CORPORATE GOVERNANCE

Introduction..................................................................................................................................... 2

I. §464 of Companies Act............................................................................................................2

II. Key issues in the Course...........................................................................................................2

Two models of Corporate Governance /Approaches to Corporate Governance.......5

I. Comply or Else Approach........................................................................................................5

II. Comply or explain approach.....................................................................................................6

 Date: August 3, 2020

INTRODUCTION

It is not only a theoretical subject.

I. §464 OF COMPANIES ACT.

There is Co Act whereas there are others which are Codes.

S.464: Prohibition of Association or Partnership of Persons Exceeding Certain Number

(1) No association or partnership consisting of more than such number of persons as may be
prescribed shall be formed for the purpose of carrying on any business that has for its
object the acquisition of gain by the association or partnership or by the individual
members thereof, unless it is registered as a company under this Act or is formed under
any other law for the time being in force:
Provided that the number of persons which may be prescribed under this sub-section shall
not exceed one hundred.
(2) Nothing in sub-section (1)shall apply to—
(a) a Hindu undivided family carrying on any business; or
(b) an association or partnership, if it is formed by professionals who are governed by
special Acts.

(3) Every member of an association or partnership carrying on business in contravention of

sub-section (1)shall be punishable with fine which may extend to one lakh rupees and shall
also be personally liable for all liabilities incurred in such business.

II. KEY ISSUES IN THE COURSE

They shall be covered by Committee recommendations. We shall look at the acceptance of

some recommendations and reasons for acceptance and rejection. The issues in the course
are:

1) Compliance with Corp Governance: If company doesn’t observe a rule, should it

be punished or be asked whether it should be punished or not? CSR- No gun to
your head. It is a paid promoted extortion. People are afraid of CSR instead of

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 being enthusiastic. Milton Friedman- Case of people wanting to have a
corporation living under social responsibility. The main aim, as per Friedman, is
to maximize wealth of shareholders. It is not a welfare state body.
2) Dichotomy of control and ownership,
3) Independent Directors- Borrowed from US- Retail shareholding. How is that
functioning? Is the qualification valid that anyone can be appointed? What would
their liability be?
4) Halo Effect of Promoters: Narayan Murthy and Ratan Tata- Sikka and Mistry.
Teacher and warden is one person- wields too much power. Richard Branson and
Steve Jobs- violated rules. Chairman emeritus- Ratan Tata- There is no position.
Theory of Internal Autonomy- Reign the person- Question of control becomes
important. Role of Key Managerial Personnel will also be looked at.
5) RPTs will also be looked at. Chanda Kochchar – Husband case.
6) Woman directors- Whether gender based reservation is good? Professionally
managed company- We associate companies with promoters. How do these
companies then play out?
7) The role of auditors,
8) Interface of IBC over CG.
9) The rights of Minority Class shareholders.
10) Ease of Doing Business Index: What do the numbers and factors in the index
mean and they represent? Singapore- Not even one RPT being challenged-
Enforcement of Contracts Index.
11) The issue of arbitrability of Company Disputes. Mediation has been introduced in
Companies Act. How effective is it?

Doubts:

1. Gautam: There are shareholders big in size, even in the US.

Sir: They are regulated by SEC.
2. Abhinav: Environmental Due Diligence- CSR- Zero Draft- MCA. COVID-19 and
change.
Sir: If we have time, we’ll look at it.

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 Date: August 4, 2020

TWO MODELS OF CORPORATE GOVERNANCE /APPROACHES TO

CORPORATE GOVERNANCE.

What kind of model do we adopt in India? It is based on four factors:

1) Fairness
2) Accountability
3) Transparency
4) Equity

The definitions are old and were given in some context. Although they have changed, we
need to consider the social milieu in which the businesses operate. Without the problems of
corporate governance in a jurisdiction, the response to the problems would be coloured by the
definition.

I. COMPLY OR ELSE APPROACH

There are provisions or rules and one has to follow those rules and if there are any deviations,
it would attract penalties. It is a traditional idea. Focus is not on the company or shareholders.
It rests on shoulders of regulators.

In the US or UK, some activities are purely internal matters- M&A of company- doesn’t
require approval from NCLT. They have scheme of arrangement and it gets accepted, the
M&A gets executed.

One jacket fits all approach. Internal powers are taken from shareholders and placed in
regulators’ lap. Something which has taken birth from negativity- It can never be an agent of
positive change.

NCLAT- Cyrus Mistry- Not an iota in reasoning for corporate governance. Not a consti
matter where 143 can be invoked. This concept places over-reliance on rules rather than
business sense. Many thinkers- primary purpose of law is realization of larger goal. Objective
of company is not strict observance of law. Its objective is wealth or profit maximization.

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Company can’t be made to treat the same line as PSUs. Equity can’t overrule Foss v.
Harbottle rule.

Ease of doing business issues arise out of it. Corporate houses wield power. The more this
model is accepted, there would be erosion of shareholder of shareholder autonomy.
Shareholder activism withers away. When you want to become investor friendly destination,
these decisions don’t allow settled positions of law.

E.g.: Officer-in-default – What led us in 1956 to have the concept? We have the concept of
Key Managerial Personnel in 2013.

III. COMPLY OR EXPLAIN APPROACH

Examples of comply or else approach are primarily US or India. Even countries like Thailand
or Singapore- most of these jurisdictions have leaned towards comply or explain approach.

It arises out of Cadbury Report in the UK.

Observation of rule precedes content of the rule/effect of rule. Herd mentality followed in
India. Singapore became hub of arbitration.

There would be no rules- there are guidelines. There are some fundamental rules which bring
certainty. Beyond that, there would only be guidelines. Guidelines are recommendatory in
nature.

