Management of Companies

Management of Companies

Director: Is a person who directs, conduct, supervise and control the functioning of the company.

Board of Directors

A Board of directors is a team of people elected by shareholders to represent the shareholders interest and ensure that the company’s management acts on their behalf. The head of the board of directors is the Chairman or Chairperson of the Board.

 Asper Section 149 (1) Every company shall have a Board of Directors consisting of individuals as director. The following are the provisions:

ü Every company shall have a minimum number of three directors in the case of public company, Two directors in the case of private company, and one director in the case of one-person company. A company can appoint maximum 15 directors.

Ø Provided that a company may appoint more than 15 directors after passing a special resolution.

ü At least one-woman director must be appointed by the company

ü All listed companies must have at least one third proportion of their board of directors as independent directors

Legal position of director (Role of directors)

As agents

The relationship between company and director is like principle and agent. Thus the company will be liable for the all acts done by the agent on behave of the principle. 

As trustee

Directors are considered as the trustee for the money which comes in their hands

As managing partner

They are elected members of the shareholders

As employees

A director may be considered as the employee, if he is serving the company such as secretary, manager or otherwise

Appointment of directors

Appointment of first directors

• By the articles of the company
• By the subscribers of the MoA

Appointment of subsequent directors

• By the company in general meeting
• By the Board of Directors
• By the third party
• By the principal of proportionate representative
• By the tribunal

Removal of Directors

• By the shareholders
• By the Tribunal
• By the central government

Powers of Directors

According to Companies Act 2013, the Board of Directors of a Company has the following powers in the Company.

(a) To make calls on shares in respect of money unpaid

(b) To authorize buy back of securities under section 68

(c) To issue securities, including debentures, whether in or out side India

(d) To borrow money

(e) To invest in funds of the company

(f) To grant loans or give guarantee or provide security in respect of loan

(g) To approve financial statements 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.

Liabilities of Directors

Liability to the Company-
The liability of the Director to the company may arise from:
(a) Breach of fiduciary duty.
(b) Ultra Vires acts
(c) Negligence, and
(d) Mala fide Acts

(a) Breach of Fiduciary duty

 Whenever a director works dishonestly to the interest of company, he will be held liable for breach of fiduciary duty. Most of the powers of Directors are ‘powers in trust’ as explained above and therefore, should be exercised in the benefit of company and not for their own benefit or for the benefit of other members.
(b) Ultra vires acts:

Everybody in the company are supposed to work within the prescribed limits or the provisions of Companies Act, Memorandum and Articles of association since these lay down the limits to the activities of the company and consequently to the power of board of Directors. If the Directors do anything which is beyond these prescribed limits it would be considered as ultra vires and so he shall be made personally liable for this.
(c) Negligence:

Whenever the directors fail to exercise reasonable care, skill and diligence, they shall be deemed to have acted negligently in discharge of their duties and consequently shall be liable for any loss or damage resulting therefrom..
(d) Mala fide Acts:

Directors are the trustees of the assets of the company including money, property and also exercise power over them. And If they exercise such power dishonestly or perform their duties in a malafide manner, they will be held liable for the breach of trust and would be asked to reimburse the company of whatever the loss company has suffered of such malafide act

2. Liability to third parties:
In addition to the statutory duties, directors also owe common law duties. As a result of this, they may often find themselves liable to third parties. If, for example, you assumed personal responsibility for a misstatement to a customer, you could find yourself sued by that customer alongside the company.

3. Criminal Liability

If the prospectus contain an untrue statement

If the application money does not deposited in the scheduled bank

If the return on allotment not filed with registrar

If annual general meeting is not called with the specified time
If the allotment made without getting minimum subscription

Independent Director

An Independent Director means a director other than a managing director or a whole time director or a nominee director who does not have any material or pecuniary relationship with the company.

Qualifications of Independent Director

• Integrity, expertise and experience
• Who is or was not a promoter of the company, or its holding, subsidiary or associate company
• Who is not related to promoters or directors in the company
• Who has or had no pecuniary relationship with the company
• None of whose relatives has or had pecuniary relationship with company
• Who possess such other qualifications as may be prescribed

Tenure of ID

An independent Director can be appointed for a term of up to five consecutive years on the board. Special resolution is to passed for reappointment of further five years Sec.149 (10).

Role and Responsibilities of Independent Directors

• ID acts as a coach, guide and mentor to the company
• Improving corporate credibility and governance standards by working as a watch dog
• Fulfills a useful role in succession planning
• Risk managemet and strategy
• Scrutinizing, monitoring and reporting management performance regarding goals and objectives agreed in the board meeting
• Safeguard the interest of all stakeholders, particularly the minority share holders
• Balance the conflicting interest of shareholders.

