Essential Rules of
Interpretation of Statutes
for company secretaries
A presentation by
Dr K R Chandratre
1
 To be a company secretary, you have to be able to read
and interpret statutes, rules, regulations , etc correctly
and effectively, and advise your employer or client, who
look to you for advice for their problems.
 A company secretary can advise their clients effectively
and correctly on statutes only if they have sound
knowledge of the principles or rules of interpretation of
statutes.
 This will enable you to enhance your legal acumen, your
status and multiply your clientele; or else you will lag
behind and can’t gain true recognition to our profession.
2
Statute Law
 It is the body of law contained in an Act of Parliament
(statute) is a document that sets out legal rules and has
(normally) been passed by both Houses of Parliament in
the form of a Bill and assented to by the President of
India a Bill becomes an Act.
3
Delegated legislation (subordinate legislation)
 It is the law made in exercise of the powers conferred on a
government or other authority by an Act of Parliament (an
enabling statute or parent Act). The bulk of delegated
legislation is governmental, consisting mainly of orders,
regulations, rules, directions, etc.
 Every statute contains a provision conferring powers on the
government or other statutory authorities to make rules,
regulations, forms, etc (such as s. 469 of Cos Act 2013 or s.
642 of Cos Act 1956).
4
 Rules, Regulations, etc made under a Statute have the
same legal status and force as the statute made by
Parliament. Notification published in the Official Gazette
either promulgating rules, regulations, forms, etc or
amending them but not circulars issued by the government
have the same legal status.
 Circulars, press notes, instructions, clarifications, etc issued
by the government constitute only views of the
government on statutory provisions and may be taken help
of to understand meaning of a statutory provision but they
are not mandatory and cannot have a bearing on
interpretation of a statute.
5
 For example, the Supreme Court (SC) said in one case,
that MCA’s Circular of 6 September 1994, advising
companies that bonus shares should not be issued out
of revaluation reserve cannot have any mandatory
effect against the law which does not prevent issue of
bonus shares out of revaluation reserve. These Circulars
are merely advisory in character.
Case Law (also known as precedential law, decisional law or
jurisprudence)
 It is the law established by judicial decisions in particular cases,
instead of by legislative action or the law as established by the
outcome of former cases. It is the body of judge-made law and
legal decisions that interprets prior case law, statutes and other
legal authority.
 It is the source for interpretation and understanding of various
facets of statute law. It helps to develop an insight and enrich
knowledge of law. The courts interpret law and unfold Legislative
intent by applying principles of statutory interpretation.
7
Object of Interpretation
 To ascertain what is intended by the words of a statute.
The primary object of the interpretation of statutes is to
discover the true intention of the Legislature; and where
the intention can be indubitably ascertained the courts
are bound to give effect to it regardless of their opinion
about its wisdom or folly.
8
Process of Interpretation
(1) Read the relevant provision carefully and try to unfold
meaning of every word and the whole provision. Focus
on the language of the provision.
(2) If any word used in the provision is defined either in the
section itself or in the definitions section, apply it; if it is
not defined, find out its meaning from a dictionary.
(3) Try to find out if a word used is defined in some other
statute and take aid of such definition to understand its
meaning in the context of the provision you are
interpretation.
9
(4) Don’t add or deduct any word of your own or rewrite any
word to suit your case. Don’t mix into the language of the
statutory provision anything like ethics, morals, governance,
equity; or your emotions or sentiments and not even views
expressed in the circulars or press notes.
(5) If there are any standard phrases or expressions used in
the provision, which are ordinarily used in legislative
drafting (such as Notwithstanding anything contained;
Provided that; Save as otherwise provided; Without
prejudice to, etc; try to ascertain the effect of such phrase
or expression in relation to any other provision(s) of the Act.
10
(6) If there are two provisions on the same subject and they
apparently conflict with one another, try to find out of
them which one is special and which one is general.
(7) If a word is ambiguous and can lead to two meanings,
try to find out the intention or purpose of the provision
from legislative background, case law, etc in order to
decide whether interpretation you are trying to place on
it is consistent with such intention or purpose.
(8) Now, by applying various rules of interpretation in the
following slides, come to a conclusion as to the correct
interpretation of the provision.
11
THE BASIC AND PRIMARY RULE OF INTERPRETATION THE GOLDEN RULE
 The primary rule of interpretation (which is called
‘literal rule’) is the literal interpretation: to interpret a
statutory provision literally and grammatically giving
the words their ordinary and natural meaning.
 If a word used in a statutory provision is not defined in
the statute, it must be given its ordinary, literal meaning
in the context of the relevant provision.
12
It was held that the first and primary rule of
construction is that the intention of the legislature
must be found in the words used by the Legislature
itself. If the words used are capable of one
construction only ,then it would not be open to the
Courts to adopt any other hypothetical construction
on the ground that such construction is more
consistent with the alleged object policy of the Act.
Thus, the cardinal rule of construction of statutes is to read
the statute literally, that is, by giving to the words used by
the legislature their ordinary, natural and grammatical
meaning. If, however, such a reading leads to absurdity
and the words are susceptible of another meaning the
Court may adopt the same. But if no such alternative
construction is possible, the Court must adopt the
ordinary rule of literal interpretation.
 If the language of an Act is clear and explicit, we must
give effect to it, whatever may be the consequences, for
in that case the words of the statute speak the intention
of the Legislature. In other words, if the language used by
the Legislature is precise and unambiguous, we have only
to expound the words in their natural and ordinary sense.
 So, truly speaking, the only rule of interpretation is ‘literal
interpretation rule’.
15
For example, If a statutory provision states ‘contract for the sale,
purchase or supply of any goods, material or services’, all
the words - sale, purchase, goods, material, services - not
defined in the statute must be interpreted according to
their natural, ordinary meaning, although in the process,
meanings given in other statutes may be taken help of to
understand its meaning.
 Meaning of a word or phrase defined in any other statute
may be taken help of to interpret it if it is used but not
defined in another statute.
16
Hardship, inconvenience etc are not relevant
 The statutory provision may cause hardship or
inconvenience to a particular party but the Court has no
choice but to enforce it giving full effect to the same. The
legal maxim dura lex sed lex (the law is hard but it is the
law), stands attracted in such a situation. It has consistently
been held that, inconvenience is not a decisive factor to be
considered while interpreting a statute.
 If the language of a statute is clear and explicit, it must
receive full effect, whatever may be the consequences.
17




Some examples of ‘literal interpretation’
The words ‘purchase’ of immovable property do not
include ‘lease’ of immovable property.
The word ‘sale’ did not include lending of an article for
temporary use to be returned after some time.
A guarantee or security not in respect of a loan is outside
the ambit of the provision which applies to a guarantee or
security in connection with a loan.
The words ‘contract for service’ do not apply to ‘contract of
service’.
18
 A comfort letter given by a company to a bank in respect of
another company which had taken a loan from the bank,
was not a guarantee.
 In the absence a definitions, the natural and ordinary
meaning of the word ‘aircraft’ is wide enough to include a
hot air balloon used for carrying passenger and ‘passenger’
includes any person who is being conveyed in an aircraft
from one place to another and who is not himself
contributing to the process of flying, and even for reasons of
pleasure or recreation and destination is unpredictable.
