Corporate Governance Gets a Facelift
After almost 60 years, India changed, at least partially, its governing law for companies. The Companies Act 2013 has 470 sections, of which over two-thirds have already been notified by the government of India. The new act has far reaching consequences for almost all aspects of a company’s incorporation, operation and winding up. One area to which several changes have been brought about is the composition of the Board of Directors.
The New Board Composition
Some salient features of the Companies Act 2013 impacting board composition are:
One Person Company: The act introduces the concept of a single person company having only one director.
Resident Director:It now mandates all companies to have at least one director who should have stayed in India for at least 182 days in the previous calendar year. This is to ensure that no company can have a board comprising only of non-residents as its members.
Independent Directors: In order to strengthen management and governance, the role of Independent Directors has been stressed upon. It is now mandatory for listed companies to have Independent Directors comprising at least one-third of the board. Unlisted public companies with specified share capital, turnover and outstanding loans are also required to have at least two Independent Directors. The act also prescribes qualification criteria for Independent Directors and significant importance has been given to the relationship of Independent Directors with the promoters, directors, subsidiaries and associates of the company.
Woman Director: The Companies Act 2013 requires that all listed entities, irrespective of their size or turnover, must appoint at least one woman director as a member of the board. Unlisted public entities having paidup share capital of Rs. 100 crores and above or having a turnover of Rs. 300 crores and above must also have one woman on the board. This rule is expected to bring in diversity to the board and encourage companies to groom female leaders to take on higher responsibilities.
Number of Board Members: The new act prescribes that a company can have a maximum of 15 directors; however, the organisation now has the flexibility to appoint directors above the prescribed limit through a special resolution. The earlier law allowed businesses to determine the maximum number of directors through its Articles of Association and any increase beyond that number required the government’s approval.
Board Committees: The act also lays out a framework for the board’s functioning through committees. A company is now prescribed four committees – Audit Committee, Nomination and Remuneration Committee, Stakeholder’s Relationship Committee and Corporate Social Responsibility (CSR)Committee.
Overall, the new Companies Act 2013 has tried to bring in more accountability and transparency to the board and laid out an advanced and effective framework for its functioning.
After almost 60 years, India changed, at least partially, its governing law for companies. The Companies Act 2013 has 470 sections, of which over two-thirds have already been notified by the government of India. The new act has far reaching consequences for almost all aspects of a company’s incorporation, operation and winding up. One area to which several changes have been brought about is the composition of the Board of Directors.
The New Board Composition
Some salient features of the Companies Act 2013 impacting board composition are:
One Person Company: The act introduces the concept of a single person company having only one director.
Resident Director:It now mandates all companies to have at least one director who should have stayed in India for at least 182 days in the previous calendar year. This is to ensure that no company can have a board comprising only of non-residents as its members.
Independent Directors: In order to strengthen management and governance, the role of Independent Directors has been stressed upon. It is now mandatory for listed companies to have Independent Directors comprising at least one-third of the board. Unlisted public companies with specified share capital, turnover and outstanding loans are also required to have at least two Independent Directors. The act also prescribes qualification criteria for Independent Directors and significant importance has been given to the relationship of Independent Directors with the promoters, directors, subsidiaries and associates of the company.
Woman Director: The Companies Act 2013 requires that all listed entities, irrespective of their size or turnover, must appoint at least one woman director as a member of the board. Unlisted public entities having paidup share capital of Rs. 100 crores and above or having a turnover of Rs. 300 crores and above must also have one woman on the board. This rule is expected to bring in diversity to the board and encourage companies to groom female leaders to take on higher responsibilities.
Number of Board Members: The new act prescribes that a company can have a maximum of 15 directors; however, the organisation now has the flexibility to appoint directors above the prescribed limit through a special resolution. The earlier law allowed businesses to determine the maximum number of directors through its Articles of Association and any increase beyond that number required the government’s approval.
Board Committees: The act also lays out a framework for the board’s functioning through committees. A company is now prescribed four committees – Audit Committee, Nomination and Remuneration Committee, Stakeholder’s Relationship Committee and Corporate Social Responsibility (CSR)Committee.
Overall, the new Companies Act 2013 has tried to bring in more accountability and transparency to the board and laid out an advanced and effective framework for its functioning.
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