director of 20 companies at one time. There is also a requirement to have a minimum of one woman director in every company. Additionally, the one-third proportion of the board must compose of independent directors.
The Board of Directors is led by the Chairman of the company, who is elected by the BoD. Executive directors are responsible for administration, sales, finance, and other business processes. In contrast, the non-executive directors provide critical opinions and advice to the company. They are not employees of the company however are part of the BoD. On the other hand, managing directors are those who are elected by executive directors for the purpose of providing guidance and overseeing the business’s functioning.
For listed companies, Regulation 17 of the Securities and Exchange of India (Listing Obligations and Disclosure Requirement) 2015 provides the composition of the Board of Directors.
It states that the Board must comprise of both executives as well as non-executive directors who shall not be less than 50% of the total composition. The Company is required to have a minimum of one woman director. Further, one-third of the BoD shall constitute independent directors if the chairman is a non-executive director. Whereas, if the chairperson is an executive director, then at least half of the board must comprise independent directors.
Role of Board of Directors in a company
The Act provides clarity on the responsibilities and powers of the Board of Directors of the Company. It states that the director is required to act in good faith and exercise independent judgment in the best interests of the company. Disclosure of conflict of interest is an essential duty of a director in furtherance of which they are required to abstain from participating in discussions involving such matters. It is the duty of the BoD to ensure that the company has adequate systems and processes in place to manage risks and maintain an appropriate level of accountability and transparency. The Companies Act, 2013 aims to enable the directors to establish internal controls, financial reporting systems, and a code of conduct for the members of the company. The directors are also vested with the responsibility of overseeing the preparation of the company’s financial statements and ensuring that they are accurate and transparent.
The statute has provisions for the appointment of committees of the board, such as the audit committee, the nomination and remuneration committee, and the stakeholders’ relationship committee. These committees play a critical role in ensuring that the company’s management and governance systems are robust and effective.
The Board is responsible for setting the strategic direction of the organisation, overseeing the fiscal performance of the company, and deciding upon vital corporate policies. It is also their responsibility to check whether the company is operating in compliance with all applicable laws and regulations and to act in the best interests of shareholders at all times.
In furtherance, the performance of the senior executives of the company is also overseen by the directors. They play a key role in decision-making for actions like mergers-acquisitions etc. To sum up, a director’s role is critical to the success of any company.
Powers of the Board of Directors
Under the Companies Act 2013 in India, Board of Directors have various powers that are specified by law. Some of them are as follows –
- Power to make decisions – The Board of Directors is vested with the power to make decisions on behalf of the company. It is their responsibility to provide strategic guidance to the company, and therefore they have the power of important decision-making and steering the organisation in the right direction. It is of paramount importance that the company runs in a manner that is in the best interest of the stakeholders and, at the same time, is in compliance with the laws and regulations in force. Therefore the directors have been given the power to approve or reject major business transactions, such as the decision of a merger/acquisition or to approve or disapprove the financial plans of the company.
- Power to appoint and remove directors – The Board of Directors has the power to appoint and remove other directors from the company. This must be done in accordance with the company’s article of association and the procedures set out under the companies act. Under Section 152 of the Act, the directors exercise this power by way of voting. In addition to the power of appointment, the power of removal also vests with the directors under Section 169 of the Companies Act, 2013. (Add from provisions).
- Power to act as an agent of the company– The Board of Directors has a fiduciary relationship with the company. That is to say that they have a relationship of trust and confidence and the power to act on behalf of the company. The director acts as an agent of the company for its benefit. Thereby they have the power to enter into contracts and legal agreements on behalf of the company. The authorisation for the exercise of such power comes from the Articles of Association of the Company or by resolutions passed by the Board of Directors.
- Power to delegate – The power to delegate certain duties and responsibilities to other individuals within the company is enjoyed by the Board of Directors. Responsibilities relating to certain business transactions or management of specific departments are some of the functions that could be delegated by a director. These delegations must be made in accordance with the Article of Association and Companies Act, 2013.
- Power to approve dividends – The decision regarding the approval of dividends to be paid to the shareholders is taken by the directors. The decision to pay dividends must be based on the company’s financial performance and the company’s ability to pay dividends. Dividends can only be paid out of the company’s profits and must be approved by a resolution of the Board of Directors.