 Key Managerial Personnel Under Companies

 According to Standard 18 (AS18) the Key Managerial personal are people who have authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. The following are the Key Managerial Personal under companies Act:

These are a group of people who are in charge of managing the operations of a Company; they are responsible for the planning, directing and controlling the functioning of a Company. They are the first point of contract between the company and its Stakeholders.

• CEO/MD
• Company Secretary
• Whole Time Director
• Chief Finance Officer

CEO/MD:

CEO is the highest ranking executive in a company. They are responsible for the running of the whole company. Whose major responsibilities include making major corporate decisions, managing the overall operations and resources of a company. He is also responsible for innovating and growing the company to a large scale.

Company Secretary

According to Section 2(1)(c) of the Company Secretaries Act, 1980, company secretaries are the people who are the member of the Institute of Company Secretaries of India. Hence, he is a member of ICSI and performs various ministerial and administrative functions of the organization.

Whole Time Director:

A director who is devoting the whole of working hours to the company is called whole time director. He has the substantial stake in the company and is a part of day to day operation.

Chief Finance Officer:

He is a senior level executive responsible for handling the financial status of the company. He needs to formulate financial planning, contingency plans etc.

Audit Committee

An audit committee is a committee of an organisation’s board of directors which is responsible for oversight of the financial reporting process, selection of the independent auditor, and receipt of audit results both internal and external.

• All public companies with a paid up capital of R.s. 10 crore or more
• All public company having turnover of 100 crores or more
• All Public companies having aggregate, outstanding loans or borrowing or debentures of deposits exceeding R.s. 50 Crores or more.

Audit Committee – The Function

• Recommendation for appointment, remuneration and terms of appointment of auditor of the company
• Review and monitors auditor’s independence
• Examination of the financial statements and auditors report
• Scrutiny of intercorporate loans and deposits
• Valuation of undertakings or assets of the company
• Evaluation of the internal financial controls

SEBI (Security Exchange Board of India)

• Securities and Exchange Board of India (SEBI) is a statutory regulatory body entrusted with the responsibility to regulate the Indian capital markets. It monitors and regulates the securities market and protects the interests of the investors by enforcing certain rules and regulations.
• SEBI was founded on April 12, 1992, under the SEBI Act, 1992. Headquartered in Mumbai, India, SEBI has regional offices in New Delhi, Chennai, Kolkata and Ahmedabad along with other local regional offices across prominent cities in India

Structure of SEBI

SEBI has a corporate framework comprising various departments each managed by a department head. There are about 20+ departments under SEBI. The chairman of SEBI is nominated by the Union Government of India.

• Two officers from the Union Finance Ministry will be a part of this structure.
• One member will be appointed from the Reserve Bank of India.
• Five other members will be nominated by the Union Government of India.

Objectives of SEBI:

SEBI has following objectives-

• Protection to the investors

The primary objective of SEBI is to protect the interest of people in the stock market and provide a healthy environment for them.

• Prevention of malpractices

This was the reason why SEBI was formed. Among the main objectives, preventing malpractices is one of them.

• Fair and proper functioning

SEBI is responsible for the orderly functioning of the capital markets and keeps a close check over the activities of the financial intermediaries such as brokers, sub-brokers, etc.

Functions of SEBI:

SEBI primarily has three functions-

• Protective Function
• Regulatory Function
• Development Function

Protective Functions

As the name suggests, these functions are performed by SEBI to protect the interest of investors and other financial participants. It includes-

• Checking price rigging
• Prevent insider trading
• Promote fair practices
• Create awareness among investors
• Prohibit fraudulent and unfair trade practices

Regulatory Functions

These functions are basically performed to keep a check on the functioning of the business in the financial markets.These functions include-

• Designing guidelines and code of conduct for the proper functioning of financial intermediaries and corporate.
• Regulation of takeover of companies
• Conducting inquiries and audit of exchanges
• Registration of brokers, sub-brokers, merchant bankers etc.
• Levying of fees
• Performing and exercising powers
• Register and regulate credit rating agency

Development Functions

• SEBI performs certain development functions also that include but they are not limited to-
• Imparting training to intermediaries
• Promotion of fair trading and reduction of malpractices
• Carry out research work
• Encouraging self-regulating organizations
• Buy-sell mutual funds directly from AMC through a broker

Corporate governance

• Corporate governance is the system by which companies are directed and controlled.
• Corporate governance is an internal system that encompasses policies, processes, people and which makes sure the needs of share holders and other stake holders are met in full.

