THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XII

Meetings of Board and its Powers

Sections 173–195

For Judicial Service Aspirants & Law Students

RJS • DJS • PCS-J • HJS • UPJS • BJS • MPCJ

Board Meetings • Audit Committee • RPTs • Section 179 & 180

— Enriched with landmark judgments and illustrative case law —

Chapter XII — Meetings of Board and its Powers

If Chapter XI deals with who the directors are, Chapter XII (Sections 173 to 195) deals with what they do — how they meet, what decisions they can take collectively, what they cannot do without the approval of the shareholders, what contracts they must approve through the audit committee, how they handle conflict of interest, and to what limits they can borrow, invest, or transact with related parties. This chapter is quite exam-heavy — especially Sections 179, 180, 181-182, 184-188, and 192-195.

Section 173 — Meetings of Board

(1) Number of Board Meetings

Every company shall hold the first meeting of the Board of Directors within thirty days of the date of its incorporation and thereafter hold a minimum number of four meetings of its Board of Directors every year in such a manner that not more than one hundred and twenty days shall intervene between two consecutive meetings of the Board.

The Central Government may, by notification, direct that the provisions of this sub-section shall not apply in relation to any class or description of companies or shall apply subject to such exceptions, modifications, or conditions as may be specified in the notification.

(2) Participation through Video Conferencing

The participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio-visual means, as may be prescribed, which are capable of recording and recognising the participation of the directors and of recording and storing the proceedings of such meetings along with date and time. The Central Government may, by notification, provide that any matter may not be dealt with in a meeting through video conferencing or other audio-visual means. Note: After the pandemic-era amendments, all matters may now be dealt with through VC.

(3) Notice of Meeting

A meeting of the Board shall be called by giving not less than seven days' notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means. A meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting. In case of absence of independent directors from such a meeting, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

(4) Penalty

Every officer of the company whose duty is to give notice under this section and who fails to do so shall be liable to a penalty of ₹25,000.

OPC, Small, Dormant & Section 8 Companies

Under Section 173(5), a One Person Company, small company, dormant company, and every private company which is a start-up shall be deemed to have complied with the provisions of this section if at least one meeting of the Board has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days. Provided that nothing contained in this sub-section and in section 174 shall apply to OPC in which there is only one director on its Board of Directors.

Section 174 — Quorum for Meetings of Board

The quorum for a meeting of the Board of Directors of a company shall be one-third of its total strength or two directors, whichever is higher, and the participation of the directors by video conferencing or by other audio-visual means shall also be counted for the purposes of quorum. Where at any time the number of interested directors exceeds or is equal to two-thirds of the total strength of the Board of Directors, the number of directors who are not interested directors and present at the meeting, being not less than two, shall be the quorum during such time.

Where a meeting of the Board could not be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned to the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place.

Section 175 — Passing of Resolution by Circulation

No resolution shall be deemed to have been duly passed by the Board or by a committee thereof by circulation, unless the resolution has been circulated in draft, together with the necessary papers, if any, to all the directors, or members of the committee, as the case may be, at their addresses registered with the company in India by hand delivery or by post or by courier, or through such electronic means as may be prescribed and has been approved by a majority of the directors or members, who are entitled to vote on the resolution.

Where not less than one-third of the total number of directors of the company for the time being require that any resolution under circulation must be decided at a meeting, the chairperson shall put the resolution to be decided at a meeting of the Board.

Section 177 — Audit Committee

(1) Applicability

The Board of Directors of every listed public company and the following classes of companies shall constitute an Audit Committee:

• All public companies with a paid-up capital of ₹10 crore or more;
• All public companies having turnover of ₹100 crore or more;
• All public companies having aggregate outstanding loans, borrowings, debentures or deposits exceeding ₹50 crore.

(2) Composition

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

(4) Terms of Reference

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include:

1. The recommendation for appointment, remuneration and terms of appointment of auditors of the company;Review and monitor the auditor's independence and performance, and effectiveness of audit process;Examination of the financial statement and the auditors' report thereon;Approval or any subsequent modification of transactions of the company with related parties;Scrutiny of inter-corporate loans and investments;Valuation of undertakings or assets of the company, wherever it is necessary;Evaluation of internal financial controls and risk management systems;Monitoring the end use of funds raised through public offers and related matters.

(9) Vigil Mechanism (Whistle-blower)

Every listed company or such class or classes of companies, as may be prescribed shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed. The vigil mechanism shall provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. The details of establishment of such mechanism shall be disclosed by the company on its website and in the Board's report.

Section 178 — Nomination and Remuneration Committee and Stakeholders Relationship Committee

The Board of Directors of every listed public company and the classes of companies as prescribed under Section 177 shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors. The committee shall identify persons who are qualified to become directors and who may be appointed in senior management, and shall formulate the criteria for determining qualifications, positive attributes, and independence of a director and recommend to the Board a policy relating to the remuneration for the directors, key managerial personnel, and other employees.

Stakeholders Relationship Committee [178(5)]

The Board of Directors of a company which consists of more than one thousand shareholders, debenture-holders, deposit-holders, and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the Board. The committee shall consider and resolve the grievances of security holders of the company.

