Lesson 15 Board Constitution and its Powers

INTRODUCTION

The company is an artificial person and is managed by the human beings. The people who run it are
known as Board of Directors. Directors acting collectively are known as Board. The directors play a very
important role in the day to day functioning of the company. It is the board, who is responsible for the
company’s overall performance. To attain the objectives prescribed in Memorandum of Association of
the company, the company depends on Board of Directors (collectively) and directors (individually).
Committees as constituted by the Board are essential for effective functioning of the company.

The Board formulates policies and establishes organizational set up for implementing those policies and
to achieve the objectives contained in the Memorandum, muster resources for achieving the company
objectives and control, guide, direct and manage the affairs of the company.

Section 2(10) of the Companies Act, 2013 defines that “Board of Directors” or “Board”, in relation to a
company, means the collective body of the directors of the company. The term ‘Board of Directors’
means a body duly constituted to direct, control and supervise the affairs of a company.

As per Section 149 of the Companies Act, 2013, the Board of Directors of every company shall consist of
individual only

BOARD COMPOSITION

Minimum/Maximum Number of Directors in a Company [Section 149(1)]

Minimum number of directors

 public Company - 3 Directors

 Private Company - 2 Directors
 One Person Company (OPC) - 1 Director

Maximum Number of Director is 15which can be increased by passing a special resolution. Section 8
companies can have more than 15 directors even without passing a special resolution.

Resident director section 149(3)

Women director Second proviso to Section 149(1) read Rule 3 of Companies (Appointment and
Qualification of Directors) Rules, 2014

Composition of Board Directors in Listed Entity

According to Regulation 17 of SEBI (LODR) Regulations, 2018, the composition of board of directors of
the listed entity shall be as follows:
(a)Board of directors shall have an optimum combination of executive and non-executive directors with
at least one woman director and not less than fifty per cent of the board of directors shall comprise of
non-executive directors.

the Board of directors of the top 1000 listed entities shall have at least one independent woman director
by April 1, 2020; the top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less
than six directors. The top 1000 and 2000 entities shall be determined on the basis of market
capitalisation as at the end of the immediate previous financial year.

(b)Where chairperson of the board is executive director at least 50% of board shall comprise of
Independent Director.

Where chairperson of the board is non-executive at least 1/3 of board of Director comprise of
Independent Director.

Where the regular non-executive chairperson is a promoter of the listed entity or is related to any
promoter or person occupying management positions at the level of board of director or at one level
below the board of directors, at least half of the board of directors of the listed entity shall consist of
independent directors.

Number of directorships [Section 165]

Power of Board [Section 179]

All powers to do such acts and things for which the company is authorised are vested with board of
directors. The board cannot act nor do the things for which powers are specifically vested with general
meeting.

[Section 179(3) read with Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014]

Powers of the Board of directors shall be exercised only by means of resolutions passed at meetings of
the Board, namely:

(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) to make political contributions;

(l) to appoint or remove key managerial personnel (KMP);

(m) to appoint internal auditors and secretarial auditor;

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 (d) to (f) above
on such conditions as it may specify. The banking company is not covered under the purview of this
section. The company may impose restriction and conditions on the powers of the Board. Section 8
companies resolutions related to clauses (d), (e) and (f) may be decided by the Board by circulation
instead of at a meeting

Restriction on Powers of Board [Section 180]

The board can exercise the following powers only with the consent of the company by special
resolution, namely

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

in case of Private Companies provisions of Section 180 shall not apply.

Contributions to Charitable Funds [Section 181]

The power of making contribution to ‘bona fide’ charitable and other funds is available to the board
subject to certain limits. Further, the prior permission of company in general meeting is required if such
contribution in case any amount the aggregate of which, in any financial year, exceeds five percent of its
average net profits for the three immediately preceding financial years.

Prohibitions and Restrictions Regarding Political Contributions [Section 182]

According to Section 182 of the Act, a company, other than a government company and a company
which has been in existence for not less than three financial years may contribute any amount directly
or indirectly to any political party. Further the contribution under this section shall not be made except
by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic
clearing system through a bank account.

The contribution must be authorised by board in its meeting by resolution and such resolution deemed
to be the justification in law for such contribution. If the expenditure incurred on advertisement in any
publication souvenir, brochure, tract, pamphlet or the like is deemed as political contribution if such
publication is by or on behalf of political party or if not, then for the advantage to such political party for
a political purpose. Every company is required to disclose in its profit and loss account the total amount
contributed

Penalty for Contravention

The contribution in contravention of the provisions of this section, the company shall be punishable for
an amount of which may extend to five times of the amount so contributed and every officer 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 of the amount so contributed.

Power of Board and other Persons to make Contributions to National Defence Fund, etc. [Section 183]

The Board is authorised to contribute such amount as it thinks fit to the National Defence Fund or any
other fund approved by the Government for the purpose of national defence. The company is required
to disclose in its profit and loss account the total amount or amounts contributed by it during the
financial year.