- Power to approve financial statements – The power of approving financial statements of the company vests with the directors. Statements such as balance sheets, income statements, and cash flow statements fall under this category. Such statements must be prepared in accordance with accounting standards and must be a true and fair representation of the company’s financial position.
- Powers to manage the company– The Board of Directors of a company have the power to manage the organisation. Management power includes the power to make business decisions, provide strategic decisions and run the company in an efficient manner. This power must be exercised by the directors in a manner that would be in consonance with their fiduciary duties, including their duty to act in good faith and in the best interests of the company.
Analysis of Section 179 of the Companies Act, 2013
The provision begins with prescribing principles of agency to the directors. It provides that the director would be empowered to exercise such powers and do such acts as the company is authorised to do. This brings into play the agency and fiduciary roles of the directors. They act on behalf of the company.
There are two provisos provided in this Section.
The first one provides the limits within which the board is required to use its power. It lays down that the Board of Directors shall exercise their powers subject to the Companies Act, 2013 Memorandum of Association, Articles of Association and regulations made in the general meetings.
The second proviso to the Section provides that the Board shall refrain from doing any act or thing which is to be done by the company in the general meeting or directed or required under the Companies Act, Memorandum of Association, and Article of Association.
Section 179(2) of the Companies Act, 2013 goes on to say that an act done by the Board of Directors would not be invalidated by any regulation passed by the company in the general meeting, which otherwise would have been valid had the regulation not been passed.
This provision is a reflection of the balance of power between the shareholders and the directors. The tussle for power between the directors and the shareholders of a company is long-drawn. However, the shareholders are not empowered to subside the power of the directors, as held in the case of The Public Prosecutor v. T.P. Khaitan (1956).
Section 179(3) provides what powers the Board of Directors can exercise on behalf of the company by means of passing resolutions at Board meetings.
- Power to make calls on shareholders in respect of money unpaid on their shares – The Companies Act, 2013 provides the directors the power to make calls in respect of money unpaid on shares and this is a key aspect of corporate governance. It enables the director to require the shareholders to pay amounts outstanding on their shares. The company usually takes the amounts from the shareholders in the form of calls. The first installment for the share amount is paid at the time of issue and the rest of the installments are known as calls. This serves as an important tool to ensure that the shareholders do not fail to meet their obligations to the company and the dues on their shares are paid in full.
The Articles of Association of the company provide the directors with this authority. The directors are required to send notice to each and every shareholder stating the amount due and the date by which it must be paid. In situations where there is a failure to pay the amount by the due date, the directors are empowered to take enforcement action to recover the debt, which includes filing a legal claim or appointing a debt collection agency. The directors also have the power to forfeit shares if the shareholder fails to pay the amount due on time. Such actions have serious repercussions for the shareholders; for example, result in the loss of their equity in the company and their right to participate in the organisation’s management. This power, however, is not unfettered in nature. The Companies Act, 2013 provides that such power cannot be exercised in an arbitrary manner. The directors must act in good faith, keeping in mind their fiduciary duties and the best interests of the company. The directors must be given a reasonable opportunity to pay the amount, and the process should be fair and transparent.
- Power to authorise buy-back of securities – Section 68 of the Companies Act, 2013 allows a company to buy back its own securities subject to the approval of its board of directors and shareholders. This power vests with the Boards and is an essential tool for the organisation to manage its capital structure. It aids the company in returning surplus funds to its shareholders and thereby increases shareholder value. The buying back of shares is subject to the conditions laid down under Section 62 of the Companies Act, 2013. It can be made from the existing shareholders, open market purchases, or through a tender offer. The maximum amount that can be utilised for the buyback is 25% of its total paid-up capital and free reserves. Authorisation of such buy-backs results in the reduction of outstanding shares, enhances the earnings per share and increases the shareholder value. Furthermore, since the number of shares available for acquisition is brought down, hostile takeovers are also more likely to be prevented. There are certain restrictions on this power of the directors, for example- the requirement for a special resolution to be passed by the shareholders and the prohibition on buyback in case of default in repayment of deposit or interest thereon, among others.
