UNIT 1 BOARD OF DIRECTORS

1.1Meaning and Importance of Directors, Separation of Ownership and Control

1 Meaning of Directors
a. Concept of Director
When a company is registered, it becomes a legal entity. It lives like a human
being and its death lies in its winding up or on its amalgamation with other
company on its being declared defunct by Registrar of Companies.
On incorporation a company becomes a person in the eyes of law, it has perpetual
succession, its members may come and may go but the company lives till its death
as aforementioned. It has a common seal, which is affixed on all the legal
documents executed on behalf of the company in the presence of and signed by
authorised signatories. It is empowered to hold all properties in its own name and
its own rights. It can sue others and can be sued by others in its own name.
With all the strapping of a legal person, a company is unlike a living human being.
It has no physical existence. It has no eyes to see, no ears to hear, no hands to sign
and execute documents, no brain to think and no nerves to communicate among its
various limbs. In order to enable a company to live and to achieve its objects as
enshrined in the objects clause of its Memorandum of Association, it has
necessarily to depend upon some agency, known as Board of Directors.
The Board of directors of a company is a nucleus, selected according to the
procedures prescribed in Act and the Articles of Association. Members of the
Board of directors are known as directors, who unless especially authorised by the
Board of Directors of the company, do not possess any power of management of
the affairs of the company. Acting collectively as a Board of directors, they can
exercise all the powers of the company except those, which are prescribed by the
Act to be exercised by the company in general meeting.
The directors of a company are its eyes, ears, brain, hands and nerves and other
essential limbs upon whose efficient functioning depends the success of the
company. The directors formulate polices and establish organisational set up for
implementation those polices and achieve the objectives as contained in the
Memorandum, muster resources for achieving the company objectives and control
guide, direct and manage the affairs of the company.
A director is an individual who direct, control, manage or superintend the affairs of
the company in the form of the Board of Directors. As a body, they frame the
general policy of the company, direct its affairs, appoint the company's officers,
ensure that they carry out their duties and recommend to the shareholders
regarding distribution of the dividend as per the Articles of Association. The
collective body in whom the authority vested and through whom the company acts
is called the "Board of Directors" or Board.
A company necessarily contracts through agents such as its directors and other
officers, and senior employees. When these agents enter into transactions which
they are not authorised to make or use their powers for an improper purpose, or
exercise them by irregular procedures, they will be held responsible personally.
Meaning of Director
A director is an elected individual who, along with other directors, is responsible
for a company’s corporate policy. Collectively, directors form the board of
directors.
A Company director is the one of the group of managers at the highest level in a
company who control it and are in charge of making decisions about how it is run.
Cmbridge dictionary
“Director is the one who supervises, regulates, or controls.”
A director is the head of an organization, either elected or appointed, who
generally has certain powers and duties relating to management or administration.
A corporation's board of directors is composed of a group of people who are
elected by the shareholders to make important company policy decisions.
A director is a person who conducts the affairs of a company. Directors act as
agents of the company, owe fiduciary duties to it and have a duty of care towards
it. Directors may have executive functions or they may be non-executive functions,
their principal functions being to safeguard the interests of investors. Directors,
while not servants of the company as such, have a responsibility to it not dissimilar
to the responsibility owed by a trustee to his beneficiaries. Specifically, directors
are under duties to exercise their powers for the purposes for which they were
conferred and to exercise them bona fide for the benefit of the company as a
whole; and not to put themselves in a position in which their duties to the company
and their personal interests may conflict.
 Importance of Directors
The board of directors in a company are solely responsible for setting the
company’s vision and mission, as they ensure that all actions being performed
adhere to, and are related to that mission. The directors may also change the vision
or mission as needed.
The board of directors’ overarching goal is to look out for the company’s financial
wellbeing and “promote the success of the company for the benefit of its members
as a whole".
The general responsibilities of the directors include:
Setting the company’s objectives and implementing corporate policy
Adopting bylaws
Hiring, monitoring, and firing executives
Setting dividend policies and paying executive compensation
Issue additional shares
If a company is large enough, the directors will need to produce a directors’ report
at the end of each financial year.
Directors’ powers come from the company’s articles of association.
3. Separation of Ownership and Control
Separation of ownership and management in corporate governance involves
placing the management of the company under responsibility of the professional
who are not it owners. Owners of a company may include shareholders, directors,
government entities, other corporations and the initial founders. The separation
allows skilled managers to conduct the complicated business of running a large
company. It aloows:
Professional Managerial Skills
The growth of a company comes with the demand for different skills to manage the
operations of the company, meaning the owners of a company may not have all of
the necessary skills and experience needed for certain managerial roles. Creating a
management team separate from the ownership enables the company to be run by
professionals with diverse skills such as in marketing, corporate financing and
public relations.
Easier Performance Appraisals
Performance appraisals are an essential part of good corporate governance, as they
enable managers to evaluate the company and to point out areas of improvement. It
can be complex to evaluate performance where there is a lack of separation of
ownership and management. But separation makes it easier for the board and those
in management to be evaluated objectively. Owners can freely deal with the chief
executive officer and other senior managers, even after the appraisals.
Capital Utilization
Capital utilization involves the arrangements that determine the way in which
resources and assets are managed in a company. Separating personal assets and
liabilities from the business assets and liabilities may prove difficult for company
owners. Managers come in to devise ways in which business assets are managed to
generate the highest profits for all shareholders.
Checks and Balances
Separate managers and owners in a firm ensure that a system of checks and
balances is in place. Managers act as a buffer between the company and
stakeholders such that they can alleviate negative impacts of stakeholder activities
and avoid hitches in public relations. Managers are well suited to put in place
strategies that will lessen losses to the rest of the stakeholders as a result of the
actions of another stakeholder.
The Advantages & Disadvantages of the Separation of Ownership & Control
in the Modern Corporation
With the structure of the modern corporation, the ownership of the company and
the control distribute among the shareholders. The structure of business can
provide some advantages to the company overall, but it can also create some extra
burdens along the way. Before choosing to incorporate, it helps to understand both
sides of the issue.
Democratic Decision Making
One of the advantages of the modern corporation is that it uses a democratic
decision-making process on major issues. When the shares of a corporation divide,
each share of common stock typically carries with it one vote. The shareholders get
the opportunity to vote on matters for the company. Instead of having one person
that is in charge of making all of the important decisions, the group can decide
what is most appropriate.
Unbiased Structure
Another advantage of separating the control and the ownership of the company is
that the executives and the upper level managers of the company are not
necessarily those that own the majority of the company. This separates those who
make the day-to-day operational decisions for the company from those who own
stock. This means that the managers and Chief Executive Officer, or CEO, can
make decisions based on the interest of the company and not themselves.
Complications
One of the potential problems of using this method is that it complicates making
decisions and forces them to take longer than they should. For example, if the
shareholders are not happy with the board of directors, they can elect new board
members. However, it takes time to distribute information to all of the shareholders
and then have a vote for the board members. By comparison, other business
entities can make decisions much more quickly.
Disconnect
Separating the ownership and control of the company can be beneficial in cases,
but it can also lead to a disconnect between the two parties. The investors in the
company may not understand what really goes on within the company. Alternately,
the employees of the company may not understand exactly what the investors are
thinking on important matters. This can lead to communication problems and
assumptions.

1.2 Positions of Director in the Company and Types of Director and

Qualification
1. Position of Directors in the Company
It is very difficult to define precisely the position of directors in a company.
Directors have been described sometimes as trustees, sometimes as agents or
sometimes as managing partners.
Directors as Agent: Directors are, in the eyes of law, agents of the company for
which they act. The company itself cannot act, it can act only through directors and
by the reason of which a relation of principal and agent is established between the
company and the directors. Wherever as agent is liable those directors would be
liable; where the liability would attach to the principal and principal only, the
liability is the liability of the company.
In a case of Ferguson v. Wilson (1966) L.R. 2 Ch., F applied for and by resolution
of the Board was allotted certain shares in the railway company. However, the
Company was unable to place F on the register of members as the holder of shares
in the company. F sued W, a director of the company, claiming inter alia that W
should transfer some of his own shares to F and pay damages. Held F's claim failed
on the ground that the directors of a company acting in the normal course of their
duties are agent for their company it incur no personal liability.

Where the directors make contracts on behalf of the company, they incur no
personal liability provided they act within the scope of their authority. In such a
case, the company alone would be liable. Directors incur a personal liability in the
following circumstances:
a) Where the contract in their own names.
b) Where they use the company’s name incorrectly.
c) Where director’s exceeds their powers.
But the position of directors differ from that of the agents because an agent can
enter into a contract in his own name but a director cannot. Again an agent may not
disclose the name of his principal but a director must disclose the name of his
principal. Hence, the directors are not agents in the true sense.
Directors as trustees: The directors have also been described as trustees of the
company. They are trustees of the company’s money or property which comes into
their hands or which is actually under their control and of the powers entrusted to
them. Directors stand in fiduciary position towards the company in regard to the
powers conferred on them.
Directors as officers: Moreover whether or not a director is in the employment of
the company, he shall be treated as an officer of the company.
Directors as employees: Although directors are agents of the company, they are
not employees or servants of the company. But where any director, besides being a
director, is also in the service or employment of the company, such as secretary,
manager, accountant or otherwise, he will be treated as an employee. As such he
will be entitled to the remuneration and other benefits admissible to his as an
employee in addition to his rights as a director to sitting fee, etc.
Directors as managing partners: The directors are also sometimes described as
managing partners because like a partner of a firm, they manage the affairs of the
company and they are also usually important shareholders of the company. They
do all proprietorial functions like allotting shares, making calls, forfeiting shares
etc.
2. Types of Directors
Companies Act, 2063, Section 2: Definition
(j) “Officer” includes director, chief executive, manager, company secretary,
liquidator and any employee undertaking departmental responsibility of the
company.
(z) “Board of directors” means the board of directors of a company.
(z1) “Managing director” means a managing director of a company.
(z7) “Independent director” means any independent director appointed under
Sub-section (3) of Section 86.

20. Articles of association:

(2) The articles of association shall state the following matters:
(c) Number of directors, provision of alternate director, if any, and tenure of
directors,
a. Executive Director: Executive Director is a common post in many
organization. S/he is a person responsible for the administration of a business.
Executive directors perform operational and strategic business function such as:
 - Managing peoples
- Looking after assets
- Hiring and firing
- Entering into contracts
Executive directors are usually employed by the company and paid a salary,
so are protected by employment law.
b. Managing Director:
Companies Act, 2063, Section 2: Definition
(z1) “Managing director” means a managing director of a company.
96. Appointment of managing directors, and management of company: (1) The
directors may, subject to the articles of association, appoint one managing director
from amongst themselves.
(2) The functions, duties and powers of the managing director shall be as
mentioned in the articles of association or as prescribed by the board of directors.
(3) While appointing a managing director and other director taking responsibility
of the management of the company pursuant to Sub-section (1), there shall be
entered into an agreement in writing stipulating the terms of appointment,
remuneration and facilities; and no facilities or payment other than the
remuneration and facilities specified in such agreement and any other facilities
receivable as specified by the general meeting shall be provided or made.
(4) The term of agreement as referred to in Sub–section (3) shall not exceed four
years at a time.
(5) There shall be made such arrangement that the shareholders can inspect, free of
charge, the agreement entered into with the directors pursuant to Sub-section (3).
(6) A director who is receiving regular remuneration or facilities, other than
meeting allowances, from any one listed company shall not be appointed to the
post of managing director in another listed company, with entitlement to regular
remuneration or facilities.
c. Full-Time Director: A full-time directors includes a director in full-time
employment of the company. Full-time director means a director who devotes all
his time and attention to the management of the company. Where a director is
appointed to act as Technical Director, Legal Director, Work Director and Sales
director on full-time basis, he is a full-time director of the company. A full-time
director is also a managerial position.
d. Non-executive Director: Non-executive director do not get involve in the
day-to-day running of the business. Non-executive may or may not be an
independent director.
c. Nominee directors: Nominee directors are a powerful tool of the project
supervision, monitoring and control particular following the issue of Government
guidelines. In Government owned company the Government shall appoint the
directors.
d. Independent Directors:
86. Board of directors and number of directors: (1) The appointment and number
of directors of a private company shall be as provided in its articles of association.
Nevertheless, number of directors shall not be more than eleven.
(3) In forming the board of directors pursuant to Sub-section (2), at least one
independent director, in the case of the number of directors not exceeding seven,
and at least two independent directors, in the case of the number of directors
exceeding seven, shall be appointed from amongst the persons who have the
knowledge as prescribed in the articles of association of the company and gained
knowledge and experience in the subject related with the business of the company
concerned.
e. Female Director: There shall be at least one female director in public
company having female shareholders.86(2) Every public company shall have a
board of directors consisting of a minimum of three and a maximum of eleven
directors. There shall be at least one female director in public company having
female shareholders.

f. Alternate Director
87. Appointment of directors: (1) The directors of a company shall be appointed
by the general meeting of the company, subject to the provisions contained in
Section 89 and the articles of association.
(2) Notwithstanding anything contained in Sub-section (1), in the case of a
company any shares in which a corporate body has subscribed, the corporate body
may appoint a director in proportion of the total number of directors of the
company and the number of shares subscribed by such body and also an alternate
director to attend and vote in a meeting of the board of instead of every such
director in cases where such director will not be in a position to attend
the meeting of the board for any reason.
(3) Where any director appointed pursuant to Sub-section (2) is not able to attend a
meeting of the board of directors, such director shall give information thereof to
his/her alternate director and the board of directors. In such case, the alternate
director shall be entitled to attend, and vote in, the meeting of the board of
directors.
(4) Except in the case referred to in Sub-section (1), any alternate director
appointed pursuant to Sub-section (2) shall not be entitled to attend, and vote in a
meeting of the board of directors.
Company Directives, 2072
52. Provision for Alternate Director: (1) In case of an incorporated entity
becomes a shareholder of a company, the entity can appoint an alternate director to
take part in the meeting of Board of Directors and vote in case Director
representing the entity becomes absent. However, a natural person director cannot
appoint alternate director on his/her behalf.
(2) Only incorporated entity shall have power to appoint alternate
director. However, director representing on behalf of an incorporated entity shall
not have power to appoint alternate director.
(3) Only the incorporated entity shall have power to appoint a new
alternate director in the place of appointed alternate director in case he/she could
not remain in his/her position for full tenure. The Director representing such
incorporated entity shall not have such power.
g. First Directors: The directors who works as directors until first general
meeting are first directors. Articles of Association can mention these interim
directors. If in any case the directors are not named in the AOA, then the
subscribers of the MOA are considered as the directors until proper directors are
appointed.
 h. Other Professional Director: Section 20: Articles of Association
(g) Where any professional persons, other than shareholders, are to be appointed
as directors, provisions relating to the number, tenure, qualifications and
procedures of appointment of such persons.
j. Single shareholder company 152. Single shareholder company not required to
call meeting of the board of director and general meeting: Notwithstanding
anything contained elsewhere in this Act, except as otherwise provided in the
articles of association of a single shareholder company, all acts and decisions
required to be done and made by the board of directors or general meeting of the
company shall be as decided in writing by such shareholder; and no meeting of the
board of directors or general meeting shall be required to be called.
k. 145. Consensus agreement: (1) Except as otherwise provided in this Act,
the following matters may be provided for in a consensus agreement of a private
company:
(f) Matter as to who will be the directors, officers, or the persons bearing the
ultimate responsibility or the chief executive, of the company;
(h) Matter that there shall be no board of directors;
(i) Matter that, if there shall be no board of directors, who shall perform such
functions as required to be performed by the board of directors under this Act;
(j) If the annual general meeting is not required to be held, provisions
pertaining thereto;

3. Qualification of Directors
88. Shares qualification of director: If the articles of association of a company
specify any number of shares required to be held by a person for his/her
appointment as director of the company, the person who becomes director shall
hold such number of shares. Failing any provision specifying such number of
shares, any such person shall hold at least one hundred shares.
Provided, however, that any director who is appointed pursuant to Subsection (3)
of Section 86 and Sub-section (2) of Section 87 shall not be required to hold such
shares.
Section 20: Articles of Association
(g) Where any professional persons, other than shareholders, are to be appointed
as directors, provisions relating to the number, tenure, qualifications and
procedures of appointment of such persons.
89. Circumstances where one is disqualified to be appointed to, or continue to
hold, office of director: (1) Any of the following persons shall not be eligible to be
appointed to the office of director:
(a) Who is below Twenty one years of age, in the case of a public company;
(b) Who is of unsound mind or is insane;
(c) Who is a declared insolvent and a period of five years has not lapsed;
(d) Who is convicted of an offense of corruption or of an offense involving
moral turpitude.
Provided, that in the case of a private company, a period of three years has not
lapsed from the date of such sentence,
(e) Who is convicted of an offense of theft, fraud, forgery or embezzlement or
misuse of goods or funds entrust to him/her, in an authorized manner, and
sentenced in respect thereof, a period of three year has not elapsed from the expiry
of the sentence;
(f) Who has personal interest of any kind in the business or any contract or
transaction of the concerned company;
(g) who is already a director, substantial shareholder, employee, auditor or
adviser of another company having similar objectives or has personal interest of
any kind in such company;
Provided, however, that such person of a private company may become a director
of another private company having similar objectives.
(h) Who is a shareholder that is held to have failed to pay any amount due and
payable by him/her to the concerned;
(i) In the case of a person who has been sentenced to punishment pursuant to
Section 160 (to be punished with a fine of more than fifty thousand Rupees and
imprisonment up to two years or both), a period of one year is not lapsed from the
date of sentence, or in the case of a person who has been sentenced to punishment
pursuant to Section 161 (to be punished with a fine up to fifty thousand Rupees), a
period of six months has not lapsed after the date of sentence;
(j) In the event that the prevailing laws prescribed any qualification or
disqualification in the case of a company carrying on any specific business, who
does not possess such qualification or suffers from such disqualification (e.g. Bank
and Financial Institution Act)
(k) Who is already a director of any company which has not submitted such
returns and reports as required to be submitted to the Office under this Act, for any
continuous three financial years;
(k1) Who has not paid a fine according to Section 81 (2).
(l) Who is holding the office of director receiving from another listed company
any remuneration or facility, other than a meeting allowance and actual expenses to
be incurred in coming to, going from, and staying in, the place of meeting.
(2) Any of the following persons shall not be eligible to be appointed to the office
of in independent director:
(a) Who is a person as referred to in Sub-section(1);
(b) Who is a shareholder of the concerned company;
(c) Who has not obtained at least bachelor degree in a subject that is related to
the business to be carried on by the concerned company and gained at least ten
years of experience in the related field or in the company management affairs or
who has not obtained at least bachelor degree in finance, economics, management,
accounts, statistics, commerce, trade or law and gained at least ten years of
experience in the related field;
(d) Who is an officer, auditor or employee of the concerned company or a
period of three years has not lapsed after his/her retirement from any such office;
(e) Who is the close relative of the office of the concerned company;
(f) Who is an auditor of the concerned company or his/her partner.
(3) No person shall continue to hold the office of a director in any of the following
circumstances;
(a) If one suffers from any disqualification for appointment to the post of
director as mentioned in Sub-section (1) or (2);
(b) If the general meeting passes a resolution to remove him/her from the office
of director,
(c) If the resignation tendered by the director is accepted by the board of
directors;
(d) If one is held by a court to have done any act involving dishonesty or ulterior
motive in the activities of the company;
(e) If one is held by a court to have done any act prohibited by this Act from
being done by a director or to have failed to do any act required to be done under
this Act;
(f) If one is blacklisted by a competent body pursuant to the prevailing law for
his/her default in repaying a loan of any bank or financial institution, and the
period of such black listing has not expired.
(4) Prior to holding any person to be disqualified for being appointed to the office
of a director or holding such office, the company shall give information thereof to
him/her and provide him/her with a reasonable opportunity to defend him/herself
90. Term of office of directors: (1) The tenure of office of a director of a private
company shall be as provided in its articles of association
(2) The tenure of office of a director of a public company shall be as specified in
its articles of association, which shall not exceed four years.
Provided that:
(1) A director appointed by the Government of Nepal or a corporate body shall
hold office so long as the Government of Nepal or the appointing body desires.
(2) A director appointed pursuant to Clauses (1) and (2) of the proviso to Section
87 shall hold office only until the holding of the annual general meeting.
(3) The term of office of a director appointed to the office of any director which
has fallen vacant before the expiry of his/her term of office shall be only the
remainder of the tenure of office of that director whose office has so fallen vacant
and in whose place one is appointed.
(3) Notwithstanding anything contained in the prevailing law or articles of
association, a person retired from the office of director on expiry of his/her tenure
of office shall be eligible for reappointment to the office of director.
91. Remuneration, allowance, reward etc. of directors: (1) Directors' meeting
allowance, monthly pay, daily and travel allowances, and other benefits must be
decided by the general meeting of shareholders.

2. Full-time directors can get a reward up to 3% of net profits after tax if

approved by a special resolution. If more tax is later found due, directors must pay
back a proportion of the excess from their reward.

3. Until the first annual general meeting, the board can decide the pay and benefits
of the managing or full-time directors.

4. A listed company cannot pay any retirement or exit compensation to a director

unless the general meeting allows it.

1.3 Powers, Functions, Duties and Responsibilities of Directors

Directors acting collectively i.e. Board of Directors are authorized to do what the
company is authorized to do unless barred by restrictions on their powers by the
provisions of the Companies Act, 2006, the Memorandum or Articles of the
company. Except where express provisions are made that the powers of a company
in respect of any matter are to be exercised by the company in general meeting, in
all other cases the Board is entitled to exercise all its powers. The directors acting
together are the authority for conducting the affairs of the company. They are
authorised to do what the company is authorised to do, unless barred by restrictions
on their powers by the provisions of the Companies Act, 2006 (the Act), the
Memorandum or Articles of the company.

Power and Functions of directors:

Normally, the powers of the BOD may be grouped under the following heads;
Powers exercisable only at Board of Directors meeting,
Powers exercisable only with the consent of the company in general meeting,
All other powers which, subject to the provisions of the Companies Act, AOA,
MOA is authorized to exercise.
Powers exercisable only at Board of Directors meeting: Subsection 6 of section
95 of the Companies Act, provides that the board of directors shall not delegate the
following powers conferred to the company and shall exercise such powers only by
means of resolutions passed at meetings of the board of directors :
 The power to make calls on shareholders in respect of amount unpaid on
their shares;
 The power to issue debentures;
 The power to borrow loans or amount otherwise than on debentures;
 The power to invest the funds of the company;
 The power to make loans. The power to make loans shall not apply to loans
to be let and deposits to be received in the ordinary course of business
transaction by the companies carrying on banking and financial business.
 Besides the above powers, there are certain other powers which the BOD
can exercise only at its meeting. These powers are:
 The power to fill up casual vacancies in the office of directors,
 The power to constitute Audit Committee and other committee and specific
terms of reference thereof,
 Disclose of interest by a directors,
 The power to appoint or employ a person as managing directors or chief
executive officer,
 The power to make a declaration of solvency where it is proposed to wind
up the company voluntary,

 The BOD, may, however, by a resolution passed at a meeting, delegate to

any subcommittee, If the board of directors considers necessary to form a
subcommittee for the discharge of any specific business, it may form one or
more than one sub-committee as required and get such business discharged.

Powers exercisable only with the consent of the company in general meeting:
Section 105 (1) provides that the board of directors of a public company, or of a
private company receiving loans from any bank or financial institution, shall not,
except with a special resolution being adopted by the general meeting of
shareholders, do or cause to be done the following act:
selling, donating, gifting, leasing or otherwise disposing of more than seventy per
cent of one or more undertakings being operated by it;
borrowing moneys, where the moneys to be borrowed will exceed the aggregate of
the paid up capital of the company and its free reserves, apart from any loans and
faculties with a term of less than six months obtained by it from a bank or financial
institution in the ordinary course of business transaction;
Making a contribution, donation or gift in a sum exceeding fifty thousand rupees in
one financial year or a sum exceeding one per cent of the average net profits of the
company during the last three financial years, whichever is the lesser, except the
contribution, donation, gift etc. made for the welfare of its employees or for the
promotion of its business. Provided, however, that:
Nothing contained in Clause (a) shall affect the title of a buyer who buys any
property or undertaking of a company on payment of the prevailing market price
from a company which is solely engaged in the business of buying and selling of
movable and immovable properties.
The provision of Clause (b) shall not be applicable to the acceptance by a company
carrying on banking or financial transaction or insurance business of deposits or
insurance premium from the general public in the ordinary course of its business
transaction.
The general meeting may specify appropriate terms and conditions while giving
approval for the purposes of Sub-section (1) of section 105.

Further, except in accordance with a decision of the general meeting no director of

a public company shall do anything yielding personal benefit to him/her through
the company. Provided, however, that a private company may make a reasonable
provision on the benefit which the director may derive thought the company, as
mentioned in the memorandum of association and articles of association or
consensus agreement.