19
READING WORDS IN AND READING WORDS OUT OF A STATUTE
 Adding words in, or omitting words from, a statutory provision
is not permissible, as it amounts to doing something which
only Legislature is permitted to do. So, no one (even courts)
cannot add any words into a statute, nor can we omit any
words from it; not even in the name of interpretation or
policy or anything else. Otherwise everyone would do it.
 The intention of the legislature is required to be gathered from
the language used and, therefore, a construction, which
requires for its support with additional substitution of words
or which results in rejection of words as meaningless has to be
avoided.
20
 Every word in a statute to be given a meaning and no
word should be ignored, omitted or brushed aside, on the
presumption that Parliament does nothing in vain.
 An interpretation which would leave without effect any
part of the language of a statute will normally be
rejected. Every word and expression used by the
Legislature has to be given its proper and effective
meaning as the legislature uses no expression without a
purpose or meaning, for a statute is never supposed to
use words without a meaning, and no word should be
considered as redundant.
21
The Stamp Act in Delhi levied a fixed stamp duty on MoA
and stamp duty with reference to the authorised share
capital only at the time of incorporation of a company.
Delhi High Courtrefused to add words and held that in the
absence of express provision in the Act permitting levy of
stamp duty on the increase of authorised share capital,
no stamp duty was payable when a company increased its
authorised share capital.
22
Examples:
 Madras HC held: The words relative of such director in cl. (b) of
s. 314(1) refer to a director of the company who himself holds
an office or place of profit, and not any director; that is the
plain grammatical meaning of the words such director.
 Gujarat HC held: The words Every company … shall have a
whole-time secretary, in s. 383A of Cos Act 1956 cannot be
interpreted as meaning shall be in the employment ; so a
company secretary need not be in the employment of a
company but may be engaged on a contractual basis.
23
 Delhi HC held: The expression monthly remuneration in s. 314,
doesn’t include those payments which by virtue of their
nature and practice are not made on monthly basis (like
reimbursement of medical expenses, benefit of employer's
contribution to PF, encashment of un-availed leave and
bonus).
 Calcutta HC held: The phrase "office of profit" in s. 204 has to
be given its ordinary and natural meaning, namely, that by
virtue of the office any profit is derived.
 Madras HC held: Advance against salary is not a loan.
 Bombay HC held: A deferment of purchase price of property is
not a loan although it is a debt.
24
INTERPRETATION OF A PROVISO
 A proviso is a clause in a statute, which begins with the
phrase Provided that. Literally it means ‘on the condition
or understanding that’.
 A proviso has one or more of the following three
functions:
(a) Exception to the main provision;
(b) Condition to the main provision;
(c) Additional requirement.
25
 A proviso must be interpreted harmoniously with the
section or subsection to which it is appended. A proviso
qualifies the generality of the main enactment
 Unless the words of the proviso indicate otherwise, the
proviso applies to the whole of the main part of the section
or subsection under which the proviso has been inserted.
For example, where the main section contained two
periods, eighteen months and one year, and the proviso
used the words “the period”, it was held that the proviso
applied to both the period mentioned in the main section.
Example (Exception)
 Except with the consent of the Board of Directors given
by a resolution at a meeting of the Board …, no company
shall enter into any contract or arrangement with a
related party with respect to …
Provided also that nothing in this sub-section shall apply to
any transactions entered into by the company in its
ordinary course of business other than transactions which
are not on an arm's length basis.
27
Example (Condition)
Where a licence is revoked under sub-section (6), the
Central Government may, by order, if it is satisfied that it
is essential in the public interest, direct that the company
be wound up under this Act or amalgamated with
another company registered under this section:
Provided that no such order shall be made unless the
company is given a reasonable opportunity of being
heard.
28
Example (Exception and Condition)
Every company shall keep at its registered office proper
books of account;
Provided that the books of account may be kept at such
other place in India as the Board of directors if, within
seven days of the decision, the company files with
the Registrar a notice in writing giving the full address
of that other place.
29
Ejusdem generis
[Things of the same kind or class rule or the consistent list
rule]
 When a general word or phrase follows a list of specific
words or phrases, the general word or phrase will be
interpreted to include only items of the same type as those
listed.
 If a list of things of a particular type concludes with a catchall expression like or anything else, or the like, or otherwise,
etcetera, et all, and others; and so forth; and so on, the
general word is restricted to things of the same type or class
30
Examples:
 In the expression ‘cats, dogs, and other animals’, the
general words ‘other animals’ are to be treated as
confined to other domestic animals.
 The word ‘otherwise’ in the phrase “salary, fee,
commission, perquisites, any rent-free accommodation, or
otherwise”, should not be interpreted to include
something which is not remuneration, such as travelling
expenses.
 Closing down of an undertaking would not fall within the
phrase ‘sell, lease or otherwise dispose of’ despite the use
of the words ‘otherwise dispose of’.
31
PURPOSIVE INTERPRETATION
 Although literal rule is the primary and universal rule of
interpretation of statutes when the words of a statute are clear
and unambiguous, the rule of purposive interpretation is
resorted to when the words in a statutory provision are unclear,
vague or ambiguous and admit of more than one meaning.
 In this situation, to find out the true purpose or object of the
provision, the court uses other (external) aids of interpretation
such as historical background, report of a committee, statement
of objects & reasons, debate in Parliament, the practice
prevailing before the enactment, etc.
32
HARMONIUS INTERPRETATION OF TWO CONFLICTING
PROVISIONS IN A STATUTE
 The provisions of a statute should be so interpreted as to
harmonise with one another and the provisions of one
section cannot be used to defeat those of another unless
it is impossible to effect reconciliation between them.
33
The Court should, when it seeks to ascertain the legislative
intent, construe all of the constituent parts of the statute
together, and seek to ascertain the legislative intention
from the whole Act, considering every provision in the
light of the general purpose and object of the Act itself,
and endeavouring to make every part effective,
harmonious, and sensible. This means, that the Court
should attempt to avoid absurd consequences in any part
of the statute and refuse to regard any word, phrase,
clause or sentence superfluous, unless such a result in
clearly unavoidable.
34
 Harmonious interpretation rule is used when two
provisions on the same subject are in conflict and cannot
be reconciled with each other on plain reading. The
endeavour in such a situation is to give effect to both and
not render either redundant or useless or a dead letter.
 So, if there appears inconsistency between two sections
of the same Act, the principle of harmonious
interpretation should be applied to avoid a head-onclash; it should not be assumed that what Parliament has
given with one hand, it took away with the other.
35
CONFLICT BETWEEN GENERAL PROVISION AND SPECIAL
PROVISION
Another well known rule of construction used when there are
two conflicting or inconsistent provisions, one of them
special and the other general, is that the special provision
prevails over or overrides the general provision. They should
be interpreted to avoid the conflict and harmonize them to
give effect to both so that neither is rendered useless or a
dead letter. Provisions of one section of a statute cannot be
used to defeat those of another unless it is impossible to
effect reconciliation between them.
36
As was said by the Supreme Court, It is a cardinal rule
of construction that when there are in a Statute two
provisions which are in conflict with each other such
that both of them cannot stand, they should, if
possible, be so interpreted that effect can be given to
both, and that a construction which renders either of
them inoperative and useless should not be adopted
except in the last resort. This a what is known as the
rule of harmonious construction.