Deviation is inherent in guidelines and it will happen. It is subject to explanation. It is to the

shareholder. It is called shareholder activism.

We can claim it to be a toothless law but the teeth of Indian laws are biting the town.

In India, the CSR model adopted the ‘comply or explain’ approach. The company could have
chosen not to do it but with an explanation. Regulators have dawned same role as government
before 1990.

Doubts:

1. Officer-in-default – What led us in 1956 to have the concept? We have the concept of
Key Managerial Personnel in 2013.
2. Cross-border mergers- Pranav’s doubt- Approval of regulator.

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 3. “Observation of rule precedes content of the rule/effect of rule.”

Homework for August 6, 2020

1. Executive Summary of Cadbury Report1.

Explanation: They had to come up with the recommendations due to the global scams.
We come out of UK but want our DNAs to match the US.
2. Compounding of Offences: Injeti Srinivasana Committee Report- Re-categorization
of offences.
3. Cyrus Mistry case.

1
See SRM – I.

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 Date: August 6, 2020

RANDOM FACTS

1. SEBI’s powers- The power of SEBI have become a menace. There is no stability.
2. Shareholders can remove directors. You can call an EGM for doing this. It will crash
share prices and wreak havoc.
3. Mallya hasn’t been caught. No one understands that they are discharging multiple
roles. If King

EXAMPLES OF COMPLY OR EXPLAIN APPROACH IN COMPANIES

ACT, 2013

Two provisions to show the glimpse of comply or explain approach:

I. §129: FINANCIAL STATEMENTS

(5) Without prejudice to sub-section (1), where the financial statements of a company do not
comply with the accounting standards referred to in sub-section (1), the company shall
disclose in its financial statements, the deviation from the accounting standards, the reasons
for such deviation and the financial effects, if any, arising out of such deviation.

These deviations aren’t bad.

There is no penal provision.

There is §134 for imposing penalty.2 Also, there is §450.3

IV. §134: FINANCIAL STATEMENT, BOARD’S REPORT, ETC.

(8) If a company contravenes the provisions of this section, the company shall be punishable
with fine which shall not be less than fifty thousand rupees but which may extend to twenty-
five lakh rupees and every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to three years or with fine which shall not be less
than fifty thousand rupees but which may extend to five lakh rupees, or with both.

2
http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17517.
3
http://ebook.mca.gov.in/Default.aspx?page=applicablity&rg_applicabilityChangePage=10.

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 V. §450: PUNISHMENT WHERE NO SPECIFIC PENALTY OR PUNISHMENT IS

PROVIDED.

If a company or any officer of a company or any other person contravenes any of the
provisions of this Act or the rules made thereunder, or any condition, limitation or restriction
subject to which any approval, sanction, consent, confirmation, recognition, direction or
exemption in relation to any matter has been accorded, given or granted, and for which no
penalty or punishment is provided elsewhere in this Act, the company and every officer of the
company who is in default or such other person shall be punishable with fine which may
extend to ten thousand rupees, and where the contravention is continuing one, with a further
fine which may extend to one thousand rupees for every day after the first during which the
contravention continues.

VI. §177: THE AUDIT COMMITTEE

(8) The Board’s report under sub-section (3) of section 134 shall disclose the composition of
an Audit Committee and where the Board had not accepted any recommendation of the Audit
Committee, the same shall be disclosed in such report along with the reasons therefore.

Tussle between Executive and Non-executive directors: That is the purpose of having the
Audit Committee.

How many companies were penalized for CSR non-compliance? Show-cause to students.

VII. §135. CORPORATE SOCIAL RESPONSIBILITY

1. Eligibility in constituting a Corporate Social Responsibility Committee: of the Board

Company’s net worth of >500 cr. or turnover of >2000 cr. or a net profit > 5 cr. or
more during any financial year
Composition: 3 or more directors, at least one director shall be an independent
director.
2. Disclosure: The Board's report under sub-section (3) of section 134 shall disclose the
composition of the Corporate Social Responsibility Committee.
3. The Corporate Social Responsibility Committee shall,—

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 (a) 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;
(b) recommend the amount of expenditure to be incurred on the activities referred to
in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to
time.
4. The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social
Responsibility Committee, approve the Corporate Social Responsibility Policy for
the company and disclose contents of such Policy in its report and also place it on
the company's website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy
of the company are undertaken by the company.
5. The Board of every company referred to in sub-section (1), 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:

Provided that 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:

Provided further that if the company fails to spend such amount, the Board shall, in its
report made under clause (o) of sub-section (3) of section 134, specify the reasons for not
spending the amount.

Explanation.—For the purposes of this section “average net profit” shall be calculated in
accordance with the provisions of section 198.

Homework:

1. Reasons: Deviations from the original intent/ concept

2. Subrit Sarkar- Comply or explain approach
3. Jurisprudence- Transparency, Accountability, Safety of Shareholders- Which model
serves them best?

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4. Compounding of Offences: Injeti Srinivasana Committee Report- Re-categorization
of offences. If co. doesn’t appoint woman director- should it merit imprisonment or
does it imply compounding? Have we not diluted the “else” in comply or else
approach?

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 SUPPLEMENTARY READING MATERIAL

I. CADBURY REPORT SUMMARY

The 'Cadbury Committee' was set up in May 1991 with a view to overcome the huge
problems of scams and failures occurring in the corporate sector worldwide in the late 1980s
and the early 1990s. It was formed by the Financial Reporting Council, the London Stock of
Exchange and the accountancy profession, with the main aim of addressing the financial
aspects of Corporate Governance.