All other powers which, subject to the provisions of the Companies Act, AOA,
MOA is authorized to exercise:
Section 95 of the Companies Act, provides that the Board of Directors of the
company shall exercise subject to the provisions contained in Companies Act and
the articles of association and the decisions of the general meeting, the directors
shall manage all transaction, exercise of powers and perform duties of the company
through the board of directors collectively.

Except as otherwise provided in this Act , the memorandum of association and

articles of association or the consensus agreements, the case of a private company,
the board of directors may appoint any director from amongst themselves or any
employee of the company as its representative and so delegate to him/her any or all
of its powers, inter alia, to do any act or thing, make correspondences or sign bills
of exchange or cheques etc. On behalf of the company that such powers are to be
exercised individually or jointly. In so delegating the powers, at least one director
and their company secretary, if any, shall certify
such delegation, pursuant to a decision of the board of directors. If any person
enters into any transaction with the director or with a representative as referred to
in Sub-section (3) of section 95 despite the knowledge or having reason to believe
that such director or representative is dealing with any transaction for his/her
personal interest or for causing loss or damage to the company, such person shall
not be entitled to make any claim against the company in respect of such
transaction.

The directors shall exercise their powers bona fide and in interest of the company.
The directors while exercising their powers do not act as agents for the majority or
even all the members and so the members cannot by resolution passed by a
majority or even unanimously. The director’s powers, or instruct them how they
shall exercise their powers.
The relationship of the Board of directors with the shareholders is more of
federation than one of subordinates and superior. Some powers are specially
reserved for the Board e.g. appointing directors in casual vacancies, the power to
issue debentures, etc. On the other hand, some powers are exclusively reserved for
the members in general meeting e.g. borrowing in excess of the paid-up capital and
free reserves, selling or disposing off the whole or substantially the whole of the
undertaking etc. However, in the following exceptional cases, the general body of
shareholders is competent to act even in matters delegated to the Board:

The way we run board meetings says much about how we run the company.
Successful companies use board meetings to create and improve key business
strategies. The board of directors of a company is primarily an oversight board. It
oversees the management of the company to ensure that the interest of non-
controlling shareholders is protected. It also functions as advisory board.
Independent directors bring diverse knowledge and expertise in the board room
and the CEO uses the knowledge pool in addressing issues being faced by the
company. The most important function of a monitoring board is to provide
direction to the company. Another very important function of a monitoring board is
to set the ‘tone at the top’. It is expected to create the right culture within the
company.

Duties and Responsibilities of Directors

The duties of directors are multifarious and they vary from company to company
depending upon the type and size of its activities. The duties of directors may be
divided under two heads:
Statutory duties , and
Fiduciary duties
Statutory Duties:
Statutory duties are the duties and responsibilities imposed by the Companies Act.
Important amongst them are:
1. Duty to attend Board meeting,
Duty to attend board meetings: A director’s habitual absence may become evidence of negligence.

2. Duty not to contract without Board’s consent,

4. Duty to file return: Any return, notice or information required to be provided by the company to the
Office or information required to be provided by the officer or shareholder to the company
pursuant to this Act shall be provided by the director of the company within the time limit.
5. Duty to transact according to memorandum of association: It shall be the duty of every director
and officer to do such transaction within the ambit of jurisdiction specified in the memorandum
of association of the company.
6. Final duty to keep books of account: The directors or shall have the final duty to maintain books
of account and records of the company.
7. Directors to be responsible in the case of loss of net worth of company: If the net worth of a
public company is reduced to half the paid–up capital or less than that the directors shall
prepare an appropriate strategy for the interest of the company and shareholders, as well,
within thirty five days of the knowledge of this matter, and present a separate resolution
thereon at the general meeting toe held immediately after the knowledge of such matter.

Fiduciary and General Duties:

The directors have several duties to discharge under the common law some of
which have been evolved by courts from time to time. Some of these duties are:
1.Duty of good faith,
Every director and officer of a company shall, in discharging their duties, act
honestly and in good faith, having regard to the interest and benefit of the
company, and exercise such care, caution, wisdom, diligence and efficiency as a
reasonable and prudent person exercises. The company may recover damages for
any loss or damage caused too the company from a director who does any act with
ulterior motive, causing such loss or damage to the company, in contravention of
Sub-section (4) of section 99. It shall be the duty of every director to comply with
this Act, memorandum of association, articles of association of the company and
the consensus agreement.

2.Duty not to make secret profits,

Director of the company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners.section 99Section 99 of the
Companies Act, 2006 99 provide the responsibilities and duties of directors.
It provide that no director or of a company shall do any thing to derive personal
benefit through the company or in the course of conducting business of the
company. If any person has derived personal benefit in the course of business of
the company in contravention of Sub-section(1)of section 99, the company shall
recover the amount involved in the matter from such director as if such amount
were a loan. Any person appointed as a director of a public company shall, prior to
assuming the duties of his office, take an oath of secrecy and honesty in a format as
prescribed
(Liability for breach of trust ,99(5),

3.Duty to take care,, diligence and skill 99(3),

The directors of a company shall exercise his duties with due and reasonable care,
skill and diligence and shall exercise independent judgment
4. Duty not to delegate (authority), 95(6)
The Bod shall not delegate the following powers conferred to the company and
shall exercise such powers only by means of resolutions passed at meeting of the
BOD.
 The power to make calls on shareholders in respects of moneys unpaid on
their shares,
 The power to issue debentures,
 The power to borrow loans or moneys otherwise than on debentures,
 The power to invest the funds of the company,
 The power to make loans.

5. Duty to disclose interest,, 92

Duty to disclose interest: Where a director is personally interested in a transaction of the company, he is
required to disclose his interest to the board. An interested director is neither to vote on the
matter of his interest nor his presence shall count for the purposes of quorum.
RE W & M Roith Ltd [1967] 1 ALL ER 427
A director was about to retire and he wanted to make some financial guarantee to his wife so he
entered into a service contract with the company that his wife will receive pension from the
company upon his death. Upon his death, that the contract was challenged that the director
who approved the contract had not acted bona fide in the interest of the company.
The court held that the agreement is void because the director had breached his duty to act
bona fide for the interest of the company.
The companies Act provides the directors disclosure about securities. The
companies Act provides that in the event that the shares or debentures of a
company are listed in a body operating the stock exchange, after the director has
made disclosure to the company about the shares or debentures of such company
pursuant to Section 94, the company shall promptly give information thereof to
such body.

The directors to make disclosure in shares. The section 94 provides that if a person,
while holding the office of director, acquires title to any shares or debentures of the
company or of a company which is a subsidiary or holding company of that
company or of another subsidiary company of the holding company, in any
manner, that person shall give information as follows on that matter to the
company:
 Details of his/her title;
 Number of shares of each class in the concerned company or another
company to or in which he/she has title or interest while holding the office
of director and details of amount of debentures of each class.
 The companies Act further provides that if the following situation occurs,
any director of a company shall give written information thereof to the
company in which he/she is a director no later than fifteen days after such
situation comes to his/her knowledge:
 If , for any reason, he/she is going to acquire title to any shares or debentures
of the company in which he/she is a director or of a company which is a
subsidiary or holding company of that company or of another subsidiary
company of the holding company, in any manner , or he/she is going to lose
his title;
 If he enters into an agreement to sell the shares or debentures, as referred to
in Clause (a), held in his name;
 If he/she assigns to any other person the authority granted by the company in
which he is a director to him/her to subscribe the shares or debentures of
such company;
 If a company which is a subsidiary or holding company of the company in
which he/she is a director or another company which is a subsidiary of such
company or other subsidiary of the holding company grants authority to him
to subscribe the shareholders or debentures of such company;
  If he assigns to any other person the authority to subscribe the shares or
debentures or the company as referred to in Clause (d).
While forwarding information to the company pursuant to Sub-section (2) of
section 94, such information shall also clearly setout the number of shares or
debentures, amount and class thereof. The company shall maintain a separate
register to record the information receive pursuant to Sub-section (2) and (3) of
section 94. The provisions contained in this Section shall also apply to the close
relative of a director as if such relative were a director
6. Disclosure of misconduct
7. general equtable principle

Percival v Wright
Percival v Wright [1902] 2 Ch 401 is a UK company law case concerning
directors' duties, holding that directors only owe duties of loyalty to the company,
and not to individual shareholders. This is now codified in the United Kingdom's
Companies Act 2006, section 170.
Facts
Shareholders in Nixon's Navigation Co. wanted to sell their shares, and requested
that the company's secretary find purchasers. Some directors of the company
purchased the shares at £12.10s per share, which price was based upon
independent valuation. After the sale, the shareholders discovered that before and
during the negotiations for that sale, the board of directors had been involved in
other negotiations to sell the entire company, which would have made those shares
substantially more valuable had they come to fruition. The plaintiff sued, claiming
breach of fiduciary duty, in that the shareholders should have been told of these
negotiations.
Judgment
Swinfen Eady J held the directors owed duties to the company and not
shareholders individually.
It was strenuously urged that, though incorporation affected the relations of the
shareholders to the external world, the company thereby becoming a distinct entity,
the position of the shareholders inter se was not affected, and was the same as that
of partners or shareholders in an unincorporated company. I am unable to adopt
that view... There is no question of unfair dealing in this case. The directors did not
approach the shareholders with the view of obtaining their shares. The
shareholders approached the directors, and named the price at which they were
desirous of selling. The plaintiffs’ case wholly fails, and must be dismissed with
costs.
Significance
Percival v Wright is still considered to be good law, and was followed by the
House of Lords in Johnson v Gore Wood & Co [2000] UKHL 65.
However, it has been distinguished in at least two subsequent cases. In Coleman v
Myers [1977] 2 NZLR 225 and Peskin v Anderson [2001] BCLC 372 the court
described this as being the general rule, but one which may be subject to
exceptions where the circumstances are such that a director may owe a greater duty
to an individual shareholder, such as when that shareholder is known to be relying
upon the director for guidance, or where the shareholder is a vulnerable person.

Parke v The Daily News [1962] Ch 927

Facts: Directors decided to wind the company up which was functioning well. The
directors of the company decided that 3 million was going to be paid to redundant
employees.
Issue: One shareholder, Mr Parke complained and sought to stop this. He argued
that the money belonged to the shareholders.
Held: The money belongs to shareholders and the Court stopped directors paying
the money in question to the employees. The significance of this case was that this
money belongs to shareholders and nobody can give that away. Thus, Directors do
not have any duty to employees and directors cannot give away company money to
redundant employees in case of winding up of the company. That would be ultra
vires payment.

Howard Smith Ltd v Ampol Petroleum Ltd

Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3 is a leading UK
company law case, concerning the duty of directors to act only for "proper
purposes". This duty has been codified into the Companies Act 2006 section 171,
and arises particularly in cases involving takeover bids.
Facts
RW Miller was embroiled in a hostile takeover bid, by a large petrol company
called Ampol. Ampol already controlled (with an associated company) 55% of the
shares. The directors did not want Ampol to buy the shares of RW Miller as
Howard Smith had bettered terms for take over by offering employment to the
directors even in the future. So the directors of RW Miller issued $10m of new
shares. They said it was to finance the completion of two tankers. The shares were
given to Howard Smith Ltd who were going to take over RW Miller, and that
blocked Ampol’s rival bid. Without the issue, Howard Smith Ltd had no hope of
succeeding in taking over the company. But with the new issue, Ampol could not
complete its acquisition. Ampol commenced proceedings in the Supreme Court of
New South Wales.
Street CJ in Eq said that the argument of the directors that the tanker purchase was
the dominant purpose was ‘unreal and unconvincing’. The issue of shares to
Howard Smith was held to be invalid. Howard Smith sought and obtained
conditional leave to appeal to the Privy Council.
Judgment. The Privy Council dismissed the appeal.
Duties of Direcctor under company Act, 2006
1. participate in general meetibg section 68
2. duty to declare interest sec 92(1)
3. duty to relating to transaction with company section 89
4. transaction on securities of the company section 92(1)(d) and 94(2)
5. duty to use corporate powers sec 95(1)
6. duty to present in the meeting section 97(3)
7. duty to prepare annual report and accounts section 78, 80, 109
Transaction with company in which director is involved stated in the section 93 of
companies Act, 2006. It provide that except as otherwise provided this Section, no
public company shall, without approval of the general meeting, do any significant
transaction with its director or his/her close relative or substantial shareholder or
no subsidiary company shall, without approval of the general meeting of its
holding company, do any significant transaction with any director or his/her close
relative or substantial shareholder of the holding company.
If any transaction is done in contravention of Sub-section (1) of 93, any amount or
benefit derived from that transaction directly or indirectly shall be returned to the
company; and if any loss or damage is caused from such transaction to the
company , the person deriving benefit from such transaction shall also pay
compensation for such loss or damage. Notwithstanding anything contained
elsewhere in this Section , the provision of Sub-section (1) of 93 shall not apply to
the in-kind property acquired as follows :
While acquiring such property by a holding company from its wholly owned
subsidiary company;
While acquiring such property by a subsidiary company wholly owned by a
holding company from another subsidiary company wholly owned by the same
holding company;
While doing transaction at the prevailing market price in the ordinary course of
business transaction of the company.

1.4Importance of Procedure of Board of Directors Meeting: Authority of

Board of Directors and Delegation of Authority to Managing Directors /
Chief Executive Officer

1. Importance of Board of Directors' Meeting

Companies law provides directors with general powers to manage their
company. To exercise those powers, directors are expected to meet to
conduct their business.
a. To discharge duties
Law provides the fiduciary duties owed by directors to companies.
Additionally, the directors have other duties, such as to approve the
financial statements of their company. One of the best ways to ensure
that directors can discharge their duties is to convene regular board
meetings, which, as well as being the default method of making
decisions, provide a forum for discussion of long-term objectives,
commercial strategies and business transactions.
 Even in circumstances where a company becomes insolvent,
attendance at and participation in meetings will help to demonstrate
that a director has acted honestly and responsibly in relation to the
conduct of the affairs of the company. Directors who dissent from
decisions of the majority can request that their objections are recorded
in the minutes of the meeting.
It is important to ensure that there is a written record of the matters
discussed and agreed at board meetings, not only because it is
required by law, but also because minutes constitute evidence of the
meeting’s proceedings.
b. To authorise certain transactions
Directors have authority to bind their company to contracts. The board
will remain collectively responsible for the company’s performance.
Approval of any large or significant contracts are discussed and
resolved by the directors at a properly convened and minuted meeting
to ensure that each director is aware of the activities of the company
and of the other members of the board.
c. Evidence of management and control
A company needs to demonstrate that it is managed and controlled
properly. Convening board meetings to discuss and approve matters of
strategic importance are an important way to show how and where
decisions are being made.
1. Procedures of Board of Directors' Meeting
The Companies Act 2006 section 97 provide the meetings of board of directors.
It provide that Meetings of the board of directors of a private company shall be
held as mentioned in the articles of association.

Requirement for meeting: The Companies Act, 2006 provide requires

every companies hold its board of directors meeting. In case of single
shareholder company, all acts and decisions required to be done and made
by the board of directors of the company shall be as decided in writing by
such shareholder. Meetings of the board of directors of a public company
shall be held at least six times in a year. Provided, however, that the interval
between any two meetings shall not exceed three months.97(2) The meeting
of the private companies is required as per the provision of article of
 association. There is silent fix for the times and interval period of the
meeting of the board for the private company.

Power to call the meeting: Except as otherwise provided in the articles of

association of a company, the company secretary or Chairperson of the board or
chief executive of the company shall call a meeting of the board of directors of
the company. Notwithstanding anything contained in Sub-section (1) of section
98 if at least twenty five per cent directors of the total number of directors make
written requisition, setting out the subject to be discussed in the meeting, for
calling the meeting of the board of directors, the Chairperson shall call the
meeting of the board no later than seven days of the receipt of such requisition.
If the meeting of the board of directors is not called within that period, such
requisition making directors themselves may call the meeting of the board of
directors.98(2)

Notice of meeting: The companies Act provide the provision of notice of

meeting of board of directors:98 The matters about the notice of a meeting
of the board of directors shall be as provided in the articles of association of
the company. Failing such provision, a written notice of the meeting of
board of directors and agenda thereof shall be sent to every directors at the
address supplied by him/her to the company; and such notice may also be
given through any electronic means of communication.98(3)

Present: The directors shall be present in personal meetings of the board of

directors of a company. The presence of the proxy of a director in his/her
stead shall not be held valid. Directors may participate in the meeting either
in person or through video conferencing or other audio visual means. After
the roll call, the Chairperson or the Secretary shall inform the Board about
the names of persons other than the directors who are present for the said
meeting at the request or with the permission of the Chairman and confirm
that the required quorum is complete.

Quorum at meeting: The majority of directors shall be the quorum for a

meeting. If due to resignations or removal of director(s), the number of
directors of the company is reduced below the quorum as fixed by the
Articles of Association of the company, then, the continuing Directors may
act for the purpose of increasing the number of Directors to that required for
the quorum or for summoning a general meeting of the Company. It shall
not act for any other purpose.
 No meeting of the board of directors shall be held unless it is attended by at
least fifty one per cent of the total number of directors of the company.
Provided, however, that any director who is not entitled to take parting any
matter to be discussed in a meeting of the board of directors under this Act
shall not be counted for the purposes of this sub- section. 97(4)If a meeting
of the board of directors cannot be held because of the lack of presence of
directors in the number mentioned in Subsection (4), another meeting may
be called by giving a notice of at least three days. Even if such meting is not
attended by the directors in the number mentioned in Sub-section (4), the
proceedings and decisions conducted and made by the attending directors
shall be valid.97(5)

The meeting shall be adjourned due to want of quorum, unless the articles
provide shall be held to the same day at the same time and place in the next
week or if the day is National Holiday, the next working day at the same
time and place. It can thus be observed that the provisions of the Companies
Act, 2006 relating to board meetings have been made more realistic and in
line with the current expectations of the corporate sector.

2. Articles of association:
(2) The articles of association shall state the following matters:
(d) Provisions relating to the minutes of decisions of the general
meeting and the board of directors, and duplicate copies and
inspection thereof;
(j) Quorum for a meeting of the board of directors, notice of
meeting and proceedings of meeting,
97. Meetings of board of directors: (1) Meetings of the board of directors of a
private company shall be held as mentioned in the articles of association.
(2) Meetings of the board of directors of a public company shall
be held at least six times in a year.
Provided, however, that the interval between any two meetings
shall not exceed three months.
(3) The directors shall be present in person in meetings of the
board of directors of a company. The presence of the proxy of a
director in his/her stead shall not be held valid.
 (4) No meeting of the board of directors shall be held unless it
is attended by at least fifty one per cent of the total number of
directors of the company.
Provided, however, that any director who is not entitled to take
parting any matter to be discussed in a meeting of the board of
directors under this Act shall not be counted for the purposes of this
sub- section.
(5) If a meeting of the board of directors cannot be held because
of the lack of presence of directors in the number mentioned in Sub-
section (4), another meeting may be called by giving a notice of at
least three days. Even if such meeting is not attended by the directors
in the number mentioned in Subsection (4), the proceedings and
decisions conducted and made by the attending directors shall be
valid.
(6) The decision of a majority in a meeting of the board of
directors shall be binding, and in the event of a tie, the Chairperson
may exercise the casting vote, in addition to a vote cast by him/her as
a director.
Provided, however, that any director who has any personal
concern or interest in any matter to be discussed in a meeting of the
board of directors shall not be entitled to take part in such discussion
and vote on the matter.
(7) Minutes regarding the names of directors present in the
meeting of board of directors, the subjects discussed and the decisions
taken thereon shall be recorded in a separate book, and such minute
book shall be signed by at least fifty one per cent of the total directors
present in the meeting.
Provided, however, that, if any director puts forward any
opinion opposed too or differing from the decision in the course of
discussions on any subject in a meeting, he/she may mention the same
in the minute book.
(8) Any decision shall not be deemed invalid merely for the
reason that there is no signature of any member.
(9) Notwithstanding anything contained in Sub-section (3), (4),
(5) and (6),except in the cases that are so expressly prohibited by the
memorandum of association or articles of association, if all the
 members of the board of directors or a sub-committee of directors so
consent in writing in regard to any act or resolution permitted to be
done or adopted by the board of directors or such sub-committee, such
act may be done even without holding a meeting by recording such
consent in the minute book.
(10) The consent referred to in Sub-section (9) shall be deemed
to be a decision of a meeting of board of directors.
98. Notice of meeting of board of directors: (1) Except as otherwise provided
in the articles of association of a company, the company secretary or
Chairperson of the board or chief executive of the company shall call a
meeting of the board of directors of the company.
(2) Notwithstanding anything contained in Sub-section (1) if at
least twenty five per cent directors of the total number of directors
make written requisition, setting out the subject to be discussed in the
meeting, for calling the meeting of the board of directors, the
Chairperson shall call the meeting of the board no later than fifteen
days of the receipt of such requisition. If the meeting of the board of
directors is not called within that period, such requisition making
directors themselves may call the meeting of the board of directors.
(3) The matters about the notice of a meeting of the board of
directors shall be as provided in the articles of association of the
company. Failing such provision, a written notice of the meeting of
board of directors and agenda thereof shall be sent to every directors
at the address supplied by him/her to the company; and such notice
may also be given through any electronic means of communication.
Chairman Role for Conducting Board Meeting
The Chairman is a necessary element of company meeting and is usually appointed
by the AOA. Section of the CA, 2006 provides that unless the ………
Election of Chairman: The Board of directors shall elected the chairman to run
the meeting of the BOD and General meeting. The Board shall elect a chairman of
its meeting and determine the period for which he is hold office. The chairman of
board shall preside as chairman of general meeting.
Pursuant to section 164 of CA, an Audit Committee is required to be constituted
with paid up capital 30.00 million. The Chairman of the Board shall preside as
chairman at every general meeting of the company.
In order to remove a chairman, the usual procedure would be for a director to
propose a vote of no confidence in the chair and this move should be seconded by
another director. The chairman would have the right to make a representation
against the removal. The matter should then be put to vote. If he loses the vote, he
should relinquish the chair. Thus, a chairman who has been elected by the meeting
of the Board and can be removed by the meeting.
Role of Chairman: The chairman has prima facie authority to decide all questions
which arise at a meeting, and which require decision at time. Before proceeding
with the meeting, the Chairman ascertain that a quorum to constitute the meeting
as prescribed under the CA or AOA of the company is present. If there is no
quorum, he has to adjourn the meeting.
The Chairman may adjourn meeting at his discretion when he feels that peaceful
conduct of the meeting is not possible. The Chairman should allow sufficient time
for discussion on all items on the agenda of a meeting. He should give all the
directors a sense of participation and should inspire them to do their homework and
come prepared for the meeting and contribute their best to the deliberations of the
Board. Normally, Chairman must allow the directors to have a fair and full
discussion on each agenda before the meeting.
A chairman-cum-managing/executive directors is sometime called an Executive
Chairman or Whole-time Chairman. Even, if a managing director is chairman-
cum-managing director of the company, he acts as chairman of the meetings of the
Board only when they are held. During the intervals, he occupies the chair of the
managing director.
Nepal Rastra Bank has issued the directive for the Bank and Financial Institutions
regarding the no appoint the Executive Chairman due to the address corporate
governance. Further SEBON has issued a governance guideline for the listed
companies regarding the restriction for the appointment of Executive Chairman.
In Nepal, Bank and Financial Institutions and Listed companies are not allow to
appoint the Executive Chairman.
It is the duty of the Chairman of a Board or company General meeting is to ensure
the presence of quorum before proceeding with the deliberations of the meeting
and then to conduct the meeting. It is his duty to ensure that all the participating
directors get an opportunity to express their views on the business before the
meeting so that the deliberations and decisions have the benefit of the experience,
knowledge and expertise of all the participating directors.
Right to demand a poll:
The Chairman must take consensus of the meeting on the agenda before meeting
and voting in Board meeting will be by show of hands. At the meeting of the
Board, the Chairman may allow additional vote for the decision in the event of
equality of votes in a meeting. Section……….CA .

Decision: The decision of a majority in a meeting of the board of directors shall be

binding, and in the event of a tie, the Chairperson may exercise the casting vote, in
addition to a vote cast by him/her as a director. Provided, however, that any
director who has any personal concern or interest in any matter to be discussed in a
meeting of the board of directors shall not be entitled to take part in such
discussion and vote on the matter.

