Auditors of Government Companies

The auditor of a Government company is appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of India provided that the audit would be within the number of acceptable audits available to each auditor.

The Comptroller & Auditor General of India has the power :-

to direct the manner in which the company’s accounts are to be be audited by the auditor so appointed and to give such auditor instructions in regard to any matter relating to the performance of his functions as such

to conduct supplementary or test audit of the company’s accounts by such person or persons or persons as he may authorise in this behalf; and for the purpose of such audit, to require additional information to be furnished to any person or persons so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General may, by general or special order, direct.

The auditor must submit a copy of his audit report to the Comptroller and Auditor-General of India who shall have the right to comment upon or supplement, the audit report in such manner as he may think fit.

Any such comments upon, or supplement to, the audit report must be placed before the annual general meeting of the company at the same time and in the same manner as the auditors’ report.

Auditors of Other Companies

It is the duty of the auditor conduct the audit of the books of accounts of the company and to make his report to the members of the company on the accounts examined by him, and on every balance sheet, every profit and loss account and on every other document declared by the Act to be part of or annexed to the balance-sheet or profit and loss account and laid before the company in general meeting during his tenure of office. The auditor’s report, besides other things necessary in any particular case, must expressly state-

whether, in his opinion and to the best of his information and according to explanation given to him, the accounts give the information required by the Act and in the manner as required;

whether the balance-sheet gives a true and fair view of the company’s affairs as at the end of the financial year and the profit and loss account gives a true and fair view of the profit or loss for the financial year;

whether he has obtained all the information and explanations required by him for the purposes of his audit;

whether in his opinion, the profit & loss account and balance sheet refered to in his report comply with the accounting standards recommended by the Institute of Chartered Accountants of India;

whether, in his opinion, proper books of account as required by law have been kept by the company, and proper returns for the purposes of his audit have been received from the branches not visited by him;

whether the company’s balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns.

In case any of the above matters is answered in the negative or with a qualification, the auditor’s report must state the reason for the same. Where the auditor is unable to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question.

The Central Government is empowered to issue orders requiring the auditor to include in his report a statement on such matters as may be specified. In exercise of this power the Central Government has issued an order called “The Manufacturing and other Companies (Auditor’s Report) Order, 1975. It is the duty of the auditor to comply with this order when making his report to the shareholders.

Only the person appointed as auditor of the company or where a firm of auditors is so appointed, only a partner of that the firm practising in India, can sign the auditor’s report or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

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Inter Corporate Loans and Investments

A company cannot :-

make any loan to any other body corporate

give guarantee or security in connection with any loan made by any person to another body corporate

acquire, by subscription, purchase or in any other manner, securities in any other body corporate

exceeding 60 % of its paid up share capital and free reserves or 100 % of its free reserves, whichever is more, unless approved by a special resolution passed at a general meeting of members.

The Board of the company may give a guarantee without being previously authorised by a special resolution of members if all the following conditions are satisfied :-

a Board resolution is passed to this effect

there exist exceptional circumstances which prevent the company from obtaining previous authorisation by special resolution

the Board resolution is confirmed within 12 months in a general meeting or its next Annual general meeting, whichever is earlier.

Notice of such resolution must clearly indicate the specific limits, the particulars of the body corporate in which the investment / loan / guarantee / security is proposed, the purpose of the investment / loan / guarantee / security, sources of funding, etc.

No investment / loan / guarantee / security may be made or given unless the Board resolution sanctioning it is with the consent of all directors present at the meeting and prior approval of the public financial institution ( if any term loan is outstanding ) is obtained.

Approval of the public financial institution is not required if the investment / loan / guarantee / security is with the 60 % limit as mentioned above and there has been no default in repaying the term loan and / or interest thereon.

No loan can be made at a rate of interest lower than the bank rate prescribed by the Reserve Bank of India.

A company which has defaulted in repaying public fixed deposits cannot make or give any investment / loan / guarantee / security unless the fixed deposit is fully repaid along with interest due as per the terms and conditions of the fixed deposit.

A register of such inter-corporate loans and investments must be maintained giving the relevant details.