A classic example is, sections 185 and 186 of Companies
Act 2013. While s.185 prohibits giving loans, guarantees
and securities to some parties, s.186 permits it. In this
situation, allowing s.186 to prevail over s.185 will make
s.185 completely useless and a dead letter. So the rules
of harmonious interpretation and special overrides
general would help reconcile them, to say that cases
covered by s.185 (which is a special provision) are
excluded by s.186 (which is a general provision).
38
INTERPRETATION OF DEFINITIONS
 Definition is a statement of the meaning as of a word or
phrase used in a statute. It is common to define in a
statute certain words and phrases used in that statute,
e.g. s. 2 of Companies Act 2013.
 Definitions are either restrictive or extensive. They are
called ‘exhaustive definitions’ and ‘inclusive definitions’
respectively. This is indicated by the use of the words
‘means’ and ‘includes’ respectively.
39
 There is also a definition called an ‘adoptive definition’.
This type of definition adopts the definition given in one
statute for another statue (‘Depository’ has the same
meaning as in the Depositories Act, 1996.)
 There is also an ‘exclusive definition’ that excludes
something from for the Act in which it is stated
(‘member’, in relation to a company, does not include a
bearer of a share-warrant of the company ...)
 A majority of definitions are, however, either exhaustive
or inclusive.
40
 When the word ‘means’ is used, the definition is
exhaustive or restrictive definition which means the
definition does not cover anything outside the definition.
When the word ‘includes’ is used the definition is an
inclusive or expansive definition.
 When both the words are used, the definition is an
exhaustive or restrictive definition.
41
 An exhaustive definition does not cover anything other
than what is stated in the definition and hence its scope is
restrictive; you cannot include anything outside its scope.
 Unless there are compelling reasons to do so, meaning of
the word or phrase in a restrictive definition would not be
expanded or made extensive to embrace things which are
strictly not within the meaning of the word as defined.
42
 An inclusive definition is wide enough to include anything
not mentioned in the definition but which is similar to what
is mentioned in it; while the term defined should retain its
ordinary meaning, it should also cover things in addition to
those mentioned in the definition of similar nature.
 For example, definition of ‘company’ only means a company
registered in India under the Companies Act but definition
of ‘body corporate’ includes a company as well as any entity
in or outside India which is a juristic or artificial person
incorporated under law and having an independent
corporate personality.
43
But the definition using the word ‘means’ is an exhaustive
definition and it cannot take in its fold anything other that
what is covers. For example, we can’t bring anything
beyond what the definitions of ‘company secretary’,
‘promoter’, ‘public company’, ‘private company’, ‘related
party’, ‘relative’, ‘subsidiary’ state because all these
definition use the ‘means’ and hence cannot be expanded
beyond what they state.
Examples:
 "company" means a company incorporated under this Act or
under any previous company law.
 "Chief Financial Officer" means a person appointed as the Chief
Financial Officer of a company
 "body corporate" or "corporation" includes a company
incorporated outside India.
 "document" includes summons, notice, requisition, order,
declaration, form and register, whether issued, sent or kept in
pursuance of this Act or under any other law for the time being
in force or otherwise, maintained on paper or in electronic form.
45
Definition having a limited scope to specific section
 While definitions given in the definition section apply to
the entire Act, sometimes a definition for a particular
section or subsection is given in the Explanation
appended to that section or subsection.
 These definitions apply to specific sections only. In such
cases, usually the words “For the purposes of this section’
or ‘For the purposes of this subsection’ are used to
indicate the limited scope of the definition.
 Such definitions cannot be used to interpret the same
words or phrases used in other sections.
46
Examples:
Explanation.—For the purposes of sub-section (2), the term
"infrastructure projects" means the infrastructure
projects specified in Schedule VI.
Explanation.—For the purposes of this sub-section,
"National Holiday" means and includes a day declared as
National Holiday by the Central Government.
47
Interpretation of words not defined
 When a word used in a provision of Act is not defined in
the Act, it should be interpreted according to its ordinary,
natural meaning.
 If it is defined in some other statute, that definition
cannot be blindly imported into the statute but such
other definition can be used to understand the meaning
of that word in the context of the provision of such other
Act.
48
HEADINGS AND MARGINAL NOTES
 The ‘heading’ or ‘title’ prefixed to a section or a group of
sections have a limited role to play in the construction of
statutory provision.
 They may be taken as very broad and general indicators or the
nature of the subject matter dealt with by the section but they
do not control the meaning of the section if the meaning is
otherwise ascertainable by reading the section in proper
perspective along with other provisions.
 Often, the heading of a section is at variance with the
provision in the section and sometimes it is misleading.
49
INTERPRETATION OF ‘SHALL’ AND ‘MAY’
 The standard rule is that the provision containing shall is
mandatory and the provision containing may is either
permissive or discretionary. In other words, shall conveys
mandatory nature of the provision, while may conveys
permissive or discretionary or directory nature.
 When a provision uses the word may, it is a permissive
provision, giving a discretionary power or authority and that
the provision is not mandatory and when the word shall is
used the provision is considered mandatory, prohibitory or
commanding a duty or obligation.
50
 There are, however, cases where shall is used even if the
nature of the provision is permissive or discretionary and
vice versa.
 This is either due to uncertainty in the mind of the drafter
of the statute or drafting mistake.
 In India, there is often a confusion (and also a phobia) about
the use of shall; so most drafters find an easy way of using
shall, leaving it to the courts to interpret the provision.
There are several court decisions in which shall is held as
may and vice versa.
51
Examples:
 Every company shall keep a register of members. This is
mandatory.
 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 sub-section (1). This is permissive.
 The Central Government or the Registrar may, at any
time, require a copy of the said register, or any part
thereof. This is discretionary.
52
INTERPRETATION OF ‘AND’ AND ‘OR’
 In ordinary usage, and is conjunctive (that connects
words, phrases and clauses in a sentence) and or is
disjunctive (that separates words, phrases and clauses in
a sentence).
 Thus and connects two or more items and makes a
cumulative group of them whereas or separates two or
more items and makes them alternative to one another
53
When in a series of two or more items and is used, they are
said to be cumulative.
Example:
"foreign company" means any company or body corporate
incorporated outside India which—
(a) has a place of business in India whether by itself or
through an agent, physically or through electronic mode;
and
(b) conducts any business activity in India in any other
manner.
54
When in a series of two or more items ‘or’ is used, they are
said to be alternative to each other.
Example:
A company formed under sub-section (1) may be either—
(a) a company limited by shares;
(b) a company limited by guarantee; or
(c) an unlimited company.
55
Interpretation of some
Standard Expressions and
Phrases used in Statutes
56
For the purposes of this section = applies only to the
particular but the whole section.
Example:
For the purposes of this section any person in accordance
with whose directions or instructions the Board of
directors of a company is accustomed to act, shall be
deemed to be a director of the company [s.307].
57
For the purposes of this sub-section / clause = applies only to
the relevant sub-section or clause and not the whole
section.
Example:
 Explanation.—For the purposes of this clause, "free
reserves" means all reserves created out of the profits and
share premium account but does not include reserves
created out of revaluation of assets, write back of
depreciation provisions and amalgamation. [s.2(29A)]
58
For the purposes of this Act = applies to the whole Act.