Minutes: Minutes regarding the names of directors present in the meeting of board
of directors, the subjects discussed and the decisions taken thereon shall be
recorded in a separate book, and such minute book shall be signed by at least fifty
one per cent of the total directors present in the meeting. Provided, however, that,
if any director puts forward any opinion opposed too or differing from the decision
in the course of discussions on any subject in a meeting, he/she may mention the
same in the minute book . Any decision shall not be deemed invalid merely for the
reason that there is no signature of any member. Notwithstanding anything
contained in Sub-section (3), (4), (5) and (6) of section 97 except in the cases that
are so expressly prohibited by them memorandum of association or articles of
association, if all the members of the board of directors or a sub-committee of
directors so consent in writing in regard to any act or resolution permitted to be
done or adopted by the board of directors or such sub-committee, such act may be
done even without holding a meeting by recording such consent in the minute
book. The consent referred to in Sub-section(9) of 97 shall be deemed to be a
decision of a meeting of board of directors.

Passing of Resolution by Circulation/ Written Resolutions:

A company may pass the resolutions through circulation. The resolution in draft
form together with the necessary papers may be circulated to the directors or
members of committee at their address registered with the company or through
electronic means which may include e-mail or fax. The said resolution must be
passed by the all of directors entitled to vote. The resolution passed through
circulation be noted at a subsequent meeting and made part of the minutes of such
meeting.

Adjourned meeting:
At the conclusion of a meeting, the chairman should declare the meeting closed.
The Chairman must ensure that minutes of proceeding of all the general meeting
and meeting of Board containing a fair and correct summary of the proceedings.
The chairman has powers under the common law, such as (1) the power to bring
the discussion on any question to a close (2) the power to adjourn a meeting, if it is
necessary, in his opinion, under any circumstances.
for role of chairman see section 74 and 75

Delegation of Authority to Managing Director/ Chief Executive Office

The directors’ power of delegation to senior management has not given rise to any
equivalent debate as to its legal effects. In practice, powers will be delegated on the
basis that the delegation continues only at the pleasure of the board. There is
normally a very large grant of managerial power to the most senior of the
company’s managers, who will invariably be a member of the board of directors as
well.
Delegation of Authority from the Board to the Management
The BOD’s shall manage the business of a company. The directors shall manage
all transactions, exercise of powers and perform duties of the company through the
BOD Collectively.
The BOD can delegate the authority to the management i.e. MD, CEO, GM of
the company..
The delegation of authority shall be determined as following;
 To organize the management;
 To determine the positions of the management;
 To define the duties of the management; and
 To regulate reporting to the BOD from the management.
If the board of directors delegates all or part of its duties to other management, the
manager may also become liable for the actions. The Company Act provided that
the delegation of duties to the management is validly executed, a member of the
board of directors may not liable for the actions of the management
Restrictions on authority to Board:
The board of directors of a public company, or of a private company receiving
loans from any bank or financial institution, shall not, except with a special
resolution being adopted by the general meeting of shareholders, do or cause to be
the following acts;
  Selling, donating, gifting, leasing or otherwise disposing of more then
seventy per cent of one or more undertaking being operated by it,
 Borrowing moneys, where the moneys to be paid up capital of the company
and its free reserves, apart from any loans (less than six month)
 Making a contribution, donation or gift in a sum exceeding one lakh rupee in
one financial years
The general meeting may specify appropriate terms and conditions while giving
approval for the purposes of section 105(2) of the Companies Act, 2006.
Restrictions on authority to the Management
The Bod shall not delegate the following powers conferred to the company and
shall exercise such powers only by means of resolutions passed at meeting of the
BOD.
 The power to make calls on shareholders in respects of moneys unpaid on
their shares,
 The power to issue debentures,
 The power to borrow loans or moneys otherwise than on debentures,
 The power to invest the funds of the company,
 The power to make loans.
The power to make loans shall not apply to loans to be let and deposits to be
received in the ordinary course of business transaction by the companies carrying
on banking and financial business.
If the board of directors considers necessary to form a sub-committee for the
discharge of any specific business, it may form one or more than one sub-
committee as required and get such business discharged.
The Companies Act, 2006 (2063 b.s.) has the provision of the Managing director
and management of the company. The BOD can Appoint of managing directors,
and management of company: The Companies Act provide that the directors may,
subject to the articles of association, appoint one managing director from amongst
themselves. The functions, duties and powers of the managing director shall be as
mentioned in the articles of association or as prescribed by the board of directors.
While appoint a managing director and other director talking responsibility of the
management of the company pursuant to
Subsection (1) of section 96, there shall be entered into an agreement in writing
stipulating the terms of appointment, remuneration and facilities; and no facilities
or payment other than the remuneration and facilities specified in such agreement
and any other facilities receivable as specified by the general meeting shall be
provided or made.
The term of agreement as referred to in sub –section (3) of section 96 of the
Companies Act, shall not exceed four years at a time. There shall be made such
arrangement that the shareholders can inspect, free of charge, the agreement
entered into with the directors pursuant to Sub-section (3) of section 96. A director
who is receiving regular remuneration or facilities, other than meeting allowances,
from any one listed company shall not be appointed to the post of managing
director in another listed company, with entitlement to regular remuneration or
facilities.

Appointment of managing director and management of the company, 96

 the directors may, subject to the AOA appoint one managing directors from
amongst themselves.
 the functions, duties and powers of the managing directors shall be as
mentioned in the AOA or as prescribed by the BOD.
 while appointing a managing director and other director taking responsibility
of the management of the, there shall be entered into an agreement in writing
stipulating the terms of appointment, remuneration and facilities; and no
facilities or payment other than the remuneration and facilities specified in
such agreement and any other facilities receivable as specified by the
General meeting shall be provided or made.
 the term of agreement shall not exceed four years at a time. 96(4)
 there shall be made arrangement that the shareholders can inspect, free of
charge, the agreement entered into with the directors pursuant to 96(3),
 a director who is receiving regular remuneration or facilities, other than
meeting allowances, from any one listed company shall not be appointed to
the post of managing director in another listed company, with entitlement to
regular remuneration or facilities.

Managing or whole-time director or manager

Managing director, Executive Chairman, who is the whole-time employment of the
company. Managing director/ Executive Chairman occupies duel capacity, namely,
that of a director and of an employee.
A managing director, being an agent of the Board of Directors, can’t exercise any
powers as have been delegated to him. Section 2 (Z1) of Companies Act define the
“managing director” means a managing directors of a company. Further Section 2
(J) define the “Officer” includes any director, chief executive, manager, company
secretary, liquidator and any employee undertaking departmental responsibility of
the company.
Bank and Financial Institution Act, 2073 section 2 (mm) “Chief Executive” means
the executive chairperson, chief executive office, executive director, managing
director, executive manage, or general manager of a bank or financial institution;
and this expression also includes any other officer working as the chief executive
of a bank or financial institution.
A non-executive director/director , is a director, who is not working full-time for
the company and will receive, in exchange of his work for the company, a
director’s fee/ allowance pursuant to the provisions of Article of Association or
resolution of the general meeting. An executive director/ managing director, is a
director who is employed under a contract of service, i.e. an employment contract,
and will be working full-time for the company and will receiving a salary in
exchange for his work.

Company to be bound: Any act done or action taken by or document signed by at

least one director authorized by a company or any person authorized to act for the
company shall be valid and binding for the company. Where any person does any
transaction with a company in good faith, such transaction shall be binding for the
company; and nothing contained in memorandum of association, articles of
association of the company or in any resolution adopted by the general meeting or
in any agreement concluded between the company and its shareholder shall be
deemed to have made any limitation in or restriction on the authority of the
director or the authorized person to do such transaction. Provided, however, that if
any officer does any act or transaction mentioned in Sub-section (1) or (2) of
section 104, in excess of his/her authority, such officer shall be personally liable
for such act or transaction unless such authority is ratified by the general meeting
pursuant to this Act ; and the company may also recover from him/her the loss or
damage, if any caused to the company from such act or transaction.

If it is afterwards discovered that any provision under this Act has not been
complied with in respect of the appointment of any director, acts already done by
such director him /her before the discovery of such fact shall not be rendered
invalid by that fact.
The Boards of Directors are a group of individuals within your company, elected
or appointed as representatives of Shareholders / Owners to establish Corporate
Governance. A Strong and Effective Board of Directors is an invaluable asset, one
that is a key to success in creating the wealth envisioned by the Entrepreneurs and
Business Owners.

Unit 2 : Shareholder Meeting

A meeting may be generally defined as a gathering or assembly, or getting together
of a number of persons or share holders for transacting any lawful business or
making a decision on particular matters. It is to be noted that every gathering or
assembly does not constitute a meeting. to be a meeting there must be certain
agenda to be discuused and on which decisio is to be made.
Shareholders of a company or the directors of a company can exercise their powers
and can bind the company only when they act as a body at a validly convened and
held meeting. An individual shareholder, irrespective of his shareholding, cannot
bind a company by his individual act.
.A company is composed of a shareholders. Though the company and its
shareholders are different ebntity they cannot express its will on ot own. It
Therefore, exoress takes its decisions through resolutions passed at validly held
Meetings.
The primary purpose of a Meeting is to ensure that a company gives reasonable
and fair opportunity to those entitled to participate in the Meeting to make
decisions as per the prescribed procedures.
Public companies must hold annual general meetings, private companies need not
do so. The shareholders of a private company may take decisions by written
resolution using a statutory procedure.
General Meeting
The decision-making powers of a company are vested in the shareholders and the
Directors, and they exercise their respective powers through Resolutions passed by
them. General Meetings of the shareholders provide a platform to express their will
in regard to the management of the affairs of the company. Convening of one such
meeting every year is compulsory. Holding of more general meetings is left to the
choice of the management or to a given percentage of shareholders to exercise their
power to compel the company to convene a meeting. Shareholder Democracy and
Protection of the interests of investors are the essence and attributes of the
Companies Act, 2006.
Importance of General Meeting
1. GM are intended to be the means where by the members of the
company can participate and decide on matters provided by the
consent on MOA, AOA and Consensual agreement.
2. The company's general meeting is the important medium where
the rules and policies of the Company are formulated
3. Objective of the companys are discussed, determined and
amended as per the need in the General meeting.
4. The directors are elected/appointed and BOD is formed(vide
sec 86(2))
5. General Meeting provides a major protection and ownership of
the investment of shareholders.
6. GM exhibits control over management through appointed BOD
7. De facto powers of the General Meeting:
The general meeting of shareholders usually cannot stop or
withdraw legal proceedings that have been lawfully initiated by
the Board of Directors (BoD) in the name of the company.
However, the general meeting sets the overall direction of the
company, and major strategic decisions (like selling the
company's site or changing its core business) must be taken
there.
8. The auditor is appointed and his/ her remuneration is fixed.
9. The shareholder's attained the meeting individu-ally, participate
in the discussion, and cast his/her votes in the election. If he/she
becomes unable to attain the meeting helshe may nominate any
person as proxy to vote on his/her behalf by sending and
application signed by him/her.
 10.Every director of a company shall be present by himself in the
General meeting [sec. 68(2) of Companies Act (first
amendment, 2017). if any. director can't be present by himself
in the GM due to the circumstances out of control, he may
present in the Gm through Video Conference or any other
similar Technology and use his vote 「 sec.68(2) first
amendment 2017.
11. The director shall present the annual financial statement as
audited, auditor's report, and director's report at the annual
general meeting public company. The directors are not only the
representative of share holders from the management of the
company perspectives but also the hope of shareholders so they
must prepare the report and present it at the AGM.
12.Special Resolution shall be presented in GM of a Company for
decision on following matters:-(vide see.83)
a. Increasing the authorized Capital of company,
b. Decreasing or altering the share capital of the company
c. Altering the Name or main objectives of the company
d. (d) Amalgamating of one company into another.
e. issuing bonus shares
f. buying back of own shares by the company
g. converting a private company into a public company and vice-versa
h. such other matters in respect of which the company is required by this Act,
AOA to adopt a special resolution,

Kinds of General Meeting

The main classification of general meeting of the company are two i.e. annual
general meeting and extra-ordinary
general meeting. The general meetings of a company shall be as follows. 67(1).
(a) Annual general meeting, and section 76
(b) Extra-ordinary general meeting.section 82
Further, we may classification as following meeting also known as general meeting
of the shareholders.
(1) First General Meeting,
(2) Annual General Meeting,
(3) Extra-Ordinary General Meeting,
(4) Class Meeting.
First Annual General Meeting: First annual general meeting of the company
should be held within one year from the incorporation of the company. The
Companies Act, 2006 section 76 (1) provide that every public company shall hold
its first annual general meeting within one year after it is licensed to commence its
business.
Annual General Meeting: Refersb to those meeting which is held immediately after
closing of financial year
section 76

1. Every company must hold an AGM every year.

o It must be held within 6 months after the end of its financial year.

2. If a public company doesn't hold its AGM even within 3 months after that 6-month
deadline, then:
o The Office of the Company Registrar can order the company to hold the
AGM.

3. If the company still doesn’t hold the AGM even within 3 more months after receiving
the order:
o Then, any shareholder can go to the court and file a complaint.
o The court can then either:
 Order the AGM to be held, or
 Give any other suitable legal order.

section 76 deals with calling of annual general meeting

Extra-Ordinary General Meeting:

A company usually holds one main meeting every year, called the Annual General Meeting
(AGM). This meeting is required by law and is used to discuss important matters like company
performance, financial statements, and the election of directors.

However, if something urgent comes up between two AGMs—like a serious issue in the
company’s management or finances—the company can hold a special meeting. This special
meeting is called an Extraordinary General Meeting (EGM).

An EGM can be called:

 When there’s an emergency,

  And if a certain number of shareholders (as required by law) make a formal request

section 82 deals with calling of extra ordinary general meeting

Class Meeting:

Apart from general meetings of the whole company, separate meetings can be held for
different groups (or classes) of shareholders. These are called class meetings. A general
meeting is open to all shareholders, no matter what kind of shares they hold.

A class meeting, on the other hand, is only for shareholders who own a specific type of share,
like ordinary shares or preference shares. Companies often have different classes of shares, and
each class may have its own rights—such as the right to vote, receive dividends, or be paid first
if the company shuts down. These are called class rights.

Class meetings are important when decisions need to be made that affect the rights of only one
class of shareholders.

2.2 procedures of meeting : Notice, Agendas, Quorum, Proxies, Resolutions,

and Minutes
The Companies Act, 2006 provides the procedures for the general meeting of the
companies. Its provide that notwithstanding anything contained elsewhere in this
Section, matters relating to the general meeting of a private company and
procedures thereof shall be as provided in the articles of association or the
consensus agreement. Failing such provision, the provisions of this Act shall
apply.67(11) Other provisions relating to the procedures of general meeting shall
be as contained in the articles of association of a company.67(12)
.The Companies Act, 2006 stated that a company shall frame the articles of
association in order to attain the objectives set forth in its memorandum of
association and carry out its activities in a well –managed manner. The articles of
association shall state the following matters: 20(2)

o Procedures for convening the general meeting of the company and notice to be
given for such meeting,
o Proceedings of the general meeting,
o Provisions relating to the minutes of decisions of the general meeting and the
board of directors, and
duplicate copies and inspection thereof,
o Different classes of shares and the rights, powers and restrictions attached to
such shares.

Hence, the article of association has provide the procedural for the conduct of the
general meeting of the companies. These are the stage for the conduct of the
general meeting of the companies. There are three key stages to an AGM which
include; pre-AGM, the official AGM and post AGM. Below are the key elements
included in each stage:
(i) Pre-General Meeting (AGM),
(ii) The Official General Meeting, and
(iii) Post General Meeting (AGM).
Pre-General Meeting (Annual General Meeting)
the work which needs to be carried out regarding matters to be dealt in GM before
conducting GM
Preparation of documents: Section 79
At least twenty-one days prior to the holding of the annual general meeting,
every public company shall prepare
 Annual financial statements as audited,
 Auditor’s report, and
 Directors report.
section 77(3)The matters to be presented and decided in annual general
meeting
.At least twenty one days prior to the holding of the annual general meeting, every
public company shall make arrangement so that the shareholders can inspect and
obtain copies of the annual financial statement, directors’ report and auditors’
report as referred to in Section 84 and to publish a notice in a national daily
newspapers for information thereof.
77(4)Information of the statements and reports as referred to in Sub-section (3) of
section 77, may also be disseminated through electronic communication media, as
per necessity.77(4)

Report to be submitted to office:

The Companies Act, 2006 section 78Every public company shall prepare a report indicating
the following matters and submit the same to the Office in advance of at least twenty one days before
the holding of the annual general meeting. Such report has to be approved by the board of directors and
certified by the auditor of the company.

(a) The total number of the shares allotted,

(b) Number of fully paid up and unpaid shared out of the allotted shares out of the allotted shares,

(c) Particulars of director, managing director, auditor, executive chief and manager of the company, and
amount of remuneration, allowance and facility paid to them,

(d) The names of individuals or corporate bodies subscribing five percent of more of the paid up capital
of the company, and details of shares or debentures held in their names,

(e) The total proceeds of the sale of shares, and particulars of the new shares and debentures issued
and raised by the company in the financial year concerned,

(f) The amount due and payable by the director or substantial shareholder to his/her close relative to
the company

(g) The details of payment made or to be made against the sale of shares or for any other matters,

(h) The amount of loans borrowed from banks and financial institutions and of principal and interest
due and payable,

(i) The amount claimed to be receivable by the company or payable by the company to any other person
to details of, lawsuits, if any , ongoing in this respect,

(j) The number of expatriate employees engaged in the management of the company and at other
levels, and remuneration, allowances and facilities paid to them,

(k) The number of expatriate employees engaged in the management of the company and at other
levels, and remuneration, allowances and facilities paid to them,

(l) Where any agreement has been entered into between the company and any foreign body or person
on investment, management or technical services or other matter for a period of more than one year,
particulars thereof and the particulars of the dividend, commission, fee, charge and royalty, as well paid
under such agreement in the financial year concerned,
(m) A statement of the management expenditures of the company in a financial year,

(n) The amount of dividends yet to be claimed buy the shareholders,

(o) A declaration that the company has fully observed this Act and the prevailing law,

(p) Other necessary matters .

Agenda

77(2)If any shareholder or group of shareholders holding at least 5% of shares

wants to add a topic for discussion at the annual general meeting (AGM), they
can apply to the directors before the meeting notice is issued under section 67(2)

At the AGM, the company can decide on important matters like:

 Giving out dividends,

 Appointing directors and fixing their pay,
 Appointing an auditor and fixing their pay,
 And any other issues required by law or the company’s rules.

However, shareholders cannot increase the dividend rate beyond what the board of
directors has recommended.77(6)

Notice:
The main protection for the shareholders in such a case lies in the information
made available to them in advance of the meeting and the length of notice required.
grower
All shareholders are entitled to receive written notice of a meeting unless the
articles say otherwise.
In addition, notice of a general meeting must also be given to each director. Notice
can be given to shareholders in hard-copy form, electronically. Whichever method
is chosen, it’s important that the relevant provisions in the Companies Act and the
articles are followed.
The notice must give sufficient indication of the business of the meeting, so that a
shareholder can decide whether to attend or not. This is usually done by clearly writing out
all the resolutions (decisions) that will be discussed at the meeting. If it's a special resolution, the exact
wording must be included in the notice.The
notice must also tell shareholders that they can
appoint a proxy to attend and vote in their place.
67(2)The Companies Act, 2006 provides the provision of notice for the general
meeting of the companies under section 67. Its provides that a public company
shall send a notice specifying the place, date and agenda of meeting to every
shareholder at the address supplied by that shareholder to the company, in advance
of at least twenty one days to hold the annual general meeting, and in advance of at
least fifteen days to hold the extra- ordinary general meeting. A notice thereof shall
also be published at least twice in a national daily newspaper
Annual General Meeting - 21 days before - with date, time,
place and agenda and a notice in a national newspaper for two
days
Extra Ordinary General Meeting - 15 days before - with date,
time, place and agenda a notice in a national newspaper for two
days.
Adjourned General Meeting - 7 days before - if no new agenda
(chair can adjourn the meeting)

67(3)Normally, no decisions can be made on topics not included in the notice

under section 67(2), except in these two cases:

1. If 67% or more voting shareholders (in person or proxy) agree to discuss

and decide on the new matter at the meeting;
2. If the matter was already listed in a previous meeting notice, but that
meeting was adjourned and the meeting is now being continued.

Place of Meeting:67(4)
Except in cases where the Office gives prior approval to hold the general meeting
elsewhere, the general meeting of a public company shall be held either at the
district where the registered office of such company is situated or at such place
adjoining to the district of registered office as is convenient to most shareholders
In case of private company, the companies Act, 2006 provide that except as
otherwise provided in the article of association of a private company, the general
meeting of such company may be held in any place within and outside the state of
Nepal.
67(5) ) A list indicating the name, address of the existing shareholders of the company and the number
of shares held by them shall be kept at the meeting venue for inspection by the shareholders.

Abstract of a financial statement

84(1)Even though the law usually requires companies to send the full annual financial
statement and director’s report to shareholders or debenture-holders, a company listed on the
stock exchange does not have to do this.

However, the company must send a summary (abstract) of the financial statement—prepared
as per the rules in Sub-sections (2) and (3)—to every shareholder along with the notice for the
Annual General Meeting (AGM).

3) it shall contain following matters:

a) A statement clearly saying that it is only a summary of the company's full financial statement
and the director’s report — not the full version.

(b) The auditor’s opinion stating:

 Whether the abstract matches the full financial statement and director’s report, and
 Whether it follows the required format mentioned in this Section.

c)Information on whether the auditor has made any remarks about the company’s annual
financial statement.

(d) If the auditor’s report mentions:

 That the company’s accounts or returns are not complete,

 Or that the accounts don’t match the company’s records,
 Or that the auditor did not receive some information or explanation they asked for,

Then the abstract must also give full details of those issues.

During the General Meeting (AGM)

sec 68 Directors required to be present:
Every director of a company shall be present by himself in the general meeting as
far as possible .
Legality of meeting:
69Before a general meeting starts, the shareholders present must check if the meeting was called
according to the Companies Act and the articles of association (the company’s internal rules).

Even if some other legal requirements were not followed, the meeting will still be considered
valid if:

 A notice was properly sent to all shareholders (as required by Section 67(2)), and

The minimum number of shareholders (quorum) needed (as per Section 73) are present and
agree to hold the meeting.
Quorum
Section 73
1)A quorum of GM shall be as mentioned in the AOA of a company
2)until and unless the AOA of a public company doesnot mention for a large number of
shareholder for quorum, a meetingn shall not be conducted unless at least 3 shareholder
representing 50% of share among total alloted shares of company are present in person or proxy.
3)where a meeting cannot be held because of quorum mentioned in sub section 2 , then notice
shall be flowed for 7 days and meeting shall be conducted even if only 3 shareholders
representing 25 percent of share are present in person or proxy

Chairman
section 74 Every meeting needs a person to preside over it, if it is not to descend
into chaos.
1)A general meeting shall be chaired by the Chairperson of board of directors and,
in his/her absence, by the person nominated by the directors from amongst
themselves.
2)Every matter to be discussed in a general meeting shall be presented in the form
of resolution. The chairperson of the meeting shall declare whether a resolution has
been adopted or not.

3)The opinion of majority of the shareholders present in the meeting shall be deemed to be the
decision of that meeting on every matter put to the vote. Voting can be done by:

 Show of hands
 Voice vote
 Grouping of shareholders
  Poll (ballot paper)
 Or any other method the Chairperson decides

For a special resolution, at least 75% of shareholders present must vote in favor.

4)however if the If votes are tied, the Chairperson has a casting vote (an extra
deciding vote). The Chairperson can also vote like any regular shareholder.

.
Voting

Case where voting is restricted section 70(1) A person cannot vote at a general meeting (either
in person or by proxy) on any matter that involves a contract or agreement between them
and the company.

2)A director (or their partner or proxy) is not allowed to vote at a general meeting on:

 Any issue about their own actions or responsibilities,

 Their appointment, removal, transfer, or confirmation,
 Decisions about their salary, bonus, or allowance,
 Or any matter where they have a personal interest.

3) A shareholder who has not paid the required amount (calls) on their shares is not allowed
to attend or vote in the general meeting.

4) If a shareholder appoints a director as their proxy, that director cannot vote as a proxy on:

 Any matter where the director has a personal interest,

 Or on matters relating to the director’s own appointment.

5) If a bank or financial institution takes legal action against a shareholder who hasn’t repaid a
loan that was secured using their shares, and asks the company to block the shareholder’s

71 right to vote

1)Only the person whose name is registered as a shareholder in the company’s records can
attend the general meeting and vote, with one vote for each share they hold—unless stated
otherwise in the law or the company’s rules (articles of association).

2) A shareholder can appoint someone else (a proxy) to attend and vote on their behalf—
unless the company’s articles specifically say proxies aren’t allowed.
3) If a shareholder can’t attend in person, they can still vote by sending a proxy, using the
official format and signing it. The proxy can then attend and vote at the meeting, but this is
subject to the rules in Section 72.