Other objectives include:

(i) uplift the low level of confidence both in financial reporting and in the ability of
auditors to provide the safeguards which the users of company's reports sought
and expected;
(ii) review the structure, rights and roles of board of directors, shareholders and
auditors by making them more effective and accountable;
(iii) address various aspects of accountancy profession and make appropriate
recommendations, wherever necessary;
(iv) raise the standard of corporate governance; etc. Keeping this in view, the
Committee published its final report on 1st December 1992. The report was
mainly divided into three parts:-

• REVIEWING THE STRUCTURE AND RESPONSIBILITIES OF BOARDS OF DIRECTORS AND

RECOMMENDING A CODE OF BEST PRACTICE  

The boards of all listed companies should comply with the Code of Best Practice. All
listed companies should make a statement about their compliance with the Code in their
report and accounts as well as give reasons for any areas of non-compliance. The Code of
Best Practice is segregated into four sections and their respective recommendations are:- 

1. Board of Directors - The board should meet regularly, retain full and
effective control over the company and monitor the executive management.
There should be a clearly accepted division of responsibilities at the head of a
company, which will ensure a balance of power and authority, such that no

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 one individual has unfettered powers of decision. Where the chairman is also
the chief executive, it is essential that there should be a strong and independent
element on the board, with a recognised senior member. Besides, all directors
should have access to the advice and services of the company secretary, who is
responsible to the Board for ensuring that board procedures are followed and
that applicable rules and regulations are complied with.

2. Non-Executive Directors - The non-executive directors should bring an

independent judgement to bear on issues of strategy, performance, resources,
including key appointments, and standards of conduct. The majority of non-
executive directors should be independent of management and free from any
business or other relationship which could materially interfere with the
exercise of their independent judgment, apart from their fees and shareholding.

3. Executive Directors - There should be full and clear disclosure of directors’

total emoluments and those of the chairman and highest-paid directors,
including pension contributions and stock options, in the company's annual
report, including separate figures for salary and performance-related pay.

4. Financial Reporting and Controls - It is the duty of the board to present a

balanced and understandable assessment of their company’s position, in
reporting of financial statements, for providing true and fair picture of
financial reporting. The directors should report that the business is a going
concern, with supporting assumptions or qualifications as necessary. The
board should ensure that an objective and professional relationship is
maintained with the auditors.

• CONSIDERING THE ROLE OF AUDITORS AND ADDRESSING A NUMBER OF

RECOMMENDATIONS TO THE ACCOUNTANCY PROFESSION  

The annual audit is one of the cornerstones of corporate governance. It provides an external
and objective check on the way in which the financial statements have been prepared and
presented by the directors of the company. The Cadbury Committee recommended that a
professional and objective relationship between the board of directors and auditors should be
maintained, so as to provide to all a true and fair view of company's financial statements.
Auditors' role is to design audit in such a manner so that it provide a reasonable assurance

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that the financial statements are free of material misstatements. Further, there is a need to
develop more effective accounting standards, which provide important reference points
against which auditors exercise their professional judgement. Secondly, every listed company
should form an audit committee which gives the auditors direct access to the non-executive
members of the board. The Committee further recommended for a regular rotation of audit
partners to prevent unhealthy relationship between auditors and the management. It also
recommended for disclosure of payments to the auditors for non-audit services to the
company. The Accountancy Profession, in conjunction with representatives of preparers of
accounts, should take the lead in:- (i) developing a set of criteria for assessing effectiveness;
(ii) developing guidance for companies on the form in which directors should report; and (iii)
developing guidance for auditors on relevant audit procedures and the form in which auditors
should report. However, it should continue to improve its standards and procedures.

• DEALING WITH THE RIGHTS AND RESPONSIBILITIES OF SHAREHOLDERS 

The shareholders, as owners of the company, elect the directors to run the business on their
behalf and hold them accountable for its progress. They appoint the auditors to provide an
external check on the directors’ financial statements. The Committee's report places particular
emphasis on the need for fair and accurate reporting of a company's progress to its
shareholders, which is the responsibility of the board. It is encouraged that the institutional
investors/shareholders to make greater use of their voting rights and take positive interest in
the board functioning. Both shareholders and boards of directors should consider how the
effectiveness of general meetings could be increased as well as how to strengthen the
accountability of boards of directors to shareholders.

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 Date: August 7, 2020

COMPOUNDING OF OFFENCES

It is about making good the default of non-compliance. You’ve done a wrong and want to
correct it. Thus, there is an opportunity to make good the default. There are some fines but
overall, it is fine.
It is some kind of settlement. Fees shall not exceed fine. It doesn’t exclude payment of a
lesser fees.
Penalty- LODR Regulation 30
We are still following Comply or Else Approach. You say a rule is mandatory. If you don’t
follow the rule, make good the rule by paying a fees- Aren’t we coming to the Comply or
explain approach.
Hasn’t the mandate become criminal?
Right to be heard arises only when the investigation starts.
Companies Act §441- There are offences which would be punishable with imprisonment or
fines.
The severe offences which are compoundable:
1. Non-appointment-
2. Non-Holding of AGM-
3. RPTs-
4. Non-Disclosure of Financial Statements-
Why are we still insisting on Comply or Else.
8 categories of offences- Not the entire report is important. Focus on 2 things:
Among all categories- Category Number 4- p.22, Chapter IV- p. 50. Other relevant
recommendations.
S.197-
53.  (1) Except as provided in section 54, a company shall not issue shares at a discount.
      