The above provisions do not apply to :-

Any loan / guarantee / security made or given by :-

a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company established with the object of financing industrial enterprises or providing infrastructural facilities

a company whose principal business is the acquisition of shares, stocks, debentures or other securities

a private company unless it is a subsidiary of a public company

Investment made under Rights issue of securities

Loan made by holding company to its wholly subsidiary company

Guarantee or security given by a holding company for loan to its wholly owned subsidiary

Acquisition of securities by a holding company in its wholly owned subsidiary

The report of the Board of Directors must be attached to every balance sheet prsented at the annual general meeting. The report must contain information regarding the following matters :-

The state of affairs of the company

The amount, if any, which it proposes to carry to any reserves in such balance sheet

The amount of dividend recommended

Details of any material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report

Conservation of energy, technology absorption, foreign exchange earnings and outgo.

Names, designations and other particulars of all employees drawing more than Rs. 50000/- p.m. in the company

Details necessary for a proper understanding of the state of the company’s affairs and which are not, in the Board’s opinion, harmful to the business of the company or of any of its subsidiaries, in respect of changes which have occured during the financial year :-

in the nature of company’s business;

in the company’s subsidiaries or in the nature of the business carried on by them; and

generally in the classes of business in which the company has an interest

Though no format has been prescribed for the profit and loss account, Part II to Schedule VI of the Companies Act, 1956 gives a list of items which must be disclosed in every profit & loss account. Every profit and loss account of a company must give a true and fair view of the company’s profit or loss for the financial year for which it is drawn up.

Adoption of Balance Sheet and Profit & Loss Account

The Board of directors must present to the shareholders of the company, the balance sheet and a profit and loss account for the financial year at every annual general meeting. In the case of companies which are not commercial organisations such as Section 25 companies, instead if the profit & loss account, an income & expenditure account may be prepared. The profit and loss account to be placed in the FIRST annual general meeting should relate to a period beginning with the incorporation of the company and ending with a day, the interval between which and the date of the meeting does not exceed nine months. In case of subsequent annual general meetings, the profit and loss account should relate to a period beginning with a day immediately after the period for which the preceding profit & loss account was made and ending with a day, the interval between which and the date of the meeting should not exceed six months. The financial year may be more or less than a calendar year, but it must not exceed 15 months or with the special permission of the Registrar, 18 months.

If any director fails to take all reasonable steps to comply with the aforesaid requirements he is, in respect of each offence liable to be punished with imprisonment up to six months or with fine up to Rs.1,000/- or with both.

Authentication of Balance Sheet and Profit & Loss Account

The balance sheet and profit & loss account of a company must be signed on behalf of the Board of directors by two directors out of whom one must be the managing director, where there is one and the manager, or secretary, if any. The balance sheet and profit and loss account must be approved by the Board of directors before they are submitted to the auditors for the purpose of audit. The report of the auditors must be attached to the balance sheet and profit & loss account.

The company and every officer of the company who is in default with the above provisions shall be punishable with the fine which may extend to Rs.500/-, if:

any copy of balance sheet and profit and loss account is issued, circulated or published, without being signed as required ; or

any copy of balance sheet is issued, circulated or published, without there being annexed or attached thereto, a copy each of the following :-

the profit and loss account;

any accounts, reports or statements pertaining to subsidiary companies which are required to be attached to the balance sheet,

the auditors’ report; and

the Report of the Board of Directors

Circulation of Balance Sheet and Auditors’ Report

A copy of every balance sheet, profit and loss account, auditors’ report and every other document required to be annexed or attached to the balance sheet must be sent not less than twenty-one days before the general meeting to every member, to every trustee for debenture holders, and to all other persons who are entitled to have a notice of general meetings. In the case of a company not having a share capital, the above documents need not be sent to a member, or debenture holder who is not entitled to have notice of general meetings.

In case of listed companies, the company may keep the aforesaid documents available for inspection at its registered office during working hours for a period of twenty-one days before the meeting and send to every member and trustee for debentureholders only a summarised statement containing the salient features of these documents in the prescribed format.

Filing of Annual Accounts with the Registrar

Every company must file with the Registrar within 30 days from the day on which the annual accounts, auditor’s report and the director’s report were presented at the annual general meeting, three certified copies of these documents signed by the managing director, manager or secretary of the company or if there be none of these by a director of the company.