4) If two or more people jointly own shares, only the vote (or proxy form) submitted by:

 The partner they all agree to appoint,

 Or, if there is no agreement, the partner whose name appears first in the company’s
shareholder register,

will be considered valid.

section 72 Election of Director:

(1) Voting by Shareholders:

Unless the company’s articles of association say something different, during the election of
directors, each shareholder gets votes by:

 Multiplying the number of shares they own by

 The number of directors to be elected.

The shareholder can:

 Use all their votes for one candidate, or

 Split their votes among two or more candidates however they want.

(2) Appointment and Voting by Corporate Bodies:

a corporate body (like a company or institution) has the right to appoint directors according to
this law or the company’s articles, then:

 It can appoint directors based on the number of shares it holds (in proportion).
 If it appoints directors this way, it cannot vote in the general election of directors.

However, if that corporate body:

 Does not have enough shares to appoint even one director, or

 Fails to appoint a director even though it has the right,

Then:
  It can participate in the election like any other shareholder.
 It can vote and file nominations for the number of directors that matches its shareholding
proportion.

Resolutions

 Resolutions are the agendas placed in meeting or a motion when adopted

becomes a resolution.
 If resolutions are passed by the required majority, they become the binding
decisions and constitute the source from which action follows and they must
be legally valid.
 Some resolutions may relate to only the class of shareholders.
 Resolution passed by the general meeting to be valid must be:
 Passed by the required majority
 Passed by the AGM where notice and quorum requirement are fulfilled .
section 74General resolutions and special resolutions,sepcial section 83
According to the sect. 74 of the Companies Act of Nepal:
 Ordinary Resolution can be passed by the simple majority that is by 50% of
present's shareholders. The matter which are not defined as special resolution,
are ordinary resolution.
The ordinary resolution contains the fallowing matters;
 Appointing director

 Appointing auditor

 Fixing remuneration of auditor/director

 Approving the rate of divided etc.

 Increasing issued capital

Special resolution section 83 Special resolutions shall be presented in the general meeting of a
company for decision on the following matters:

(a) Increasing the authorized capital of the company,

(b) Decreasing or altering the share capital of the company,

(c) Altering the name or main objectives of the company,

(d) Amalgamating one company into another company, (e) Issuing bonus share, (f) Buying back of own
shares by the company, (g) Selling shares at a discount, (h) Converting a private company into a public
company or vice versa,
 (i) Such other matter in respect of which the company is required by this Act or the articles of
association to adopt a special resolution.

Extra-ordinary General Meeting (Section 82)

 (1) The BOD of a company may convene an EGM if it deems necessary.
 (2) If the auditor of the Company may request the Board of Directors to call such meeting;
and if the Board of Directors fails to call the meeting accordingly, the auditor may make an
application, setting out the matter, to the Office; and if an application is so made, the Office
may call the extra-ordinary general meeting of the company.
 (3) If the shareholders holding at least ten percent shares of the paid-up capital of a
company or at least twenty-five percent shareholders of the total number of shareholders
make an application, setting out the reasons therefore, to the registered office of the
company for calling an extraordinary general meeting of the company, the board of
directors shall call the extraordinary general meeting of the company within 30 days from
the date of such application (Sec.82 (3), First Amendment 2017)
4. If the board of directors does not call the extra-ordinary general meeting within the time limit
referred in Sub-section (3), the concerned shareholders may make a petition to the Office setting
out the matter; and if a petition is made, the Office may cause to call such meeting. (Sec.82 (4),
First Amendment 2017).

Post AGM
Minutes to be kept section 75
(1) Every company shall keep minutes of the proceedings of general meeting, by making entries thereof
in a separate book; and the minutes shall be signed by the chairperson of the meeting concerned and by
the company secretary, if any . In the case of a company which has no company secretary, the minutes
shall be signed by the Chairperson of the meeting concerned and by a representative of shareholders
appointed by a majority of the general meeting.

(2) While keeping the minutes as referred to in Sub-section (1), matters such as the manner in which the
notice of the meeting was issued, the number of shareholders present, the percentage of representation
of the total shares , the result of voting, if any, shall all be set out in the minutes.

(3) The minutes set down pursuant to this Section shall be sent to the shareholders within thirty days of
the holding of the general meeting . Provided, however, that if any company publishes the minutes in a
national daily newspaper, it need not send the same to the shareholders.

(4) The minutes of proceedings of the general meeting kept pursuant to Sub-section (1) shall be kept at
the registered office of the company. If any shareholder wishes to inspect such minutes during 80 office
hours, the company secretary or such other employee as designated by the company shall allow such
inspection.

(5) If any shareholder wishes to get a copy of any minutes of the general meeting, the company shall
provide such copy by collecting such fees as specified by its articles of association.

Return of AGM to be forwarded to OCR: section 80

 Every public company shall, within thirty days of the holding of the annual general
meeting, forward to the Office a return indicating the number of shareholders
present in the meeting, a copy of the annual financial statement, director’s report
and auditor’s report and resolution adopted by the meeting.
Except as otherwise provided in this Act, every private company shall submit a
copy of the annual financial statement certified by the auditor to the Office within
six months of the completion of its financial year.
Section 81 : Fine to be imposed in case of failure to forward return of AGM

 If paid-up capital is up to Rs. 2.5 million → Fine: Rs. 1,000

 If paid-up capital is up to Rs. 10 million → Fine: Rs. 2,000
 If paid-up capital is more than Rs. 10 million → Fine: Rs. 5,000, i9f delay is about 3
months after the deadline

🔹 Fine (b) – If delay continues for another 3 months (i.e., 3 to 6 months late):

 If paid-up capital is up to Rs. 2.5 million → Fine: Rs. 1,500

 If paid-up capital is up to Rs. 10 million → Fine: Rs. 3,000
 If paid-up capital is more than Rs. 10 million → Fine: Rs. 7,000

🔹 Fine (c) – If delay continues for another 6 months (i.e., 6 to 12 months late):

 If paid-up capital is up to Rs. 2.5 million → Fine: Rs. 2,500

 If paid-up capital is up to Rs. 10 million → Fine: Rs. 5,000
 If paid-up capital is more than Rs. 10 million → Fine: Rs. 10,000

🔹 Fine (d) – If delay continues even after 1 year:

Then, for each year of delay, the fine is:

 If paid-up capital is up to Rs. 2.5 million → Rs. 5,000 per year

 If paid-up capital is up to Rs. 10 million → Rs. 10,000 per year
 If paid-up capital is more than Rs. 10 million → Rs. 20,000 per year

Shankar Lal Agrawal vs. Nepal Lever Limited, NKP (2057), No. 5, P. 427.
 Decision made by Division Bench comprising Justices Kedarnath Upadhyaya
and Topbahadur Singh
Mandamus

 FactsA company called Nepal Lever Limited announced its 6th general meeting on
Marga 1, 2056, through a notice in Kantipur Daily.
 One agenda of the meeting was to hold an election for a Board of Directors member.
 A person (the complainant) filed his candidacy to participate in the election.
 The Election Officer published the final list of candidates.
 But the election was cancelled, saying that the required number of members
(quorum) was not present.

⚖️Court's Decision (Held):

 The complainant filed a writ petition in the Supreme Court, saying the company and its
officials did not follow the law, including:
o The Companies Act, 2053
o The company's Memorandum and Articles of Association
o The Election Directives related to directors

👨‍⚖️What the Court Said:

 The remedy (solution) the complainant is asking for is extraordinary in nature.

 Under Article 88(2) of the Constitution of the Kingdom of Nepal, 2047, the Supreme
Court only gives extraordinary remedies when no other effective remedy is available.
 But in this case, the Companies Act, 2053 already provides a proper process and
authority to deal with such complaints within the company system.
 So, the complainant should have first gone to the proper authority under the
Companies Act (such as the Company Registrar or internal mechanisms) before coming
to court.
 Since the complainant skipped that step, the Court refused to give the extraordinary
remedy.

✅ Conclusion:

The Supreme Court dismissed the case, saying that:

 The complainant should have first used the remedies available under the Companies
Act.
  The Court won’t provide an extraordinary remedy if there's another effective way to
solve the problem.

2.3 Adjournment of meeting, default in holding annual GM, and consequences

Adjournment of Meeting
A meeting is said to be ‘adjourned’ if, at a time when its business has not been
completed, the meeting is discontinued with the intention that there will be a
continuation of the meeting at a subsequent time. When the meeting reassembles, it
is described as an ‘adjourned meeting’. Adjournment of a meeting means the
temporary suspension of the meeting in one session. The grounds for adjournment
are normally set out in the articles of association of the company. The person
chairing the general meeting may adjourn the meeting as required.
see section 67(2)Any matter which is notified, pursuant to this Act, before or after
the day of holding the adjourned general meeting may be discussed and decided in
such adjourned meeting 67(7). The original meeting and the adjourned meeting
shall have the same powers. A resolution adopted at the adjourned meeting shall be
deemed to be adopted on the date of holding that adjourned meeting 67(8)
Absence of Quorum:
If the quorum is not present within from the time appointed for holding a meeting
of the company: (a) the meeting shall stand adjourned to the same day in the next
week at the same time and place, or to such other date and such other time and
place as the Board may determine; or (b) the meeting, if called by requisitionists,
shall stand cancelled.
In the public company, the quorum in the general meeting is stated in the
Companies Act, 2006. It provides, no proceedings of the meeting of the public
company shall be conducted unless at least three shareholders of the total
shareholders, representing more than fifty per cent of the total number of allotted
shares of that company, are present either in person or by proxy 73(2). Further,
where a meeting cannot be held because of quorum as referred to in Sub- section
(2) section 73, and the meeting is called next time by giving a notice of at least
seven days, nothing shall prevent the holding of such a meeting if at least three
shareholders, representing twenty five percent of the total number of allotted
shares of the company, are present either in person or by proxy. 73(3)
 Notwithstanding anything contained elsewhere in the section 73, in the case of a
company incorporated under the proviso to Sub-section (2), of Section 3 or a
company incorporated under subsection (1) of Section 173, the presence of three
shareholders as mentioned in Sub-section(2) or (3) shall not be mandatory 73(4)
In case of an adjourned meeting or of a change of day, time or place of meeting,
the company shall give not less than 7days notice to the members either
individually or by publishing an advertisement in the newspapers which is in
circulation at the place where the registered office of the company is situated.
by Chairman of Meetings (Section 104)
Unless the articles of the company otherwise provide, the members personally
present at the meeting shall elect one of themselves to be the Chairman thereof on
a show of hands. If a poll is demanded on the election of the Chairman, it shall be
taken forthwith in accordance with the provisions of the Companies Act and the
Chairman elected on a show of hands shall continue to be the Chairman of the
meeting until some other person is elected as Chairman as a result of the poll, and
such other person shall be the Chairman for the rest of the meeting.
Postponement:

Postponement of a meeting is to put off or defer the holding of a meeting before

the date originally fixed for the meeting has arrived. The postponement is the act of
the convening authority whereas the adjournment is the act of the meeting itself.
2.3 Default in Holding Annual General Meeting and Consequences:
Section 81 of the Companies Act, 2006 provide the fine to be imposed in case of
failure to submit returns. Its provides that any return, notice or information
required to be provided by the company to this Office or information required to be
provided by the officer or shareholder to the company pursuant to this Act shall be
provided by the director of the company or the officer or shareholder who has the
duty to provide such return, notice or information to the Officer or the company, as
the case may be, within the time-limit, if any, prescribed by this Act for the
provision of such return, notice or information 81(1)
The following director of a company or its officer who is in default in providing
the return, notice, information or reply as referred to in Section 51, 78, 80, 120,
131 or 156 within the time limit as referred to in Sub-section (1)section 81 shall be
punished by the Registrar with fine, as follows81(2):
(a) a fine of one thousand rupees if the paid up capital of the company is up to two
million five hundred thousand rupees, a fine of two thousand rupees if the paid up
capital of the capital is up to often million rupees, and a fine of five thousand
rupees if the paid up capital of the company is more than ten million rupees, for a
period not exceeding three months after the expiry of the time limit;
(b) a fine of one thousand five hundred rupees if the paid up capital of the
company is up to two million five hundred rupees, a fine of three thousand rupees
if the paid up capital of the capital is up to ten million rupees, and a fine of seen
thousand rupees if the paid up capital of the company is more than
ten million rupees, for and additional period not exceeding three months after the
expiry of the time limit as referred to in Clause (a);
(c) A fine of two thousand five hundred rupees if the paid up capital of the
company is up to two million five hundred thousand rupees, a fine of five thousand
rupees if the paid up capital of the capital is up to ten million rupees, and a fine of
ten thousand rupees if the paid up capital of the company is more than ten million
rupees, for an additional period not exceeding six months after the expiry of the
time limit as referred to in Clause(b);
(d) A fine of five thousand rupees, for each year, if the paid up capital of the
company is up to two million five hundred thousand rupees, a fine of ten thousand
rupees , for each year, if the paid up capital of the capital is up to ten million
rupees, and a fine of twenty thousand rupees, for each year, if the paid up capital of
the company is more than ten million rupees, in cases where even the time limit as
referred to in Clause (c) has also expired.
In the case of a company not distributing profits which is in default in providing
such statement, in formation or notice within the time limit as referred to in Sub-
section (1) of section 81, the director or officer of such company shall be liable to
the same fine as is imposable on a company of which paid up capital is up to ten
million rupees.81(3)
.
Any director, office or shareholder who is liable to pay the fine as referred to in
Sub-section (2) of section 81, shall pay it too the Office and submit to the Office or
the concerned company such returns as required to be forwarded 81(4). In
calculating the period of expiration of the time limit pursuant to Sub-section (2), it
shall be calculated from the date of commencement of this Act. Any director ,
officer or shareholder of a company who is in default in providing such other
statement, notice or information as is required to be forwarded to the Office
pursuant to this Act shall be punished with a fine of two hundred rupees for every
month, after the expiration of one month of the date of expiry of the time limit
within which such statement, notice or information is required to be provided.81(6)
consequences directors shall be fined
 If the AGM not called in any public company, the following
things may happen;
 The directors personally shall have to pay fine;
 If the AGM is not held on the prescribed time the return of
AGM cannot be forwarded to OCR on prescribed time. if the
return of AGM is not forwarded to OCR can make a decision
against the concerning Directors to pay the fine up to NRS
20000- per year, according to sec. 81 of the companies Act
2006.
 The Directors may be disqualified for their post;
 If the directors continuously fail to forward the return of
AGM for 3 years, the directors shall be terminated from their
post they also may be disqualified for the post of Director of
any company. (sec.89(1)(k),sec.89(3))
 he court may give a decision against the concerning
Directors, if a case is filed against them for not calling the
AGM. The court My give a decision with fine of NRS
10000/- to 50000/- against the concerning authorities.
 The registration of the company shall be cancelled;
 The OCR may cancel the registration of a company if the
AGM is not called since last 3 years according to sec. 136(1)
(b)(c))

2.4 Rights of shareholders in the general meeting

Shareholders’ rights and obligations have been generally viewed as part of the
provisions contained in the article of association. The Companies Act, 2006 has
provided the shareholders' rights in the general meeting of the companies.
to share certificate section 33
To call the Annual general meeting section 71
 Office
 Court
To put agenda
To vote
To elect directors
To adopt resolution
The appointment of a proxy is an important right of a shareholder of the company.
Any member of a company entitled to attend and vote at a meeting of the company
shall be entitled to appoint another person as a proxy to attend and vote at the
meeting on his behalf. Normally, the instrument appointing the proxy must be
deposited with the company, 48 hours before the meeting. Any provision contained
in the articles, requiring a longer period than 48 hours shall have effect as if a
period of 48 hours had been specified.
 Only registered shareholders as of the “record date” (also called “cut-off
date”) are eligible to vote in the AGM.
 Each shareholder typically gets one vote per share they hold, unless stated
otherwise in the company’s articles of association or governing documents.
 Voting can be done:
In person
By proxy (appointing someone else to vote)
section 71
 Registered Shareholder
 1 share = 1 vote
📌 Subject to Section 70 and Articles of Association
Voting by proxy
 Shareholders appoint proxy
 Allowed unless Articles prohibit it
 Must be in prescribed format
✍️Signed by shareholder
 Proxy can attend and vote
Joint Shareholders
👥 2+ people own same share
Only one can vote:
 Appointed by others OR
First name in register (Section 46)
Restriction on Voting Rights (Section 106)
A shareholder shall not exercise any voting right in respect of any shares
registered in his name on which any calls or other sums presently payable by
him have not been paid or on which the company has exercised any right or
lien. No member can be prohibited from exercising their voting right on any
other ground. Every shareholder has the right to inspect the documents
referred to and may submit to the board of directors written questions for the
directors / managing director GM to respond to during the AGM. Every
Shareholder shall have the right to request the GM to invite the shareholders
to a meeting to discuss the report.
Voting through Electronic Means (Section 108)
An annual general meeting is required to be held every year by every
company whether public or private, limited by shares or by guarantee, with
or without share capital or unlimited company. In case of default is made in
holding the annual general meeting of a company under section 76 , the
Court may call or direct the calling of an annual general meeting. If a
company has more than one class of shareholders, it may need to hold class
meeting, for which there are special rules. Class meetings are those meetings
which are held by holders of a particular class of shares e.g. preference
shares. Chairman plays a very important role in a meeting as he is
responsible for successful conduct of a meeting. A motion becomes a
resolution only after the requisite majority of members have adopted it.
 Various methods which may be adopted for taking votes on a motion
properly placed before a meeting are by show of hands, by poll, by postal
ballot and by electronic voting.
Conclusion
An Annual General Meeting where, once a year, the shareholders of a
company and its board of directors meet to discuss company matters and
corporate finances. Normally, this is the only time where the shareholders
and directors meet throughout the year. An AGM gives the opportunity to
present and discuss the annual business report, business concerns, corporate
matters and audited financial records to the shareholders.
In all companies, majority decisions can be made at meeting. At any general
meeting, a resolution put to the vote of the meeting shall in the first instance
be decided on a show of hands. A declaration by the Chairman of the
meeting of the passing of a resolution or otherwise, by show of hands shall
be conclusive evidence of the fact of passing of such resolution or otherwise,
unless a poll is demanded before or immediately on declaration by
Chairman. Normally, a resolution is carried if there are more votes for than
against known as ordinary resolution. Some resolutions, called special
resolutions, require a 75 per cent majority.

Unit 4
CORPORATE CONTROL AND PROTECTION OF SHAREHOLDERS
4.1 Corporate Control over the management
Corporate Control" consists of two words: corporate and control.
- Corporate: This word relates to corporations. which are large companies or
groups of companies
- Control: Control means the power to influence or direct people's behavior or the
course of events.
When combined, Corporate Control refers to the power or authority exercised by
corporations to influence or direct events, particularly in the business world.

Corporate control means having the power to make important decisions in a company. This
power can be held by one person or a group of people, called the controlling party.

In other words, corporate control is about having enough influence to guide how a company
works and makes decisions.

In their famous work The Modern Corporation and Private Property, Berle and Means (1932) started
from a pragmatic perspective, defining corporate control as “the actual right to choose the members of
the board of directors of a company or the majority of the members whether through the exercise of
legal powers or by bringing pressure to bear.

models of coroporate control mechanism

1. UK–US Model (Anglo-US Model)

 Shares are widely spread out — many people own small amounts.
 There is a strong stock market, and shares are easy to buy and sell (high liquidity).
 Since most people own only a few shares, they don’t influence the company's day-to-day
decisions.
 Shareholders focus more on share prices than how the company is managed.

2. Continental Model (German Model)

 Shares are mostly held by a few big players (like other companies or banks).
 A special supervisory board oversees the company’s management.
 There is a system of checks and balances between different groups inside the company.
 Big shareholders, like banks, often have strong control over the company.
3. Family Model (Japanese Model)

 A few family members own most of the shares.

 These family members also run the company.
 Because the owners and managers are the same people (family), their goals are usually
aligned.
 The company is more stable because of family loyalty and relationships.

Who really controls companies?

Control is usually in the hands of two types of people:

1. Managers who run the company but own few or no shares.

o Risk: They might use their power for personal benefit, not the company’s
success (agency problem).
2. Big shareholders who own a lot of shares.
o Risk: They may use their power to get personal gains instead of helping the
company grow.

To understand corporate control completely, we must look at the main techniques used to
control or manage a company. . Each technique offers a different kind of control — some
focus on money, some on strategy, some on rules, and so on. These are tools that help owners
or managers influence how the company works

🧰 Main Techniques of Corporate Control:

1. Budgeting / Financial Control

o This is about managing money wisely.
o It includes making budgets, checking financial reports, and conducting audits.
o Helps ensure the company is spending properly and following financial rules.
2. Strategy / Strategic Control
o This keeps the company on the right path to achieve its long-term goals.
o Involves making corporate plans and using tools like market research and
business analytics.
o Ensures that the company’s actions match its mis sion and vision.
3. Operational Control
o This deals with everyday decisions in the company.
o Examples include starting a new project, handling daily tasks, or applying
changes in strategy.
o It makes sure the daily work supports the bigger company goals.
4. Bureaucratic Control
 This involves strict rules, formal procedures, and authority structures.
o
Common in large and traditional companies.
o
Tools include organizational charts, job roles, reporting systems, and following
o
regulations.
5. Market Control
6. b
o This works by comparing the company’s performance to market standards or
competitors.
o Prices, profits, and competition act as indirect controls.
o If the company performs poorly, the market "pushes" it to improve.

Mechanisms of restraint for control rights

Internal control mechanisms are the rules and systems inside a company that help keep
management in check and make sure they work for the company’s benefit.

The management includes the board of directors and the top-level managers they hire.

The board of directors is the main authority in the company. It works on behalf of the
shareholders and is responsible for managing the company’s daily affairs.

In theory, the shareholders choose the directors, and the directors must answer to the
shareholders. Their job is to watch over the managers and make sure the managers are doing
what’s best for the company.

1. Duties of Directors

 Duty of Care: Directors must act carefully, responsibly, and within the law.
 Duty of Loyalty (Fiduciary Duty): Directors must always put the company’s interest first, not
their personal interests.

3. Shareholders’ Rights

These rights help shareholders keep management in check:

 Right to Information: Shareholders have the right to see important company documents and
accounts so they can monitor how the company is doing.
 Right to Make Proposals: Shareholders can propose issues to be discussed at meetings or even
call for a special meeting if enough of them agree.77(2), 82 EGM
 Right to Sue (Right to Institute Proceedings): If the board does something wrong, shareholders
can go to court.
 Right to Dissent: If a shareholder disagrees with big company decisions (like a merger), they can
ask the company to buy back their shares.
External Control Mechanisms (Outside the company)

These are pressures from outside the company that also help prevent mismanagement:

1. Company Acquisitions and Mergers

 If a company is not doing well or is badly managed, other companies may try to take it over
(called a hostile takeover).
 This threat forces the current management to improve performance or risk being removed.

2. Proxy Voting Rights

 Shareholders can give their voting power to someone else (a proxy).

 Sometimes, a group of small shareholders will combine their proxy votes to challenge the
current management and bring change

Corporate Control Theory

standard corporate Control theory
Over the years, scholars have. conceptualized numerous theories to explain and
guide the process of corporate control. Among these, a few have guided a
widespread recognition for their profound insights & practical viability.
These include the. Agency Theory. Stewardship Theory. Stakeholder Theory,
Resource. Dependence Theory, and Transaction Cost Economic. among otheros.
( Explanation in next topic)

4.2 Shareholders rights and privileges, and protection against......

1. power to file the petition to call the AGM and EGM

See section 76(3) of the Act

2. Ownership in a Portion of the Company.

Previously, we discussed a corporate liquidation where bondholders and preferred
shareholders are paid first. However, when business thrives, common shareholders own a
piece of something that has value. Common shareholders have a claim on a portion of the
assets owned by the company. As these assets generate profits and as the profits are
reinvested in additional assets, shareholders see a return as the value of their shares
increases as stock prices rise.

3. The Right to Transfer Ownership.

 The right to transfer ownership means shareholders are allowed to trade their stock on an
exchange. The right to transfer ownership might seem mundane, but the liquidity provided
by stock exchanges is important. Liquidity—the degree to which an asset or security can be
quickly bought or sold in the market without affecting the asset’s price—is one of the key
factors that differentiate stocks from an investment such as real estate. If an investor owns
the property, it can take months to convert that investment into cash. Because stocks are so
liquid, investors can move their money into other places almost instantaneously.