- Power to issue securities, including debenture in or outside India – Under the Act, the power to issue securities, including debentures, is vested with the board of directors. The BoD is empowered to issue securities for the purpose of raising capital for the company’s business operations, expansion, or investment. This can be done within India as well as outside. The Board of Directors are required to pass a resolution specifying the type of securities, the number of securities to be issued, the face value of the securities, and the price at which the securities are to be issued. The entire process must be done in compliance with the prevailing laws and must be authorised under the articles of the company. Additionally, the directors must take due care that the necessary approvals have been obtained from the regulatory authorities. Furthermore, all disclosures must be made as per the requirement of SEBI, failure to which shall lead to legal consequences.
- Power to borrow money – The Board of Directors under this provision are empowered to borrow monies on behalf of the company. In order to exercise this power, a board resolution is required to be passed, which would outline the purpose of borrowing, the amount to be borrowed, the terms and conditions of the borrowing, and any security that may be required to be provided to the creditors. The financial advisors of the company play a key role in approving such a resolution. The Articles of Association lay and the borrowing policies of the company lay down the limits within which such power is to be exercised. This power is required to be used prudently by the directors and only for purposes that will benefit the interest of the company such as financing business operations, funding new projects, investing in capital assets, or repaying existing debt.
- Power to invest the funds of the company – Under the Companies Act, 2013 the power to invest the funds of the company is vested with the Board of Directors. This function is of vital importance since this involves a certain quantum of risk and the BOD is expected to exercise it judiciously. A thorough evaluation is required to be done in respect of the nature of the investment, the risk involved, and the potential returns before the investment is made. Along similar lines, the resolution which approves a decision to invest the funds of the company must, in detail, outline the purpose of the investment, the amount to be invested, the expected returns, and the risks involved. The financial position of the organisation and the probable impact of the investment in the operations of the company are some of the other factors that must be taken care of. After the investment is made, it is the responsibility of the directors to regularly review the investments and ensure they are in line with the company’s financial objectives and investment policies so that the interests of the company and its stakeholders are protected.
- Power to grant loans or give security in respect of loans – The BoD is empowered to grant loans, give guarantees, or provide security in respect of loans. However, the directors cannot exercise this power in an unfettered manner. Under Section 185 of the Companies Act, 2013 a company cannot provide loans, guarantees, or security to its directors or any person in whom the director is interested. The Act has stipulated certain exceptions to this such as loans provided in the ordinary course of business and loans given to employees as part of their terms of employment. The directors must make sure the loans or securities are being given only after approval from the board by means of a resolution and are within the limitations set out in the articles and the policies of the company.
- Power to approve company’s financial statements and the board’s report- A company’s financial statements include a balance sheet, profit and loss account, and cash flow statement, along with other related documents such as notes to accounts and auditor’s report. Section 134 of the Companies Act, 2013 provides that the board report must contain details, such as the state of the company’s affairs, the financial results, and the details of the board’s meetings. Additionally, the Corporate Social Responsibility policies (these refer to policies through which a company integrates environmental and social concerns in its operation) must also be reflected on the board’s report. It is required that the financial statements are prepared in compliance with the applicable accounting standards and present a true and fair view of the company’s financial position. It must be done in accordance with a procedure prescribed under the Act as well as in compliance with relevant rules such as the Companies (Accounts) Rules of 2014. The approval of the financial statements and the reports must be done at the board meeting and the directors would be required to sign the above-named documents stating that they have reviewed and approved the same.
- Power to diversify the business of the company – This power vests with the Board of Directors. The directors of the company are empowered to initiate the company to enter into a new arena of business. It is required to prepare a detailed report, which includes the justification for diversifying the business, the potential benefits and risks associated with the diversification, and the impact of diversification on the financials of the company.
- Power to acquire a stake in other companies, approve merger acquisitions or amalgamations– In any acquisition, it is required that the board of directors must approve such a decision. The fiduciary role of the directors comes into play here. The director is required to inform the stakeholders about the rationale of the company, the reason behind such merger/acquisition/amalgamation and the benefits sought to be derived from such transaction at the time of the deal. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 mandates the BOD to set up a committee of independent directors who are required to provide reasoned recommendations on the transactions. These recommendations are required to be published by the company. Additionally, the directors are required to file a notice to the Competition Commission of India within 30 days from the approval of a proposal of a merger or an amalgamation in compliance with requirements under the Competition Act, 2002.
Section 179 further provides that the BoD can, by means of a resolution passed at a board meeting, delegate its powers to borrow money, invest funds, grant loans, or give securities to any committee, managing director, manager or principal officer of the branch office.