These accounts may be inspected and copies thereof may be obtained by any member of the public at the Registrar of Companies on payment of the requisite fee. However, no person other than a member of the company is entitled to inspect, or obtain copies, of the profit and loss account in the case of the following types of companies :-

a private company which is not a subsidiary of public company;

a private company whose entire paid-up capital is held only by one or more bodies corporate incorporated outside India; or

a private company which is deemed to be a public company by virtue of Section 43A, if the Central Government directs that it is not in the public interest that any person other than a member of the company should be entitled to inspect or obtain copies of the profit and loss account of the company.

In case the annual general meeting of a company for any year has not been held, , 3 copies of the balance sheet and profit and loss account, duly signed, within thiry days from the latest day on or before which that meeting should have been held in accordance with the provisions of the Act must be filed with the Registrar of Companies. If for any reason, the annual general meeting before which a balance sheet is laid does not adopt it, or is adjourned without adopting the balance sheet or if the annual general meeting of a company for any year has not been held, a statement of the fact and reasons thereof must also be annexed to the balance sheet and to the copies thereof to be filed with the Registrar.

If default is made in complying with the above provisions, then the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs.50 for every day during the period the default continues.

The managing director or manager are responsible for maintaining the books of accounts of a company ;

If the company has neither a managing director nor manager, then every director of the company are responsible for maintaining the books of accounts of a company ;

Every officer and other employee who has been authorised and to whom responsibility to maintain the books has been alloted by the Board of Directors.

If any of the persons referred to above fails to take all reasonable steps to maintain proper books of accounts or has by his own willful act been the cause of any default by the company in this respect, he is punishable with imprisonment up to six months or with fine which may extend to Rs. 1,000 or with both. However, no person can be sentenced to imprisonment unless it is proved that the contravention was committed by him wilfully.

Preparation of Balance Sheet and Profit and Loss Account

The company has to prepare its balance sheet and profit & loss account from the books of account maintained by it. Every Balance Sheet of a company must give a true and fair view of the state of affairs of the company as at the end of the financial year and must be in the prescribed format.

If the responsible for maintaining proper books of account fails to take all reasonable steps to secure compliance by the company with the requirement of law relating to the form and contents of the balance sheet, he is liable for each offence to imprisonment for a term extending up to six months or to fine up to Rs.1,000/- or to both.

Form of Balance Sheet,

Part 1 to Schedule VI of the Companies Act, 1956 gives the format in which the balance sheet is to be prepared. The schedule specifies 2 types of formats, the horizontal format and the vertical format. A company can prepare its balance sheet in either of the 2 formats. In the horizontal format, the liabilities including the share capital are placed on the left side and assets of all types on the right. The main heads in this form are arranged as under:

(a)

Share Capital (a) Fixed assets

(b)

Reserves and surplus (b) Investments

(c)

Loans (c) Current assets, loans and advances

(d)

Current liabilities and (d) Miscellaneous expenditure to the provisions extent not written off or adjusted

(e)

Profit & Loss Account

———– ———–

Total

———– ———–

In the vertical format, the various heads of liabilities and assets are arranged vertically and current liabilities are shown as deduction, from current assets. Whatever information which is required to be given in the horizontal format must also be given in the vertical format. Summarised prescribed vertical form of balance sheet is given below:

I. Sources of Funds

(1)

Shareholders’ funds

(2)

Loan funds

———————-

Total

———————-

II Application of Funds

(1)

Fixed assets

(2)

Investments

(3)

Current assets, loans and advances

Less: Current liabilities & provisions

(4)

(a) Miscellaneous expenditure to the extent not written off or adjusted

(b) Profit & Loss Account

———————-

Total

———————-

The Central Government may, on the application or with the consent of the Board of Directors of the company, by order, modify in relation to that company, any of the requirements as to matters to be stated in the company’s balance sheet or profit and loss account for adapting them to the circumstances of the company.

Every company must maintain proper books of accounts of its affairs. The following transactions must be entered in the books of accounts of the company which must be kept at its registered office :-

(a) all sums of money received and expended by the company and the matters in respect of which the respect of which the receipt and expenditure took place;

(b) all sales and purchases of goods by the company; and

(c) the assets and liabilities of the company.

(d) in the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or other items of cost as may be prescribed relating to certain class of companies as the Central Government may require.