4. An Entitlement to Dividends.
Along with a claim on assets, investors also receive a claim to any profits the company pays
out in the form of a dividend. Management of a company essentially has two options with
profits: they can be reinvested back into the firm (thus, one hopes, increasing the company’s
overall value) or paid out in the form of a dividend. Investors do not have a say as to what
percentage of profits should be paid out—the board of directors decides this. However,
whenever dividends are declared, common shareholders are entitled to receive their share.
section 182(1) of the Act provide circumstances under which dividend cannot be distributed
within 45 days of the decision

5. Opportunity to Inspect Corporate Books and Records.

Shareholders have the right to examine basic documents such as company bylaws and
minutes of board meetings. In addition, the securities and exchange law requires public
companies to periodically disclose financials.
section 79, 119, 170

6. The Right to Sue for Wrongful Acts.

Suing a company typically takes the form of a shareholder class-action lawsuit. For example,
Worldcom faced a firestorm of shareholder class-action suits in 2002 when it was discovered
that the company had grossly overstated earnings giving shareholders and investors an
erroneous view of its financial health.
7.Controlling rights of shareholders
a. right to receive notice of the meetibg
b. voting right
c. right to appoint proxy
d. voting in the election of the director
e. right to decide the matter
see section 67(2), 71, 72, 74
8. right to appoint directors
section 89 and AOA
9. Right to appoint an auditor
section 87(1), 111 of the Act
10. power of shareholder to make a complaint
see section 30(3)
11. right of ahareholder to institute a complain on behlf of the company
section 140(2).
Shareholder rights under BAFIA, 2017
1.Allotment of shares
2. restriction on the distribution of dividends
3.functions not permitted to licensed holder corporate body
4. Amalgamation of licensed holder corporate body
5. priorities on settlement of liabilities in the process of ewinding up the company
6. provision relating to account, record and description of re[ort
7. provision relating to the power to regulation, supervision and inspection.

Protection against oppresion and mismanagement

4.3 Derivative Action

Any action taken by the Shareholders on behalf of the company for the interest of
the company is called “Derivative Action”/ DA. The DA is basically taken by the
shareholders not for their interest but for the best interest of the company against
the action of officers or majority shareholder/ BOD. The DA is different from
‘representative action’ that may be brought by any shareholders for infringement of
his personal and individual rights like recording the vote cast in a representative
capacity for himself and for the other shareholders enjoying such rights in common

Normally, only the company itself can sue if someone (like a director) harms it — this is called
the “proper claimant rule.”

But sometimes, the court allows a shareholder to sue on behalf of the company. This is called
a derivative claim, and it's an exception to the usual rule.
A derivative claim is allowed only when the company itself cannot or will not file the case,
even though it was harmed.

This kind of claim can be made when a director does something wrong — like being careless
(negligence), not doing their job properly (default), breaking their responsibilities (breach
of duty), or misusing company property (breach of trust).

A shareholder derivative action is when a shareholder sues someone (often a

director or officer) on behalf of the company because the company itself has been
harmed but its management refuses to take legal action.

 Normally, only the company (through its directors) can sue if it is harmed.
 But if the directors are the wrongdoers or choose not to act, a shareholder
can step in and sue for the company.
 Any money won in the lawsuit goes to the company, not the shareholder
personally.
 Before suing, the shareholder often has to meet certain conditions, like
owning shares for a certain time or first asking the board to act.

This action helps ensure company leaders are held accountable when they breach
their duties and the company suffers harm.
Derivative suits in the United Kingdom
In the United Kingdom, an action brought by a minority shareholder may not be upheld under
the doctrine set out in Foss v Harbottle in 1843. Exceptions to the doctrine involve ultra vires
and the "fraud on minority". The purpose of the suit is not to protect the shareholders, but to
protect the corporation itself. Creditors, rather than shareholders, may bring an action, if a
corporation faces insolvency.
The Companies Act 2006 provided a new procedure, but it did not reformulate the rule in Foss v
Harbottle. In England and Wales, the procedure slightly modified the pre-existing rules, and
provided for a new preliminary stage at which a prima facie case must be shown. In Scotland
where there had been no clear rules on shareholder actions on behalf of the company, the Act
sought to achieve a result similar to that in England and Wales.
Derivative action in nepal
section 140(1) , (2)Right of shareholder to institute case on behlf of the company
Condition when such action can be initiated
resolution requiring special ,eeting
ultra vires and illegal act
fraud
delegation of control
 directors not paying their calls
sell of assets under valued
insovency
diversion of funds
diversion of business opportunities
improper rejection ofvotes
insufficient notice of the agenda of the meeting
exclusion from management
wrong doer’s in control
breach of duty of good faith
Majority Rules
Majority and minority define who has the power to rule. The structure of democracy is as such,
where the majority has the supremacy. In the corporate world, also the rule and decisions of the
majority seem to be fair and justifiable. The power of the majority has greater importance in the
company, and the court tries to avoid interfering with the affairs of the internal administration
of the shareholders. With the superiority of the majority, there is always inferiority among the
minority, which shows an unbalance in the company. ‘Majority rule’, is an established principle
of company law whereby the majority of the shareholders hold the decision-making power of
the company.
Advantages of Majority Rule
 The company recognizes a separate personality by exercising this rule.
 It is an easy decision-making policy.
 It avoids the multiplicity of the suits.
a. Majority and Minority Rights

Protection of Minority Shareholders & the Rule in Foss v. Harbottle

In companies, majority shareholders—those who own more shares—usually have more control over
decisions. While this reflects democratic control, it can sometimes result in unfair treatment of minority
shareholders, who may be sidelined or harmed by decisions made purely in the majority's interest.

To prevent abuse, modern company law tries to strike a balance between:

 Allowing the majority to manage the company, and

 Ensuring minority shareholders are treated fairly.

This is done through a mix of statutory protections and legal rules, the most famous being the Rule in
Foss v. Harbottle (1843).
 The rule was first laid down in Foss v. Harbottle, where two shareholders sued the
directors for misusing company property. The allegation by them on the company was that
the directors of the company made an illegal transaction which caused heavy loss to the
company. The directors sold their own land to the company at a higher price and raised money
for which they were not authorized. And when the company held a meeting, the decisions taken
by the majority were that there should not be any action taken against the directors.

. The court refused the case, stating: If the wrong is done to the company, it’s the company itself—not
individual shareholders—that must sue.

This became known as the "proper plaintiff rule: the company is a separate legal entity, and its
decisions should be governed by the majority unless there's a legal reason to intervene. established
majority rule

In MacDougall v. Gardiner, the court clarified that:1875

If the action complain is something the majority of shareholders could lawfully approve, then there’s
no point going to court. A meeting could simply be called, and the majority would have its way.

This ensures internal company matters are handled within the company, not through endless litigation.

Later, in Edwards v. Halliwell, Jenkins LJ summed up the rule as follows:1950

1. If a wrong is done to the company, the company is the proper party to bring the claim.
2. If the act can be approved by a majority, individual shareholders can’t challenge it, since the
majority can ratify the action anyway.

While the rule protects majority rule, it also creates a problem: what if the wrongdoers are the majority
or the directors themselves?

In such cases, the company won’t sue because those in control are the very ones who caused the harm.
This is where derivative actions come in.

🔸 Derivative Action:
A minority shareholder sues on behalf of the company when the people in control are breaching their
duties—such as committing fraud, misusing company funds, or acting illegally.

These actions are an exception to the rule in Foss v. Harbottle and aim to prevent abuse of power by
those in control.
🔹 Personal vs Corporate Rights

Shareholders have two broad types of rights:

 Corporate rights – These belong to the company (e.g., claims for misused company funds).
 Personal rights – These belong to individual shareholders (e.g., right to vote, receive dividends,
or get notice of meetings).

🟢 The rule in Foss v. Harbottle only applies to corporate rights.

🟢 If a personal right is violated, the shareholder can sue directly, without needing to follow the
majority.

Also, not all personal rights come from the Articles of Association (AOA). Some come from general law,
and the rule in Foss v. Harbottle does not stop shareholders from enforcing such rights.

🔹 When Both Rights Are Affected

Sometimes, a single event may violate both company rights and personal rights.

🟠 Example: If directors give false information, the company suffers loss (corporate wrong), and
shareholders are misled (personal wrong).

Earlier, it was believed that you couldn’t bring both types of claims in the same case. But in Prudential
Assurance Co. Ltd. v. Newman Industries Ltd. (1981), the court allowed it. That means today, both
types of claims can be combined, making the legal process more efficient.

🔹 Summary

✅ The company is the proper party to sue when a wrong is done to it.
✅ Individual shareholders usually cannot sue unless their personal rights are affected.
✅ If the act can be approved by a majority, courts will not interfere.
✅ But if the majority or directors abuse power, commit fraud, or breach duties, minority shareholders
can bring a derivative action.
✅ The law now accepts that personal and corporate claims can be brought together, when based on the
same facts.

Exception to the Majority Rules and Protection of Minority Shareholders’ rights

 1 Ultra vires acts – When the majority is not acting within its powers then the
majority rule shall not be followed.

Normally, under the rule in Foss v. Harbottle, only the company itself can sue when something goes
wrong, not individual shareholders. But this rule only applies when the company is acting within its legal
powers.

However, if the company or its directors do something ultra vires (meaning beyond the powers given in
its Memorandum of Association), then even a single shareholder can bring a case.section 138(1)

🔹 Case Example: Bharat Insurance Co Ltd v. Kanhaiya Lal 1935

In this case:

 The company’s Memorandum said it could lend money on security (like land, buildings, etc.).
 A shareholder found that the company was making investments without proper security, which
went against its stated powers.
 He asked the court to stop the company from making such investments.

The court agreed that:

Even though internal matters are usually left to the company itself, if the directors are misusing the
company’s money in a way that the company has no legal power to do, it is not just an internal issue.

So, the court allowed the shareholder to sue individually, because:

✅ The directors were allegedly acting ultra vires the company's Memorandum,
✅ And no majority of shareholders could approve or fix this, since such acts are legally invalid.

2.Fraud on minority – Discriminatory action which is the majority shareholders given an

advantage over the minority shareholders. The fraud must involve unreasonable use of the
majority power resulting huge loss to the minority shareholders. Thus, the majority power must
be exercised in a good faith and for the benefit of the company.

In company law, majority shareholders usually have the power to make decisions for the
company. But this power is not absolute.

If the majority use their power unfairly or selfishly to harm or take advantage of minority
shareholders, it is called a “fraud on the minority.”

It doesn’t mean fraud in the usual criminal sense—it means abuse of power in a way that is
unjust or discriminatory toward the minority.
🔹 Key Case: Greenhalgh v Arderne Cinemas Ltd, 1951

In this case, the judge said:

A resolution (decision) can be challenged if it gives an unfair advantage to the majority that the
minority shareholders do not get.

This kind of discriminatory action is what courts may call a fraud on the minority.

Cook v Deeks, 1916

The directors (who also held majority shares) took a contract for themselves instead of giving it to the
company.

The court said the contract belonged to the company, not to the directors, and they could not keep it
for personal gain just because they had voting power.

Brown v. British Wheel co ltd, 1919

 The company was in financial trouble and needed more capital (money) to keep running.

 The majority shareholders (who held 98% of the shares) were willing to provide this
money.

 However, they said they would only invest if they could force the remaining 2% minority
shareholders to sell their shares to them.

 Since the minority refused to sell their shares voluntarily, the majority tried to pass a new rule
(an article in the Articles of Association) that would allow them to compulsorily buy the shares
of the minority.
 This rule would force the 2% shareholders to sell, whether they wanted to or not.

⚖️What the Court Said

 The court had to decide:

👉 Is this new rule (that lets the majority forcibly buy minority shares) fair and legal?
 The court ruled in favour of the minority shareholder who had challenged the resolution.
 The judge said the key question is:

“Is the proposed article for the benefit of the company as a whole?”

 In this case, the answer was No.

 📌 The court found that the proposed rule was not just, not fair, and not truly for the benefit of
the entire company—
it was mainly for the benefit of the majority shareholders.

 Therefore, the resolution was declared void (invalid).

3.Actions requiring a special majority – When in a company, special resolution is required but it
is done by ordinary resolution then it could be challenged.

In company law, there are certain important decisions that a company cannot make casually.

These include actions like:

 Changing the company’s objects

 Altering the Articles of Association
 Approving certain types of restructuring
 Reducing share capital
 Authorizing a merger, etc.

👉 These actions must be done by a "special resolution", not just a regular (ordinary) resolution.

A special resolution is:

 Passed with at least 75% of the shareholders voting in favor

 Done with proper notice and following legal procedure

If this process isn’t followed, the decision is invalid.

If the majority shareholders try to:

 Pass a major change with only an ordinary resolution (just over 50%)
 Or skip the formalities required for a special resolution,

Then any shareholder (even a single one) can file a case to stop that action.

1. Dhakeswari Cotton Mills Ltd v Nil Kamal Chakravorty 1937

 In this case, the company tried to take certain actions that required a special resolution.
 But they did not pass the resolution in the correct manner.
 A shareholder challenged the move.
 The court agreed with the shareholder and stopped the company from proceeding.
 3. Wrongdoers in control – When a wrong is done to a company and is obvious and the
majority shareholders takes a decision to not permit an action to be taken against them,
then it could be challenged.
Generally, if the company is wronged (for example, someone steals company money), only the
company itself can bring a case to court — not individual shareholders.

Because:The company is a separate legal person.This is called the "proper plaintiff rule."

 Internal matters should be handled by the majority of shareholders at a general

meeting.established majority rule

But If the Wrongdoers Control the Company

💥 In such situations, an exception to the Foss v. Harbottle rule is allowed.

✅ The Exception: Derivative Action

When wrongdoers control the company, and the company refuses to act, a shareholder (or group of
shareholders) can file a case on behalf of the company.

🧑‍⚖️The court allows this to protect justice and prevent abuse of power.

This is called a derivative action — the shareholder sues not for personal benefit, but to protect the
company’s interests.

Case: Glass v. Atkin (Ontario High Court) 1967

Facts:

 The company had 4 shareholders: 2 plaintiffs and 2 defendants.

 The 2 defendants controlled the company and had misused company funds for personal gain.
 The plaintiffs (the other 2) brought a case on behalf of the company.

Court’s Decision:

 Normally, the company should sue.

 But here, since the wrongdoers were in control, the plaintiffs were allowed to sue on behalf of
the company.

Theories of Protection of Minority Shareholders

 i. Proprietary Interest Theory: Minority shareholders hold proprietary interests
in the investment in the company. Shareholders should have the same
property rights as owners of other kinds of property . They are passive
owners and own certain part of the comapny but dont control how the
company is run. They just have right to whatever is left after paying all the
debts of the comapny, this is known as residual claimant(Berle & Means, the
Modern Corporation and Private Property, MacMillan, 1932: 355).
ii. Contractarian Theory: The protection of minority shareholders is founded on the nexus of the
contracts paradigm or the contractarian theory (A Ogus, 1994:29). The shareholders are deemed
to enter into voluntary and unanimous agreements with the company.
iii. Trust Theory: The protection of minority shareholders relies on the concept
of trust, under trust law. It is the branch of law where one person(the
trustees)does something valuable forn another person(beneficiaries).So,
trustees have a fiduciary duty and must always act in good faith, honestly
and for the best interest of the beneficiaries. In the corporate world, majority
of shareholders have major decision making power where minority of
shareholders do not have such power and they are more vulnerable to unfair
treatment.so as per trust theory, majorityy of SH must be treated as trustee
and Minority SH must be treated like beneficiaries. si just like trustee
Majority SH owes fiduciary duties towards minority SH(Lawrence E
Mitchell, Trust, Contracts, Process, 1986:203).
iv. Total Wealth Creation Theory: The protection of minority shareholders is
based on the notion of total wealth creation. According to this theory the
main purpose of the company is not to make profits for certain individuals
but to creat thetotal wealth that is to increase the overall economic value for
everyone.This theory is supported by . If the goal of the company is total
wealth creation then it should conduct activities that includes and benefits
everyone, avoid the action which majority while hurting the minority, ensure
that decision benefit the entire economic value of the company rather than
just benefitting certain insiders.(G. Graham, Regulating the Company.1989)
v. Corporate Democracy Theory: The protection of minority shareholders relates to proper
functioning of corporate democracy. This theory compares companies to democracy like a
governement system. Here shareholder are cotizens, voting power and decision making power are
rights that people have in a democracy., majority SH are the ruling party anmd minority
shareholders are the opposition party.In practice majority shareholder acn pass the decision that
benefits them ignoring the right of minority , this could damage the democratic spirit of the
company. So , this theory stats that minority should be legally protected from such abuse to have
a fair, balanced and democratic company.Acc to this theory majority rule is only legitimate when
everyone has had chance to participate fairly and equally in decision making process.(J. Cohen ,
Procedure and Substance, 1997:407).
vi. Distributive Justice Theory: The protection of minority shareholders is the
notion of distributive justice. Distributive justice means fair distribution of
resources and wealth among all the member of the society. In context of
 corporate law , it focuse on fair distribution of all benefits and losses among
all the shareholders especially majority and minority shareholders.
In a perfect market, the forces of supply and demand balances everything . State
intervention is considered as unnecessary or eeven harmful. This is believed by
Adam Smith. Acc to him market works best when left alone.
but J.K Galbraith poitned out that market doesnot aleways works best when left
alone. sometimes majority shareholder manipulate it in such a way that all
benefotes are enjoyed by them and minority are left with unfair treatment. At this
time distributive justice says that law should intervene and protect weaker parties
to ensure fair treatment, promote equal opportunities, prevent abuse of power.
(J K Galbraith, History of Economics,1987:64).

b. Protection of Minority and against the oppression of the majority

Protection of Minority: Shareholders' agreement to be void if it is against the interest of the

company or the minority shareholders (Vide Section 187(1) and its proviso, Companies Act 2006 and
its First Amendment, 2017).
Validity of agreement between shareholders (Sec.187): (1) An agreement entered into between
the shareholders of a company in respect of the management, operation of the company, and the use of
voting rights conferred to them shall be binding on them.
Provided, however, that if any provision of such agreement is prejudicial to the interest of the
company or its minority shareholders, such provision shall ipso facto be invalid to the extent.

The concerned shareholder shall submit two copies of the agreement entered into under Sub-
section (1) to the company within fifteen days after the date on which such agreement was entered into.
The company shall submit a copy of the agreement so received from the shareholder to the Office within
fifteen days after the receipt of the same .(Sec.187(2)

First amendment of the Act 2017 added Necessary things to be done for Assets Laundering
Prevention: Section 187 (ka), new provision: The company shall commit to following the prevalent
laws for the prevention of asset laundering and financial investment in terrorist activities.

Shareholders recourse against the oppression of the Majority for discrimination, class action, and
derivative action (vide Sections 21(4), 30, 138, 139, 140 of Companies Act)

21(4) a sherholder who is noty satisfied with the amendment made to the objective of the
comapny may file a petition on fulfilling followinbg requirement to have court declare such
amendment null and void.
5% of share
within 21 days
if a shareholder is to file on behalf of one or more , petition shall be filed by those who is
authorized in writing for that purposes

Section 30 Share with different right and rights of such shareholder

1.a company may by mentioning the provision in AOA and MOA may have different class of
shares and difeerent rights attached thereto.
2.no changes shall be made to the right of a particular class of shareholders without prior
approval of shareholder of that class
3.a shareholder representing 10% if disagrres with the changes made to the right of particular
class of share may file a petition in court to declare that changes void
4.such petition is to be filled within 30 days after the adoption of resolution to change the rights
of that share class, and changes shall not be enforced until a decision is given by the court
5.if it appears that changes made in right of share of a particular class is prejudicial to petitioner
SH court shall quash the decision of alteration to the rights of shares of that class.
6.Board must propose such change in GM and it should be passed by special resolution of that
meeting
7.Notwithstanding anything mentioned above, GON shall have special voting rights in a
company that has been fully or partialy privatized.
A provison statting special voting power must be mentioned in AOA
GON can use such power at the time of making decision on following matters:
a.regarding selling of some part of company
b.merging of one company with another
c.voluntarily closing the company

Section 138 Power to prevent directors and officers from doing unauthorized act:
(1) If, on behalf of a company, any director or officer of the company does any act beyond
his jurisdiction, any shareholder of such company may make a petition to the Court to
prevent such act
(2) If OCR gets a report showing that company is acting in such a that affects the
rights of specific or all group of SH or fails to to an act that it was supposed to di,
then OCR can file petition in court aginst company, director or officer those who
is responsible.

section 139 remedy for the act done aginst the right and interest of shareholder

 If a company does any act that affects the rights and interst of the shareholder ,
such shareholder may file a petition to the court and seek remedies
 The shareholder must show that a director, manager, or officer acted with bad intent or made
unfair decisions against company rules (MoA, AoA, or agreements).

The court may issue various orders, such as:

 (a) Stop harmful acts and ensure fair operation in the future.
 (b) Prevent future harmful acts or make the company take necessary actions.
 (c) Order the company to file a case against someone on the court’s direction.
 (d) Buy back shares of affected shareholders and return their money.
 (e) Pay compensation to shareholders who suffered discrimination.
 (f) Order company liquidation (in serious cases).
 (g) Ask company or other shareholders to buy shares of a complaining shareholder.
 (h) Recover losses from the person responsible.
Shareholders can also seek other remedies under different laws, even beyond this section.

If the court has ordered that MoA or AoA must be changed or not changed, the company must get court
approval before making those changes.

Any amendment ordered by the court will be treated as if it was passed by a special resolution.

Even people who legally own shares but are not yet registered will get the same protections as
shareholders.

Cases Relating Minority Shareholders’ Rights

Sushila Rani v. Jaya International, NKP 2041, at 554-56:
Anand Bahadur sued Sushila Rani Rana on behalf of the company but there was no delegation of
authority from the BOD. There is lack of delegated authority to sue without decision of BOD of the
company as per Sec.69 of the Companies Act . Law suit was quashed due to lack of locus standi.

Rameshari Sharma v. Tek Bahadur Rayamajhi, NKP 2042

Plaintiff was the shareholder of Durga Floor MILL Pvt.Ltd. The plaintiff sued the defendant for the
recovery of damages total amount of Rs 2014751.50. The defendant replied that an individual shareholder
has not right to sue to closing of a company. The plaintiff claimed that defendant captured forcefully
Durga Floor Mill and caused closure of the company. In such situation it is damage to the company so
only the company has right to sue for damages, the shareholders haa ve not rights to sue against the
damage of the company. The lawsuit was cancelled due to lack of locus standi.

unit 5 corporate governance and its mechanism

Governance
Governance has been defined to refer to structures and processes that are designed
to ensure accountability, transparency, responsiveness, rule of law, stability, equity
and inclusiveness, empowerment, and broad-based participation.
Governance also represents the norms, values and rules of the game through which
organization's affairs are managed in a manner that is transparent, participatory,
inclusive and responsive. Governance therefore can be subtle and may not be
easily observable. In a broad sense, governance is about the culture and
institutional environment in which stakeholders interact among themselves and
participate in organization's affairs. It is more than the organs of the organization.
Governance is the exercise of authority or power in order to manage an
organization's affairs. Governance is the ‘power relationships,’ ‘formal and
informal processes of formulating policies and allocating resources,’ ‘processes of
decision-making’ and ‘mechanisms for holding organization accountable.’
Corporate Governance?
Narrow Perspective
Relationship between company and shareholders
Traditional finance paradigm
Broader Perspective
Web Relationship
Company, shareholder, employees, customers, suppliers bondholders,
etc.

Corporate governance is an area that has grown very rapidly in the last decade,
particularly many companies, banks are collapse in various countries. There has
been a significant interest shown by governments in trying to ensure that such
collapses do not happen again because these lead to a lack of confidence in
financial markets. Emerging financial scandals will continue to ensure that there is
a sharp focus on corporate governance issues, especially relating to transparency
and disclose, control and accountability, and to the most appropriate from of Board
structure that may bem capable of preventing such scandals occurring in future.
There is no unique structure of corporate governance in the developed world. The
corporate governance code of each country has to be designed keeping in view the
particularities of the country.

A company’s corporate governance is important to investors since it shows a

company's direction and business integrity. Good corporate governance helps
companies build trust with investors and the community. As a result, corporate
governance helps promote financial viability by creating a long-term investment
opportunity for market participants.
Organization for Economic Co-operation and Development (OECD) describes
corporate governance as: ‘a set of relationships between a company’s board, its
shareholders and other stockholder. It also provides the structure through which
objectives of the company are set, and the means of staining those objectives, and
monitoring performance, are determined’. Corporate governance is the acceptance
by management of the inalienable rights of shareholders as the true owners of the
corporation and of their own role as trustees on behalf of the shareholders. It is
about commitment to values, about ethical business conduct and about making a
distinction between personal and corporate funds in the management of a
company.

CORPORATE GOVERNANCE PARTIES

8.1. The company or entity – an artificial person created by law with perpetual
succession and a common seal but operating through the medium of directors.

8.2. Directors – guardians of the company assets for the shareholders.

8.3. Managers – those who use the company’s assets.

8.4. Shareholders – those that own the company for private or public entities or the
line Ministers representing the Governments.