Section 179(4) provides a restriction on the rights to be exercised by the Board of Directors. It states that the Company vide its general meeting has the power to impose restrictions and conditions on the Board of Directors while exercising their powers prescribed under Section 179. Further on, Section 180 of the Companies Act, 2013 imposes restrictions on the prescribed powers of the BoD and ensures that they are not exercised in an unfettered manner.
Additional powers of the Board under Rule 8 of the Companies (Meeting of Board and its Powers) Rules, 2014
The Companies (Meeting of Board and its Powers) Rules 2014 provide a framework for the conduct of board meetings and the exercise of powers by the directors of a company. In addition to Section 179, Rule 8 of the 2014 Rules outlines certain additional powers vested with the Board of Directors.
These powers are as follows –
- Making political contributions: Section 182 of the Companies Act, 2013 provides limitations for political contributions. It puts forth that Government Companies and a Company that has been in existence for less than three years is prohibited from making any kind of political contribution. Except for these two kinds, other companies are permitted to make such contributions. Such contributions can be made only after passing a board resolution and full disclosure in its profit and loss account of the total amount contributed.
- Appointing or removing Key Managerial Personnel (KMP): The Rule provides that the following companies are required to appoint whole-time Key Managerial Personnel –
a. Public Company having a paid-up share capital of Rupees 10 Crore or more;
b. Private Company having a paid-up share capital of Rupees 10 Crore or more;
c. Every listed Company.
A whole-time KMP receives remuneration from the company and is not allowed to hold any position in any other company simultaneously, other than a subsidiary company. Section 2(51) of the Act provides the definition of Key Managerial Personnel. They are responsible for taking crucial company decisions and managing the employees. It is also their duty to see to it that the mandatory compliances laid down by the Act are being followed by the company.
3. Appointment of internal auditors and secretarial auditor: Section 138(1) of the Companies Act and the Companies (Accounts) Rules, 2014 provides the classes of companies that are required to appoint an Internal Auditor. The individual to be appointed can either be an employee of the organisation or an external member. It is required to obtain written consent from the proposed individual, after which a Board Meeting is required to be conducted for his appointment and to fix his remuneration. Section 204(1) of the Companies Act mandates Secretarial Audit for every listed company. It is mandated that only a certified Company Secretary can become a Secretarial Auditor. The Secretarial Auditor is to be appointed by means of a board resolution post which the resolution is to be filed with the ROC.
The Board of Directors of a company enjoys a number of powers conferred upon them by virtue of the Companies Act, 2013 and its allied rules. These powers are vested in them so as to enable them to efficiently manage and operate the company. While using the powers conferred upon them, the director should act in the best interest of the company. Directors have a fiduciary duty to act in the best interest of the company. The personal interests of the directors should never override the interests of the company and its stakeholders. The directors must act prudently while exercising their powers and exercise due diligence. They must take all reasonable steps to gather information, assess risks and make informed decisions. It is necessary that the decisions taken by the board should not be influenced by any personal or external pressures and should make decisions based solely on their best judgement and in the best interest of the company. Directors are required to maintain transparency while exercising their powers. The other stakeholders of the company should not be kept behind any veil of ignorance. The directors must also ensure compliance with legal and regulatory requirements and promote ethical conduct. By following these principles, directors can ensure the long-term success and sustainability of the organisation.
Frequently Asked Questions (FAQs)
Who is a director of a company under the Companies Act, 2013?
The term “director” has been defined under Section 2(34) of the Companies Act, 2013. A director may be understood as an individual who is appointed in order to carry out the responsibilities of a company’s director.
Can a director of a company act on his/her own without the approval of the Board of Directors?
The Companies Act, 2013, provides that the Board of Directors of a company must act collectively and make decisions by passing resolutions at board meetings. They must act in the best interest of the company, keeping in mind the interests of all the stakeholders. A decision taken by any director without the approval of the board would not bind the company, and the director would be responsible for any losses or damages caused to the company as a result of such actions in his personal capacity. However, in certain urgent situations, a director may take actions on his/her own, such as in situations when it is not possible to hold a board meeting on short notice, but such actions must be ratified by the Board of Directors at the next board meeting.
What are the restrictions on the powers of a director of a company under the Companies Act, 2013?
Section 180 of the Companies Act, 2013, provides restrictions on the powers of the director. It provides situations wherein the directors can exercise their power only by means of special resolution.
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