 (2) Any share issued by a company at a 1[discount] price shall be void.
2
[(2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue
shares at a discount to its creditors when its debt is converted into shares in pursuance of any
statutory resolution plan or debt restructuring scheme in accordance with any guidelines or

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directions or regulations specified by the Reserve Bank of India under the Reserve Bank of
India Act, 1934 or the Banking (Regulation) Act, 1949].
5, 4 3
[ [ [(3) Where any company fails to comply with the provisions of this section, such
company and every officer who is in default shall be liable to a penalty which may extend to
an amount equal to the amount raised through the issue of shares at a discount or five lakh
rupees, whichever is less, and the company shall also be liable to refund all monies received
with interest at the rate of twelve per cent. per annum from the date of issue of such shares to
the persons to whom such shares have been issued.]]]

§53 is deeply rooted in idea of fairness, an ideal of corporate governance- default in corp
governance norms.
There should be no differentiation
The offences regarding corporate governance offences are very vast. It is not limited to the 4-
5 offences.
Category VI- Substantial Offences- Wh
http://vinodkothari.com/wp-content/uploads/2018/08/Recommendations-of-MCA.pdf
§441 Compounding of Offences
https://www.mca.gov.in/SearchableActs/Section441.htm

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 Date: August 10, 2020

DIRECTORS UNDER THE COMPANIES ACT, 2013

SEBI Laws- Multiple laws

Independent Directors- India welcomed the move- How well are they functioning? Are they
effective?
Mind and brain of the corporation
Simple advice/ resolution: can
Fredrick Trowtwein- Theories of Corp Law- Corpn serving of directors or the other way
around?
US or UK- Not similar to India- Because of promoters. Promoter in 2013, ICDR Regulations
Tata, Mistry, Wadia- Euphoria in India. Halo effect of promoters- No one knows promoters
in Infosys besides Murthy or Nilekani.
Berle and Maine- Modern Company Law- Shareholder responsibilities & Agency Problem in
Companies. Entire development of literature.
Undertakes analysis of American shareholders. Lack of trust between different players-
shareholders and mgt. Rules about Independent directors, auditors, etc.
Wealth maximization and empire building.
Wealth maximizing: Problem of mistrust- Ancillary issues with directors.
Entire issue of directors being agents- Doesn’t emanate from companies act, 2013.
Source of classical problem: Before CG- Friedman only maximization was wealth
maximization. Only parameter was this. Egoistic empire building- frowned upon- throw
directors out of the company.

I. S.182. ‘AGENT’ AND ‘PRINCIPAL’ DEFINED.—

An ‘agent’ is a person employed to do any act for another, or to represent another in dealings
with third person. The person for whom such act is done, or who is so represented, is called
the ‘principal’.
Directors are employed by the corporation- not shareholders- using money of shareholders-
“Interested”- Relationship between Principal Agents? Can directors be liable for any wrong
decisions? How does their liability flow?

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 VIII. S.88. INDIAN TRUSTS ACT.—

Where a trustee, executor, partner, agent, director of a company, legal advisor, or other
person bound in a fiduciary character to protect the interests of another person, by availing
himself of his character, gains for himself any pecuniary advantage, or where any person so
bound enters into any dealings under circumstances in which his own interests are, or may
be, adverse to those of such other person and thereby gains for himself a pecuniary
advantage, he must hold for the benefit of such other person the advantage so gained.
Illustrations:
(a) A, an executor, buys at an undervalue from B, a legatee, his claim under the will. B is
ignorant of the value of the bequest. A must hold for the benefit of B the difference
between the price and value.
(b) A, a trustee, uses the trust-property for the purpose of his own business. A holds for
the benefit of his beneficiary the profits arising from such user.
(c) A, a trustee, retires from his trust in consideration of his successor paying him a sum
of money. A holds such money for the benefit of his beneficiary.
(d) A, a partner, buys land in his own name with funds belonging to the partnership. A
holds such land for the benefit of the partnership.
(e) A, a partner, employed on behalf of himself and his co-partners in negotiating the
terms of a lease, clandestinely stipulates with the lessor for payment to himself of a
lakh of rupees. A holds the lakh for the benefit of the partnership.
(f) A and B are partners. A dies. B, instead of winding up the affairs of the partnership,
retains all the assets in the business. B must account to As legal representative for the
profits arising from As share of the capital.
(g) A, an agent employed to obtain a lease for B, obtains the lease for himself. A holds
the lease for the benefit of B.
(h) A, a guardian, buys up for himself incumbrances on his ward Bs estate at an
undervalue. A holds for the benefit of B the incumbrances so bought, and can only
charge him with what he has actually paid.

Specific Relief Act, 1983

Definition of not only Trust but Trustee
Everyone holding property in Trust. Trustee holds property for benefit of beneficiary.
Fiducuiary duty

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Person can mean shareholder or company.

IX. S.2 SPECIFIC RELIEF ACT, 1963. —

S.2. Definitions.—In this Act, unless the context otherwise requires,—

(c) “trust” has the same meaning as in section 3 of the Indian Trusts Act, 1882 (2 of
1882), and includes an obligation in the nature of a trust within the meaning of
Chapter IX of that Act;
(d) “trustee” includes every person holding property in trust;

Definition of Trustee also includes any obligation

X. S.11 OF THE SPECIFIC RELIEF ACT, 1963.—

11. Cases in which specific performance of contracts connected with trusts enforceable.—
1. Except as otherwise provided in this Act, specific performance of a contract may, in
the discretion of the court, be enforced when the act agreed to be done is in the
performance wholly or partly of a trust.
2. A contract made by a trustee in excess of his powers or in breach of trust cannot be
specifically enforced.

