MANAGEMENT
The management of companies now includes: (1) Directors, (2) Managing Directors, (3) Manager, (4) Legal Advisor, and (5) Auditors-all of whom work under the control and direction of the Board of Directors and are subordinates of management.
Sections 149, 151 to 165, 167 to 169 of the Companies Act deal with the appointment, rights and duties, remuneration, etc., of these officers. An attempt has been made in the following lines to put these provisions briefly so far as they relate to the subject in hand.
Appointment and Qualifications of Directors
(1) Every company shall have a Board of Directors consisting of individuals as directors and shall have:
Minimum Directors. A minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a “One Person Company”; and
Maximum. A Company can have maximum of fifteen directors:
Provided that a company may appoint more than fifteen directors after passing a special resolution.
Woman Director. Such class or classes of companies as may be prescribed, shall have at least one woman director. The companies which should have woman director are: every listed company and every public company having paid-up share capital of one hundred crore rupees or more or turnover of three hundred crore rupees or more. (BCom 3rd Year Company Audit Notes Study Material)
Stay in India. Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year. (BCom 3rd Year Company Audit Notes Study Material)
Independent Directors. Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government m prescribe the minimum number of independent directors in case of any class or classes of public companies. The following public companies must have at least two independent directors.
These companies are: Public companies having paid-up capital of or more. Public companies having turnover of 100 crore or more and public companies which have in aggregate outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees.
An independent director in relation to a company, means a director, other than a managing director or a whole-time director or a nominee director:
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors of the company, its holding, subsidiary or associate company:
(c) who has or had no pecuniary (Financial) relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year.
Term. An independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for re-appointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report. No independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director. (BCom 3rd Year Company Audit Notes Study Material)
Appointment of Director elected by Small Shareholders
A listed company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed.
For the purposes of this section “small shareholders” means a shareholder holding shares of the nominal value of not more than twenty thousand rupees or such other sum as may be prescribed. (BCom 3rd Year Company Audit Notes Study Material)
Every director shall be appointed by the company in a general meeting.
Identification No. No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number.
Consent. A person appointed as a director shall not act as a director unless he gives his consent to hold the office as director and such consent has been filed by the company with the Registrar within thirty days of his appointment in such manner as may be prescribed.
Retirement. Unless the Articles provide for the retirement of all the directors at every general meeting, not less than two-thirds of total numbers of directors of public company retire by rotation. (BCom 3rd Year Company Audit Notes Study Material)
Duties. The Directors of a company have a dual role to play-that of the trustees and of agents. As was held in the case of Lord Selbourne in G.E. Rlye. Co. vs. Turner (1872). the Directors are the mere trustees or agents of the company-trustees of the company money and property; agents in the transactions which are entered into on behalf of the company. (BCom 3rd Year Company Audit Notes Study Material)
In the capacity of trustees of the company, they cannot enter into contracts with the company in which they are interested and similarly as agents, they cannot sell goods or purchase goods from the company whose Directors they are.
Contracts with directors. Under section 189, a company is required to maintain one more registers of contracts in which its Directors are interested. This register shall be kept at the registered office of the company and shall be open for inspection to the members.
Under section 188, the following restrictions have been imposed on the Directors who wish to enter into contracts with the companies whose Directors they are :
Except with the consent of the Board of Directors of a company, a Director of the company or his relative, a firm in which such a Director or relative is a Partner, any other Partner in such a firm, or a private company of which the Director is a member or Director, shall not enter into any contract with the company:
(a) for the sale, purchase or supply of any goods, materials or services; or
(b) after the commencement of this Act, for underwriting the subscription of any shares in, or debentures of, the company.