The books of accounts must comply with the following conditions :-

The books must give a true and fair view of the state of affairs of the company or the branch office, if any, and explain its transaction.

The books must be kept on accrual basis and according to double entry system of accounting.

Every company must keep its books of account at its registered office. However, some of the books of account may be kept at such other place in India as the Board of Directors may decide, provided a notice in writing giving full address of that other place alongwith requisite filing fee is filed with the Registrar of Companies within seven of such decision.

If the company has a branch office, the books of account relating to transactions at the branch office may be kept at that branch office, but proper summarised reports and statements must be sent to the registered office or such other place where the books are kept, at intervals of not more than three months. The books of account of the branch must give a true and fair view of the affairs of the branch and clearly explain its transactions.

They must not conceal any transaction and also not disclose any transaction which is fictitious. The books of accounts and other documents and records are open to inspection by any director during business hours. Similarly, they are open to inspection by the Registrar of Companies or an officer authorised by the Central Government.

These books and papers together with the vouchers pertaining to entries made must be maintained for at least 8 years. It has been clarified by the Department of Company Affairs in their Circular No. 2/83 dated 2/3/1983 that the books of account should be prepared and maintained in indelible ink (and not in pencil).

A company may, by ordinary resolution, remove a director (not being a director appointed by the Central Government in pursuance of section 408) before the expiry of his period of office. This provision shall not apply where the company has availed itself of the option given to it of proportional representation on the Board of Directors to appoint not less than two-thirds of the total number of directors according to the principle of proportional representation.

Special notice shall be required of any resolution to remove a director, or to appoint somebody instead of a director so removed at the meeting at which he is removed.

On receipt of notice of a resolution to remove a director under this section, the company shall forthwith send a copy thereof to the director concerned, and the director (whether or not he is a member of the company) shall be entitled to be heard on the resolution at the meeting.

Where notice is given of a resolution to remove a director and the director concerned makes representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so :-

in any notice of the resolution given to members of the company state the fact of the representations having been made; and

send a copy of the representations to every member of the company to whom notice of the meeting is sent

If a copy of the representations is not sent as aforesaid because they were received too late or because of the company’s default, the director may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting.

However, copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the Company Law Board is satisfied that the rights conferred by this provision are being abused to secure needless publicity for defamatory matter and the Company Law Board may order the company’s costs on the application to be paid in whole or in part by the director.

A vacancy created by the removal of a director if he had been appointed by the company in general meeting or by the board in on a casual vacancy, be filled by the appointment of another director in his stead by the meeting at which he is removed, provided special notice of the intended appointment has been given.

A director so appointed shall hold office until the date up to which his predecessor would have held office if he had not been removed as aforesaid.

If the vacancy is not filled, it may be filled as a causal vacancy in accordance with the provisions.

The above provisions of removal of a director shall not affect :-

any compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director

any other power to remove a director which may exist apart from this provision.

A person shall not be capable of being appointed director of a company, if,

*he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force

*he is an undischarged insolvent

*he has applied to be adjudicated as an insolvent and his application is pending

*he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence

*he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call

*an order disqualifying him for appointment as director has been passed by a court and is in force unless the leave of the court has been obtained for his appointment in pursuance of that section.

The Central Government may, by notification in the Official Gazette, remove :-

the disqualification incurred by any person in virtue of clause (d) either generally or in relation to any company or companies specified in the notification; or

the disqualification incurred by any person in virtue of clause (e)

*A private company which is not a subsidiary of a public company may, by its articles, provide that a person shall be disqualified for appointment as a director on any grounds in addition to those specified above.

*No person to be a director of more than twenty companies

*No person shall, hold office at the same time as director in more than twenty companies.

*Where a person already holding the office of director in twenty companies is appointed, as a director of any other company, the appointment :-

*shall not take effect unless such person has, within fifteen days thereof, effectively vacated his office as director in any of the companies in which he was already a director; and

*shall become void immediately on the expiry of the fifteen days if he has not, before such expiry effectively vacated his office as director in any of the other companies aforesaid.

Where a person already holding the office of director in nineteen companies or less is appointed, as a director of other companies, making the total number of his directorships more than twenty, he shall choose the directorships which he wishes to continue to hold or to accept so however that the total number of the directorships, old and new, held by him shall not exceed twenty.