XI. S.166. DUTIES OF DIRECTORS. —

1. Subject to the provisions of this Act, a director of a company shall act in accordance
with the articles of the company.
2. A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, the community and for the protection of
environment.
3. A director of a company shall exercise his duties with due and reasonable care, skill
and diligence and shall exercise independent judgment.
4. A director of a company shall not involve in a situation in which he may have a direct
or indirect interest that conflicts, or possibly may conflict, with the interest of the
company.
5. A director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates and if such

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 director is found guilty of making any undue gain, he shall be liable to pay an
amount equal to that gain to the company.
6. A director of a company shall not assign his office and any assignment so made shall
be void.
7. If a director of the company contravenes the provisions of this section such director
shall be punishable with fine which shall not be less than one lakh rupees but which
may extend to five lakh rupees.
The forum for this dispute would be the NCLT. S.88 been eclipsed? Wouldn’t there be
overlap of jurisdictions? 166- Fiduciary duty would be loosely worded.

XII. S.172, COMPANIES ACT, 2013- PUNISHMENT. —

If a company contravenes any of the provisions of this Chapter and for which no specific
punishment is provided therein, the company and every officer of the company who is in
default shall be punishable with fine which shall not be less than fifty thousand rupees but
which may extend to five lakh rupees.

XIII. S.430- MATTERS ONLY BE HEARD BY NCLT

L. Chandra Kumar and Sampath Kumar- Tribunals have supplementary role the HC. Now,
the tribunals go over the HC.
New Fleming Spinning & Weaving Company v. Kessowji Naik, 1885 ILR 9 Bom 373.

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 Corporate Governance Notes
Independent Director / Executive Director - relevance attached to decision making in the affairs of the
Company.  Risks and liabilities attached to the company. Mind and brain of the corporation. 
Frederick theories of corporation. 
Promoter - do not take from RBI - definition under the CA, 2013 relevant and ICDR regulation. 
Essentially a shareholder. Director is a part of the management or the board.  Nandan Nilekani or
Naryana Murthy for Infosys. Promoters are powerful. 
Berles and Means  shareholding pattern - environment of mistrust. Management is engaged in the
wealth maximisation objective of the shareholders. 
Role of director is 
S.2 (34) of CA - director. Problem of directors being agents of shareholders does not emanate from
the Act. Source of this problem. Definition of agency S.182 of Contract Act, 1872 - problem. If
shareholders were principal, then the directors would be the agents. Others argue the Corporation
itself would be the Principal and all the others would be its agents . Directors are employed by the
corporation to utilize or maintain the wealth of the Corporation.  
Only principal which would have governed - Wealth maximization objective
Entrusted - relationship Can the directors be held liable for any decision impacting the wealth
maximization objective of the Corporation. Responsibility of directors. 
S.88 Indian Trusts Act - where a trustee, executor, partner, agent, director of a company, legal adviser,
or other person bound in a fiduciary character to protect the interests of another person. 
Specific Relief Act, 1963. S2(c) Trust and S. 2(d) Trustee defined. Includes every person holding
property in trust.  S.3 of Indian Trust Act. includes an obligation in the nature of trust. Equating
director as trustee. S.2(c) “trust” has the same meaning as in section 3 of the Indian Trusts Act, 1882
(2 of 1882), and includes an obligation in the nature of a trust within the meaning of Chapter IX of
that Act; Directors of Co have fiduciary duty or a responsibility to protect the interests of another
person (includes both juristic and living being) can mean both Corp and Shareholders. Individually to
shareholders and collectively towards the Corporation. Co is the collective will towards the
shareholders. If a director fails to perform the obligation out of a negligent Act S.11 of Specific Relief
Act, can be enforced or resorted to enforce or call for a specific relief. 
Trustee towards the beneficiary and Trust - the same analogy applies to directors having a fiduciary
relationship with the shareholders and the Corporation. 
S.166(5) duty of director to act in good faith  continues to apply - forum for remedy would be NCLT.
Case may be brought under S.447. 
Alternate remedy - Consequences for civil remedy under Specific relief S.11  may also be claimed in
a civil court. 
New Fleming Spinning and Weaving Co. v.  Aessowge Naik 1885 ILR (9) Bom 373.  
Directors can be held responsible for Misstatements in Prospectus under S.35
Duties shouldn’t be onerous. For every Act where they can’t be made liable. For every minute mishap
they can't be held liable. People would prefer being shareholders rather than directors.
Can't let go of the directors for mismanagement if culpability was intentional. Wrongful gain or loss. 
Differentiating Intentional gain and mistake
Interpretation given by Courts for liability of Independent/Executive Directors for acts of the
Company: 
1. Sahara Judgment: 2011 SEBI - Subrata Roy Sahara convicted. Offshoot subsidiary of
Sahara. Pvt placement can be made limited to 49 people max. In one instance or not it was not
specified. Took money in groups/tranches of 49 people.  Private company and not listed so
SEBI wouldn’t have had a role. SEBI show cause notice issued. But “interests” of investors
was involved and confidence of shareholders gets affected- SEBI can have jurisdiction under
S.11(1) (tb checked). Intention to get listed. SEBI said it wasnt mistake done in the garb of
raising extra money. What can’t be done directly was done indirectly. 
2. Avnish Bajaj v. State (29 May 2008 Del HC)-  Read IMP - MMS clip related to the DPS
scandal was being sold on Ebay (Baazi.com). Liability of directors was the contentious issue.
Directors can't look after everything being sold on the platform . Liability of EBay’s
directors? Contended: Merely a lapse, not intentional. The site earned huge revenue.