BOARD COMMITTEES

A board committee is a small working group identified by the board, consisting of board members, for
the purpose of supporting the board’s work. Committees are generally formed to perform some
expertise work. Committees are usually formed as a means of improving board effectiveness and
efficiency. Committees focus on specific areas and take informed decisions within the framework of
delegated authority, and make specific recommendations to the Board on matters in their areas or
purview. Through committees board can adapt quickly to the changing demands of the environment.

. The functions of board committees can be divided as under:

 Divide and expediting the work of the organization by removing routine tasks from monthly
board consideration
 Utilize the specific talents and knowledge of board members
 Permit broader participation by all board members

For a committee to operate effectively, it needs:

  A specific terms of reference so that it is aware of its responsibility, timeline, and the limits of its
authority
 A capable staff for assistance when needed
 An effective committee chairperson who:
Understands the decision-making process
Knows how to lead a group through that process
Enables the committee to arrive at appropriate decisions
 Responsible committee members who:
Spend the time and effort as may be necessary
Understand how to contribute and evaluate the adequacy of available data and its limits
Brain storm for alternative course of actions

However, the Board of Directors is ultimately responsible for the acts of the committee

Mandatory Committees under the Companies Act 2013 are:

 Audit Committee
 Nomination and Remuneration Committee
 Stakeholders Relationship Committee
 Corporate Social Responsibility Committee

AUDIT COMMITTEE Section 177

Audit Committee is one of the main pillars of the corporate governance mechanism in any company. The
Committee is charged with the principal oversight of financial reporting and disclosure and aims to
enhance the confidence in the integrity of the company’s financial reporting, the internal control
processes and procedures and the risk management systems.

Constitution of Audit Committee

Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of the Board
and its Powers) Rules, 2014

(i) Every listed public company;

(ii) All public companies with a paid up capital of 10 crore rupees or more; or
(iii) All public companies having turnover of 100 crore rupees or more; or
(iv) All public companies, having in aggregate, outstanding loans, debentures and deposits
exceeding 50 crore rupees.

The paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may
be, as existing on the last date of latest audited financial statements shall be taken into account for the
purposes of this rule.

The following classes of unlisted public company shall not be covered for above purpose:
 (a) a joint venture;

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act

Composition of the Audit Committee [Section 177(2)]

Audit Committee shall consist of a minimum of three directors, with majority being independent. The
majority of members including the Chairperson should be persons with ability to read and understand
the financial statement. The requirement of Independent directors forming a majority is not applicable
to Section 8 companies.

Audit Committee for the listed entities, according to SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015

(a) The audit committee shall have minimum three directors as members.

(b) Two-thirds of the members of audit committee shall be independent directors and in case of a listed
entity having outstanding SR equity shares, the audit committee shall only comprise of independent
directors

(c) All members of audit committee shall be financially literate and at least one member shall have
accounting or related financial management expertise.

The chairperson of the audit committee shall be an independent director and he shall be present at
Annual general meeting to answer shareholder queries. The Company Secretary shall act as the
secretary to the audit committee. Occasionally the audit committee may meet without the presence of
any executives of the listed entity.

Number of Meetings and Quorum

In case of unlisted public companies, audit committee may meet number of times as desirable to serve
its purpose. In such companies quorum, minimum number of meetings and quorum may be decide by
the Board of Directors

For listed companies, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides

(i) The Audit Committee of a listed entity shall meet at least four (4) times in a year and not more than
120 days shall elapse between two meetings.

(ii) The quorum for audit committee meeting shall either be 2 members, or 1/3rd of the members of the
audit committee, whichever is greater; with at least 2 independent directors.

Functions/Role of the Audit Committee [Section 177(4)]

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

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

Section 177 shall not be applicable for Specified IFSC Public Company.

Powers of the Audit Committee [Section 177(5) and (6)]

i) The Audit Committee may call for the comments of the auditors about internal control
systems, the scope of audit, including the observations of the auditors and review of
financial statement before their submission to the Board
ii) discuss any related issues with the internal and statutory auditors and the management of
the company
iii) to investigate into any matter in relation to the items specified in Section 177 (4) of the Act
or referred to it by the Board and for this purpose shall have power to obtain professional
advice from external sources and have full access to information contained in the records of
the company

Disclosure in Board’s Report

Section 177(8) of the Act provides that the board’s report shall disclose the following

 Composition of an Audit Committee

 Where the Board had not accepted any recommendation of the Audit Committee, the same
shall be disclosed in the report along with the reasons therefore.