None of the new appointments of director shall take effect until such choice, is made; and all the new appointments shall become void if the choice is not made within fifteen days of the day on which the last of them was made.

In calculating the number of companies of which a person may be a director, the following companies shall be excluded :-

a private company which is neither a subsidiary nor a holding company of a public company

an unlimited company

an association not carrying on business for profit or which prohibits the payment of dividend

a company in which such person is only an alternate director, that is to say, a director who is only qualified to act as such during the absence or incapacity of some other director.

Any person who holds office, or acts, as a director of more than twenty companies in contravention of the foregoing provisions shall be punishable with fine which may extend to five thousand rupees in respect of each of those companies after the first twenty.

Vacation of office by directors

The office of a director shall become vacant if :-

*he fails to obtain within the time specified ( 2 months ) or at any time thereafter ceases to hold, the share qualification, if any, required of him by the articles of the company

*he is found to be of unsound mind by a Court of competent jurisdiction

*he applies to be adjudicated an insolvent

*he is adjudged an insolvent

*he is convicted by a Court of any offence involving moral turpitude and is sentenced in respect thereof to imprisonment for not less than six months

*he fails to pay any call in respect of shares of the company held by him, whether alone or jointly with others, with in six months from the last date fixed for the payment of the call unless the Central Government has, by notification in the Official Gazette removed such disqualification.

*he absents himself from three consecutive meetings of the Board of directors, or from all meetings of the Board, for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board

*he, whether by himself or by any person for his benefit or on his account or any firm in which he is a partner or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the company in contravention of section 295 ( without due authorization of the Central Government )

*he acts in contravention of section 299 ( failure to disclose interest in any transaction with the company )

*he becomes disqualified by an order of Court under section 203

*he is removed by the members by- resolution at a general meeting

*having been appointed a director by virtue of his holding any office or other employment in the company, he ceases to hold such office or other employment in the company.

The disqualification referred to in clauses (d). (e) and (j) shall not take effect,-

for thirty days from the date of the adjudication sentence or order

where any appeal or petition is preferred within the thirty days aforesaid against the adjudication, sentence or conviction resulting in the sentence, or order until the expiry of seven days from the date on which such appeal or petition is disposed of

where within the seven days aforesaid, any further appeal or petition is preferred in respect of the adjudication, sentence, conviction, or order, and the appeal or petition, if allowed, would result in the removal of the disqualification, until such further appeal or petition is disposed of.

If a person functions as a director, knowing that his office has vacated on account of the above provisions, shall be liable to a fine upto Rs. 500/- per day of default.

A private company which is not a subsidiary of a public company may, by its articles, provide, that the office of director shall be vacated on any grounds in addition to those specified in above

No company can, appoint or employ any individual as its managing director for a term exceeding five years at a time.

However, a person may be re-appointed, re-employed, or his term of office extended by further periods not exceeding five years on each occasion. Such re-appointment, re-employment or extension cannot be sanctioned earlier than two years from the date on which it is to come into force.

This provision does not apply to a private company unless it is a subsidiary of a public company.

No public company or private company which is a subsidiary of a public company can, appoint or employ any person as managing director, of he is either the managing director or the manager of any other company, except as provided below.

A public company or a private company which is the subsidiary of a public company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company provided that such appointment or employment is made or approved by a unanimous resolution passed at a meeting of the Board and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India.

In addition to the above provision, the Central Government may, by order, permit any person to be appointed as a managing direct of more than two companies if the Central Government is satisfied that it is necessary that the companies should, for their proper working, function as a single unit and have a common managing director.

No company can, appoint or employ, orWhat is the continue the appointment or employment of, any person as its managing or whole time director who-

is an undischarged insolvent, or has at any time been adjudged an insolvent

suspends, or has at any time suspended, payment to his creditors or makes, or has at any time made, a composition with them

is, or has at any time been, convicted by a Court in India of an offence involving moral turpitude.

Every public company or a private company which is a subsidiary of a public company, having a paid up share capital of Rs. 5 crores or more must have a managing director or wholetime director or manager.

Appointment of managing director or wholetime director or manager of a public company or a private company which is a subsidiary of a public company requires the approval of the Central Government unless the appointment is in accordance with the conditions specified in Schedule XIII of the Companies Act, 1956 and a returm in Form 25 C is filed within 30 days of appointment.