Example:
 For the purposes of this Act, a company shall, subject
to the provisions of sub-section (3), be deemed to be
a subsidiary of another if, but only if …
59
Without prejudice to = without affecting or causing harm to, or
damaging, the other provision of the Act. It seeks to protect
other provision(s) of the Act which may be on the same
subject.
Example:
 The provisions of this section shall be in addition to, and
without prejudice to the operation of, any other provision
contained in this Act.
 Without prejudice to the rights conferred by sub-section (5),
the Central Government or the Registrar may, at any time
require a copy of the said register, or any part thereof.
60
When a subsection in a section contains these words, no harm
should be done to the other subsection(s) mentioned and
call for compliance with that/those subsection(s) also.
Example:
(2A) Without prejudice to the provisions of sub-section (1)
and sub-section (2) a company having a share capital,
whether or not it has issued a prospectus inviting the public
to subscribe for its shares, shall not at any time commence
any business
61
Nothing in this section shall be taken to prejudice the
operation of = seeks to avoid conflict by retaining the
requirement under any other law.
Example:
Nothing in this section shall be taken to prejudice the
operation of any rule of law restricting a director of a
company from having any concern or interest in any
contracts or arrangements with the company [s 299(5)].
62
Nothing (contained) in this section shall apply = if a
sub-section of a section contains this, it excludes the
applicability of the whole section.
Example:
Nothing in this section shall apply to any contract or
arrangement entered into or to be entered into
between two companies where any of the directors
of the one company or two or more of them together
holds or hold not more than two per cent of the paidup share capital in the other company. [s 299(6)]
63
Notwithstanding anything contained in this Act (Non-obstante
clause)
The Latin phrase ‘non obstante’ means ‘notwithstanding’, which
means in spite of; in spite of the fact that; without being
opposed or prevented by; although; regardless of; irrespective
of. It seeks to give the provision an overriding effect as against
any contrary provision that may be found either in the same
enactment or (if the words so suggest) in some other statute;
it is used to avoid the operation and effect of all contrary
provisions.
64
Subject to the provisions of section … = on the condition of the
provisions of the specified section being observed or complied
with. This phrase is used when, while complying with one
statutory provision, another provision relating to the subjectmatter also must be complied with.
Example:
 Subject to the provisions of this Act, the memorandum and
articles shall, when registered, bind the company and the
members thereof to the same extent as if they respectively
had been signed by the company and by each member, and
contained covenants on its and his part to observe all the
provisions of the memorandum and of the articles.
65
Save as otherwise provided in this Act = In legal context,
save means except, but, other than; to preserve
something from harm, injury, loss, etc. This phrase seeks
to keep applicability of any other provision on the same
subject unaffected.
Example: Save as otherwise expressly provided in the Act—
(a) the provisions of this Act shall have effect
notwithstanding anything to the contrary contained in
the memorandum or articles of a company, …...
66
For a detailed study on this subject, and
extensive case law, refer to the book-
ESSENTIAL RULES OF
NTERPRETATION OF STATUTES
for Company Secretaries
By Dr K R Chandratre
published by the ICSI
67
Companies Act 2013
Chapters XII & XIII
[comprising sections 173 to 205]




Meetings of Board [S. 173]
First board meeting must be held within 30 days after
incorporation.
4 board meetings in a year with interval of maximum 120
days between two consecutive meetings.
CG may exempt a class of companies.
OPC, Small Company and Dormant Company can hold only
one board meeting in each half year and with a gap of not
90 days between two meetings. But OPC having only one
director need not comply with this requirement. [S. 173(5)]
 Directors may participate in board meetings either in
person or through video-conferencing or other audiovisual means, if it is capable of recording and
recognising the participation of the directors and
recording and storing the proceedings of meetings
along with date and time and prescribed by CG. [S.
173(2)]
 Chapter XII Rules: Rule 3 details procedural
requirements as regards participation in board
meetings through videoconference.
 The matters specified in Rule 4 of Rules under Ch. XIII
can’t be passed at a meeting held through
videoconference:
(i) approval of the annual financial statements;
(ii) approval of the Board’s report;
(iii) approval of the prospectus;
(iv) audit committee meeting for consideration of accounts;
(v) approval of the matter relating to amalgamation,
merger, demerger, acquisition and takeover.
Notice of board meeting [S. 173]
 7 days’ notice in writing to every director at his registered
address (in or outside India) must be given for every
board meeting.
 A notice may be sent by hand delivery or by post or by
electronic means.
 A shorter notice may be given to transact urgent
business, but at least one independent director, if any,
must be present at the meeting. Ratification by at least
one independent director will be valid.
Quorum for Board meetings [S. 174]
 One-third of total strength of the board or two,
whichever is higher, will be quorum for board meetings.
 Participation of the directors by video conferencing or by
other audio visual means shall also be counted for
quorum.
 Any fraction in the one-third must be rounded off as one.
 Quorum must be of disinterested directors. so interested
directors cannot participate or vote.
 If the number of interested directors exceeds or is equal
to two-thirds of the total strength of the Board, the
number of directors who are not interested directors and
present at the meeting, being not less than two, shall be
the quorum. [S. 174(3)]
 Thus, at least two disinterested directors must be present
when the number of interested directors is equal to twothirds or more.
 Thus, if a situation of only one disinterested director
arises (e.g. when board considers resolution for
remuneration of non-executive directors), divide the nonexecutive directors in two groups and pass two separate
resolutions alternately so that on both occasions there
will be sufficient disinterested quorum (e.g. if a company
has eight non-executive directors and one executive
director, place two separate resolutions, each for four
non-executive directors instead of one resolution for all
eight directors)
The continuing directors may act notwithstanding any
vacancy in the Board; but, if and so long as their number
is reduced below the quorum fixed by the Act for a
meeting of the Board, the continuing directors or director
may act for the purpose of increasing the number of
directors to that fixed for the quorum, or of summoning a
general meeting of the company and for no other
purpose. -- S. 174(2)
 This means, if the number of directors reduces below the
minimum number of directors required by the Act under
s. 149, the continuing directors (which means at least
two) may act despite any vacancy in the Board.
 But if the number of directors reduces only below the
quorum fixed by the Act, one or more continuing
directors may act only for increasing the number of
directors up to the quorum, or for convening a general
meeting.
Circular Resolution [S. 175]
 Directors can pass any resolution without a meeting
except those which the Act specifically requires to be
passed only at meetings.
 A circular resolution must be sent to all the directors at
their addresses registered with the company in India, by
hand delivery or by post or by courier, or by email or fax
[Rule 5].
 A director who stays outside India must provide address
in India to which circular resolution will be sent.
 But Articles of a company may provide that circular
resolutions must be sent to the foreign directors at their
overseas address.
 A circular resolution will be passed if it is approved by a
majority of the directors, who are entitled to vote on the
resolution.
 This means, for passing, a circular resolution will need
approval of a majority of directors (excluding interested
directors) whether they are in India or out of India.
 If one-third or more of the directors require that the
resolution circulated must be placed before the board at
a meeting, the resolution cannot be passed by circulation.
 Every circular resolution must be noted at a subsequent
board meeting and made part of the minutes of such
meeting.
