Restrictions on Powers of Board of Directors

At every stage right from a company’s incorporation till its existence, there are some common set of persons who are a part of this entire journey. The shareholders and Board of directors of a company being prominent of them. The shareholders aid the company financially in the form of capital in exchange of return on such capital known as dividends. The Board of Directors though not providing capital in a company, contribute their know-how to the company to increase its profitability with each passing day. This does not mean that the Board of Directors cannot hold shares of a company. They are also given shares of the company in the form of ESOPs. 

Generally, the way of making any new decision for a company is to first get it approved by its Board of Directors and then to obtain the approval of shareholders. If the decision is regarding the rights of preference shareholders or holders of debentures, then their approvals are also taken into consideration respectively. This means that the first authority to make decisions for the company are the Board of directors.

The company law of India has provided certain matters on which the approval from the Board of directors shall be considered final and it need not be referred further to the members (i.e holder of shares). We can therefore say that although the directors play a major role in the company’s decision making, there are certain limitations imposed by law on their powers.

Further, we shall look at the powers of directors and their limitations in detail within which they are allowed to make the decisions.

What powers do the directors possess?

The Company law of India states that the Board of Directors of a company shall have the powers under Section 179 to make decisions on the following matters:

1) demanding call money on the unpaid amounts of shares held by the shareholders.

2) decisions regarding the buyback of the company’s shares.

3) issue of shares, debentures, or other securities of the company in India or abroad.

4) borrowing monies for the company.

5) investing in the company’s funds.

6) advancing a loan/ providing guarantee or any security for loans.

7) approval of the Board’s report and the company’s financial statements.

8) decisions in respect of diversifying the company’s business.

9) giving approval in case of a merger, amalgamation, and reconstruction of the company.   

10) transactions involving company takeover.

In addition to this, the Board of directors is empowered to decide on the political contributions to be made by the company, appointment of key managerial personnel, and their removal, appointing internal auditors and secretarial auditors of the company.

The company can decide to revoke any one of the above powers given to the Board of Directors by passing a resolution in that regard in the general meeting of the company.

Which are restrictions imposed by law on the powers of the Board?

Yes, the Indian company law has imposed certain restrictions on the powers of the Board of Direction under Sec 180.

The Board cannot exercise the decision-making power in the following matters:

1) to sell off or dispose of the company’s undertaking, wholly or a substantial part of the undertaking of the company or giving it on lease.

 Here, undertaking means holding in any other organization more than 20% of the company’s net worth as per the latest financial data of the company.

2) to invest the money except in trust securities when such money forms part of the compensation received in the event of amalgamation or the merger of the company.

3) to borrow money from bankers of a company when such borrowing along with the existing borrowings of the company exceeds the total of the company’s paid-up capital, free reserves, and securities premium.

Borrowings in Point 3) shall not include temporary loans. Temporary loans are those loans that are repayable within a period of 6 months.

Companies engaged in the business of banking and accepting deposits from the public shall not be understood as borrowings in terms of point 3).

4) waiving off the debt which is due to any director or increasing the time given for repayment for such debts.

The Board of Directors shall be authorized to act in respect of the above 4 points after passing a special resolution in the company’s general meeting.

Do these restrictions apply to all types of companies?

No, the exemption is granted to private companies from complying with the aforementioned provisions.

Conclusion:

After going through the powers available to the Board of Directors of the company and the restrictions laid down on them under the company law of India, one can say that these provisions promote fairness in the conduct of the directors as they are not given absolute powers to decide on all the matters relating to the company. By imposing these restrictions, the Board of Directors shall know about the fact that they are answerable to the shareholders of the company and hence take each step carefully while exercising the powers granted to them by the Indian company law.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.