Management, Meetings and Corporate Governance (CA Final IBS)

Understand Management, Meetings and Corporate Governance

Key rules to remember

Ordinary resolution

Votes in favour > votes against

A simple majority of the votes cast. Votes are counted as cast by members entitled to vote, whether in person, by proxy, or electronically. Used for most routine business.

Special resolution

Votes in favour ≥ 3 × votes against

At least three times the votes cast against. Votes are counted as cast by members entitled to vote, in person, by proxy, or electronically. Notice must say it is proposed as a special resolution.

Board meeting gap

Gap between two board meetings ≤ 120 days

A minimum of four board meetings a year is required. Check the exemptions for specific company types before applying.

Overall managerial remuneration cap

All directors and managers ≤ 11% of net profit

Net profit is computed as per the Act. A company with adequate profit can exceed this 11% cap under s.197(1) only with a resolution of the company in general meeting, and the Schedule V conditions apply to that approval. Schedule V also governs the case of absent or inadequate profit. A special resolution is needed only where Schedule V specifically demands it.

Managing or whole-time director limit

Remuneration to MD/WTD ≤ 5% of net profit (one such director); ≤ 10% for all together

Applies when profits are adequate. These sub-limits, and the other directors' 1%/3% limits, can be exceeded only with a resolution of the company in general meeting, and the Schedule V conditions apply to that approval. A special resolution is required only where Schedule V specifically demands it, as in certain cases of absent or inadequate profit. Any amount paid beyond the permitted limits without approval must be refunded to the company, and until it is refunded the director holds it in trust for the company.

Other directors' limit

Non-executive directors together ≤ 1% of net profit if there is an MD/WTD/manager; ≤ 3% otherwise

Sitting fees are treated separately. Use this only where the company has adequate profit.

Related party transaction approval

Board approval (disclosed, at a meeting) for specified transactions; shareholder approval by ordinary resolution if prescribed thresholds are crossed

Under the Companies Act, s.188 applies to the specified transactions, not to those in the ordinary course of business at arm's length. That exemption is available only for s.188. Separately, a company that must have an audit committee needs that committee's approval for all related party transactions under s.177, including ordinary-course, arm's-length ones. For listed companies, SEBI LODR also requires audit committee approval for all related party transactions (omnibus approval is allowed). The rule that material related party transactions need shareholder approval, even if in the ordinary course and at arm's length, comes from SEBI LODR (Regulation 23) and applies to listed companies. It is not a Companies Act rule. On the s.188 shareholder resolution, no member who is a related party can vote on it. Under the proviso to s.188(1), this bar does not apply to a company in which ninety percent or more of the members, in number, are relatives of promoters or are related parties. An interested director must not vote at the board. Always check the threshold for the transaction type.

Board composition

Prescribed companies need at least one-third independent directors and at least one woman director

Which companies are covered depends on listing and size. Check the facts given.

How to solve Management, Meetings and Corporate Governance questions

1. 1Identify the company: listed or unlisted, public or private, and its size. Many rules change on this.
2. 2Identify the person or decision: director, KMP, resolution, transaction, or payment.
3. 3Name the rule in plain words, with its condition or threshold.
4. 4Find the approving body: board, committee or general meeting, and the type of majority.
5. 5Check disqualifiers: interested parties, absence of quorum, missing notice, or profit inadequacy.
6. 6Apply the numbers, such as days, percentages, or thresholds, and show the working.
7. 7Write the conclusion: valid or invalid, allowed or not, and what the company must do to comply.

Quickest way: Four-question scan

Common mistakes in Management, Meetings and Corporate Governance

• Letting an interested director vote on a related party transaction.

  Students focus on the board's power and forget the conflict rule.

  Fix: Always ask who the related party is. That person must not vote on the resolution. Say so in your answer.

• Applying the 11% cap when the company has no profit.

  The percentage limits are memorised, but the profit test is skipped.

  Fix: Test profit first. If profit is absent or inadequate, move to Schedule V limits and its conditions.

• Mixing up ordinary and special resolutions.

  Both sound like simple majority.

  Fix: For special resolution, remember the votes in favour must be at least three times the votes against.

• Treating all board matters as passable by circulation.

  Students know circulation exists but forget its limits.

  Fix: Check whether the matter is one that law requires to be decided at a board meeting. If so, circulation is not valid.

• Counting the 120-day gap from the wrong date.

  Students count from the notice or the financial year start.

  Fix: Count between the dates of two consecutive meetings actually held.

• Giving a conclusion without naming the consequence.

  Students stop after stating the rule.

  Fix: End with what the company must do, such as obtain approval or refund excess pay.

Worked examples