 These provisions also apply to circular resolution to be
passed by a committee of the board.
Committees of the Board [Rule 6]
The following companies must have Audit Committee and
Nomination & Remuneration Committee of Board:
 A listed company;
 A public company with a paid up capital of Rs. 10 cr or
crore;
 A public company having turnover of Rs. 100 cr or more;
 A public company, having in aggregate, outstanding loans
or borrowings or debentures or deposits exceeding Rs. 50
cr or more.
Audit Committee (AC) [S. 177]
 AC must have minimum three directors as its
members with a majority of Independent
Directors (ID).
 A majority of members of AC (including its
Chairperson) shall be persons with ability to read
and understand financial statements.
 Existing ACs must be reconstituted within a
year after commencement of the new Act.
 Functions of AC are as specified in s. 177(4) and any other
function delegated by the Board.
 The auditors and KMP shall have right to be heard in the
AC meeting when it considers the auditor’s report; but
they shall not have the right to vote.
 Board’s Report must disclose composition of AC and
recommendations of AC not accepted by the board along
with reasons.
Nomination and Remuneration Committee (NRC) and
Stakeholders Relationship Committee (ARC) -[S. 178]
 NRC must consist of three or more non-executive
directors of whom at least 50% must be IDs:
 The chairperson of the company (whether executive or
non-executive) may be appointed as a member of the
NRC but not as the chairperson.
 The NRC must identify persons who are qualified to
become directors and who may be appointed in senior
management in accordance with the criteria laid down,
recommend to the Board their appointment and removal
and shall carry out evaluation of every director's
performance. [S. 178(2)]
 The NRC shall formulate the criteria for determining
qualifications, positive attributes and independence of a
director and recommend to the Board a policy, relating to
the remuneration for the directors, key managerial
personnel and other employees. [S. 178(3)]
Powers of Board [S. 179]
 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. [S. 179(1)
 This provision, like s. 291 of the 1956 Act, gives the
Board supremacy for powers of management of affairs
of the company (subject to provisions of the Act and
shareholders’ approval where required under the Act).
 The Board must exercise 19 kinds of powers mentioned in sub-
s. (3) of S. 179 and Rule 8 by means of resolutions passed at
meetings of the Board and not by circular resolutions. But
these powers can be taken also at board meetings held by
video-conference.
 Only following powers can be delegated by the Board:
 to borrow monies;
 to invest the funds of the company;
 to grant loans or give guarantee/provide security for loans
 The requirement that all these decisions should be
taken only at board meetings and passed by circular
resolution is too cumbersome for fast decisionmaking. Section 175 contains sufficient safeguard to
facilitate passing of resolutions at board meeting if
some directors insist on it.
 Every resolution passed under s. 179 must be filed
under s. 117. This is unnecessary compliance work.
 At least private companies should be exempted from
these requirements
Powers to be exercised by Board with shareholders’
approval [S. 180]
 The powers specified in s. 180 will require
shareholders’ approval by special resolution.
 A special resolution will be required to sell, lease or
otherwise dispose of the whole or substantially the
whole of the undertaking or one of the undertakings
of the company, only if any of the parameters
mentioned in Explanation in s. 180(1)(a) is attracted.
• But what is proposed to be sold, leased or otherwise
dispose of must be an ‘undertaking’ according to its
ordinary meaning.
• It has been held by courts that sale of entire shareholding
in a subsidiary or a wholly-owned subsidiary by the
holding company does not amount to sale of undertaking.
Contribution to charitable funds [S. 181]
 Like s. 293(1)(e) of the 1956 Act, Board is authorised to
contribute to bona fide charitable and other funds.
 Prior permission of members by ordinary resolution is
required for such contribution in any financial year in
excess of 5% of average net profits for the three
immediately preceding financial years. But such
permission can be by general authority given to the Board
Political Contributions [S. 182]
 A company (other than a government company and
a company which has been in existence for less than
three financial years), may contribute in any financial
year up to 7.5% of its average net profits of the three
immediately preceding financial years any amount
directly or indirectly to any political party.
 Political contributions can be made on the authority
of a board resolution passed at a meeting and such
resolution must be deemed to be justification in law
for the making and the acceptance of the
contribution authorised by it.
Disclosure of Concern or Interest by Directors [S. 184]
 Two types of disclosures are required:
(a) Subsection (1): disclosure of a director’s connection with
bodies corporate, firms, or other association of
individuals;
(b) Subsection (2): disclosure of a director’s concern or
interest in contracts and arrangements.
Under sub-s. (1), every director must disclose his concern
or interest in any company or companies or bodies
corporate, firms, or other association of individuals
(including shareholding):
 at the first meeting of the Board after his appointment;
 at the first meeting of the board in every financial year;
and
 at the first board meeting held after any change in the
disclosures already made.
• The disclosure under s. 181(1) must be made:
 by a notice in Form MBP 1.
 at a board meeting held immediately after the date of
the notice.
 All notices must be kept at the registered office in the
custody of the company secretary or any other person
authorized by the Board for the purpose, and preserved
for 8 years from the end of the financial year to which
they relate. [Rule 9(3)]
Under sub-s. (2), every director must disclose at a
board meeting, his concern or interest in a contract
or arrangement or proposed contract or arrangement
entered into or to be entered into with(a) a body corporate in which he holds (independently
or with any other director), more than 2%
shareholding of that body corporate, or is a promoter,
manager, CEO of that body corporate; or
(b) a firm or other entity in which, he is a partner,
owner or member.
 Section 184 does not cover interest or concern of a
director when he himself or his relative is a party to the
contract arrangement. This appears to be a an
unintended anomaly . In any case, directors must
disclose their interest when they themselves or their
relatives are parties to contracts arrangements.
 If a director becomes concerned or interested after a
contract or arrangement is entered into, he must
disclose his concern or interest forthwith when he
becomes concerned or interested or at the first
meeting of the Board held after he becomes so
concerned or interested.
 Disclosure must be at the board meeting of the Board
in which the contract or arrangement is discussed.
 Interested director not to participate in such meeting.
 Interest or concern in contracts between two companies
not required to be disclosed, if any of the directors of the
one company or two or more of them together holds or
hold not more than 2% of the paid-up share capital in the
other company.
 Contravention to meet with punishment by imprisonment
upto one year and fine of min. Rs. 50,000 and max. Rs.
One lakh, besides vacation of office.
Loans, Guarantees, Securities [S. 185]
 Loans to, and guarantees and securities on behalf of, any
director or any of the parties mentioned in the
Explanation are prohibited, except loans to MD/WDR
(i) as a part of the conditions of service extended by the
company to all its employees; or
(ii) pursuant to any scheme approved by the members by a
special resolution.
 The expression ‘Save as otherwise provided in this Act’
creates an impression that a loan/guarantee/security
prohibited under this section can be given under s. 186.
 But this interpretation is not correct as it would have the
result of making s.185 a dead letter. Section 185 is a
special provision whereas s. 186 is a general provision; so
s. 185 overrides s. 186. Therefore when both the sections
apply, both must be complied with.
 Loans, guarantees or securities by a company in the
ordinary course of its business, if in respect of such loans an
interest is charged at a rate not less than the bank rate
declared by the Reserve Bank of India.
