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Welcome bid to define directors’ duties in Companies Bill, 2008

— FILE PHOTOS

Parliament House in New Delhi.

The Companies Act gives the pride of place to company directors, collectively called the board of directors. But there is no clear definition in the existing Act of 1956 about their duties and responsibilities.

It gives an innocuous one line definition that a director includes any person occupying the position of director, by whatever name it is called. The duties can be inferred in a manner, from Sec. 307 (10) of the existing Act, which says that any person in accordance with whose instructions and directions the board of directors is accustomed to act shall be deemed to be a director of the company.

One can understand from this that the duties and responsibilities of directors include instructing and directing the company and its officers in the realisation of its objectives. From a strictly legal angle, it would be difficult to charge a director or a board for having failed in his or its duties, when the duties are not defined. This omission to clearly enunciate the duties of directors is sought to be made good in the new Companies Bill, 2008, introduced recently in Parliament.

It is hoped that this will help in strengthening the corporate concept and infusing a new sense of understanding, commitment and responsibility in the thousands of directors who constitute the boards of Indian companies. This should enable them to perform a more active role for the good of the companies and their investors.

Clause 147 of the new Companies Bill, 2008, seeks to define the duties of a director as follows, listing some do’s and don’ts. A director shall act in accordance with the company’s Articles. He shall act in good faith in order to promote the objects of the company for the benefit of the members as a whole and in the best interest of the company. He shall exercise his duties with due and reasonable care, skill and diligence.

He shall not involve himself 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. He shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners and associates, and if he is found guilty of this offence, he shall also be liable to pay an amount equal to that gain to the company. He shall not assign his office and any such assignment so made shall be void. Any director contravening these provisions shall be punishable with fine ranging from Rs. 1 lakh to Rs. 5 lakh.

The bill does not prescribe a minimum educational qualification or experience or training for the position of non - independent directors. However, it provides that independent directors should be persons of integrity and possess relevant expertise and experience or other qualifications as may be prescribed. One cannot help questioning these different yardsticks? Is there no need for integrity, expertise or experience for the non - independent directors, appointed by the major investors as their own choice? The bill seems to betray a lack of application of mind in this important area of directors’ qualifications.

Given the large resources of the shareholders and others placed at the disposal of directors in a company, there is full justification to prescribe that a person to be appointed a director shall possess such qualification as may provide evidence about his knowledge of commerce, management and/or law besides general or technical or scientific attainments and that he should be a person with integrity, contractual capacity and in good physical health to perform effectively the duties of director. This suggestion takes into account the concerns of the chambers expressed in the past against placing an upper age limit being placed for directors.

Another important new provision will facilitate holding board meetings either with the directors’ personal attendance (actual meetings} or through the application of new technology known as video conference or other electronic means as may be prescribed (virtual meetings without physical presence at the venue of meetings). This measure will afford the facility to recognise the participation of the directors and of recording and storing the proceedings of such meetings. In a globalised corporate environment, this measure will help directors from other countries and even from towns and cities far away from the company’s headquarters to participate in board meetings.

Prem Chand Gupta, Union Minister for Corporate Affairs.

Even directors who are very old or unwell will find this new facility useful in avoiding disqualification for long absences at board meetings under the new Clause 148. The government may also by notification specify matters which shall be considered only at the board meetings, personally attended by the directors.

The bill makes a serious effort to upgrade the position of directors by laying down specific duties and responsibilities for them. The higher quanta of penalties and imprisonment proposed in the bill for defaults and violations in the case of directors indicate the government’s keenness to create a stiff deterrent for corporate misgovernance.

P. T. RANGAMANI

Former President, Institute of Company Secretaries of India.

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