However a director can purchase goods and materials or sell goods and materials to a company where he is or his relative is director etc. for cash at prevailing market prices. (BCom 3rd Year Company Audit Notes Study Material)
Any contract or contracts between the company on one side and such Director, relative, firm, partner or private company on the other for sale, purchase or supply of any goods, materials and services in which either the company or the Director, relative, firm, partner or private company, as the case may be, regularly trades or does business is valid. (BCom 3rd Year Company Audit Notes Study Material)
Provided that such contract or contracts do not relate to goods and materials the value of which exceeds five lakh rupees in the aggregate in any year comprised in the period of the contract or contracts; or
in the case of a banking or insurance company any transaction in the ordinary course of business of such company with any Director, relative, firm, partner or private company as aforesaid. (BCom 3rd Year Company Audit Notes Study Material)
Every consent of the Board required under this section shall be accorded by a resolution passed at a Meeting of the Board and not otherwise; and the consent of the Board shall not be deemed to have been given unless the consent is accorded before the contract is entered into or within three months of the date on which it was entered into. (BCom 3rd Year Company Audit Notes Study Material)
If consent is not accorded to any contract under this section, anything done in pursuance of the contract shall be voidable at the option of the Board. (BCom 3rd Year Company Audit Notes Study Material)
Auditor’s Duty
(1) The auditor should make sure that the Directors do not enter into contracts unless they are authorized to do so by the Articles, the Board and the Statute. (BCom 3rd Year Company Audit Notes Study Material)
(2) He should ascertain from the Minutes of the Board of Directors whether the Director had made it clear at the meeting about his being interested in a particular contract, and if so, whether he voted at such a meeting. (BCom 3rd Year Company Audit Notes Study Material)
(3) He should examine the Register of Contracts maintained by the company.
(4) He should ensure that the statutory restrictions have been duly obeyed.
(5) He should see that the qualification shares are held by Directors as laid down by the Articles of Association.
OVERALL MAXIMUM REMUNERATION OF DIRECTORS
Ordinarily, the Articles of Association provide for the payment of remuneration to Directors. The Directors are not entitled to any remuneration as a matter of right unless:
(i) there is an agreement to that effect; or
(ii) the Articles of Association provide; or
(iii) the shareholders so decide at the General Meeting to pay such a remuneration.
The total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven per cent of the net profits of that company for the financial year.
Provided that the company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration exceeding eleven per cent of the net profits of the company. (BCom 3rd Year Company Audit Notes Study Material)
Remuneration of one Managerial personnel: The remuneration payable to any one managing director; or whole-time director or manager shall not exceed five per cent of the net profits of the company. (BCom 3rd Year Company Audit Notes Study Material)
If there is more than one such director remuneration shall not exceed ten per cent of the net profits to all such directors and manager taken together;
The remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed:
(a) one per cent of the net profits of the company, if there is a managing or whole-time director or manager;
(b) three per cent of the net profits in any other case.
The percentages aforesaid shall be exclusive of any fees payable to directors for attending Board or Committee meetings
Any remuneration for services rendered by any director in professional capacity (like financial advisor etc.) shall not be included in total remuneration. (BCom 3rd Year Company Audit Notes Study Material)
AUDIT COMMITTEE AND NOMINATION AND REMUNERATION COMMITTEES
The following companies should have (i) Audit Committees and (ii) Nomination Remuneration Committees:
(a) every listed company;
(b) every other public company having paid-up capital of one hundred crore rupees or more or outstanding loans or borrowings or debentures or deposits of one hundred crore rupees or more. (BCom 3rd Year Company Audit Notes Study Material)
Audit Committee
The Board of Directors shall constitute an Audit Committee.
The Audit Committee shall consist of minimum three directors with independent directors forming majority. Majority of members of Audit Committee, including its Chairperson shall be persons with ability to read and understand financial statements.
Functions: Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall inter alia, include:
(i) Appointment etc. of auditors. The recommendation for appointment, remuneration and terms of appointment of auditors of the company;
(ii) Review. Review and monitor auditor’s independence and performance, and effectiveness of audit process;
(iii) Examination of the financial statement and the auditor’s report thereon.
(iv) Approval or any subsequent modification of transactions of the company with related parties.
(v) Scrutiny of inter-corporate loans and investments.
(vi) Valuation of undertakings or assets of the company, wherever it is necessary.
(vii) Evaluation of internal financial controls and risk management systems.
(viii) Monitoring the end use of funds raised through public offers and related matters.
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 and may also discuss any related issues with the internal and statutory auditors and the management of the company. (BCom 3rd Year Company Audit Notes Study Material)
The Audit Committee shall have authority to investigate into any matter 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.
Vigil mechanism for directors etc. Every listed company and other classes of prescribed companies have to establish vigil mechanism for directors and employees. Such mechanism shall report genuine concerns of persons in such a manner as prescribed.
The vigil mechanism shall also provide adequate safeguards against victimisation of person who use such mechanism. It should also provide them an opportunity to directly approach the chairman of the Audit Committee in appropriate and exceptional cases.
Existence of such vigil mechanism should be disclosed by the company on its website (if any) and also in the Directors’ Report.