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 Shouldn’t they be held liable? Specific provision to impose criminal liability on company or
directors, S. 67 IT Act or sth- 
Two situations where director can be held liable:
A. Doctrine of attribution. Can the crime be attributed to the director? A sufficient role must
have been played by the director. Alter ego doctrine applies here. Attribute acts of company
to director. Doctrine of attribution is the genes, while others are species. 278, 292- Other than
this, no vicarious liability in IPC.  S.27 SEBI Act- Vicarious liability of director of listed
company. 305 CrPC- If case against company.
B. Doctrine of vicarious liability. S.141 of NI Act, Tortious principle. 
C. Doctrine of Special Responsibility & Knowledge: Case on this: Shamanur Shiv
Shankaraarappa v. India Sugars Co. - 18 July 2014 :  Kar HC - Responsibility of different
portfolios- Managing director’s liability different from other directors. Responsibilities
attached to one position need to be examined for non-observance- If found guilty, you’ll be
responsible. Apart from the portfolio, if you had the knowledge of the act or fraud being
played upon, (people were raising the defence of their portfolio- I am supposed to have a very
narrow functioning area).  
Do liabilities only flow out of the responsibilities he has been given. Can only be held
liable for special knowledge regarding the affairs which he has been assigned. Rank/
Position/ Responsibilities given if were to be the deciding criteria for determining
liability would be very problematic. 
Rata Tata protects himself from the position he has taken as Chairman Emeritus.
Where would you find the responsibilities for that position. How would any
shareholder proceed against him because there is no principle under contract law
governing such a position. 
Antitrust law is called so because these were enacted to regulate the functioning of
these trusts. 
Fundamental idea across all offences: Officer-in-Default, Fraud in 447 (Fraud is
different in Companies Act to that from under S.17 Indian Contract Act Law).
Directing mind and will of the Co is different. Irrespective of whether you were
supposed to know something (e.g. a director in sales- liability to you via virtue of
doctrine of attribution.) 
3. Miheer H. Mafatlal v. Mafatlal Industries: 1956 Act case- Landmark holds true. Every
decision put to test/scrutinized by the directors/ BoDs - Reasonable diligence has been
exercised. What would be the std? Ordinary prudent man? No. Business prudent man.
Corporate Restructuring and M & As. Scrutiny of decision/ how to check that. Reasonable
care and due diligence. There shouldn’t be a hair-splitting analysis. For every investment
decision- not resulting in dividends- shouldn’t be scrutinized/penalized. Court must see the
decision taken from the point of view of a common ordinary prudent man of business taking
commercial decisions. Decisions taken by BoD were in the best interests of the shareholders
or not. Bound to make errors at certain instances. Can't be based on results. Intention should
be the deciding criteria but how to determine the intention. If results were the criteria, it
would be very odd. 
3. Zylok: Commercial decision making power of the director needs to be reasonable and can’t
be perfect.
3. Sunil Bharti Mittal v. CBI- 2015 (Read) Corporate Criminal Liability. Specific provision to
impose criminal liability on company or directors, S. 67 IT Act or sth- How does the court
reach the conclusion? Alter-ego principle was applied in reverse. Person in charge of the
company- should be in control at the time the crime was committed.
3. Iridium Telecom v Motorola India - 
3. Standard Chartered Bank v. Directorate of Enforcement 5 May - Corporations can be held
liable. The only possible option that the court had was to impose a fine. (Read para 19). The
language was imprisonment & fine was read as imprisonment or fine. 
3. Official Liquidator Supreme Bank Ltd. v. PA Tendulkar - AIR 1973 SC 1104
3. National Small Industries v. Harmeet Singh Paintil  - SC 15 Feb 2010
3. Chanda Kochhar case - Rules were not notified under which was she held liable- check 

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 3. HDFC Securities v. State of Maharashtra  (2017) 1 SCC 640 - Crim appeal 1213 of 2016- SC
judgment
3. Shiv Kumar Jatia v. NCT of Delhi - SC judgment - these two cases toe the line of Sunil
Bharti Mittal case - 
3. SEBI v. Gaurav Varshney - (2016) 14 SCC 430- When would SEBI be allowed to prosecute
directors criminally? Other side- The principle is: An absolute liability with regard to any
fraud or wrongful act or omission on whom a responsibility has been given by the company
like an officer-in-default (should there be a carve out as Australia & States of US). Under
companies act 
 1st type of offences- look for Officers-in-Default [S.2(60)]- Who  can be held to O-i-
Ds? WTDs- then whom and then proceeds….). Attributing the criminal intent - The
person fails to take reasonable steps to prevent or act in accordance with rules. For
this to become OiD- the requirement of mens rea is present.
 2nd type of people: Non-compliance of failure to comply - Someone fails to comply
with the norms and rules laid under the Companies Act. (Examples? Auditors, etc)
E.g. Financial statements - S. 129(7) Annual financial statements if not submitted
properly- it lists out category of persons- if they are not there (like the auditors not
appointed, WTDs, Director in charge of financial statements or person in charge of
financial statements are not there)- then all the directors can be held liable. 
 Is it the violation of the Doctrine of attribution or vicarious liability? 2 fork test?  
S. S.129(7): Punishment for non-compliance with  financial statement requirements of CA, 2013. 
If a company contravenes the provisions of this section, the managing director, the whole-time
director in charge of finance, the Chief Financial Officer or any other person charged by the Board
with the duty of complying with the requirements of this section and in the absence of any of the
officers mentioned above, all the directors shall be punishable with imprisonment for a term which
may extend to one year or with fine which shall not be less than fifty thousand rupees but which may
extend to five lakh rupees, or with both.
(Aakash) AK Ahuja- Negligence- AK Ahuja case- Even for these the director can be held liable.
While enumeration position under 141(2)- for dishonour of cheque (connivance, consent or
negligence)- 
(Sir) Provisions always have “knowingly, knew, knowledge, etc”. Second category is interesting. NI
act- Has provision of vicarious liability for incriminating directors for offences by company. WCan
the directors be criminally prosecuted for acts done with wrongful criminal intention and thought
process or can the directors be criminally prosecuted under the garb of collective responsibility
theory? 
 Gopal Khaitan v. State - AIR 1969 Cal 132  Cal HC - Imp Read
Trust building exercise between owners and directors.
S.141 of NI Act - 
Chitra Sharma v. UOI
Jagjivan Joshi 
S.27 of SEBI Act which doctrine responds to this provision. r/w S.24 and S.26 25, 24, 27 of SEBI
Act
KK Ahuja v VK Vohra - Cheque bounce. Liability of directors under civil and criminal liability for
mismanagement. 
Independent and Non Executive Directors - difference. 
S.2(47)- 149(5)- 
Independent Directors concept introduced in Companies Act, 2013- check mandate of Executive
Directors. Appointed by Executive Directors - to evaluate their performance who in  turn assess the
performance of Ind. Directors. 
Non-executive vis-a-vis executive directors: Meaning of the non-executive directors has to be
inferred. Companies (Specification of Definition) Rule, 2014- Rule 2(k) Definition of executive
director. Executive means Whole Time Director(WTD). 
Def of WTD- S.2(94)- It says includes  (inclusive definition) = Director in Whole time employment
of company [Nature of service covered]. 