Pillars of Corporate Governance

ü Accountability: Safeguard the interest of stake holders.

ü Fairness: Fairness means “treating all stakeholders s including minorities, reasonably, equitably and provide effective redress for violations.

ü Transparency: Transparency “means having nothing to hide” that allows its processes and transactions observable to outsiders. It means accurate, adequate and timely disclosure of relevant information to the stake holders.

ü Independence: Strong board of directors with independency

ü Integrity: Highest standard of integrity.

ü Stakeholder engagement: Those charged with governance should identify the key stakeholders and how they interact with the business and how they are engaged with to ensure the best outcome for the organization.

Why Corporate Governance is Important

1. Large number of stake holders: There are several stake holders in a company like shareholders, employees, creditors government, community etc. These stake holders have different rights and interest in the operation of the company. Corporate governance is necessary to protect the interest of these stake holders

2. Changing structure f ownership: Now a day’s promoters or shareholders includes the foreigners also. So a transparent administration system is essential to attract global capital to the Indian industries’.

3. Greater Social Responsibility: In order to ensure the transparent and better dealings with regard to the environment, conservation of resources, basic infrastructure, a good system is essential.

4. Corporate scams and frauds: Several corporate scams and frauds have been reported in the corporate world in recent years. The board of directors may misuse their powers, commits frauds, manipulation and misappropriation, insider trading etc. to prevent this better system is essential

5. Shareholders activism: Shareholders associations and strong shareholders’ movement have led to demand for good governance of corporation.

6. Need to implement a strong regulatory system for better administration

7. Merger and acquisition of companies demanded the corporate governance to ensure the rights and interest of various shareholders.

Corporate Social Responsibility (CSR)

Corporate Social Responsibility/ corporate sustainability/sustainable business/ corporate conscience/ corporate citizenship/ conscious capitalism or responsible business

It implies the responsibility of a business towards its various stake holders, namely shareholders, suppliers, customers, public, government and society.

CSR – The Importance

a) Improved public image – Undertaking CSR enhances reputation of the company.

b) Increased brand awareness and recognition – If you are following ethical practice, the news will be spreading quickly.

c) Cost saving – Sustainability leads to cost reduction

d) An advantage over competitors

e) Increased customer engagement

f) Greater employee engagement

g) More benefit to employees – positive and productive

 Arguments for Social Responsibility

The following are the arguments in favour of SR:

1. Business is a part of society:

Business is a part of society. Society is a system and business is one of its sub systems. Every sub system of a system formulates for the betterment of the whole system and not for its own betterment only.

• Long term self-interest of the Business:

The existence of a business depends on the existence of various social organs like employees, customers, society as a whole. So the business should provide satisfaction to all these organs on continuous basis for its continued existence.

• Avoidance of Government Regulations:

Government aims at maintaining equilibrium in the society on long term basis. For this purpose, it tries to ensure that every organs of society meets social requirements. If any organization fails to do so, the government has the power to take action.

• Moral Justification:

Social responsibility has moral justification. Business takes various inputs from the society, namely money, material, people information etc. So business has to undertake social responsibility.

• Public Image:

Any business which involves in fulfilling the inspirations of the society creates better image in the public.

• Maintenance of Society:

The business has to be socially responsible in order to avoid anti social entities so that society is maintained on continuous basis.

• Availability of Resources with the business:

Business enterprise has huge financial resources and very efficient managers. So they can solve a social problem easily.

.

Arguments against Social Responsibility

1. Conflict with profit motive:

The main aim of business is to maximize the profit, but the discharge of social responsibility adds to cost of business. So there is a chance for violation of profit maximization. It is Contrary to basic functions of business.

• Distortion of resource Allocation:

Social responsibility leads to distortion of resource allocation.

• Imposition of social values:

Discharging of Social responsibility involves lots of influence of the business on the society. Therefore by undertaking SR, a business is likely to impose its own value on the society.

• Personal Resistance:

People tend to dislike interference from business in their problems.

CSR Committee

Following companies to constitute CSR committee

• Net worth of Rs. 500 crore or more, or
• Turnover of Rs. 1000 crore or more, or
• Net Profit of Rs. 5 crore of more

Committee to consist of atleast 3 directors out of which atleast 1 to be independent director.

Functions of CSR Committee

• Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII
• Recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
• Monitor the Corporate Social Responsibility Policy of the company from time to time.
• Prepare a transparent monitoring mechanism for ensuring implementation of the projects / programmes / activities proposed to be undertaken by the company.