8.5. Stakeholders – various.

Corporate governance aims to improve the company’s image, efficiency,

effectiveness and social responsibility. It encompasses in itself a range of corporate
controls and accountability mechanisms designed to meet the aims of corporate
stockholders. It deals with issues regarding transparency accounting integrity,
composition of the board of directors, the role of non-executive directors and their
accountability to shareholders, etc.

definition
Corporate Governance is the process of supervision and control intended to ensure
that the company’s management acts in accordance with the interests of
shareholders (Parkinson, 1994).
Corporate Governance is the system by which companies are directed and
controlled (The Cadbury Report, 1992)
Corporate Governance is the structures, process, cultures and systems that
engender the successful operation of the organization (Keasey and Wright, 1993).
Example

PepsiCo is a good example of a company that practices good corporate

governance and keeps improving it.PepsiCo practices good corporate
governance by focusing on board diversity, long-term goals, ethics, employee
management, fair executive pay, and strong shareholder communication.
They clearly showed their leadership structure and linked executive pay to their
"Winning With Purpose" vision. By doing this, PepsiCo keeps improving and
avoids scandals.

 The companies Act, 2006 basic element of CG

 Rule of law: corporate governance is backed by appropriate legal
frameworks which protects an interest of all stakeholders with special
reference to minority shareholders. This effective implementation on
enforcement of legal framework leads to the formation of independent
judiciary as a regulatory body.
 Fairness: the corporate governance frameworks should protect share
holder right and ensure the equitable treatment of all share holders,
including minority and foreign shareholders. All shareholders should have
opportunity to obtain effective redress for violations of their right all
shareholders should be entitled to receive equitable treatment.
 Balance of power: this concept of separation of power is recently
developed in companies for check and balance between each other's actions
among the wings of the company i.e. company shareholders, board of
directors, and managers of the company, who are responsible for operation
and administration off the company.
 Protect interest of other stake holders: the OECD has recognized other
stake holders in the companies in addition to shareholders. Companies Act
has realize and recognize the sense of land protection that they have legal
and other obligations against all legitimate stakeholders.
 Disclose and transparency: corporate governance framework must be
consist of the principle of timely accurate discloser in respect of all material
matters regarding the corporation, including, financial situation,
performance, ownership and governance of the company.
 provision related to good governance :Sec. 11, 12, 16(2), 24(2), 28 (share
allotment), 35 (debenture issue), 36 (debenture trustee), 50(2), 57(1), 60
 (director's responsibility), 68, 77, 81 (can be fined), 86(3), 89(2), 90(2), 92,
94 ,95, 97, 99, 100, 104, accounts of a company: 108, 109, 110, 111, 112,
115, 164, 165, chapter-9: 120, 121, chapter -11: 136, 137, 178, chapter-12:
138, 139, 140, chapter-14: 145, chapter-17:160, 161

THEORIES

a. Agency Theory - Finance and Economics

b. Finance Theory
c. Transaction Cost Theory -
d. Stakeholder Theory
e. Stewardship theory
f. Resource Dependency Theory
g. Political Theory
explanation
f. the growth of stock markets and how they work led to the
development of agency theory. Amajor reason behind this was
the idea of limited liability, introduced in 1855, which laid the
foundation for agency theory. Before stock markets, companies
got money mostly from rich individuals, often family members.
In those days, the people who owned the company also
managed it. but for company to grow bigger, companies needed
money from many different investors, not just a few rich ones.

Limited liability encouraged more people to invest because investors would only
lose the money they put in, not their personal assets, if the company failed.
Because of this, companies could sell shares to the public through the stock
market to raise money.
However, companies only get money when shares are sold for the first time —
later buying and selling between investors doesn’t benefit the company directly.
When companies became owned by many shareholders from the public, a big
change happened: Shareholders could not run the company themselves, so they
appointed managers to do it for them.

This caused a separation between ownership (shareholders) and control

(managers), leading to what we call the agency problem.
In agency theory:

 The shareholder is the principal (the one who owns the company).
 The manager is the agent (the one who runs the company).

The problem is, managers (agents) might make decisions that help themselves, not
always what is best for shareholders (principals).

b. In finance theory, it’s generally assumed that a company’s main goal should be
to maximize the wealth of its shareholders.
However, managers often focus on their own personal interests (called egoism)
instead of doing what’s best for shareholders.
Because of this, managers might prefer projects that give quick, short-term
profits (especially if their salary or bonuses depend on it), rather than focusing on
long-term investments that would benefit shareholders more in the future.

This problem of focusing only on the short term is called short-termism.

Short-termism means:

 Companies make decisions with very short timeframes in mind.

 They may demand higher returns too quickly, instead of thinking about
proper long-term investment returns.

Countries like the UK are known for this problem, especially because their big
companies are often influenced by outside investors, like institutional investors
(big investment funds).
These investors often want quick profits from buying and selling shares fast
("churning" shares), without caring much about the company’s long-term health.
Because of this outside pressure, managers also focus on short-term results to
satisfy these investors.

In this situation, managers may also misuse company resources (like taking
company-paid holidays or buying expensive office equipment for themselves).
This kind of misuse reduces the value that should go to shareholders.
In agency theory, this loss to shareholders is called residual loss.

Overall, because the owners (shareholders) and managers have different goals,
there is a big agency problem.
This creates a need for shareholders to control and monitor managers better.

c.

Transaction cost theory connects ideas from law, economics, and management.
It looks at companies not just as businesses in perfect markets but as groups of
people with different views and goals.

The theory says that firms have grown so big that inside the firm, they do not rely
on outside markets to set prices or coordinate work.
Instead, management decides internally how resources are used, replacing what
markets normally do outside the firm.

The way a company is organized (like how much it controls its supply chain —
vertical integration) sets its power over prices and production.
Management prefers to internalize as much work as possible because it reduces
risks and uncertainties, like price changes or quality problems.

Dealing with outside markets has high costs (called transaction costs), so it’s often
cheaper and safer for companies to do things themselves.

Unlike traditional economics, which thinks people are fully rational and only
want profits, transaction cost theory accepts that humans are limited ("bounded
rationality") — they try to be rational but are limited by their knowledge and
abilities.
It also says people are sometimes opportunistic — meaning they act selfishly and
take advantage when they can.

Because of bounded rationality and opportunism, managers often arrange deals

to benefit themselves, not the company.
If managers behave selfishly, it discourages investors from trusting and investing
in companies.

This is where transaction cost theory and agency theory are similar:
  Both are worried about how to make managers work for shareholders,
not for themselves.
 Agency theory focuses on individual managers misusing company
resources (like bonuses and perks).
 Transaction cost theory focuses on the transactions themselves being
manipulated for self-interest.

d.stakeholder theory has been growing since the 1970s. One of the earliest ideas
was given by Freeman in 1984, who said companies should not only be
accountable to shareholders, but also to many different groups called
stakeholders. since then, many writers from different fields have talked about
stakeholder theory. Over time, people have started paying more attention to how
companies affect employees, the environment, communities, and not just their
shareholders.
Social and environmental groups have collected information and exposed
companies that harm or ignore their stakeholders. Stakeholder theory is not one
strict theory, but a mix of ideas from philosophy, ethics, politics, economics,
law, and social sciences. The main idea is that companies are so powerful today
that they must be accountable to many parts of society, not just their investors.
Stakeholders aare anyone who is affected by the comoany or can affect the
company. They hod a stake (an interest), not just a share(ownership) in the
company.

Examples of stakeholders include:

 Shareholders (investors)
 Employees
 Suppliers
 Customers
 Creditors
 Local communities
 The general public

Some strong versions of stakeholder theory even say that the environment,
animals, and future generations should be considered stakeholders.

Stakeholder relationships are like a two-way exchange:

 Stakeholders give something to companies (like labor, money, or support).

  In return, they expect companies to respect and satisfy their interests.

For example, the public can be seen as stakeholders because they pay taxes, which
support roads, schools, and services that companies use.
In return, they expect companies to act responsibly and improve quality of life.

Inshort
Every stakeholder is part of the big network of promises and expectations that
make up a company.
Some writers define stakeholders simply as anyone who has a real and fair
interest in the company.

e. Stewardship theory looks at relationships and behaviors that are often ignored
in traditional business theories.
It focuses on managers working for the good of the company, rather than for
their own personal gain.
In this theory, managers are seen as stewards — people who naturally want to do
what is best for the company and its owners (the principals).

Stewardship theory was created as an alternative to agency theory, which

assumes managers mostly act for themselves.

The basic ideas of stewardship theory are:

 Managers build long-term relationships based on trust, good reputation,

and shared goals.
 Managers and owners work together, with less focus on controlling or
watching managers all the time.
 Good relationships and mutual respect help align the managers’ actions
with the company’s goals.

f. The Resource Dependency Theory focuses on the role of board directors in

providing access to resources needed by the firm. It states that directors play an
important role in providing or securing essential resources to an organization
through their linkages to the external environment. The provision of resources
enhances organizational functioning, firm’s performance and its survival. The
directors bring resources to the firm, such as information, skills, access to key
constituents such as suppliers, buyers, public policy makers, social groups as well
as legitimacy. Directors can be classified into four categories of insiders, business
experts, support specialists and community influentials.
g. Political Theory
Political theory brings the approach of developing voting support from
shareholders, rather by purchasing voting power. It highlights the allocation of
corporate power, profits and privileges are determined via the governments’ favor.
PRINCIPLES
The basic principles of corporate governance are accountability,
transparency, fairness, and responsibility, equity, participatory.
The Organisation for Economic Co-operation and Development (OECD) is
an intergovernmental economic organisation with 37 member countries,
founded in 1961 to stimulate economic progress and world trade. It is a
forum of countries describing themselves as committed to democracy and
the market economy, providing a platform to compare policy experiences,
seek answers to common problems, identify good practices and coordinate
domestic and international policies of its members. The OECD is an official
United Nations observer.
The G20/OECD (Organization for Economic Cooperation and
Development) Principles of Corporate Governance
The purpose of corporate governance is to help build an environment of
trust, transparency and accountability necessary for fostering long-term
investment, financial stability and business integrity, thereby supporting
stronger growth and more inclusive societies. Corporate governance is about
how companies are directed and controlled. It creates trust, transparency, and
accountability, which helps attract long-term investments and ensures business stability.
The G20/OECD Principles of Corporate Governance guide countries in improving
their corporate governance laws and systems to support economic growth and financial
stability.

 First introduced in 1999, and last updated in 2015, these principles focus on:
o Protecting shareholders' rights
o Ensuring transparency and accountability
o Promoting board oversight
o Recognizing the role of stakeholders

They mainly apply to publicly traded companies, but can also help private or smaller
companies improve governance.

Governments or private sectors can build detailed rules based on these principles, adapting them
to local needs
 Corporate governance involves a set of relationships between a company’s
management, its board, its shareholders and other stakeholders. Corporate
governance also provides the structure through which the objectives of the
company are set, and the means of attaining those objectives and monitoring
performance are determined.
The Principles focus on publicly traded companies, both financial and non-
financial. To the extent they are deemed applicable, they might also be a
useful tool to improve corporate governance in companies whose shares are
not publicly traded. While some of the Principles may be more appropriate
for larger than for smaller companies, policymakers may wish to raise
awareness of good corporate governance for all companies, including
smaller and unlisted companies.
The Principles are presented in six different chapters:
I. Ensuring the basis for an effective corporate governance framework -
(Rule of Law)

The corporate governance framework should promote transparent and

fair markets, and the efficient allocation of resources. It should be
consistent with the rule of law and support effective supervision and
enforcement.

II. The rights and equitable treatment of shareholders and key ownership
functions

The corporate governance framework should protect and facilitate the

exercise of shareholders’ rights and ensure the equitable treatment of
all shareholders, including minority and foreign shareholders. All
shareholders should have the opportunity to obtain effective redress
for violation of their rights.

III. Institutional investors, stock markets, and other intermediaries

(Accountability)

The corporate governance framework should provide sound incentives

throughout the investment chain and provide for stock markets to
function in a way that contributes to good corporate governance.
IV. The role of stakeholders

The corporate governance framework should recognise the rights of

stakeholders established by law or through mutual agreements and
encourage active co-operation between corporations and stakeholders
in creating wealth, jobs, and the sustainability of financially sound
enterprises.

V. Disclosure and transparency

The corporate governance framework should ensure that timely and

accurate disclosure is made on all material matters regarding the
corporation, including the financial situation, performance, ownership,
and governance of the company.

VI. The responsibilities of the board

The corporate governance framework should ensure the strategic

guidance of the company, the effective monitoring of management by
the board, and the board’s accountability to the company and the
shareholders.
All these principles are related to the firm’s corporate social
responsibility. Started off being four (4). Now grown
to eleven (11). These are:

o Accountability
o Fairness
o Transparency
o Independence
o Sustainability
o Good board practices
o Control environment
o Board commitment
o Openness
o Reputation
o Stakeholder interface

There are 8 principles which underpin every system of governance:

The Core Concepts of Corporate Governance
We deal with each in turn.
a. Accountability – ensures that: Management is accountable to the
Board; and The Board is accountable to the shareholders.

b. Fairness: Fairness means impartiality or lack of bias. Refers merely

to the way companies and their officers treat stakeholders with some
disabilities such as
minority shareholders, employees, foreign investors, as against the
dominant players such as majority
shareholders. Provide effective redress for violations

c. Transparency – ensures that: timely accurate disclosure of all

material matters, including the financial situation,
performance, ownership and corporate governance is made. Financial
statements are prepared in accordance with international financial
reporting standards
(IFRS). The company’s registry filings are up to date. High quality
annual reports are published. Web based disclosure is in place.

d. Independence – ensures that: procedures and structures are in place

so as to minimize or avoid conflicts of interest. The Board has
independent non-executive Board members and advisors,
e. Sustainability – bear in mind that: No generally accepted definition
exists. But most commonly used definition is from the Brundtland’s
Report from the World
Commission on Environment and Development 1987 which defines
sustainability as:

f. Openness: Willingness to give all stakeholders information, except

that which is commercially sensitive. Information about current
developments in the company’s affairs must be provided timeously
through newspapers, radio and television, websites, etc.
g. Reputation: Being the character generally ascribed to a company or
organizational entity. For a listed company, a good reputation is a key
asset because it helps to enhance the shareholder value. Companies
with high reputation have corresponding high share prices. A strong
share price makes the raising of extra capital for existing or new
investments easy. Damage to the reputation of a company is quickly
reflected by a drop in its share price.

h. Stakeholder interface – well defined shareholder rights Recognizes

stakeholder rights, i.e. the rights of all those with an interest in the
entity and its
operations, e.g. employees, the community, suppliers, customers, etc.
Encourages cooperation between the company and its stakeholders in
creating wealth, jobs and
economic stability. Ensures that minority shareholder rights are
formalized and protected. Ensures that well organised shareholder
meetings are conducted. Ensures that policy on related party
transactions is in place. Ensures that policy on extra-ordinary
transactions involving the entity is in place.Also ensures that clearly
defined and explicit dividend policies are in place.

i. Good Board Practices – this entails

 Clear definition of roles and authorities of stakeholders.
 That duties and responsibilities of the directors are understood.
 That the Board is well structured and has appropriate composition
and mix of skills.
 Appropriate board procedures are in place.
 Director remuneration in line with best practice exists.
 Business ethics – i.e. established values and principles the entity
uses are in place to inform and
conduct its activities.
 That business ethics permeates a company’s culture and drives its
strategy, business goals,
policies and activities.
 The formulation of the entity’s business ethics code.

j. Control Environment

 Internal control procedures must be in place.

 Risk management framework must be present.
 Disaster recovery systems must be in place.
 Media management techniques must be understood.
 Business continuity procedures must be in place.
 Independent external auditors must be appointed to audit the
entity’s financial
statements.
 An independent audit committee must be established.
 Internal audit function must be appreciated and the internal auditor
must be
appointed.
 Management information systems must be established.
 Compliance framework must be established.

k. Board Commitment – ensures that:

 The Board discusses corporate governance issues and creates a

corporate governance
committee with a corporate governance champion.
 A corporate governance improvement plan has been created for the
entity.
 Appropriate resources are committed to corporate governance
initiatives.
 Corporate governance policies and procedures have been
formalized and distributed to relevant
staff.
 A corporate governance code has been developed.
 A code of business ethics has been developed.
 The company is recognized as a corporate governance leader.

l. As a matter of emphasis:

 Corporate governance is an important consideration for investors

around the world, especially
in Africa and other emerging markets.
 Directors are responsible for corporate governance.
 Serving as a member of any board is becoming a more demanding
responsibility.
5.2
model in UK

In the UK and the US, many big financial failures happened because internal
controls inside companies were weak.
In the US, a study (by the Treadway Commission) found that in almost half the
cases of corporate failure, fraud in financial reporting was part of the problem.

In the UK, corporate governance (the system of rules and practices that control
companies) started developing seriously only recently.
In the late 1980s and early 1990s, a series of scandals and company collapses
made shareholders and banks worried about losing their investments.
The UK Government realized that the existing laws and self-regulation were not
enough to prevent these failures.

To fix this, in May 1991, the Financial Reporting Council, the Stock Exchange,
and the accounting profession set up a committee led by Sir Adrian Cadbury.
The committee's report came out in December 1992. It said that companies with
strong governance would earn more trust from investors and grow better.
This report also introduced the Cadbury Code, a set of guidelines for good
corporate governance.

The Cadbury Code mainly focused on:

 How the board of directors should control the company, and

 The important role of auditors.

The London Stock Exchange made it mandatory for all listed companies in the
UK to either follow the Code or explain why they didn’t.

The Cadbury Code was based on three main principles:

1. Openness
2. Integrity
3. Accountability

Here are some key recommendations of the Cadbury Committee:

  The top roles (Chairman and CEO) should have separate responsibilities to
avoid too much power with one person.
 The board must have a clear list of important decisions that only they can
make.
 Directors should be able to get independent professional advice if needed,
at the company's expense.
 Ideally, the Chairman and Chief Executive should be two different
people.
 Executive directors' contracts should not be longer than three years.
 A remuneration committee (mainly made of non-executive directors)
should decide executives' pay.
 Non-executive directors should be appointed for fixed terms and should
not be automatically reappointed.
 Non-executive directors should be selected formally by the whole board.
 An audit committee (with at least three non-executive directors) should be
created with clear written rules.
 Directors must report how effective the company's internal controls are.
 Companies must fully disclose the fees paid to audit firms even for non-
audit services.

Many of these ideas were later included in Nepal’s Companies Act, 2006 and
guidelines issued by Nepal’s Securities Board and Nepal Rastra Bank.

After the Cadbury Report, more reports were made to improve corporate
governance in the UK:

1. Rutteman Report (December 1994):

o The Internal Control Working Group (led by Paul Rutteman)
created this report.
o It gave guidance to directors of listed companies on internal
controls and financial reporting, as Cadbury had recommended.
o It focused on making sure companies had good systems to prevent
fraud and mistakes.
2. Greenbury Report (July 1995):
o Created by the Confederation of British Industry.
o It focused on the growing concern about high pay for company
directors.
o Today, the ideas from this report are found in Section D of the UK
Corporate Governance Code.
3. Hampel Report (January 1998):
 o It reviewed the Cadbury and Greenbury Codes.
o The Hampel Committee found that a big change was not needed.
o It said that companies should mainly aim to protect and grow
shareholders’ investments.
o It preferred broad principles and common sense over strict “tick-the-
box” rules.
4. Turnbull Report (September 1999):
o Chaired by Nigel Turnbull.
o It gave practical guidance to company directors on how to set up
good internal controls under the Combined Code.
o The idea was to prevent financial fraud and ensure good quality
financial reporting.
o The guidance was updated in 2005 and replaced in 2014.
5. Higgs Report (January 2003):
o Led by Derek Higgs, after scandals like Enron and WorldCom in
the US.
o It reviewed the role and effectiveness of non-executive directors
and audit committees.
o Higgs supported the idea of "comply or explain" — companies could
either follow the Code or explain why not.
o He wanted stricter rules for board composition and better evaluation
of independent directors.
o He believed that earlier scandals (like the Maxwell case) could have
been avoided if proper governance codes were already in place.
o Later, in 2009, the Financial Reporting Council asked for an update
to his guidance, and in 2010, new draft guidance ("Improving Board
Effectiveness") was launched.

CORPORATE GOVERNANCE model in USA

Expansion of Corporate Directors' Duties (1977–1997)

From 1977 to 1997, the job of company directors in the U.S. grew bigger. Earlier,
they mainly had to be loyal to the company and its shareholders. Now, they also
had to make sure the company was being properly managed and that directors and
CEOs weren't too "friendly" at the expense of shareholders.

Corporate Governance in the 1990s

In the early 1990s, there was a lot of news about company boards firing CEOs (like
at IBM, Kodak, and Honeywell). Investors, led by a big group called CalPERS,
started getting more involved to protect their investments. They were worried that
CEOs and boards were getting too close — for example, giving out too many stock
options, sometimes with dishonest practices like back-dating them.

Scandals and the Rise of Governance Laws (2000s)

In the early 2000s, major companies like Enron and Worldcom collapsed because
of fraud. Smaller scandals also popped up (Adelphia, AOL, Arthur Andersen, etc.).
This made politicians and the public demand stronger rules for companies.
This led to the Sarbanes–Oxley Act of 2002. Later, the 2008 financial crisis and
concerns about extremely high CEO pay kept the spotlight on corporate
governance.

Ethical Measures (like Hotlines)

Some companies set up anonymous hotlines to report wrongdoing, like Citi's
"Ethics Hotline." But it's unclear if companies actually take the reports seriously.

Corporate Governance Rules

 After the Enron and other scandals, there was a big push for companies to be
more accountable.
 Enron's fraud made people question corporate accounting methods.
 Sarbanes–Oxley Act was passed to stop future scandals.

Some companies, like Citi, tried to look more ethical by setting up whistleblower
hotlines, but it’s not always clear if they take complaints seriously.

U.S. law for companies works like this:

 State law controls companies directly (like where they are incorporated,
mostly in Delaware).
 Federal law controls trading of company shares.
 Companies have charters (main rules) and bylaws (less powerful rules).
 Shareholders can change bylaws but cannot change the charter
themselves.
Other important laws and events:

Foreign Corrupt Practices Act (FCPA) of 1977

 This U.S. law banned bribing foreign government officials.

 Companies must also keep good financial records.
 The Department of Justice and the SEC (Securities and Exchange
Commission) enforce it.
 Breaking this law leads to serious fines and jail time.

The Enron Scandal

 What Enron Did: Enron, once a major energy company, used fake
accounting to make its finances look much better than they were.
 The Fallout:
o Enron collapsed in 2001, costing thousands of jobs and billions of
dollars.
o Their main auditor, Arthur Andersen, also shut down.
o This scandal helped push for the Sarbanes–Oxley Act.
 After Bankruptcy: Enron reorganized to sell off its remaining businesses
and settle debts.

Sarbanes–Oxley Act (SOX) of 2002

Key changes under SOX:

 Created the Public Company Accounting Oversight Board (PCAOB) to

regulate auditors (auditors previously policed themselves).
 CEOs and CFOs must now personally confirm that the company's financial
statements are true.
 Company audit committees must have independent members, including at
least one financial expert (or explain why they don’t).
 External audit firms:
o Cannot offer certain consulting services to companies they audit.
o Must rotate their lead auditor every 5 years.
o Cannot audit a company if certain top managers used to work for the
auditor recently.
Stock Exchange Requirements (like NYSE)
Companies listed on stock exchanges (like the NYSE) must meet extra governance
rules:

 Majority Independent Directors: More than half the board must be

independent — meaning they don’t work for the company and have no
major financial ties to it.
 Board Meetings Without Management: Independent directors must
regularly meet by themselves to discuss matters without company executives
present.
 Board Committees:
o Companies must have committees (like for nominating directors,
compensation, and audits), all made up of independent directors.
o Each committee must have clear roles written out (called charters).

Corporate Governance in India

The SEBI Committee on Corporate Governance says that corporate governance

means management must respect the shareholders as the real owners of the
company. Managers must act like caretakers (trustees) for the shareholders. It is
about following strong values, behaving ethically, and keeping company money
and personal money separate.

Since India’s economy is growing, it is very important to protect investors and

make sure company managers are held responsible. Big scandals like the Satyam
case (sometimes called "India's Enron") showed how bad governance can destroy
shareholder wealth and scare away foreign investors. Other scams like the stock
market scam, UTI scam, and Ketan Parekh scam also made people demand
better, more transparent corporate governance in India.

Satyam Scandal

 In January 2009, Satyam’s chairman, Ramalinga Raju, admitted he had

faked company accounts, hiding a fraud of ₹14,162 crore.
 The CBI (Central Bureau of Investigation) took over and filed charge sheets.
 In 2015, Raju and 10 others were found guilty.
  PricewaterhouseCoopers (PwC), Satyam’s auditor, was fined by the US
SEC and banned in India for 2 years by SEBI for helping in the fraud.