 This exemption can be availed of by banking companies and
NBFC companies which can give loans.
 Guarantees and securities only in connection with loans
attract this section. Guarantees and securities not in
connection with do not attract this section; e.g.
performance guarantee, guarantee for timely execution of a
contract, letter of comfort no in the nature of guarantee,
etc.
 The parties covered by the Explanation:
(a) any director of the lending company, or of a company
which is its holding company or any partner or relative of
any such director;
(b) any firm in which any such director or relative is a
partner;
(c) any private company of which any such director is a
director or member;
(d) any body corporate at a general meeting of which not
less than twenty-five per cent of the total voting power
may be exercised or controlled by any such director, or by
two or more such directors, together; or
(e) any body corporate, the Board of directors, managing
director or manager, whereof is accustomed to act in
accordance with the directions or instructions of the
Board, or of any director or directors, of the lending
company.
 The section applies to public and private companies. But it
doesn’t apply to loans, guarantees, securities to public
companies unless cl. (e) is attracted.
 Clause (e) can’t apply unless there is evidence indicating
instances or documents which amount to the holding
company’s board or directors(s) giving directions or
instructions to the subsidiary’s board, managing director or
manager who is accustomed to in accordance with those
directions or instructions and it cannot be presumed that a
subsidiary’s board or managing director or manager who is
accustomed to act in accordance with the directions or
instructions of the holding company’s board or directors(s).
Exemptions under Rule 10 :
 A loan by holding company to its wholly-owned subsidiary
(WOS);
 A guarantee or security provided by a holding company in
respect of any loan taken by its WOS; and
 A guarantee security provided by a holding company in
respect of loan made by any bank or financial institution to
its subsidiary.
These exemptions are available subject to the condition that
the loan is utilised by the subsidiary for its principle
business activities.
Investments, Loans, Guarantees & Securities [S. 186]
 This section corresponds to s. 372A but with changes.
 Subject to some exceptions, investment by a
company through more than two layers of investment
company (a company whose principal business is the
acquisition of shares, debentures or other securities)
is prohibited. Guarantees and securities also covered.
 Under sub-s. (2), directly or indirectly—
(a) giving a loan to any person or other body corporate;
(b) giving any guarantee or provide security in connection
with a loan to any other body corporate or person; and
(c) Investing in securities of any other body corporate,
exceeding 60% of its paid-up share capital, free reserves
and securities premium account or 100% of its free
reserves and securities premium account, whichever is
more, will require compliance with this section, unless the
transaction is eligible for exemption.
Exemptions under s. 186(11):
 The words “Nothing contained in this section, except
sub-section (1), shall apply” seek to grant total
exemption except under sub-s. (1).
 Hence, if a company falls in any of the clauses of
subsection (11), it stands totally exempted and need
comply with any requirement under s. 186 and such
exempted loans/guarantees/securities/investments
need not be considered for the purpose of the limits.
Exempted cases:
(A) Loans, guarantees, securities by a banking/insurance company, a housing finance company
in the ordinary course of its business;
 a company engaged in the business of financing of
companies [this includes NBFCs];
 a company engaged in the business of providing
infrastructural facilities.
(B) Investment in securities(i) by NBFC registered under Chapter IIIB of the RBI Act,
having its principal business as acquisition of
securities.
(ii) by a company whose principal business is the
acquisition of securities;
(iii) by any company in shares allotted under s. 62(1)(a).
Exemption under rule 11:
 A loan, guarantee or security to a WOS or a joint venture
company, or investment made by a holding company in
the securities of its WOS.
 The company must disclose details of such loans,
guarantee, security or investment in the financial
statement as provided under s. 186(4).
The definition of ‘free reserves’ is given in s. 2(43):
 Only those reserves which, as per the latest audited
balance sheet of a company, are available for distribution
as dividend.
 Exclusions: (i) any amount representing unrealised gains,
notional gains or revaluation of assets, whether shown as
a reserve or otherwise, (ii) any change in carrying amount
of an asset or of a liability recognised in equity, including
surplus in profit and loss account on measurement of the
asset or the liability at fair value.
Related Party Transactions (RTP) -[S. 188]
 Sections 297 & 314 of the 1956 Act have been combined
in s. 188. Though the requirement of CG approval is
dispensed with, the scope of those sections expended.
 S. 188 will apply to only those types of contracts and
arrangements which are specified in clauses (a) to (g).
 To attract s.188, two essential conditions must be
satisfied. Unless both these conditions are satisfied, this
section will not apply:
(1) The company enters into a contract or arrangement of
any one or more of the kinds specified in subs. (1);
(2) The other party to the contract or arrangement is a
related party as defined in s. 2(76).
 Section 188 has no retrospective effect; hence contracts
and arrangements entered into only after 1 April 2014
will attract this section and those entered into before
and subsisting on 1 April 2014 will remain unaffected.
 The definition of ‘related party’ is an exhaustive
definition; hence no party other than those mentioned in
the definition can be brought into the definition by
implication or for any other reason, as it would amount to
rewriting the statutory provision.
 Accordingly s.188 would apply only if a contract or
arrangement is strictly between the company and any of
the parties mentioned in s. 2(76).
 Board has to approve every contract attracting
this provision, but according to the first
proviso, a contract must be entered into with
the prior approval of the company by a special
resolution in the case of a company having a prescribed
paid-up share capital; and
 In the case of a contract of prescribed value.
 While ‘prior approval’ by special resolution in terms of
the first proviso to s.188(1) can be by giving the board a
general authority to enter into from time-to-time with
related parties contracts or arrangements of the kinds
specified in s.188(1) , rule 15(3) indirectly prohibits it and
requires specific approval in each case of RTP.
 This is unreasonably cumbersome and impractical
restriction which needs to be dispensed with. This will
only cause delays in decision-making.
 According to rule 15(3)(i), except with the prior
approval of the company by a special resolution a
company having a paid-up share capital of Rs. 10 cr or
more shall not enter into a contract/arrangement with
any related party.
 This means, every company having a paid-up share
capital of Rs. 10 cr or more must obtain members’ prior
approval by special resolution to enter into any
contract/arrangement covered by s. 188(1) regardless
of the amount involved in the contract/arrangement.
 Rule 15(3)(ii) prescribes various limits which would be
relevant only for those companies which have paid-up
share capital of less than Rs. 10 cr but the
contract/arrangement falls within the limits laid down
in rule 15(3)(ii).
 In case of wholly owned subsidiary, the special
resolution passed by the holding company shall be
sufficient for the purpose of entering into the
transactions between wholly owned subsidiary and
holding company. –rule 15(4)
Prohibition against voting by related party
 As per the second proviso to s. 188(1), “no member of the
company shall vote on such special resolution, to approve
any contract or arrangement which may be entered into
by the company, if such member is a related party”.
 This means only the related party with whom a contract
or arrangement is being entered into cannot vote on the
resolution (if such party is a shareholder of the company).
Other related parties can vote.
Exemption under third proviso:
 Third proviso to s. 188(1) states: nothing in this sub-
section shall apply to any transactions entered into by
the company in its ordinary course of business other
than transactions which are not on an arm's length
basis.
 Though awkwardly worded, what this means is that
every contract or arrangement with a related party
entered into by a company in its ordinary course of
business will not attract s.188, if it is at arm’s length.