Nomination And Remuneration Committee
The Board of Directors have to 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. (BCom 3rd Year Company Audit Notes Study Material)
This Committee shall identify persons who are qualified to become directors and who may be appointed in senior management positions in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every director’s performance. (BCom 3rd Year Company Audit Notes Study Material)
This Committee 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
The Board of Directors of a company which consists of more than one thousand shareholders, debentureholders, 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 Stakeholders Relationship Committee shall consider and resolve the grievances of security-holders of the company.
CORPORATE SOCIAL RESPONSIBILITY
It is compulsory to have Corporate Social Responsibility Committee. Every company having net worth of five hundred crore or more, or turnover of one thousand crore or more or a net profit or * 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. (BCom 3rd Year Company Audit Notes Study Material)
The Corporate Social Responsibility Committee shall 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 and recommend the amount of expenditure to be incurred on social activities. (BCom 3rd Year Company Audit Notes Study Material)
Spend 2% of profits on social responsibility. The Board of every company shall ensure that the company spends, 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, in pursuance of its Corporate Social Responsibility Policy. (BCom 3rd Year Company Audit Notes Study Material)
The company shall give preference to the local area and areas around it where it! operates, for spending the amount earmarked for Corporate Social Responsibility activities. (BCom 3rd Year Company Audit Notes Study Material)
If the company fails to spend such amount, the Board shall, in its annual report specify the reasons for not spending the amount.
Auditor’s Duty
The auditor should ensure that the company spends at least 2% of its profits on the welfare of the society. The activities of social responsibilities are specified in Companies (Corporate Social Responsibility Policy) Rules, 2014.
MANAGING DIRECTOR
If the Articles of Association of the company so authorize, the company, in a General Meeting or the Board may appoint one of the Directors as Managing Director to look into the day-to-day affairs of the company for a period not exceeding five years (according to section 196).
Auditor’s Duty
(1) He should inspect the Articles of Association and also the Directors’ Minutes Book to confirm the appointment of Managing Director and the remuneration payable to him. (BCom 3rd Year Company Audit Notes Study Material)
(2) He should see that the approval of the Central Government has been obtained if the remuneration is not according to Companies Act.
(3) He should vouch the entries for payment with the help of receipts, etc.
(4) He should confirm that net profits for this purpose have been calculated in accordance with Company Law.
(5) He should ensure that no Managing Director has been receiving any remuneration from a subsidiary company.
MANAGER
A Manager is an individual (not being the Managing Agent) who, subject to the superintendence, control and directions of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a Director or any other person occupying the position of a Manager, by whatever name called, and whether under a contract of service or not.
No company shall appoint or employ, or continue the appointment or employment of any person as its manager, managing director or whole-time director who:
(a) is below the age of 21 years and above 70 years without passing a special resolution.
(b) is an undischarged insolvent, or has at any time within the preceding five years been adjudged as insolvent; or
(c) suspends, or has at any time within the preceding five years suspended, payment to his creditors; or makes, or has at any time within the preceding five years made a composition with them; or
(d) is, or has at any time within the preceding five years been convicted by a Court in India of an offence involving moral turpitude. No company at the same time appoint managing director and manager. (BCom 3rd Year Company Audit Notes Study Material)
Auditor’s Duty
(1) He should ensure that the provisions of the relevant sections have been complied with.
(2) He should examine the contracts.
(3) He should vouch the payments by reference to the receipts.
(4) If the remuneration exceeds eleven per cent of the net profits, approval of the Central Government should be taken. He should see that it is done.
FORMS AND CONTENTS OF ANNUAL ACCOUNTS
The financial statements should give a true and fair view of the state of affairs of the company. The financial statements should comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III.
According to Accounting Standards. The items contained in such financial statements should be in accordance with the accounting standards laid down by the central government. (BCom 3rd Year Company Audit Notes Study Material)
Presentation of Accounts. At every annual general meeting of a company, the Board of Directors of the company have to lay before such meeting financial statements for the financial year. (BCom 3rd Year Company Audit Notes Study Material)
Accounts of Subsidiaries. Where a company has one or more subsidiaries, it shall, in addition, prepare consolidated financial statements of the company and of all the subsidiaries in the same form and manner as that of its own. These shall also be laid before the annual general meeting of the company along with financial statements of main company. (BCom 3rd Year Company Audit Notes Study Material)
BCom 3rd Year Company Audit Notes Study Material
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