Vigil Mechanism [Section 177(9) to 177(10)]

Section 177 read with Rule 7 of the Companies (Meetings of Board and its powers) Rules, 2014, every
listed company and the companies belonging to the following class or classes shall establish a vigil
mechanism for their directors and employees to report their genuine concerns or grievances

(a) The Companies which accept deposits from the public;

 (b) The Companies which have borrowed money from banks and public financial institutions in excess of
fifty crore rupees.

The vigil mechanism shall provide for adequate safeguards against victimisation of employees and
directors who use such mechanism and make provision for direct access to the chairperson of the Audit
Committee or the director nominated to play the role of Audit Committee in appropriate or exceptional
case. Companies not required to constitute audit committee, the Board of directors shall nominate a
director to play the role of audit committee for the purpose of vigil mechanism The details of
establishment of the Vigil Mechanism is required to be disclosed by the company on its website, if any,
and in the Board’s report.

Additional role of the Audit Committee under SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015

NOMINATION AND REMUNERATION COMMITTEE SECTION 178

The Nomination and Remuneration Committee helps the Board of Directors in the election of members
of the Board of Directors, and in handling matters that relate to the conditions of employment and
remuneration of senior management, and to management’s and personnel’s remuneration and
incentive schemes. The responsibilities of the Nomination and Remuneration Committee are defined in
Nomination and remuneration policy or terms of reference of the Nomination and Remuneration
document.

Constitution of Nomination and Remuneration committee

The Board of directors of following companies shall constitute Nomination and Remuneration
Committee of the Board:

Same as that of Audit Committee

The provisions of Section 178 of the Act are not applicable to the Section 8 Companies and Specified
IFSC Public Companies.

Composition of Nomination and Remuneration Committee

The committee shall consist of three or more non-executive directors out of which not less than one-
half shall be independent directors. The chairperson of the company (whether executive or non-
executive) may be appointed as member of the Nomination and Remuneration Committee, but shall not
chair such committee.

Nomination and remuneration committee for listed Companies, SEBI (LODR) Regulations, 2015

The nomination and remuneration committee shall comprise of :

(a) At least three directors.

(b) All directors of the committee shall be non-executive directors; and

(c) At least fifty percent of the directors shall be independent directors; and

(d) In case of a listed entity having outstanding SR equity shares, two thirds of the nomination and
remuneration committee shall comprise of independent directors. The Chairperson of the nomination
and remuneration committee shall be an independent director. The chairperson of the listed entity,
whether executive or non-executive, may be appointed as a member of the Nomination and
Remuneration Committee but shall not chair such Committee.

Number of Meetings and Quorum

The quorum for a meeting of the nomination and remuneration committee shall be either two members
or one third of the members of the committee, whichever is greater, including at least one independent
director in attendance. The nomination and remuneration committee shall meet at least once in a year

The Chairperson of the nomination and remuneration committee may be present at the annual general
meeting, to answer the shareholders’ queries; however, it shall be up to the chairperson to decide who
shall answer the queries. The role of the nomination and remuneration committee shall be as specified
as in Part D of the Schedule II of SEBI (LODR) Regulations, 2015.

Role of the Nomination and Remuneration Committee

The Nomination and Remuneration Committee shall-

 Formulation of the criteria for determining qualifications, positive attributes and independence
of a director
 Identify persons who are qualified to become directors and who may be appointed in senior
management in accordance with the criteria laid down.
 Recommend to the Board their appointment and removal.
 Formulation of criteria for evaluation of performance of independent directors and the board of
directors;
 Whether to extend or continue the term of appointment of the independent director, on the
basis of the report of performance evaluation of independent directors
 Recommend to the Board a policy, relating to the remuneration for the directors, key
managerial personnel and other employees.

As per section 178(4) of the Act, while formulating its policy, the Nomination and Remuneration
Committee shall ensure that

(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and
motivate the directors

(b) relationship of remuneration to performance is clear and meets appropriate performance

benchmarks and
 (c) remuneration to directors, key managerial personnel and senior management involves a balance
between fixed and incentive pay reflecting short and long-term performance objectives appropriate to
the working of the company and its goals:

ADDITIONAL ROLE OF THE NOMINATION AND REMUNERATION COMMITTEE UNDER SEBI (LISTING
OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015

STAKEHOLDERS RELATIONSHIP COMMITTEE Section 178(5)

Constitution of the stakeholder’s relationship committee.

Section 178(5) of the Companies Act, 2013 provides that the Board of a company that has more than
one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any
time during a financial year is required to constitute a Stakeholders Relationship Committee

Composition of Stakeholders Relationship Committee

It consisting of a chairperson who shall be a non-executive director and such other members as may be
decided by the Board. The chairperson of each of the committees constituted under this section or, in
his absence, any other member of the committee authorised by him in this behalf shall attend the
general meetings of the company

Stakeholders Relationship Committee for listed companies SEBI (LODR) Regulations, 2015

As per SEBI (LODR) Regulations, 2015, the stakeholder’s relationship committee consists of

 at least three directors, with at least one being an independent director, shall be members of
the Committee and
 in case of a listed entity having outstanding SR equity shares, at least two thirds of the
Stakeholders Relationship Committee shall comprise of independent directors.
 The chairperson of this committee shall be a non-executive director.

