ROLE AND RESPONSIBILITIES OF WHOTE-TIME DIRECTOR AND NON- EXECUTVE DIRECTOR UNDER COMPANIES ACT, 1956 & OTHER LEGISLATIONS

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1 ROLE AND RESPONSIBILITIES OF WHOTE-TIME DIRECTOR AND NON- EXECUTVE DIRECTOR UNDER COMPANIES ACT, 1956 & OTHER LEGISLATIONS Date: - February 2010 By Aman Morya Company Secretary Trainee The Madras Aluminium Co. Ltd. Vedanta Group Mb csaman13@gmail.com

2 BOARD COMPOSITION BOARD OF DIRECTORS Executive Non Executive Managing Director Independent Director Whole Time Director Non- Independent Director The role and responsibility of an individual director would depend upon the nature of his directorship.

3 A BOARD OF DIRECTORS is a body of elected or appointed directors who jointly oversee the activities of a company or organization. Typical duties of boards of directors include. Governing the organization by establishing broad policies and objectives; Selecting, appointing, supporting and reviewing the performance of the chief executive; Ensuring the availability of adequate financial resources; Approving annual budgets; Accounting to the stakeholders for the organization's performance. Sources of Duties Common law Statutes - Law established by a legislative body The Memorandum and Articles of Association of the Company Service agreements specifically entered between the director and the Company Resolutions passed at members or directors meetings The rules of a regulatory body, if any

4 THE PERSONAL LIABILITIES WHICH CAN BE IMPOSED UPON THE DIRECTORS FOR BOTH CIVIL AND CRIMINAL OFFENCES MAY ARISE IN THE FOLLOWING CIRCUMSTANCES Abuse of powers by acting beyond the scope of Memorandum and Articles. Breach of duty he will be liable to pay / reimburse the company the profit made or loss suffered. Liabilities to shareholders if a person suffers a loss as a result of directors acts knowingly done against the rights of the members. Liabilities to investors where directors fail to disclose material information or give misleading information. General compliance under various other laws.

5 COMPANIES ACT AND DIRECTORS The Companies Act, 1956 looks at all directors alike. Throws some extra compliances in case of whole time directors. Defines officer in default giving a degree of immunity to directors other than the whole time directors. Requires some disclosures by interested directors. Does not exempt independent directors from any of the duties, liabilities, responsibilities of the Board. Independent directors have the same power that other directors have. Non Executive Director - Non-executive directors are subject to similar fiduciary duties as executive directors such as the duty to act in good faith and for proper purposes, duties of no conflict etc

6 ROLE AND RESPONSIBILITIES OF WHOLE-TIME DIRECTORS UNDER COMPANIES ACT, 1956 Section 5 of the Companies Act, All applicable provisions of Companies Act, 1956 wherein offences are covered by Section 5 Officer in default.

7 "OFFICERS IN DEFAULT" Section 5 of the Companies Act provides a list of officers of a company who are defined as "officers in default" so that those in charge of management or who have been charged with the responsibility of complying with any of the provisions of the Act are held responsible and liable for any contravention of the Act. A Whole-time Director of a company is also included in this list of officers who are liable for the defaults and lapses of the company. The other officers in this list are Managing Directors, Manager, Company Secretary and certain other specified persons. Some of the major provisions of the Act which attracts responsibility and liabilities for non-compliance of following Sections not limited to Section 58A, 117C, 209A, 215, 217, 220, 225 to 230, , 292A, 301 to 304, 307,372A,383A,629A,etc. It is not necessary to prove that the default has been committed by the officer knowingly or willful. Where there is failure to comply with the statutory provision, the mere failure will be made punishable

8 SCHEDULE XIII OF COMPANIES ACT, 1956 Further, Schedule XIII to the Companies Act provides that no person shall be eligible for appointment as a managing or whole-time director or a manager of a company if he had been sentenced to imprisonment for any period, or to a fine exceeding Rs. 1,000/- under any of the following Acts -

9 Schedule XIII 1. The Indian Stamp Act, The Central Excise Act, The Industries (Development and Regulation) Act, The Prevention of Food Adulteration Act, The Essential Commodities Act, The Companies Act, The Securities Contracts (Regulation) Act, The Wealth-tax Act, The Income-tax Act, The Customs Act, The Monopolies and Restrictive Trade Practices Act, The Foreign Exchange Regulation Act, 1973 (replaced by FEMA) 13. The Sick Industrial Companies (Special Provisions) Act, The Securities and Exchange Board of India Act, The Foreign Trade (Development and Regulation) Act, 1992

10 Duties and Responsibility of Whole Time Directors under various other legislations The legal responsibilities of Managing Director/ Whole Time Directors/Directors vary with the nature of the organization, and with the jurisdiction within which it operates

