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Corporate Governance and Board of Directors


Learning objectives

In this chapter, you will learn about:

  • Instruments which govern conduct of business by a company
  • Customization of default articles of association to provide for additional powers to shareholders
  • Power of the board of directors to act for the company
  • Delegation of certain powers by the board to specific directors
  • Shareholder control over directors
  • Rights of minority shareholders vis-à-vis the majority

Role of corporate governance in everyday activities

Corporate governance is one of the most important and interesting aspect of functioning of a company. The journey of a company begins with incorporation. It has to raise capital to build its business – by hiring employees, building infrastructure, creating products or services and marketing the same. Sometimes the company raises debt capital to supplement or complement the equity capital.  Once the company is profitable, the share-holders and debtors have to be paid their dues. Apart from sharing profit with the shareholders, managers and employees of various kinds, the company also needs to reinvest money into expansion of business, R&D, upgradation of technology etc. In the course of undertaking its activities, the company will interact or engage with many different stakeholders, who may have competing interests, which must all be protected. Hence, corporate governance is intricately linked with the activities of the company. This is the role of corporate governance in a company - to protect and promote various interests within a company in a fair manner and to ensure that the immense clout that the companies exercise is not misused, monopolized or exercised against public interest.
Corporate governance consists of good practices which have been widely adopted as well as legal rules that can be found in various statutes, rules and regulations, regulatory orders, court judgments etc. However, a lion’s share of corporate governance practices draw on a few sources detailed below.

Instruments that govern the conduct of business by a company

  • Companies Act, Rules, Regulations and Government of India Circulars
  • SEBI Regulations for listed companies.
  • Memorandum and Articles of Associatio:
    • Most companies are incorporated with articles of association as per Table F (earlier Table A), or which closely resemble the articles in Table F. 
    • Post the first round of funding, the articles usually change drastically and adopt investor’s rights and a different corporate governance structure.
    • Each time the company receives a further round of investment (Series B, private equity, etc.) the newer investors are granted those investor rights. However, the structural pattern of the articles stays similar.

      The volume of regulation and compliance governing various types of companies drastically vary. With increase compliance requirements, costs associated with compliance increases significantly for a company and this is a factor that entrepreneurs often fail to factor into their business plans. Corporate governance has its own cost, and compliance cost is only a part of corporate governance costs. See the list below in decreasing order of regulatory compliance requirements:
  • Listed public companies – Most heavily regulated
  • Unlisted public companies
  • Private companies – Least regulated, most flexible.
Private companies have maximum flexibility to determine how they govern their affairs. For an entrepreneur, knowing how to tailor make an AoA (articles of association) to suit his business model can help him in retaining maximum flexibility.


Role of Articles of Association in Corporate Governance and Corporate Action

In corporate governance, a company's articles of association along with the memorandum of association form the company's constitution, defining the responsibilities of the directors, the kind of business to be undertaken, and the means by which the shareholders may exert control over the board of directors as well as listing the rights and duties of the members of the company.

Table F of Companies Act 2013 (earlier Table A of Companies Act 1956)
Table F (earlier Table A) prescribes a format for articles of association of a company prescribed in the Companies Act. A company limited by shares can adopt the articles in Table F/ Table A as its articles of association. The provisions of Table F / Table A will apply to a company even if it has filed its own articles if they do not specifically exclude or modify the provisions of Table F/ Table A. However, it is advisable to draft the articles of association to suit the purposes of the company.

 Understanding the rationale for modifications to Table A

The articles under Table F (earlier Table A) are customized or modified for two purposes mainly:
  1. To provide for investor’s rights when investment is received – usually an investor enters into a shareholders agreement (SHA) prescribing certain restrictions on the actions of the company and the other shareholders (with respect to the company), which are subsequently incorporated into the articles of association to make them binding on the company.  
  2. For granting certain powers to the company, which, as per the Companies Act, the company would only possess if the articles expressly provide for it.  
Some examples of the rights specifically granted under the articles are:
  1. Former Section 76 - to pay commission on issue of shares & debentures. A corresponding provision is absent so specific authority in articles is not required.
  2. Section 68 (earlier Section 77A) - to buy-back the shares or other securities of the Company.
  3. Section 55 (earlier Section 80) - to issue redeemable, cumulative preference shares.
  4. Section 66 - (earlier Section 100) - to reduce the share capital of the Company
  5. Former Section 208 prescribed the power to pay interest on capital. A corresponding provision is absent so specific authority in articles is not required. (The full list of powers is contained in the specimen articles of association)
  6. To prescribe internal governance mechanisms for various other matters – Under the Companies Act, private companies have been left free to decide mechanism for issue and allotment of shares and have additional flexibility with respect to powers of directors, loans and borrowings and even related party transactions. The restrictions on such powers that are applicable to public companies are not applicable to them. Many private companies eventually adopt a minimalistic set of articles (unless they have an external investor) leaving significant flexibility with the board of directors – this can be risky. It is prudent to prescribe limits on the powers of directors in the articles itself.

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