Ketan Parekh Scam

 Ketan Parekh, a stockbroker, manipulated stock prices (called K-10 stocks)

between 1998-2001.
 He used bank loans illegally and was banned from trading until 2017.

1992 Indian Stock Market Scam (Harshad Mehta Scam)

 Harshad Mehta misused loopholes and fake cheques to artificially raise

stock prices.
 Many banks gave loans based on false gains.
 When the scam was exposed, the stock market crashed badly.

Punjab National Bank (PNB) Fraud

 In 2018, Nirav Modi and his family cheated PNB using fake promises
(Letters of Undertaking) for ₹11,356 crore.
 Nirav Modi ran away from India.
 Enforcement agencies are trying to seize his assets and bring him back to
India.

Vijay Mallya Case

 Vijay Mallya, a businessman and former MP, took huge loans (₹90 billion)
and used them abroad.
 He left India in 2016.
 Indian authorities are trying to bring him back from the UK to face charges
of fraud and money laundering.
 His company Kingfisher Airlines failed, and he also lost his Force India
Formula 1 team.
Corporate Governance System in India

 SEBI regulates corporate governance for listed companies (companies on

the stock market).
 MCA (Ministry of Corporate Affairs) helps by setting up committees and
trusts like NFCG to promote good practices.
 Companies must follow rules under the Companies Act, 2013, which asks
for better transparency, disclosures, and accountability.

The major corporate governance initiatives launched in India since the mid 1990s
are discussed below:

The CII Code

On account of the interest generated by Cadbury Committee Report of UK, the

Confederation of Indian Industry (CII) took special initiative with the objective to
develop and promote a code of Corporate Governance to be adopted and followed
by Indian Companies, both in private & public sector, Banks, and Financial
Institutions. The final draft of the code was circulated in 1997 and the final code
called ‘Desirable Corporate Governance Code’ was released in April 1998. The
Committee was driven by the conviction that good corporate governance was
essential for Indian Companies to access domestic as well as global capital at
competitive rates. The code was voluntary, contained detailed provisions with a
focus on listed companies.

Need and Essence of Corporate Governance

A natural question to ask, given the theory behind corporate governance, is why do
we need to impose particular governance regulations through stock exchanges,
legislatures, courts or supervisory authorities? If it is in the interest of firms to
provide adequate protection to shareholders, why mandate rules, which may be
counterproductive? Evenwith the best intentions regulators may not have all the
information available to design efficient rules. In absence of regulations, founders
could employ anti-takeover defenses excessively and in the process not allow the
capital employed, which is owned by the shareholders, to be used most efficiently.

Companies Act 1956

The Companies Act 1956 is the most focal law of the country governing the
corporate sector of India. It is a comprehensive act that covers the functioning and
management of the company right from its establishment to winding up. Unlike
other countries our Companies Act has also undergone a number of amendments
necessitated by liberalization and globalization of our economy and growing
interest of global corporate world. The Companies Act, 2013 is very
comprehensive and has implemented a good number of provisions as discussed
below:

Many new terms have been introduced in the definition clause, like abridged
prospectus, depository, derivative, employees stock option, hybrid (securities),
listed public company, option in securities, securities, shares with differential
rights.

 Enhancement of the powers of SEBI with respect to listed companies.

 Regulation of public deposits- protection of small deposit holders.

 Introduction of equity shares with differential rights.

 Deletion of the concept of public trustee.

 Protection of the interest of debenture holders.

 Provisions relating to Directors and Corporate Governance.

 Amendments in provisions relating to auditors.

 Introduction of secretarial audit.

 Appointment of directors by small shareholders.

In India corporate failures caused by fudging of annual financial accounts among

others gave birth to the crafting of more than five (5) codes on corporate
governance and these are:

“The desirable corporate governance in India” – a code on the confederation of

Indian

industries, published in April 1998.

 Report “Kumar Manglam Birla” on corporate governance published by the Sebi

Committee in May 1999.

 Summary Report of the Consultative Group of Directors of Bank/Financial

Institutions

– published by the Ganguly Committee in April 2002.

 Summary Report on corporate audit and governance prepared by the Nareen

Chandler

Committee in December 2002.

 The Code on Corporate Governance prepared by Sebi Committee chaired by

Narayanamurthy published on 8 February 2003. In India the legislated approach on
corporate governance has gained ground as well.

OECD PRINCIPLES AND INDIA

United States and the United Kingdom comprehend standards for corporate
governance which took roots there and stretched to the other countries. The
members of Organization for Economic co-operation and Development (OECD)
took early initiatives to deal with governance issues.

The focal point of official efforts brought out the OECD 'principles of Corporate
Governance, endorsed by OECD ministers in May 1999 and subsequently revised
in 2004. The doctrine are based, for all intents and purposes, on the accessible legal
and regulatory preparations as well as the best prevailing practices followed by
market players in the OECD countries. Support for this OECD principles has been
reaffirmed on several occasions by diverse inter- Governmental groups and by·
international organizations as part of efforts to construct a sound architecture of

corporate governance after the 1997 crisis.

The new OECD principles agreed by OECD countries in April 2004 reflects a
global harmony vis-à-vis the critical importance of good corporate governance in
contributing to economic feasibility and strength. In this context we can
benchmark India’s corporate laws, primarily the Companies Act 1956, and the
Clause 49 of the listing agreement of SEBI Act to these principles and highlight
the fact that India Inc. conforms to most OECD principles of corporate governance
(2004) in terms of governance, transparency and disclosures.

India has a well-established corporate governance framework and it remained

unaffected by the Asian financial crisis of the late 1990s. Indeed, the move towards
adopting good corporate governance practices; better financial and non- financial
disclosures, and the promotion of transparent and efficient markets in India had
built up well before the Asian debacle. The corporate governance framework in
India primarily consists of the following

legislations and regulations:

The Securities Contracts (Regulation) Act, 1956: It covers all types of tradable
government paper, shares, stocks, bonds, debentures, and other forms of
marketable securities issued by companies. The SCRA defines the parameters of
conduct of stock exchanges as well as its powers.

The Securities and Exchange Board of India (SEBI) Act, 1992: This established
the independent capital market regulatory authority, SEBI, with the objective to
protect the interests of investors in securities, and promote and regulate the
securities market.

The Depositories Act, 1996: This established share and securities depositories,
and created the legal framework for dematerialization of securities. Listing
Agreement with stock exchanges: These define the rules, processes, and
disclosures that companies must follow to remain as listed entities.

MODELS OF CORPORATE GOVERNANCE

The Anglo-Saxon / Anglo-American Model: Based on Entrepreneurship and

Private Property

In the Anglo-Saxon model (like in the US and UK), companies are mainly
controlled by independent individuals and many small shareholders. Managers are
responsible to the Board of Directors and to the shareholders, who mostly care
about making profits and getting dividends (a share of profits). This system helps
move investments from weak businesses to stronger ones, but it sometimes lacks
long-term planning.

In the US, the stock markets play a big role in deciding who owns and controls
companies. Earlier, laws tried to stop too much concentration of ownership,
especially among banks. But recently, rules have changed because of economic
needs. Now, boards of directors have more power, investors are more cautious, and
managers focus more on key business issues. Companies also have to be very
transparent and share more information than companies in Japan or Germany.
Even small, growing companies can list themselves on stock exchanges like
NASDAQ.

Several groups have encouraged better corporate governance by supporting

shareholders. For example, the National Association of Investors Corporation
(started in 1951) teaches about stock investments, and the National Council of
Individual Investors protects shareholders' rights with regulators. These groups
mainly work to make businesses more transparent, strengthen shareholder
protection, and promote ethical behavior.

In this system, governance happens at three levels: shareholders → directors →

managers. Managers get their power from the board, not directly from
shareholders. Shareholders cannot interfere in daily operations but can influence
decisions by electing board members, withdrawing their investments, or refusing to
invest more money.

The US Securities and Exchange Commission (SEC) has made some rules more
flexible to allow better communication between managers and shareholders about
company strategies.

Institutional investors (like big investment funds) are becoming very powerful in
this system. In the UK, they already own about two-thirds of company shares.
Now, in the US too, companies are paying more attention to these big investors,
mainly because older control systems inside and outside companies failed.

In Anglo-Saxon countries, financial markets (stock markets) are very strong, and
banks are not heavily involved in owning companies. In the UK, London’s stock
market is very important, and companies rely more on investors than banks. Banks
are mainly treated as lenders, not owners.

The structure of ownership is spread out — lots of different shareholders, not just a
few big owners. Investors can influence economic growth by buying shares. Also,
in this model, external forces like mergers and stock trading heavily influence
companies. Regulatory bodies work to protect investors and make sure companies
have independent boards that monitor managers and improve performance.

example :shareholders
 (elect)

board of directors

(appoint)

manager

(run)

daily company operations

Apple Inc.

 Shareholders:
Millions of people, mutual funds, and pension funds (like Vanguard or
Fidelity) own small pieces of Apple.
 Board of Directors:
Apple’s board includes people like Arthur Levinson (Chairman) who are
elected by the shareholders. They oversee big decisions and supervise the
CEO.
 Managers:
Tim Cook (CEO) and his team manage the company's day-to-day activities,
like launching new iPhones and expanding services.
 Shareholder Power:
o If investors think Apple’s leadership is making bad choices, they can
vote against certain directors or propose changes during shareholder
meetings.
o They can also sell Apple shares, which could cause the stock price to
fall — pressuring the company to adjust its strategies.
 Regulation:
Apple must regularly file reports with the SEC, disclosing profits, losses,
new projects, and risks. This ensures transparency so shareholders can make
informed decisions.

2. Continental European Model – Focused on Major Shareholders'

Interests
The Continental European model is marked by a high concentration of ownership.
Major shareholders have strong ties to the company and actively take part in
management and control. Managers are accountable not just to shareholders but
also to other groups like employees’ unions and business partners.

In Italy, the idea of corporations goes back to ancient Rome under Emperor Trajan.
Back then, groups called collegia artificum acted like early business organizations.
Their members received tax benefits and legal protections, inspired by Greek
traditions, and aimed to support businesspeople.

Later, Italian corporatism developed in two forms:

 Catholic corporatism (late 1800s–early 1900s), led by thinkers like

Giuseppe Toniolo, promoted solidarity over individualism.
 Fascist corporatism (1920s–1940s) under Mussolini, organized workers
and employers into corporations to manage the economy collectively. The
key moment came in 1939 with the creation of the Chamber fascia, which
ended after the fall of fascism.

In the 1980s, the idea of neocorporatism emerged, where public regulation of

companies became stronger in response to economic challenges. Today, in Italy
and much of Europe, the ownership of companies is still highly concentrated,
giving major shareholders real power to influence management decisions.

In Germany, the governance model sees a company as a gathering of many

interest groups working towards national economic goals. Historically, banks have
had a major role in company management.

 Unlike the U.S., most German companies rely on bank financing instead of
public stock markets.
 Banks often own shares in the companies they fund and can exercise voting
rights on behalf of other shareholders.

Germany follows a dual-board system:

 The Executive Board runs the company daily.

 The Supervisory Board oversees and approves important decisions.
This structure ensures strong monitoring of managers and also promotes
industrial democracy by giving employees a voice in governance.
Example: Volkswagen Group (Germany)

 Volkswagen has a dual-board system: the Executive Board (managing

daily operations) and the Supervisory Board (which includes major
shareholders, government representatives, and employee representatives).
 The state of Lower Saxony owns about 20% of Volkswagen and has special
voting rights, giving it major influence over company decisions.
 Workers have strong representation: half of the Supervisory Board members
are employee representatives.

3.The Japanese Model – Focused on Oriented Control Governance

The Japanese model introduces the idea of holdings — industrial groups made up
of companies that share interests and strategies.
Managers are responsible not only to shareholders but also to a network called
keiretsu — groups of loyal suppliers, customers, and business partners.

 Keiretsu helps companies cooperate and compete at the same time.

 It protects companies from hostile takeovers and promotes long-term
relationships over short-term profits.
 Most Japanese companies belong to some keiretsu group.

The governance structure is built on two layers of relationships:

1. Between shareholders and broader groups like employees, suppliers,

creditors, and the government.
2. Between company administrators (directors and managers) and these same
stakeholders.

This model aims to reduce the risk of conflict between different groups and ensures
that decisions focus on strengthening the company's income and market power.

 Like Germany, Japan’s governance relies on internal control, not on stock

markets.
 Strategic shareholders like banks are deeply involved in management to
ensure efficiency and penalize poor performance.
 The system balances the interests of the company’s workers and business
partners.

Financing mainly comes from bank loans, not stock market investors.
  Owners are often other companies or banks, and they control management
decisions.
 Shares are mostly held by stable, long-term partners like suppliers,
customers, and banks to build trust rather than just seek profits.

The government plays an active role:

 Through agencies like the Central Bank and Ministry of Finance, it

supervises companies' activities.
 Policies are often implemented through informal negotiation systems like
gyosei shido (administrative guidance).
 In the 1980s, many retired government officials (called amakudari) were
appointed as company directors to help align private sector strategies with
national policies.

The Japanese system still faces challenges:

 It has less corporate transparency compared to the U.S.

 Many companies are family-run, and banks or institutional investors have
limited influence over governance.
 Shareholders are generally passive, and internal directors dominate, making
corporate control mostly an internal affair.

Today, Japan’s economy is still built more on transactional networks than

individual ownership, and governance remains deeply tied to these networks.

Example: Mitsubishi Group (Keiretsu example)

 Mitsubishi is one of Japan’s best-known keiretsu.

 It includes companies like Mitsubishi Motors, Mitsubishi Heavy Industries,
and Mitsubishi UFJ Financial Group.
 These companies hold shares in each other, provide mutual financing, and
work together on long-term business strategies

Table 1 – The main features of corporate governance models

Anglo-Saxon Continental Europe Japanese
Oriented stock market banking market banking market
towards
Considers shareholders’ shareholders’ property stakeholders’
property right right and company’s interests
relationships with its (keiretsu)
employees

Shareholding dispersed concentrated concentrated

structure (cross possession
of shares)
Management executive directors Supervisor Board Board of
non-executive Board of Directors Directors
directors Revision
commission
Control external internal Internal
system
Accounting GAAP (Generally IFRS (International GAAP and IFRS
system accepted Financial Reporting
Accounting System)
Principles)

Strengths and weaknesses of governance models

Anglo-Saxon Continental Japanese
European
Strengths continuous multiple risk decreased optimism
discipline carriers
transparency mutual benefit direct influence of
owners
Weaknesse failure slow reaction resistance to change
s

V.3 ROLE OF BOARDS ON CG

 The BOd plays a pivital role in any system of CG
 BOD is responsible for the governance of their company
 The responsibilities of the companies include, inter alia, defining the
mission and vision, to set the company’s strategic aim’s financial
goals, providing the leadership to put them into effect, putting in place
adequate internal controls, supervising the management of business
and reporting periodically to share to their stewardship.
  The Action of the Directors, while subject to the laws of the company,
are also supervised by the regukators and shareholders in the AGM
 The Bod is the investors custodians of trust and they make the
decision on their behalf in the internet of companys p[rogress.
Adequate disclosure by way of financial statements and other
information becomes an important part of the governance process for
which directors are responsible.
 Since good conduct and activies of directors would bring a positive
impact to the institution and to the country’s overall financial system,
therefore the following arrangements have been made in respect of the
appointment of the directors, their duties and responsibilities:
a.Directors shall keep themselves informed of the condition of the business,
its activities and the policies pursued by the management and initiate
remedial measures as per need
b.they shall supervise and monitor the activities with a higher degree of
prudence and competence
c. they may delegate aauthorities to employees, but the ultimate
responsibilities of the work of such employee lie on the directors
d. the meetings of the BOD shall be conveyed as are provided under the
existing law.

V.4 Role of Shareholder in CG

V.5 Role of CEO and Management in Corporate Governance
CEO is a top-level executive, responsible for developing and implementing strategies. CEO‘s
responsibilities encompass allocating capital, and building and overseeing the executive team. The term
CEO is defined in the Companies Act 2006 BAFIA 2017.

“Officer” includes director, chief executive, manager, company secretary, liquidator, and any
employee undertaking departmental responsibility of the company (Sec 2 (j), Companies Act)

“Chief Executive” means, and includes the Chief Executive Officer having responsibility of operating a
bank or financial institution and also the Executive Chairperson and Managing Director acting as the
Chief Executive (Sec.2 (i) BAFIA).

The CEO is the highest-ranking employee within any corporate body and is responsible for reporting to
the BOD. The CEO’s role is to manage the company’s business, exercise power, and act in the best
interests of the company, carrying out duties like promoting success and exercising independent
judgment, reasonable care, skill, and diligence.

Major roles and responsibilities of the Directors including the CEO under the pertinent existing laws are:
(a) Managing the company’s business,
b) Exercising the company’s business,
 (c) Exercising powers of the company,
(d) Exercising independent judgment,
(e) Exercising reasonable care, skill, and Diligence
(f) Avoiding Conflict of interests
(g) Acting within the Powers as defined in the MAO and the Companies Act.

Appointment of Chief Executive and Terms and Conditions of Service (Sec. 29, BAFIA 2017):
* The Board of Directors shall, subject to this Act, MOA, and AOA, appoint one Chief Executive to
manage of the bank or financial institution.
* The tenure of office of the Chief Executive shall be four years and he/she may be re-appointed again for
the next term of office.
* The Board of Directors may remove the Chief Executive from his/her office at any time; in case his/her
work performance has not been satisfactory.
* While appointing Chief Executive, the persons having possessed the following qualifications and
experience shall be appointed and information thereof shall be furnished to the Rastra Bank within seven
days from the date of appointment:
(a) Having attained Master’s degree in management, banking, finance, monetary, economics,
commerce, bookkeeping, statistics, account, mathematics, business administration or law,
(b) Having work experience of at least ten years as an officer level or above in banking or finance
sector, government agency, corporate body, university or an international institution or
organization to carry on similar works after having attained bachelor’s degree in chartered
accountancy or management, banking, finance, monetary, economics, commerce, bookkeeping,
statistics, account, mathematics, business administration or law.
In case of the Chief Executive of a Class "D" financial institution, one shall have to possess the
academic qualifications and work experience as specified by the Rastra Bank.
(c) Having completed the criteria as prescribed by the Rastra Bank about appointment of the
Chief Executive,
(d) Not been disqualified under Sub-Section (1) of Section 18.

 In case the Chief Executive appointed according to Sub-Section (1) has not been found
qualified according to this Act, the Rastra Bank may issue an order to the concerned bank or
financial institution to remove such Chief Executive and to appoint another person being
qualified to get appointed in the post of Chief Executive.

 Remuneration, terms and conditions of service, and other facilities of the Chief Executive shall be
as specified by the BOD. The terms and conditions of service and facilities shall have to be fixed
at the time of his/her appointment.

 The Chief Executive of any bank or financial institution may not be appointed as the Chief
Executive, official, employee or in other position in any other business organization. Provided
that provision of this Sub-Section shall not be deemed to have made obstruction to be the
Director of an Infrastructure Development Bank in which the bank or financial institution has
made investment in such development bank.

Functions, Duties, and Powers of the Chief Executive (Sec.30, Ibid):

(a) To exercise the powers delegated by the Board of Directors and to implement decisions of the Board of
Directors subject to the Memorandum of Association and Articles of Association and oversee and control
the activities and transactions of the bank or financial institution,
(b) To prepare annual budget and action plan of the bank or financial institution and submit before the Board
of Directors for approval,
(c) To manage necessary human resources subject to the Personnel Byelaws of the bank or financial
institution,
(d) To implement or cause to be implemented the decisions of the General Meeting,
(e) To operate the institution according to this Act and directives of the Rastra Bank and to have an effective
internal control system and risk management,
(f) To submit statements, documents, decisions, etc. to be submitted by the bank or financial institution to the
Rastra Bank or any other agency on time subject to this Act, directives of the Rastra Bank and
Memorandum of Association, and Articles of Association,
(g) To operate the institution with optimum protection of the interests of depositors, shareholders, and the
institution itself,
(h) To apply appropriate norms for senior management subject to the policy as determined by the Board of
Directors. (2) The Chief Executive shall be accountable to the Board of Directors for his/her own work.

5.6 Role of Employees in Corporate Governance

 Shareholders’ long-rung interests are well served by employees in a corporate body.
 Growing recognition that human capital is a source of competitive advantage
 Employees’ participation enhances wealth creation.
 Employees’ participation to decision making process, contributing knowledge & skill by
representing in executive positions can play a role in maintaining corporate governance
standards.
 A company’s success stems largely from effective corporate governance &management,
& employees have a very high interest in that.
 If the company is successful, employees can continue reaping benefits in the form of
remuneration.
 Employees, have an interest in the company’s/corporation’s well-being, & as such, it is
fair that they should have a say in decisions that impact them.
 Employees share ownership plan.
 Organizations that involve their employees in corporate governance often realize positive
results.
 Employees shall maintain confidentiality of customer information & transactions.
 Business and financial information of any customer may be made available to any other
third person or organization only with the written consent of the customer.
 Fair & equal treatment: Employees shall conduct business transactions fairly & equitably
without being influenced by the friendships & associations with the customers.
 Employees have a great deal more motivation i.e enhanced productivity.
 Making employees part of the process thereby improve change management throughout
the organization.
 Where the employees of the institution have a financial interest in any customers in
respect of ownership, partnership, borrowing or giving loan, the information of such
interest shall be immediately disclosed to the nearest supervisor.
 Employee, in addition, to engagement in the corporate body, shall not be involved full-
time in the operations of other businesses.
  Employees shall not engage as trustees or administrators of customers’ estates. Written
approval of the Chief Executive Officer shall be obtained if such an engagement becomes
necessary.
 Employees shall not engage in any activities resulting in personal benefit by misusing
the name & the position held.
 Employees and their relatives shall not use their family connections in dealing with the
institution.
 Employees shall not misuse any information acquired in course of the transaction of
the institution. The employees are also prohibited from communicating such information
to any of their subordinate employees.
 Employees shall not personally alter the records and documents relating to accounts of
the licensed institution in an unauthorized manner.
 Voluntary participation, clarity and transparency, regularity, compatibility with workers
mobility (vide EU Guidelines).
 Employees shall not engage directly or indirectly in any activities which are against the
interest of the institution.
 Employees shall not engage directly or indirectly in any customer' transactions in which
they have financial interest.

Involving employees in corporate governance:

 Survey employees for feedback on corporate decisions,
 Create employee councils that act as representatives on employee-related matters,
 Get some staff representation on the BOD,
 Focus on treating employees fairly.
 Doing so makes it more likely that employees will be heard on important matters while
also supporting compliance with employment law.
 An environment where employees can be heard not only helps improve compliance with
employment regulations, but it also improves regulatory compliance throughout the
organization while enhancing corporate governance.
EU Guidelines

a.Voluntaryparticipation
b.clarityandtransparency
c.reguarity
d.compabilitywithworksmobility
Vide Section 138 of the Companies Act 2006 which stipulates power to prevent
directors and officers from doing unauthorized act

5.7Role of Creditors and Institutional Shareholders in Corporate Governance

 The creditor of the company are the stakeholders who provide company with
debt financing.
 Bond holders and banks expect to receive periodic interest and principal
repayment arising from that they lent to the company
  a sustainable company should seek to satisfy legitimate needs to both
creditors and shareholders
 They both play a critical role in financing by term growth & sustainable
value creation:
 Investors should build sensitivity towards reconciling the different but
legitimate prespective of Corporate creditors and shareholders and to seek
/ide fify common area of allignment and as an aspect of stewardship and
engagement.
 → Bank or financial institution on Banking and financial transaction
(BAFIA sec. 49,2073)
 → Effective debt monitoring and collection play a cruciel. role in corporate
governance in market economic and require adequate information, creditors
incentives. and an appropriate legal framework
 both financial sector reform private sector developmenthave received
considerable attention in developing and transaction economics in recent
years.
 creditors in turn rely for their survival for their debt repayment for their
economics.
 -Secured Transaction Act, 2065 B5.
 sec. 2(c), (7), (k)
 Muluki Civil Code, 2074 .263-273
 The requirement of good control or corporate governance by owners have
been extinsely analyzed. There are three Foundations to creditors monitoring
and control in market economices.
1.Adequate Information
2. Market Oriented Creditors Incentives
3.an appropriate legal framework for debt collection
5.8 provision relation to CG under companys law
Companies Act (2006) and amendment 2017
Rule of law
To bring about dynamism in the economic development of a country
To promote investment
To bring liberalization
Easier incorporation, operation, and administration
Simpler and transparent operation
Transparency
To ensure transparency, Chapter 7 has a provision of Accounts and Records
of the Company and Chapter 8 has provisions for Audit.
Accountability
Accountability comes by duties and responsibilities. The Chapter 6 (Board
of Directors) holds the following provisions
Sec 92: Disclosure by Directors
Sec 95: Power and Duties of BOD
Sec 99: Responsibilities and Duties of Directors
Sec 101: Prohibition on Loans to Officers or Shareholders
Sec 102: Prohibition on Giving False Statements by Officers
Sec 105: Restrictions on Authority of Directors
Chapter 8 (Audit) Section 115 puts forth the functions and duties of the
auditor, making him/her accountable for his/her activities.
Chapter 9 is rather the strongest of the provisions that help in maintaining
accountability. It is named as “Call for Explanation and Investigation”. In
the chapter following sections make sure that accountability is maintained:
Sec 120: Power of office to call for explanation
Sec 121: Power of office to deputy inspector
Sec 122: Function, Duty and Power of Inspector
Sec 124: Report to be submitted
Chapter 18 – Audit Committee presents the function, duties, and power of
the audit committee (Section 165)
Responsiveness
Following are the chapter and sections that ensures responsiveness:
Chapter 4: Shares and Debentures
Sec 29: Power to Issue Shares at Premium
Sec 56: Power of Company to Alter its Share Capital
Chapter 6: Board of Directors
 Sec 95: Power and Duties of BOD
Chapter 11: Cancellation of Registration of Company
Sec 136: Power of Office to Cancel Registration
Equity and Inclusiveness
For equity and inclusiveness, we have Chapter 12: Protection of Share
Holders. It includes
Sec 138: Power to prevent directors and an officer from doing an
unauthorized act
Sec 139: Remedy for an act or done against the rights and interest of
shareholders
Sec 140: Right to the shareholder to institute case in behalf of the company
Sec 141: Acquisition or sale of property
Participation
Chapter 5: Meeting of the company ensures the participation of every
stakeholder. it includes:
Sec 67: General meeting of the company
Sec 68: Directors required to be present
Sec 69: Legality of meeting
Sec 71: Right to vote
Sec 73: Quorum
Sec 76: Annual General Meeting
Provisions Relating to Single Shareholder Company
There are some provisions relating to single shareholders company as well in
Companies Act (2006) of Nepal. They include:
Sec 52: Single shareholder company not required to call a meeting of the
board of director
Sec 153: Transfer and transmission of shares of the single shareholder
company
 Since single shareholder is not liable to call a meeting and pass the
resolutions through consent, the very essence of participation of stakeholders
and other corporate governance essential are seen to be violated.
The Principles are presented in six different chapters:
I. Ensuring the basis for an effective corporate governance framework - (Rule
of Law)

The corporate governance framework should promote transparent and

fair markets, and the efficient allocation of resources. It should be
consistent with the rule of law and support effective supervision and
enforcement.