11 Labour Laws - Managing Director/ Whole Time Director comes under the definition of employer under the labour laws hence he/ she will be responsible for the compliance necessary under the provisions of Labour Laws 1. Occupier under the Factories Act, 1948 Occupier comes under the definition responsible under section 7-A of the Factories Act for ensuring Health, Safety and Welfare of all workers. Under Sec. 2(n) of Factories Act, any one of the directors can be appointed as Occupier (by a resolution of BOD) who is having ultimate control over the affairs of the Company. Decision of SC Only Director of the Company can be appointed as an occupier of the factory not simply an officer or employee. 2. Similarly, Managing Director/ Whole Time Director responsible under other major laws, for e.g. as Employer under the Employees State Insurance Act, 1948 (ESI Act), Decision of SC It has been held that Managing Director/ Whole Time Director is prima facia incharge of and responsible for the Company s affairs and can be prosecuted under ESI Act. Director Appropriate Director may be nominated by the Board of Director of the Company to act as a Responsible Person. 3. Managing Director/ Whole Time Director is duty bound and responsible under other major laws, for e.g. EPF Act Minimum Wages Act, Payment of Wages Act etc.. To prosecute a Director, it should be shown that he was in charge of and was responsible for the conduct of the company s affairs.-

12 Responsibility under Other Acts and laws Pollution Laws Similarly, WTD/MD responsible under other major pollution related laws and Acts, for e.g. Air (Prevention and Control of Pollution) Act, 1981, Water (Prevention and Control of Pollution) Act, 1947 Managing Director/Whole Time Director shall be responsible for all compliance of the company. - Manager of the site in not personally liable under the act because he could not be equated with a person who was managing in a governing role of the affairs of the company. Income TaxAct,1961 Principal Officer (Director) of the company shall be responsible for the compliance of the provision of Income Tax Act. MD/WTD may also responsible/ liable in the capacity of a principal officer under the Income-tax Act for false verification of and income tax return. Electricity Act, 2003 Under Section 149 of the Electricity Act, 2003, Every person who at the time when offence is committed was in charge of the company (Director) shall be deemed to be having guilty of having committed the offence and shall be liable for the offence. For certain offences committed under the Act, any director, manager or secretary or other officer of the Company can be held liable if contribution/consent to any neglect is proved against them. Hence, appropriate officer should be nominated/ appointed under the Act responsible for compliance.

13 The Mines Act, 1952, the Owner and agent of every mines shall each be responsible for making financial and other provision and for taking such other steps as may be necessary for compliance with the provision of this Act and regulations, rules, bye-laws and order made thereunder. Owner is defined in relation to a mine, means any person who is the immediate proprietor or lessee or occupier of the mine or of any part thereto. Apart from specific legislations, the Directors of reputed companies endeavour to follow basic principles of Good Corporate Governance. They understand that transparency and detailed disclosure of a Company s financial position and operation allow the investors to better assess the performance of the Board and management which in turn enable them to make informed corporate decisions.

14 Conclusion Ignorance of law is no excuse Legislation imposes numerous duties upon directors. The directors are responsible for ensuring that the company complies with all relevant legislations. Directors are presumed to know the law and it is immaterial whether the director had knowledge of the law or not. He is bound to know what the law is. It was decided in Calcutta Central Bank Limited that the Directors cannot divest themselves of their responsibilities by delegating the whole management to the Agent and abstaining from all enquiry; if the agent proves unfaithful under certain circumstances the directors cannot be absolved from all liabilities Before deciding to become a director of a company a person should make himself familiar with the Acts and laws applicable to the Company and liabilities of the director and penalties for wrongful acts.

15 Non Executive Director Non-Executive Director Independent Non-Independent Nominee Directors Constituency Director Others A non-executive director is a member of the Board of Directors of a company who does not form part of the executive management team. He/she is not an employee of the company or affiliated with it in any other way.

16 Duty, Responsibility of Non-Executive Directors Non-executive directors are the custodians of the governance process. They are not involved in the day-to-day running of business but monitor the executive activity and contribute to the development of strategy. Non-executive directors were undoubtedly subject to similar fiduciary duties as executive directors such as the duty to act in good faith and for proper purposes, duties of no conflict etc. Non-executive directors could not simply rely on the information provided by the management or by the executive directors

17 Non Executive Director in the nature of independent Director He shall have to periodically review the legal compliance reports prepared by the company as well as steps taken by the company to cure any taint. In the event of any proceedings against an independent director in connection with the affairs of the company, defence shall not be permitted on the ground that the independent director was unaware of this responsibility. He shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director Independent directors have the same power that other directors have. Non-executive directors should also provide independent views on - Resources Appointments Standards of conduct

18 Generally Non-Executive director have the responsibility and duty in the following areas Strategy: Non-executive directors should contribute to the development of strategy. Performance: Non-executive directors should scrutinize and moniter the performance of management, on the basis of agreed goals and objectives of the Company. Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible. People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning.

19 THANK YOU