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Meaning of non-executive director: Person not in the whole time employment of the company.
Is an Independent director a whole time employment in a company? Yes they would be considered as
whole time employees even though they can occupy positions as independent directors in several
Companies, he would still  be penalized if he can't manage his role. At par with EDs for liabilities. No
differentiation under the Companies Act for attracting liability.  They wont be considered as part time
employees merely because they are independent directors in several companies. 
For independent No relationships with stakeholders of the Company whether pecuniary, fiduciary
Cases:
 Pooja Ravindra Devidasini v. State of Maharashtra: (2014) 16 SCC 1
Paragraph 9 Imp to be read: This case observed that Non Executive Directors- a custodian of the
governance of the company. But it isn't involved in the day-today running of the business and only
monitors the executive activity. There is a huge confusion, thus, between Non Executive Directors
and Independent Directors. Three essentials: 
1. Both become custodians
2. Bot don’t involved in day to day
3. Both Monitor day to day activities.
Cadbury Committee Report: 
For the intention of the legislature with regard to Independent directors: See Director/ Attributes of
Independent Directors  in http://www.mca.gov.in/Ministry/reportonexpertcommitte/chapter4.html. 
 Chetan M Mannniar v. State of Maharashtra - 2004 judgment. - Liability of Non Executive
Directors: Directors not concerned with day to day functioning can’t be considered liable
unless there is “active involvement/participation” on their part. 
 SMS Pharmaceuticals v. Neeta Bhalla - Delhi HC Judgment- Very Imp- Liability of a
person would not depend on the role or designation given to him but as per the performance
of duties/discharge of duties that they would be performing. This, somehow,  corrected the
position in Chetan Manniar. 
If you read the concept of O-iD- It doesn’t differentiate between executive, non-exec or inde. s.2(60)
(6)- Every director aware of contravention- 
1. By virtue of receipt of proceedings- it may be his signature or 
2. Participation in proceedings and not objecting (This is crucial) SEBI took this into account for
holding people guilty in Zylog Systems Ltd.- 2 independent directors had raised objections to
resolutions and their dissent was noted and when later on it came out to be a fraud, these
people were let off.  or - Clause 6 
3. If there is connivance, it would amount to 
MCA circular - Circular No. 1/2020 dated 02/03/20 - Restrictions or caveats for criminally
prosecuting of  IDs and NEDs. Para 3 of the circular  Non promoter Non Key Managerial Personnel: 
1. Directors nominated by the Government or Public Sector undertakings 
2. Director nominated by public sector Financial Institutions or Banks having equity. 
3. Directors appointed under statutory rules or regulations - NCLT.
Appointed to protect the legitimate interests of certain investors. Not there to manage the day to day
working. 
Manage without intrusion into the daily affairs. 

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Legislative intent behind 149(11) & (12)- Mitigating factors- S. 2(60) - clause 6- 149(11)- Talks about
higher thresholds before imposing civil liability on directors. Reason behind mitigating factors- 21st
Report of Standing Committee of Finance behind Companies Draft Bill, 2009 and the other is the 57th
report of the Standing Committee on Finance - These 2 reports referred to if any doubts with regard to
any provision in Companies Act, 2013.  
In 21st report- If 11.43 & 11.45- 
11.43 
“The Ministry have accepted the aforesaid suggestion for incorporating a new clause on liability of
Independent Directors and have accordingly proposed a new sub-clause as under: 
New sub-clause 132(8)- (immunity from civil or criminal action to independent director in certain
cases) 
An independent director shall be held liable, only in respect of such acts of omission or
commission by the company or any officer of the company which constitutes a breach or
violation of any provisions of Act, which had occurred with his knowledge, attributable
through Board processes, and with his consent or connivance and where he had not acted
diligently.”
11.45 
“As already recommended by the Committee in the overview (Part-I of the Report), the Committee
would like the Government to formulate a code of Independent Directors, which may, inter-alia
include their mode of appointment, role and responsibilities vis-à-vis other Directors, their
remuneration and extent of their Jaliability. It is the Committee’s considered view that Independent
Directors should be distinguished from other Directors in the Board. They should also not be
‘related’ to the promoters or persons occupying management positions at the Board level and as
already recommended, they should also not have any kind of pecuniary relationship with the
company. The proposed code should be suitably incorporated in the Bill to enable the institution of
independent directors to evolve with time.” 
Intention behind Section 149(11) - Same liability shouldn't be there for independent directors as to
that of non executive directors. Threshold is low for Officer in Default under clause 6. Functional
efficacy of independent directors would be affected if liability attracted was on the same threshold.
Fear in the mind of independent directors would arise as reins of the company laid with NEDs. 
What is the role of an Independent Director in the company? Independent directors cannot be
roadblock to the job of Non executive directors. Can't be Captain America. Only job to oversee the
function of executive directors. Can't be a hindrance in their functioning. Not a part of the essential
decision making process. Can't understand the hidden/ulterior motives of the executive/non executive
directors. Bar for attracting liability is higher for these people so that they can function in a protective
environment. 
Zylok case - dissent was noted of independent directors - threshold is satisfied. 
  Jagjivan Hira Lal Doshi & Ors.v. Registrar of Companies - (1989) 65 CompCas 553 (Bom)
- Full time director compared with director lent specialized service
If the legislature doesn’t differentiate between knowledge, should there be a differential
liability? Or sth like that. 
If Directors are given equal voting rights, equal opportunity to be heard- there is no
distinction between opportunity- irrespective of him being a part timer or full timer- Why
should there be a difference between the liabilities? Rules of construction don’t call for
construction or qualification of the “directors’ liabilities”. There shouldn’t be a differential
treatment between directors. It is not a labour court where public interest is involved. You
can’t play in the gallery. It doesn’t make sense to have the different types of directors.  
 Chitra Sharma v. Union of India - Writ Pet 744 of 2017 - No Independent Director or
promoter would be allowed to alienate personal properties or assets and if they do they will be
held liable not only for criminal prosecution but also for contempt of court. Direction issued
for Independent Directors- The kind of direction that people issues for IDs- There is no
specific discussion for IDs. 
 MCA Circular 1 of 2020 (see earlier ref)- Not only a welcome move but in the spirit of
149(12).  