 A transaction or activity entered into in the normal course
of business or which relates or is connected with (directly
or indirectly) the company’s business or affairs will be in
the ordinary course of business and this is not limited to
only manufacturing of products or purchase or sale of
goods or services. To put it differently, everything that is
necessary or conducive or connected with overall
carrying on business or conduct of affairs will amount to
a transaction in the ordinary course of business, such as
purchase of assets, purchase of goods and materials,
availing of or providing services, engaging people as
employees or consultants, buying or leasing property, etc
 Arm’s length means the condition or fact that the
parties to a transaction are independent and on an
equal footing.
 A transaction between two related parties that is
conducted as if they were unrelated, so that there is no
conflict of interest will qualify as arm’s length one.
 This exemption is not limited to only transactions
relating to the selling of goods or services which forms
part of the company’s business; it can be availed of in
respect of any activity relating to the company’s
business or necessary and useful to carry on the
business.
Register of contracts or arrangements in which directors
are interested [S. 189]
 Every company must keep a register giving separately the
particulars of all contracts or arrangements to which s.
184(2) or section 188 applies, in the prescribed form. Rule
16 prescribes form of the register.
 The register must be placed before every board meeting
and signed by all the directors present at the meeting.
 Every director or KMP must, within 30 days of his
appointment, or relinquishment of his office, disclose to
the company particulars specified in s. 184(2) relating to
his concern or interest in the other associations which are
required to be included in the register under that subsection or such other information relating to himself as
may be prescribed.
Contract of employment with managing or whole-time
directors [S. 190]
 A copy of agreement between company and MD/WD or
(if there is no written contract) a Memorandum of Terms
must be kept at registered office.
 It will be open for inspection by members. Not required
to be sent to shareholders.
Chapter XIII
Appointment of Managerial Personnel [S. 196]
 A company can’t have MD and Manager
simultaneously.
 But a company can have MD and WD or WD and
Manager simultaneously.
 Maximum tenure of office at a time: 5 Years
 Re-appointment to be made not earlier than 1
year.
Disqualifications for appointment as MD/WD/Manager
 Subsection (3) states disqualifications of
MD/WD/Manager.
 One of them is age. A person who is below 21 and above
70 can’t be appointed as MD/WD but extension beyond
70 allowed by special resolution.
 The explanatory statement annexed to the notice for such
must state the justification for appointing such person.
 Appointment to be made by Board and approved by
members by ordinary resolution without govt. approval if
Schedule V complied with.
 Notices of board and general meeting to disclose details
of terms and conditions, remuneration and director’s
interest.
 A return to be filed within 60 days of appointment / reappointment.
 If members disapprove appointment / re-appointment,
acts by the appointee before the general meeting are not
invalid.
Schedule V [Sch. XIII of 1956 Act]
 Part I of Sch. V contains conditions to be complied with at
the time of appointment / re-appointment of any
managerial person [MD/WD/Mgr].
 No approval of the CG necessary if conditions in Part I are
complied with.
 Section 196 and Part I of Sch V applicable to private
companies as well.
Remuneration of Directors [S. 197]
 This section and Sch V don’t apply to private
companies. They apply to public companies and
subsidiaries of public companies.
 Private companies (which are not subsidiaries of
public companies) are free to remunerate their
directors and managing/whole-time directors
freely without any limit and any approval of
members or govt.
New Definition of ‘remuneration’
 “remuneration means any money or its equivalent given
or passed to any person for services rendered by him and
includes perquisites as defined under the Income-tax Act,
1961.” [S. 2(78)]
 This definition is substantially different from the
definition in s. 198 of 1956 Act.
 While all components of remuneration (other than
perquisites) will be taken on actual expenditure basis,
perquisites will be taken as per Income Tax Act and Rules.
 The word ‘equivalent’ means equal in value,
measure, force, effect, significance, etc.
 Thus, any perquisite, amenity, benefit or
facility provided by the company to MD/WD as
part of his remuneration package and which
has monetary value or can be converted into
money value, will amount to ‘remuneration’,
besides any payment made in money.
Remuneration of MD / WD / Manager
 Overall ceiling on remuneration of all directors:
11% of Net Profit (NP).
 In excess of 11% can be paid with the approval of
shareholders and CG.
 NP to be calculated as per s. 198 (s. 349 of the
1956 Act)
 Fees for attending board meetings over and above
11%.
Executive Directors’ Remuneration when NP is
adequate
 According to clause (i) of the second proviso to s.197(1),
except with the approval of the company in general
meeting, the remuneration payable to any one managing
director; or whole-time director or manager shall not
exceed five per cent of the net profits of the company and
if there is more than one such director remuneration shall
not exceed ten per cent of the net profits to all such
directors and manager taken together.
 The words ‘except with the approval … shall not exceed’
indicate that payment of remuneration to the executive
directors up to 5% or 10% of net profit will not require
members’ approval in general meeting, but with the
members’ approval a company may pay remuneration in
excess of 5% or 10%.
 However, as per s. 197 (4), remuneration payable to the
directors, including executive directors, shall be determined,
in accordance with and subject to the provisions of this
section, in any of the modes stated below:
 by the articles of the company, by an ordinary resolution or,
(if the articles require), by a special resolution.
• So, there is a conflict between the second proviso to subs.
(1) and subs. (4). This conflict has to be resolved by
harmonious construction of the two provisions. The only way
to resolve this conflict is to ignore the word ‘except’ in the
second proviso to subsection (1). Therefore, it is desirable to
take members’ approval by ordinary resolution.
 Under Part III of Sch. V, appointment and remuneration shall
be subject to approval of members in general meeting (by
ordinary resolution).
Executive Directors’ Remuneration when NP is
inadequate or absent
 If in any financial year, a company has no profit or
inadequate profit, it can pay remuneration without
govt. approval but subject to and in accordance with
the provisions of Section II of Part II of Sch V.
 If the company cannot to comply with Sch V
provisions or wants to pay excess remuneration,
previous govt. approval necessary.
Schedule V: Part II
 Part II of Sch. V contains conditions to be complied with in
respect of remuneration.
 Section I of Part II provides: a company having profits in a
financial year may pay remuneration to a managerial
person(s) within the limits specified in s. 197, i.e. 5% or
10% of NP.
 Section II of Part II contains provisions applicable in a
financial year when a company has no profit or
inadequate profit.
 In such a case, remuneration can be paid to managerial
person(s) without govt. approval but within the limit
under Para (A) or (B) as applicable.
 The applicable limit can be doubled if remuneration is
approved by special resolution.
 Section III of Part II contains provisions applicable
to remuneration payable by companies having no
profit or inadequate profit without govt. approval
in certain special circumstances if the
remuneration is in excess of the limit specified in
Section II of Part II.
Remuneration of Non Executive Directors (NED)
 As per cl. (ii) of the second proviso to s.197(1), except with
the approval of the company in general meeting, the
remuneration payable to directors who are neither MDs nor
WDs shall not exceed,—
(A) 1% of the net profits of the company, if there is a MD or
WD or Manager;
(B) 3% of the net profits in any other case.
 Thus, members’ approval is not required to pay
remuneration upto 1% or 3%
 The words ‘except with the approval of the company
in general meeting’ create conflict between cl. (ii) of
the second and subs. (4).