Application for approval must be made to the Central Government if Form 25 A within 90 days of appointment. The Central Government shall grant its approval if it is satisfied that :-

the managing director or wholetime director or manager is in its opinion, a fit and proper person

such appointment is not against public interest

the terms and conditions of the appointment are fair and reasonable.

The Central Government may grant approval for a period less that the period for which approval is sought.

In case the approval of the Central Government is refused, the appointed person shall vacate his office on the date of communication of the decision of the Central Government to the company and if he omits to do so, he shall be liable to a fine of Rs. 500/- for each day of default.

The Central Government, on information received by it or suo moto, is of the opinion that such appointment made without approval of the Central Government contravenes the conditions given in Schedule XIII, it may refer the matter to the Company Law Board for decision.

On receipt of the order of the Company Law Board against the company,:-

The company shall be liable to fine of upto Rs. 5000/-

Every officer of the company in default shall be liable to a fine of Rs. 10000/-

The appointment shall be deemed to have come to an end and the appointed person shall in addition to being liable to pay a fine of Rs. 10000/-, refund to the company the entire amount of remuneration received by him from such appointment.

Managing Director means a person who, by virtue of an agreement with the company or of a resolution passed by the company in a general meeting or by its Board of directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which could not otherwise be exercisable by him and includes a director occupying the position of a managing director, by whatever name called. The power merely to do administrative acts of a routine nature, when so authorised by the Board such as the power to affix the common seal of the company on any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any share certificate or to direct registration of share transfers will not be deemed to be included within substantial powers of management. The managing director must exercise his powers subject to the superintendence, control and direction of the Board.

A person shall not be capable of being appointed director of a company by the articles, unless before the registration of the articles, the publication of the prospectus, or the filing of the statement in lieu of prospectus, as the case may be , he has, by himself or by his agent authorised in writing

(a) signed and filed with the Registrar a consent in writing to act as such director; and

(b) either ;-

signed the memorandum for shares not being less in number or value than that of his qualification shares, if any, or

taken his qualification shares, if any, from the company and paid or agreed to pay for them; or

signed and filed with the Registrar and undertaking in writing to take from the company his qualification shares, if any, and pay for them; or

made and filed with the Registrar an affidavit to the effect that shares, not being less in number or value than that of his qualification shares, if any, are registered in his name.

Qualification shares are the minimum number of shares a person must own, as provided in the articles of the company, in order to qualify to become a director of the company. Qualification shares must be acquired by a director within 2 months of his appointment. The articles cannot require a director to acquire qualification shares within a shorter period. The face value of the qualification shares cannot exceed five thousand rupees, or if the face value of one share is more than five thousand rupees, then the qualification share will be one qualification share.

Every director, not being a technical director of a director appointed, by the Central or a State Government, shall within two months after his appointment file with the company a declaration specifying the qualification shares held by him. If, after the expiry of the said period of two months, any person acts as a director of the company when he does not hold the qualification shares, he shall be punishable with the fine which may extend to fifty rupees for every day between such expiry and the last day on which he acted as a director.

The above provisions do not apply to-

(a)a company not having a share capital;

(b)a private company;

(c)a company which was a private company before becoming a public company; or

(d)a prospectus issued by or on behalf of a company after the expiry of one year from the date on which the company was entitled to commence business.

The Board of directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint an alternate director to act for a director during his absence for a period of not less than three months from the State in which meetings of the Board are ordinarily held.

An alternate director so appointed shall not hold office for a period longer than the period for which the original director hold office and vacate office if and when the original director returns to the State in which meetings of the Board are ordinarily held.

Appointment of directors to be voted on individually

At a general meeting of public company or of a private company which is a subsidiary of a public company, each director has to be appointed separately by a separate resolution. However, appointment of more than one director through the same resolution will be valid if it has been passed unanimously. A resolution moved in contravention of the aforesaid provision shall be void, whether or not objection was taken at the time to its being so moved:

Consent of candidate for directorship to be filled with Registrar

A person shall not act as director of a company unless he has, by himself or by his agent authorised in writing, signed and filed with the Registrar, a consent in writing to act as such director within 30 days of his appointment. This provision shall not apply to a private company unless it is a subsidiary of a public company.