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Institution of Independent Directors

Control Ownership Dichotomy - mistrust in ownership of Company. 

Independent Directors and Minority Shareholders. 
S.230 - Scheme of Arrangement - 
Promoter / Board of Director conflict in a situation scheme of M&A or Demerger - Requirement of
majority shareholders - Must hold 3/4th or more in value of the total paid up share capital of the Co. 
100 shares holding 1 share each - FV 10. Total SC - 1000 - Satisfaction of Prompt/ Dual Majority
Test - scheme would require 75 shareholders to approve of it because of the threshold requirement
being so high. 
Reasons for dual test - 
1. People who have invested a lot of money would lack representation if they were to keep the
threshold as merely the majority. 
2. If only value was considered, in certain cases it may be provided to by very few shareholders.
Majority would not get adequate representation in such a scenario.  
3. Decisions should reflect the combined will of the promoters and the public shareholders.
Would have risked / exposed the public shareholders to the whims and fancies of the
promoter shareholders. 
Considering the dual majority test as a requirement for S.230 be a case of conflict / requirement of
Director Promoter conflict. 
Related Party Transactions could be a part of conflict. 
S.104 - Chairman of Meetings- Check his powers.  
Lot of things rest on the Chairman's shoulders which is elected by the shareholders where the
promoters have a very large say. 
Meaning of promoter under the Companies Act has been recently under with the understanding of
promoter under the SEBI Act and allied rules. 
Co limited by shares implicit idea is liability of shareholder is limited to the extent of his shareholding
in the Co. Is Not the existence of a promoter an anomaly to the idea of liability of promoters, isnt this
flouting of a basic principle of Company law. 
For any avg retail investor, the decision to invest money is not taken by the BoD, they are behind the
curtain for management, the limelight of corporate functioning is taken by the promoter, they inspire
the retail average investor. Their presence is vital. Promoters are also provided with liabilities if they
were part of some wrongful act or omission or some fraudulent act. 
S.7(6) - attracts liability of promoter - Without prejudice to the provisions of sub-section (5) where, at
any time after the incorporation of a company, it is proved that the company has been got
incorporated by furnishing any false or incorrect information or representation or by suppressing any
material fact or information in any of the documents or declaration filed or made for incorporating
such company, or by any fraudulent action, the promoters, the persons named as the first directors of
the company and the persons making declaration under clause (b) of subsection(1) shall each be liable
for action under section 447.
S. 34, 35, 36, 37 - attracts Liability of promoters
Role of SEBI - under S.24 of Companies Act, 2013. 
S.13(8)  
S.27(2) - The dissenting shareholders being those shareholders who have not agreed to the proposal to
vary the terms of contracts or objects referred to in the prospectus, shall be given an exit offer by
promoters or controlling shareholders at such exit price, and in such manner and conditions as may be
specified by the Securities and Exchange Board by making regulations in this behalf.
S.188 - RTP 
S. 149(6) -  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 in the company, its holding,
subsidiary or associate company;

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Independence of Independent Directors is of primal importance considering their as evaluating the
functioning of the executive directors. Primacy of the opinion of the Board is stressed. Independent
director cannot be at the behest of the Promoters or are not under the control of promoters - stressing
on complete independence. 
Whether an equilibrium would be maintained with the existence of this person or would it create too
many centres of power in the Co. 
Has it balanced the equation between the two entities of  promoters/ executive directors in the Co.? 
Whether the co would be facing multiple centres of power and whether it would be grappling under
it. 
Look at the definition of promoter and promoter group under SEBI (ICDR) Regulation of 2018.
Check this case also
 K.K. Modi v. Securities Appellate Tribunal- Appl 9/2001 - Bom HC 
Reclassification of shareholding - Regulation 30 & 31A under LODR Regulations - Professionally
managed Co. without any promoters - entirely run managed by Directors. If the mistrust is so deep,
then how to check for the average investor how these companies are managed or who is involved in
their decision making. 
E.g., Promoterless Co Infosys. 

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