 This conflict has to be resolved by harmonious
construction of the two provisions. The only way to
resolve this conflict is to ignore the word ‘except’ in
the second proviso to subsection (1). Therefore, it is
desirable to take members’ approval by ordinary
resolution.
• But unlike under s.309 of the 1956 Act, NEDs now can
be paid monthly remuneration, as s.197(6) states: A
director or manager may be paid remuneration either
by way of a monthly payment or at a specified
percentage of the net profits of the company or
partly by one way and partly by the other.
• But this is subject to the limits of 11% and 1% or 3%.
Remuneration for Professional Services
 As a rule, remuneration payable to NEDs in any other
capacity must be included in the 11% and 1% or 3% limits.
But remuneration for professional services is excluded, if(a) the services rendered are of a professional nature; and
(b) in the opinion of the Nomination and Remuneration
Committee [if the company requires this committee under
s. 178], or the Board in other cases, the director possesses
the requisite qualification for the practice of the profession.
[S. 197(4), Proviso]
 If any director draws or receives, directly or indirectly, by
way of remuneration any such sums in excess of the limit
prescribed by this section or without the prior sanction of
the CG, where it is required, he shall refund such sums to
the company and until such sum is refunded, hold it in
trust for the company. [S. 197(9)]
 The company shall not waive the recovery of any sum
refundable to it, unless permitted by the CG. [S. 197(10)]
 According to s.197(14), a managing or whole-time
director of a company who is in receipt of any
commission from the company can be paid any
remuneration or commission from any holding company
or subsidiary company of such company subject to its
disclosure by the company in the Board's report.
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Sitting fees
NEDs (including independent directors) may be paid fees
for attending Board or Committee meetings.
Fees can be paid also for any other meeting if so decided
by the Board.
Such fees are outside the 11% and other percentage
limits but must be within the prescribed monetary limit.
Different fees for different classes of companies and for
independent and other directors may be prescribed.
Rule 4 prescribes Rs. One lakh per meeting fee.
Filing and Disclosure
 A return in the prescribed form must be filed with the
Registrar within 60 days of appointment of managerial
person.
 The return must be accompanied by a certificate of
auditor or the company’s secretary or of (if the company
is not required to appoint a secretary), a secretary in
whole-time practice to the effect that the requirement of
Sch V have been complied with.
 A copy of the board resolution or agreement
executed, relating to the appointment, re-
appointment or renewal of the appointment, or
variation of the terms of appointment, of a MD must
be filed with the RoC under s. 117.
 Every listed company must disclose in the Board's
report, the ratio of the remuneration of each director
to the median employee's remuneration and such
other details as may be prescribed under s. 197.
Key Managerial Personnel (KMP) [S. 203]
 Every listed company (regardless of paid-up capital)
and every other public company having a paid-up
capital of Rs. 10 crore or more must have all the three
following whole-time KMPs:
 MD or CEO or Manager
 If none of the above is there, then WD;
 Company Secretary; and
 Chief Financial Officer.
 KMP must be appointed by a resolution of the Board
containing the terms and conditions of the
appointment including the remuneration. [S. 203(2)].
Companies already having persons holding positions
need not be reappointed but only designated.
 A KMP must not hold office in more than one company
(except in its subsidiary) at the same time. However, a
KMP can be a non-KMP director of any company with
the permission of the Board. [S. 203(3)]
 A KMP holding office in more than one
company at the same time on the date of
commencement of this Act, must choose,
within six months from such commencement,
one company, in which he wishes to continue
to hold the office of key managerial personnel.
 A company may appoint a person as its MD, if he
is the MD or Manager of one, and of not more
than one, other company. Such second
appointment must be made or approved by a
resolution passed at a board meeting by
unanimous resolution of the directors present at
the meeting and of which meeting, and of the
resolution to be moved thereat, specific notice
has been given to all the directors then in India.
 An individual cannot hold two positions of Chairperson
and Managing Director or CEO at the same time if(a) the company’s articles do not provides otherwise; or
(b) the company does carries on multiple businesses:
 But the above restriction will not apply to such class of
companies engaged in multiple businesses and which has
appointed one or more CEO for each such business as
may be notified by the Central Government.
 Every KMP must be appointed by the board of the
company and terms and conditions of employment and
remuneration must be determined by the board.
 If KMP’s office becomes vacant, the Board must fill
the vacancy within six months from the date of such
vacancy.
Secretarial Audit [S. 204]
 The following companies require Secretarial Audit (SA):
 Every listed company (regardless of amount of capital);
 every public company having a paid-up capital of Rs. 50 cr
or more;
 every public company having a turnover of Rs. 250 cr or
more.
• Secretarial Audit Report (SAR) must be annexed to the
Board’s Report.
• Only PCS is eligible to do SA.
 The company must give all assistance and facilities to the
PCS for auditing the secretarial and related records of the
company.
 The Board must fully explain in Board’s Report any
qualification or observation or other remarks made by
the PCS in SAR.
Secretarial Audit Form- MR3
 It requires report on compliance with the provisions of
the Acts and Rules/Regulations/Guidelines and also
certain other matters mentioned in the form.
 There is also an item which states:
(iv) …… (Mention the other laws as may be applicable
specifically to the company).
 This clause should be interpreted restrictively and not
liberally, because of the use of the word “specifically”.
 Only those laws which are specially applicable to a
company should be included and not all those laws which
are generally applicable to all or most of the companies;
e.g. in the case of an NBFC company, in addition to
clauses (i) to (v), RBI Act and RBI Regulation/Directions
will apply.
 There are some special laws like Boilers Act,
Insecticides Act, Drugs & Cosmetics Act, etc. Such
special laws only will have to be covered in the
secretarial audit and not general laws applicable to all
industries, such as tax laws, labour and industrial
laws, etc. Such laws will have to be identified by the
company and secretarial auditor and included in the
secretarial audit. If there is no special law applicable
to a company, clause (iv) will have nothing to include
Liabilities of PCS in respect of secretarial audit
 Contravention of this section by a company or any officer
of the company or the PCS would invite punishment of
fine of minimum Rs 1 lakh and maximum Rs 5 lakhs.
 Besides, s. 143 is applicable as its sub-s. (14) provides:
The provisions of this section shall mutatis mutandis
apply to— (b) the company secretary in practice
conducting secretarial audit under 15 section 204.
Section 143 (12) provides:
 Notwithstanding anything contained in this section, if an
auditor of a company, in the course of the performance of
his duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against
the company by officers or employees of the company, he
shall immediately report the matter to the Central
Government within such time and in such manner as may
be prescribed.
Section 143(15) provides:
If any auditor, cost accountant or company secretary in
practice do not comply with the provisions of sub-section
(12), he shall be punishable with fine which shall not be
less than one lakh rupees but which may extend to
twenty-five lakh rupees.
Duties of Company Secretary [S. 205]
 New provision
 Three statutory functions:
 to report to the Board about compliance with the
provisions of this Act, the rules made under the Act
and other laws applicable to the company;
 to ensure that the company complies with the
applicable secretarial standards of ICSI;
 to discharge such other duties as may be prescribed.
Thank you and wish you good
luck for safe landing in the
turbulent weather of the
Companies Act 2013