Option to company to adopt proportional representation for the appointment of directors

If the articles of a company provide for the appointment of not less than two-thirds of the total number of the directors of a public company or of a private company which is a subsidiary of a public company, according to the principle of proportional, representation, whether by the single transferable vote or by a system of cumulative voting or otherwise. Such appointments may be made once in every three years and interim casual vacancies being filled by the Board of Directors as Casual Vacancies. This may enable minority shareholders to have a proportional representation on the Board of Directors of the company.

In the case of a public company or a private company which is a subsidiary of a public company, if the office of any director appointed by the company in general meeting is vacated before his term of office will expire in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of directors at a meeting of the Board.

Any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated as aforesaid.

The Board of directors may appoint additional directors if such power is conferred on it by the articles of the company. Such additional directors shall hold office only up to the date of the next annual general meeting of the company.

Provided further that the number of the directors and additional directors together shall not exceed the maximum strength fixed for the Board by the articles.

A company, at a general meeting may, by ordinary resolution, increase or reduce the number of its directors within the limits fixed in that behalf by its articles.

Increase in number of directors to require Government sanction

In the case of a public company, or a private company which is a subsidiary of a public company, any increase in the number of its directors, beyond the maximum number of directors permitted by the Articles of the Company as first registered, shall not have any effect unless approved by the Central Government and shall become void if, and in so far as, it is disapproved by that Government.

However, where such permissible maximum is 12 or less, no approval of the Central Government is required provided the increase does not increase the number of directors beyond 12.

Every public company ( other than a deemed public company ) must have at least three directors. Every other company must have at least two directors.

The directors of a company collectively are referred to as the “Board of directors” or “Board”. Only individuals can be appointed as directors. No body corporate, association or firm can be appointed director of a Company.

In case the first directors are not appointed by the promoters of a company, subscribers of the memorandum who are individuals, shall be deemed to be the directors of the company, until the directors are duly appointed.

Appointment of directors and proportion of those who are to be retire by rotation

Unless that articles provide for the retirement of all directors at every annual general meeting, at least two-thirds of the total number of directors of a public company, or of a private company which is subsidiary of a public company, must :-

(a) retire by rotation

(b) be appointed by the company in general meeting, except where otherwise provided by the Companies Act.

The remaining directors in the case of any such company, and the directors generally in the case of a private company which is not a subsidiary of a public company, must also be appointed by the company in general meeting, unless otherwise provided in any regulations in the articles of the company.

Ascertainment of directors retiring by rotation and filling of vacancies

At every annual general meeting of a public company, or a private company which is a subsidiary of a public company, one-third of the directors liable to retirement by rotation or if their number is not three or a multiple of three, then, the number nearest to one-third, shall retire from office.

The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who will have to retire is to be determined by lot, unless otherwise agreed to among themselves.

At the annual general meeting at which a director retires as aforesaid the company may fill up the vacancy by appointing the retiring director or some other person thereto. In other words, a retiring director is eligible for re-appointment at the same meeting.

If the place of the retiring director is not so filled up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place.

If at the adjourned meeting also, the place of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy the retiring director shall be deemed to have been re-appointed at the adjourned meeting, unless

a resolution for the re-appointment of such director has been put to the meeting and lost

the retiring director, has by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so re-appointed

he is not qualified or is disqualified for appointment

a resolution, whether special or ordinary, is required for his appointment or re-appointment in virtue of any provisions of this Act.

Right of persons other than retiring directors to stand for directorship

A person who is not a retiring director shall, subject to the provisions of this Act, be eligible for appointment to the office of director at any general meeting, if he or some member intending to propose him has, given notice in writing to the company at its registered office of at least 14 days before the meeting, signifying his candidature for the office of director or the intention of such member to propose him as a candidate for that office along with a deposit of rupees five hundred ( refundable on successful election ).

The company must inform its members of such candidature by giving at least 7 days prior notice. Such notice may not be required if the company advertises such candidature at least 7 days before the meeting in at least 2 newspapers circulating in the place where the registered office of the company is situated, one of which must be in English and the other in the regional language.

This provision shall not apply to a private company, unless it is a subsidiary of a public company.

The Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting :-

sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking remit, or give time for the re-payment of, any debt due by a director except in the case or renewal or continuance of any advance made by a banking company to its director in the ordinary course of business

invest, otherwise than in trust securities, the amount of compensation received by the company in respect of compulsory acquisition of any such undertaking as is referred to in clause (a), or of any premises or properties used for any such undertaking and without which it cannot be carried on or can be carried on only with difficulty or only after a considerable time

borrow moneys, where the moneys to be borrowed together with the moneys already borrowed by the company, (apart from temporary loans obtained from the company’s bankers in the ordinary course of business) will exceed the aggregate of the paid-up capital of the company and its free reserves

contribute, to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amounts the aggregate of which will, in any financial year, exceed fifty thousand rupees, or five per cent of its average net profits during the three financial years immediately preceding, whichever is greater.

The resolutions under clause (d) and (e) above must specify the total amount upto which the Board may borrow or the total amount which may be contributed in a financial year.

Temporary loans mean loans repayable on demand or within 6 months from the date of the loan such as short term cash credit arrangements, the discounting of bills and the issue of other short term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature.

Any resolution passed by the company permitting any transaction such as is referred to in clause (a) may attach such conditions to the permission as may be specified in the resolution, including conditions regarding the use, disposal or investment of the sale proceeds which may result from the transaction:

The acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand, or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of moneys by the banking company within the meaning of clause (d).

No debt incurred by the company in excess of the limit imposed by clause by clause (d) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded

The Board of directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board:-

1. the power to make calls on shares holders in respect of money unpaid on their shares
2. the power to issue debentures
3. the power to borrow moneys otherwise than on debentures
4. the power to invest the funds of the company
5. the power to make loans

However, the Board may, by a resolution passed at a meeting delegate to any committee of directors, the managing director, or the manager of the company or any other principal officer of the company or in the case of a branch office of the company, a principal officer of the branch office, the powers specified in clauses (c), (d) and (e), to the extent specified in the resolution and subject to such conditions as may be imposed.

Acceptance by a banking company in the ordinary course of its business of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise or the placing of moneys on deposit by a banking company with another banking company on such conditions as the Board may prescribe, shall not be deemed to be borrowing of moneys or making of loans by a banking company for the purpose of these provisions.

These provisions also do not apply to borrowings by a banking company from other banking companies or from the Reserve Bank of India, the State Bank of India or any other banks.

In respect of dealings betwwen a company and its bankers, the exercise by the company of its powers to borrow money otherwise than on debentures shall mean the arrangement made by the company with its bankers for the borrowing of money by way of overdraft or cash credit or otherwise and not the actual day-to-day operation of overdrafts, cash credit or other accounts.

Every resolution delegating the power referred to in clause (c) ( the power to borrow moneys otherwise than on debentures ) shall specify the total amount outstanding at any one time up to which moneys may be borrowed by the delegate.

Every resolution delegating the power referred to in clause (d) (the power to invest the funds of the company ) shall specify the total amount up to which the funds may be invested, and the nature of the investments which may be made, by the delegate.

Every resolution delegating the power referred to in clause (e) (the power to make loans ) shall specify the total amount up to which loans may be made by the delegate, the purposes for which the loans may be made, and the maximum amount of loans which may be made for each such purpose in individual cases.

Nothing in this section be deemed to affect the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified above.

Subject to the provisions of this Act, the Board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do.

However, the Board shall not exercise any power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting.

The quorum for a meeting of the Board of directors of a company shall be one-third of its total strength (any fraction contained in that one-third being rounded off as one), or two directors, which ever is higher.

at any time the number of interested directors exceeds or is equal to two-thirds of the total strength, the number of the remaining directors, that is to say, the number of the directors who are not interested, present at the meeting being not less than 2 shall be the quorum during such time.

Interested director means any director whose presence cannot, by reason of his being interested in some manner in the subject matter of discussion be counted for the purpose of forming a quorum at a meeting of the Board, at the time of the discussion or vote on any matter.

Notice of every meeting of the Board of directors of a company shall be given in writing to ever director for the time being in India, and at his usual address in India to every other director.

Every officer of the company whose duty it is to give notice as aforesaid and who fails to do so shall be punishable with fine which may extend to one hundred rupees.

In the case of every company, a meeting of its Board of directors shall be held at least once every three months and at least four such meetings must be held every year.