Section 179 — Powers of Board

(1) General Power

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 exercise and do, subject to the provisions of the Act, the memorandum or articles, or any regulations not inconsistent therewith duly made by the company in general meeting. However, the Board shall not exercise any power or do any act or thing which is, by the Act, or by the memorandum or articles of the company, or otherwise, to be exercised or done by the company in general meeting.

(3) Powers to be Exercised Only by Resolution Passed at Meetings of the Board

The following powers, and such other powers as may be prescribed, shall be exercised by the Board of Directors only by means of resolutions passed at meetings of the Board:

1. To make calls on shareholders in respect of money unpaid on their shares;To authorise buy-back of securities under section 68;To issue securities, including debentures, whether in or outside India;To borrow monies;To invest the funds of the company;To grant loans or give guarantee or provide security in respect of loans;To approve financial statement and the Board's report;To diversify the business of the company;To approve amalgamation, merger, or reconstruction;To take over a company or acquire a controlling or substantial stake in another company;Any other matter which may be prescribed.

Note: The Board may, by a resolution passed at a meeting, delegate powers (d), (e), and (f) — borrow money, invest funds, and give loans/guarantees/security — to any committee of directors, the managing director, the manager, or any other principal officer of the company.

Section 180 — Restrictions on Powers of Board

The Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution:

1. To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings;To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;To borrow 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, free reserves, and securities premium apart from temporary loans obtained from the company's bankers in the ordinary course of business;To remit, or give time for the repayment of, any debt due from a director.

Explanations

• 'Undertaking' means an undertaking in which the investment of the company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates 20% 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 20% or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

Section 181 — Company to Contribute to Bona Fide and Charitable Funds, etc.

The Board of Directors of a company may contribute to bona fide charitable and other funds. Any contribution to any such fund which is in aggregate exceeds 5% of its average net profits for the three immediately preceding financial years, it shall require prior permission of the company in general meeting.

Section 182 — Prohibitions and Restrictions Regarding Political Contributions

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 earlier cap of 7.5% of average net profits of three preceding years was removed by the Finance Act, 2017.) Every company shall disclose in its profit and loss account the total amount contributed by it under this section during the financial year to which the account relates. The contribution shall be authorised by a resolution of the Board.

Any person who contravenes the provisions of this section shall be punishable with fine which may extend to five times the amount so contributed, and every officer 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.

Section 184 — Disclosure of Interest by Director

(1) General Disclosure

Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed (Form MBP-1).

(2) Interested Contracts

Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into —

• With a body corporate in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or
• With a firm or other entity in which, such director is a partner, owner or member, as the case may be,

— shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

Section 185 — Loan to Directors, etc.

No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by:

• Any director of company, or of a company which is its holding company or any partner or relative of any such director; or
• Any firm in which any such director or relative is a partner.

A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that — (a) a special resolution is passed by the company in general meeting; and (b) the loans are utilised by the borrowing company for its principal business activities.

Exemptions: loans to managing or whole-time director as part of service conditions; loans in the ordinary course of business at prevailing rate of interest; loans or guarantees by a holding company to its wholly-owned subsidiary, or by a company for its subsidiary in connection with principal business activities.

Section 186 — Loan and Investment by Company

A company shall, unless otherwise prescribed, make investment through not more than two layers of investment companies. No company shall directly or indirectly —

• Give any loan to any person or other body corporate;
• Give any guarantee or provide security in connection with a loan to any other body corporate or person; and
• Acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

Exceeding 60% of its paid-up share capital, free reserves and securities premium account, or 100% of its free reserves and securities premium account, whichever is more. Where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceeds the limits specified, no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting.

Section 188 — Related Party Transactions (RPT)

(1) Prior Approval Required

Except with the consent of the Board of Directors given by a resolution at a meeting of the Board, no company shall enter into any contract or arrangement with a related party with respect to:

1. Sale, purchase, or supply of any goods or materials;Selling or otherwise disposing of, or buying, property of any kind;Leasing of property of any kind;Availing or rendering of any services;Appointment of any agent for purchase or sale of goods, materials, services or property;Such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; andUnderwriting the subscription of any securities or derivatives thereof, of the company.

Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution. No member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.

Exception — Ordinary Course of Business

Nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm's length basis. Arm's length transaction means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

(5) Penalty

Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall —

• In case of listed company, be liable to a penalty of ₹25 lakh;
• In case of any other company, be liable to a penalty of ₹5 lakh.

Sections 189-195 — Other Provisions

• Section 189 — Register of Contracts in which Directors are Interested (Form MBP-4).
• Section 190 — Contract of Employment with Managing Director or Whole-Time Directors.
• Section 191 — Payment to Director for Loss of Office — requires members' approval; subject to specified ceiling.
• Section 192 — Restriction on Non-Cash Transactions Involving Directors — prior approval by general meeting required.
• Section 193 — Contracts by One Person Company — noted in writing and entered in minutes within 15 days.
• Section 194 — Prohibition on Forward Dealings in Securities (omitted by the Companies (Amendment) Act, 2017).
• Section 195 — Prohibition on Insider Trading (omitted by the Companies (Amendment) Act, 2017 — now governed under SEBI (PIT) Regulations, 2015).