Role of Stakeholders Relationship Committee

The role of the committee shall include the following as per SEBI (LODR) Regulations, 2015:

1. Resolving the grievances of the security holders of the listed entity including complaints related to
transfer/transmission of shares, non-receipt of annual report, non-receipt of declared dividends, issue of
new/duplicate certificates, general meetings etc.

2. Review of measures taken for effective exercise of voting rights by shareholders.

3. Review of adherence to the service standards adopted by the listed entity in respect of various
services being rendered by the Registrar & Share Transfer Agent.
 4. Review of the various measures and initiatives taken by the listed entity for reducing the quantum of
unclaimed dividends and ensuring timely receipt of dividend warrants/annual reports/statutory notices
by the shareholders of the company.

Penalty for Contravention of Section 177 and 178

Section 178(8) provides that the company shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to five lakh rupees for contravention of provisions of Section 177 and
178. Every officer of the company who is in default shall be punishable with imprisonment for a term
which may extend to one year or with fine not less than rupees twenty five thousand but which may
extend to one lakh rupees or with both. However, the non inability to resolve or consider any grievance
by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this
section.

Additional penalty for listed Company for Non-compliance with provisions of SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015

Risk Management Committee under SEBI (Listing Obligations and Disclosure Requirement)
Regulations, 2015.

The provisions of this regulation shall be applicable to top 500 listed entities, determined on the basis of
market capitalization, as at the end of the immediate previous financial year

 The board of directors shall constitute a Risk Management Committee

 The majority of members of Risk Management Committee shall consist of members of the
board of directors and in case of a listed entity having outstanding SR equity shares, at least
two thirds of the Risk Management Committee shall comprise of independent directors.
 The Chairperson of the Risk management committee shall be a member of the board of
directors and senior executives of the listed entity may be members of the committee.
 The Committee shall meet at least once in a year.
 The board of directors shall define the role and responsibility of the Risk Management
Committee and may delegate monitoring and reviewing of the risk management plan to the
committee and such other functions as it may deem fit.

There is no mandatory requirement for constitution of risk management committee under the
Companies Act 2013.

Corporate Social Responsibility Committee Section 135

Applicability

The provisions of the Section 135 of the Companies Act, 2013 may be summarized as under

1. The Section applies to the following classes of companies during immediately preceding financial
year:
 (i) Companies having Net Worth of rupees five hundred crore or more;

(ii) Companies having turnover of rupees one thousand crore or more;

(iii) Companies having Net Profit of rupees five crore or more

2. The companies specified above shall constitute a CSR Committee of the Board. A Company which
ceases to be a company covered under the above three threshold requirement to constitute CSR
Committee for three consecutive financial years shall not be required to constitute and comply with
the provisions contained in Section 135 of Companies Act, 2013 till such time it meets the threshold
as specified above.

3 The CSR Committee shall consist of three or more Directors, out of which at least one Director
shall be an Independent Director. Where a company is not required to appoint an independent
director under section 149(4), it shall have in its CSR Committee two or more directors

4. After taking into account the recommendations of the CSR Committee, the Board shall approve
the CSR Policy for the company.

5. The contents of the Policy shall be disclosed in the Board’s report.

6. It shall also be placed on the Company’s website, if any, in a manner to be prescribed by the
Central Government.

7. The Board shall ensure that the activities as are included in the CSR Policy (from the activities as
specified in Schedule VII) are undertaken by the Company.

The following additional features of the Section are relevant:

1. While spending the amount earmarked for CSR activities, the company shall give preference to
the local area and areas around it where it operates;

2. If the Company fails to spend the amount, the Board shall specify the reasons for not spending
the amount in the Board’s Report

3. The eligible companies are required to spend in every financial year, at least two per cent of the
Average Net Profits of the Company made during the three immediately preceding financial years or
where the company has not completed the period of three financial years since its incorporation,
during such immediately preceding financial years, in pursuance of its CSR Policy. For this purpose,
“Average Net Profit” shall be calculated in accordance with the provisions of Section 198 of the
Companies Act, 2013.

Other Board Committees

In addition to the Committees of the Board mandated by the Companies Act, 2013 Board of Directors
may also constitute other Committees to oversee a specific objective or project. The nomenclature,
composition and role of such Committees will vary, depending upon the specific objectives of the
company. A few examples of such Committees prevalent in the corporate sector in India and abroad are
given below:

1. Corporate Governance Committee

2. Science, Technology & Sustainability Committee

3. Regulatory, Compliance & Government Affairs Committee

4. Investment Committee

5. Ethics Committee