II. The rights and equitable treatment of shareholders and key ownership
functions (Equity)

The corporate governance framework should protect and facilitate the

exercise of shareholders’ rights and ensure the equitable treatment of
all shareholders, including minority and foreign shareholders. All
shareholders should have the opportunity to obtain effective redress
for violation of their rights.

III. Institutional investors, stock markets, and other intermediaries

(Accountability)

The corporate governance framework should provide sound incentives

throughout the investment chain and provide for stock markets to
function in a way that contributes to good corporate governance.

IV. The role of stakeholders (Responsive)

The corporate governance framework should recognise the rights of

stakeholders established by law or through mutual agreements and
encourage active co-operation between corporations and stakeholders
in creating wealth, jobs, and the sustainability of financially sound
enterprises.
 V. Disclosure and transparency (Transparency)

The corporate governance framework should ensure that timely and

accurate disclosure is made on all material matters regarding the
corporation, including the financial situation, performance, ownership,
and governance of the company.

VI. The responsibilities of the board (Participative)

The corporate governance framework should ensure the strategic

guidance of the company, the effective monitoring of management by
the board, and the board’s accountability to the company and the
shareholders.

Rule of law
Transparency
Accountability
Responsiveness
Equity and Inclusiveness
Participation

Unit 6 corporate liablity and business ethics

VI.1 civil liability and criminal liability of companies
. A Company Has a Separate Legal Personality. A company is treated as a
legal person. This means it can:

o Own property,
o Sign contracts,
o Be sued or sue others,
o Be responsible for wrongdoings (like torts or crimes).section
 But a company is not a human—it cannot act on its own. It needs humans
(directors, employees, or agents) to act on its behalf.

so, when a compay does something wrong It is usually because a person

(agent or employee) did it in the course of their job, and the law treats it as
the company’s act.

 Ethics is about understanding what is right or wrong in various areas of

life.
o Example: Business ethics (fair practices in business), medical ethics
(how doctors should behave), or legal ethics (standards for lawyers).
 Morality and ethics are closely related, often used interchangeably.

🔹 in one hand Individuals are moral agents. They:

o Have a conscience or a sense of right and wrong.

o Can feel guilt or remorse.
 Corporations and nations, on the other hand:
o Are not human.
o Do not have a soul or conscience.
o Are run by people, but it is difficult to say that "the company itself"
feels guilt or makes moral decisions.

📌 Example:

 If a company cheats customers, we can punish it legally, but it doesn’t feel

shame or guilt like a person would.

It matters
  Because companies are treated as legal persons, we hold them legally
accountable.
 But since they lack human feelings or conscience, the idea of moral
responsibility is more complex.
 That’s why we also look at the people behind the company’s actions—like
the directors or employees—when discussing ethic

There are two propositions about business and ethics.

Companies Have Reputations

 Just like people, companies are known by their reputation.

 A company’s reputation is based on how others feel about it:
o Customers, suppliers, employees, and the community.
 This reputation is built over time and can affect business success.

🔹 2. Goodwill Comes from Good Actions

 When a company does good things (like fair dealings, quality service,
ethical behavior), it creates goodwill.
 Goodwill means the positive feeling or trust people have toward a
company.
 Goodwill is valuable—when a business is sold, the buyer often pays more
for a company with good goodwill.
 So, if a company behaves ethically, it earns trust, and that trust becomes a
business asset.

✅ Conclusion: “Good Ethics is Good Business”

 If a company behaves well (ethically), people will trust and support it.
 That trust builds reputation and goodwill, which helps the company
succeed.

Corporate Liability
The acts and mind of the governing body (director/chief executive) of the
company are regarded as the acts and mind of the company. Corporate
liability means a situation where company can be held legally responsible
for the acts of its employees, partners or failure to do so.

The doctrine (alter ego) was first laid down by the House of Lords in
Lennards Carrying Co v. Asiatic Petroleum, (1915) where the major
shareholder’s negligence in navigating the company’s ship was held to be
the negligence of the company for the purposes of assessing
liability .Sometimes known as the alter ego doctrine, this is the antithesis of
the doctrine of separate corporate personality.

This doctrine has been applied in various areas of the law but for the some
years it remained unclear as to exactly whose acts and intentions could be
attributed to the company. In Bolton (Engineering) Co Ltd v Graham &
Son (1957), Lord Denning drew a distinction between the acts of those
directors and managers who control what the company actually does and the
acts of mere servants who simply carry out the course of action prescribed
by those in control.

Criminal Liability

Corporate Criminal Liability is a liability imposed upon the corporation for

any criminal act done by the Natural Person. Liability is imposed to regulate
the acts of the corporation. Any corporation can be made liable for the
action of its members if he/she

commit a crime

with intent to benefit corporation

acts within the jurisdiction of employment

When a Corporation is hold criminally liable it not only affects the business
of corporation but also the individuals in the corporation who are engaged
in criminal conduct it may make them suffer criminally and financially.
 Development of concept of Corporate Criminal Liability

In the past, holding a company (corporation) responsible for a crime was a new idea. But now,
the law has changed so much that it is very normal to say:
➡️A company can be held guilty of any kind of crime.

However, sometimes courts still hesitate to punish companies for certain crimes. This is
because of older legal beliefs that:

 A company is not a real person (this is called the Fiction Theory).

 Some acts are “ultra vires”, meaning they go beyond the company’s legal power, so they
don’t count.

But today, these old ideas are fading. Courts and laws have:

 Made rules stronger to allow punishment of companies..

Doctrines in Corporate Criminal Liability

These are the doctrines established in corporate criminal liability.

1. The Doctrine of Vicarious Liability

Under the Doctrine of Vicarious liability as in law of torts its stated that the
Master is vicariously held for the acts committed by the servants. Similarly,
in the case of Ranger v. The Great Western Railway Company it was held
that the company is held vicariously liable for the acts committed by its
employees if it is done in the course of its employment. This doctrine is
applicable as same as Respondent Superior was applicable as in civil law,
but it does not find in criminal law as in criminal law it states that every
person is liable for the acts committed by them and not for acts committed
by others.

2. The Doctrine of Identification

Under the Doctrine of Identification the acts of Corporate officers are

identified with that of a company wherein the corporation being a artificial
legal person having no physical existence the acts committed or guilt by
senior officers in their official capacity, the company shall be held
accountable
3. The Doctrine of Collective Blindness

Under the Doctrine of collective blindness, courts have held that

corporations will be held liable even if single individual was not at fault and
considered sum total knowledge of all employees in order to make a
corporation liable.

4. The Doctrine of Wilful Blindness

Under such doctrine if any illegal or criminal act is committed and the
corporate agent does not take action or measures to prevent happening of
such activities then doctrine of wilful blindness is applicable.

5. The Doctrine of Attribution

Under the Doctrine of attribution, as in case of sentencing or imprisonment

in event of act or omission leading to violation of criminal law, the mens rea
i.e. the guilty mind is attributed towards the directing mind and will of the
corporations. This doctrine is being used in India however this doctrine was
developed in United Kingdom.

6. The Doctrine of Alter Ego

Under the Doctrine of Alter Ego, it is described as someone’s personality

which is not seen by others. The owners and persons who manage the
affairs of the Company are considered as the Alter Ego of the Company.
The Directors and other persons who mange the affairs of the company can
be held liable for the acts committed by or on behalf of the

Company under this doctrine since the corporation has no mind, body or
soul so the people are the directing mind and will. However, it has always
been relied that the principle of Alter ego has been acted in reverse so the
acts of individuals who are managing the affairs of the Company are
attributed to the Company and not vice-versa.

Models of Corporate Criminal Liability-

The models under the Corporate Criminal Liability are as follows:

1. The Identificati on Doctrine

It is an English law Doctrine wherein it tries to identify that certain persons

who acts on behalf of corporation and whose directing mind and conduct
can be attributed to the corporation. The liability of these persons where the
persons acting on behalf of corporation is limited to the scope of them
working in employment or authority.

2. The Organizational Model

In terms of criminal cases model of corporate criminal liability in India

focuses on organizing model while defining the corporate criminal liability
of an organization. The Corporate culture may provide an environment for
which will lead to Commission of Crime.

3. The Derivative Model

The liability of an organization is derived liability in terms of Corporate

Criminal liability wherein the liability is put on the organization because the
individuals who commit the crime are in connection with the organization.

Can a company be prosecuted for a criminal offence?

In England, two early cases involving statutory companies established

that it is possible to bring criminal liability proceeding against a body
corporate. Many would say that Parliament is the proper forum for deciding
such fundamental questions of criminal liability but Parliament has given no
general guidance on the questions, and the courts have proceeded
cautiously. In case of Director of Public Prosecutions v. Kent and Sussex
Contractors Ltd., the company’s transport manager has signed a false
statement of the distance that had been travelled by one of the company’s
vehicles, presumably in order to obtain an increased allocation of petrol
under the rationing scheme then in force. The traditional approach of the
courts has been to find a company liable for the criminal failings of its
business organization if either the crime was one for which the company
could be held vicariously liable or the crime was intended by the directors
who are at the interface of the company as it is conceived in law and the
organization which conducts the company’s business.
Corporate Criminal Liability in Nepal

In criminal law, corporate liability determines the extent to which a

corporation as a legal person can be liable for the acts and omissions of the
natural persons it employs. A particular focus of the alter ego doctrine has
centered on the liability of companies for corporate manslaughter
(homicide).

There are many provisions of Companies Act, 2006 section 160 which
impose criminal sanctions for breach of its requirement. Where a company
is required to do something, it is usual to impose a criminal sanction, for
failing to comply, on every officer of the company who is in default.313

Companies criminal Liability related sections 160 (o), (p), (q), (r ), (w),
(x), (x1), and (x2).

Criminal Code, 2074 sections 249-253., 675-682.

There are two major challenges in holding a corporate criminal liable.

Firstly, an act of company or body corporate cannot be said to have met the
elements of crime in the absence of the mental element. Secondly,
punishments arising from criminal liability cannot be imposed on a
company or as a company can neither be executed nor imprisoned.

The concept of a company’s separate personality is that it can be liable for

breaches of contract, torts, crimes etc. But for obvious reasons, it can only
act through human agents or employees, so that, as a general principle, a
company can only be liable either where a principle would be liable for the
acts of an agent or an employee liable for the acts of an agent or an
employer liable for the acts of an employee.

Section 30 of Criminal Code, 2074

Section related to 160 of the Companies Act, 2006

Decision of Supreme Court of Nepal in the case of Government of Nepal v.

Webline Network Marketing Pvt. Ltd., NKP 2075, decision no. 9954, issue
2, at 305.
Civil Liability

In a certain cases a director or other company officer may become

personality liable for some wrong connected with the company. The liability
of directors for breaches of duty is joint and several, so that where the
directors have misapplied the company’s funds, as by paying dividends out
of capital. Where a director of a company repeatedly breaches his or her
duty to the company, another director who knowingly permitted that
practice will be jointly and severally liable, despite not having actual
knowledge of every individual breach.

Companies Civil Liability section 160, 161 (g), 162.

Director and other civil liability 161, 162, 163, 81, 24(3), 60(3) and 99(5).

Civil Code 2074 section 51, 78, 80, 120, 131, 156 and tort.

Relief of directors from liability for breach of duty

 Ratification by a resolution in GM

 Provision in the articles protecting directors from liability

 By the court

 Director’s liability and Insolvency

 Liability for fraudulent trading,

 Liability for wrongful trading

 Liability for use of insolvent company’s name

 Personal liability of delinquent directors

Insider Dealing

Insider dealing is a manipulation of price sensitive confidential information

of securities by insider of companies. It is a matter of Securities Laws.
Insider information or notice means any such specific kind of information or
notice not published by a Body Corporate issuing any securities as may be
capable of affecting the price of such securities if such information or notice
is disclosed. Insider dealing is often equated with market manipulation.

Nature of Insider Dealing

Insider trading is the trading of a corporation’s stock or other securities i.e.

bonds, socks, by individuals with potential access to non-public information
about the company. Trading by corporate insiders such as officers, key
employees, directors, and substantial shareholders.

Generally Insider Dealing is possible through;

 Positional capacity: access upon inside information due to their position

in company,

 Direct information: due to their position such as directors, shareholder,

auditor,

 Professional capacities : Lawyers, liquidators

 Use of Relatives: wife/husband, close relatives,

 Regulatory Bodies Officers.

To create a preventive framework to curb insider trading, all listed

companies and other entities associated with

securities market are now required to adopt a code of conduct on the lines of
the model code specified in the

regulations. Listed companies are now required to adopt a code for

corporate disclosure to improve transparency in

the market and fairness in the dissemination of information by corporate to

the market. This code covers the areas of:

 Prompt disclosure of price sensitive information by listed companies

 Responding to market rumors

 Timely Reporting of shareholdings/ ownership and changes in ownership

 Disclosure of Information with special reference to Analysts, Institutional
Investors

 Dissemination of information by companies including through company

websites.

Companies are required to designate compliance officers who can be

contacted by the stock exchanges whenever such

verification is needed. Exchanges are required to take up quick verification

of rumors and ensure proper dissemination

of the relevant information. Exchanges routinely scan newspapers to verify

unconfirmed news reports and disseminate

information to the market. Major exchanges have instituted coordination in

crucial areas related to market functioning,

and also meet periodically to discuss relevant issues.

Price Sensitive Information

Any information, which relates directly or indirectly to a company and

which if published, is likely to materially affect the price of securities of the
company is referred to as Price Sensitive Information. The following shall
be deemed to be price sensitive information:

 Periodical financial results of the company,

 Intended declaration of dividends (both interim and final).

 Issue of securities or buy-back of securities.

 Any major expansion plans or execution of new projects.

 Amalgamation or mergers or takeovers.

 Disposal of the whole or substantial part of the undertaking.

 Any significant changes in policies, plans or operations of the company.

 All directors/officer/designated employees are required to maintain the
confidentiality of all price sensitive information. They must not pass on
such information directly or indirectly by way of making the
recommendation for the purchase or sale of any security of the
company/client company. Price sensitive information is to be handled on a
“need to know” basis. It should be disclosed only to those within the
company who may need the same to discharge their duty and whose
possession of such information will not give rise to a conflict of interest or
appearance of mis- use of the information.

VI.2 CORPORATE HUMAN RIGHTS RESPONSIBILITY

Corporations impact on human rights in significant ways. The impacts have

increase over the merent decades as the economic might and political
influence of corporations have grown, and as corporation has become more
involved in delivering services previously

International standard and Initiatives Regarding Coorporation &

Human Right

some prominent Euamples of Int. Standard and Initiatives regarding

Rights are as follows:

a. The ILO tripartite declaration on fundamental principles & rights it

works.

b. The ILO tripartite declaration of principles concerning multinational

enterprises and social policy

C. The OECD principles / guidelines of multinational enterprises.

d. The United Nations Norms on the responsibilities of transnational

corporation and other business enterprises.

e. The equator principles

f. The Voluntary principles on security & Hunian Rights

g. The UN global impact.

h. The business leader initiative on Human Right

i. the global reporting initiatives .

global Impact

The ten principles of UN Global Impact.

Principle. 1.: Business should support and respect the protection of

Internationally pro-claimed Human Righth.

principle. 2: Make sure that they are not complevite 61 f in Human Rights
Abuse.

Princpple 3: Business should uphold the freedom of Association and

Effective Re-organization of the right to collective. Bargaining.

principle 4: The Elimination of All forms of force. and compulsory Labor.

Principle 5: The effective abolition of Child labour.

principle 6: The elimination of discrimination in respect of employment &

Occupation

Principio 7: Business is asked to support a precautionary Approach to

environmental challenges

principle 8: Undertake initiaticves to promote greater environmental

responsibility

principle 9: encourage the development and inclusion of environmental

friendly technologies

principle 10: Busimness should work against corruption in all its form
including extortion of bribery

In context of Nepal

It outlines expectation and duties of the governmanet and businesses in

nepal to respect, protect and fulfill HR through the comprehensive set of act
across six theramatic areas.
 1. Labor Rights,

2. migrants Workers Rights,

3. Consumer protection,

4. Environment and Indigenous people's Right

5. Women and children Right

6.Non-Discrimination Right, social inclusion,

company's Act outlined legal Remedies available to shareholder in case of

breach of their rights.

Chapter 12 - protection of shareholder's

section 138 power to prevent directors abd officers from doing unauthorized
acts

section 139 remedy for act done against rights and interest of shareholder

chapter 16 provison relating to the foreign company

section 180 An act done or action taken in contravention of this Act or AOA
is to be void

CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility (CSR) means that businesses should not only focus on making
profits but also try to make a positive impact on society and the environment.
In simple words, companies should care about more than just money they should also try to
do good.

Common CSR activities:

 Reducing pollution and environmental damage.

 Encouraging employees to volunteer.
 Donating to charities or supporting community projects.

In the 1930s, two professors, A.A. Berle and Merrick Dodd, debated CSR:
  Berle said there should be legal rules forcing businesses to protect workers, customers, and the
public — not just shareholders.
 Dodd believed directors should naturally act in trust for all stakeholders (without needing strict
legal rules).

CSR Pyramid (Carroll’s Model)

Professor Archie Carroll explained CSR as a pyramid with four layers of responsibility:

1. Economic Responsibility: First, businesses must make money — otherwise they cannot survive.
2. Legal Responsibility: They must follow the law.
3. Ethical Responsibility: They should do what is right, even if not required by law.
4. Philanthropic Responsibility: They should give back to society (like charity or community work).

Thus, a responsible company first earns profits legally and ethically, then helps society whenever it can.

/\

/ \

/ \

/ Philanthropic \

/ Responsibility \

/____________________\

/ Ethical \

/ Responsibility \

/_________________________\

/ Legal \

/ Responsibility \

/_____________________________\

/ Economic \

/ Responsibility \
 /______________________________\

This view is reflected in the Business Dictionary which defines CSR as “a company’s
sense of responsibility towards the community and environment (both ecological and
social) in which it operates. Companies express this citizenship (1) through their waste
and pollution reduction processes, (2) by contributing educational and social programs,
and (3) by earning adequate returns on the employed resources.”

True Responsibility (TRE)

The “deep” definition for CSR is the following: The Truly Responsible Enterprise (TRE):
– sees itself as a part of the system, not a completely individual economic actor
concerned only about maximizing its own profit, – recognises unsustainability (the
destruction of natural environment and the increase of social injustice) as the greatest
challenge of our age, – accepts that businesses and enterprises have to work on solutions
according to their economic weight, – honestly evaluates its own weight and part in
causing the problems (it is best to concentrate on 2-3 main problems), – takes essential
steps – systematically, progressively, and focused– towards a more sustainable world.

The five principles of the TRE are 1) minimal transport, 2) maximal fairness, 3) zero
economism, 4) maximum middle size, 5) product or service falling to the most
sustainable 30%.

CSR looks different in different countries:

 In China, it means making safe, high-quality products.

 In Germany, it means providing secure jobs.
 In South Africa, it means helping with healthcare and education. Even within Europe,
there are many different ideas about what CSR means.

There are several ways companies show CSR:

 Corporate Philanthropy: Donating money or goods to charities (like arts, education,

health, and environment).
 Community Volunteering: Employees helping out in the community, sometimes during
paid work hours.
 Ethical Business Practices: Selling products made fairly and ethically (like Fair Trade
coffee).
 Cause-related Marketing: Donating part of product sales to good causes.
 Social Marketing: Running campaigns to promote good behaviors (like recycling).

management concept

Corporate Social Responsibility is a management concept whereby companies integrate

social and environmental concerns in their business operations and interactions with their
stakeholders. CSR is generally understood as being the way through which a company
achieves a balance of economic, environmental and social imperatives, while at the same
time addressing the expectations of shareholders and stakeholders. In this sense it is
important to draw a distinction between CSR, which can be a strategic business
management concept, and charity, sponsorships or philanthropy. Even though the latter
can also make a valuable contribution to poverty reduction, will directly enhance the
reputation of a company and strengthen its brand, the concept of CSR clearly goes
beyond that.

Triple bottom line

“People, planet, and profit”, also known as the triple bottom line, form one way to
evaluate CSR.”People”; refers to fair labour practices, the community, and the region
where the business

operates.”Planet” refers to sustainable environmental practices. Profit is the economic

value created by the organization after deducting the cost of all inputs, including the cost
of the

capital (unlike accounting definitions of profit). Overall, trying to balance economic,

ecological, and social goals are at the heart of the triple bottom line.

Corporate social responsibility (CSR) is a self-regulating business model that helps a

company be socially accountable—to itself, its stakeholders, and the public. By
practicing corporate social

responsibility, also called corporate citizenship, companies can be conscious of the kind
of impact they are having on all aspects of society, including economic, social, and
environmental. To engage in CSR means that, in the ordinary course of business, a
company is operating in ways that enhance society and the environment, instead of
contributing negatively to them. Corporate social responsibility is a broad concept that
can take many forms depending on the company and industry. Through CSR programs,
philanthropy, and volunteer efforts, businesses can benefit society while boosting their
brands.

As important as CSR is for the community, it is equally valuable for a company. CSR
activities can help forge a stronger bond between employees and corporations, boost
morale and help both employees and employers feel more connected with the world
around them. For a company to be socially responsible, it first needs to be accountable to
itself and its shareholders. Often, companies that adopt CSR programs have grown their
business to the point where they can give back to society. Thus, CSR is primarily a
strategy of large corporations. Also, the more visible and successful a corporation is, the
more responsibility it has to set standards of ethical behavior for its peers, competition,
and industry.

Small-and-mid-sized businesses also create social responsibility programs, although their

initiatives are not often as well-publicized as larger corporations.
Corporate Social Initiatives

Corporate social responsibility includes six types of corporate social initiatives:

Corporate philanthropy: company donations to charity, including cash, goods, and

services, sometimes via a corporate foundation

Community volunteering: company-organized volunteer activities, sometimes while an

employee receives pay for pro-bono work on behalf of a non-profit organization

Socially-responsible business practices: ethically produced products that appeal to a

customer segment

Cause promotions and activism: company-funded advocacy campaigns

Cause-related marketing: donations to charity based on product sales

Corporate social marketing: company-funded behavior-change campaigns

Common actions

Common CSR actions include:

Environmental sustainability: recycling, waste management, water management,

renewable energy, reusable materials, 'greener' supply chains, reducing paper
use, and

adopting Leadership in Energy and Environmental Design (LEED) building standards.

Human capital enhancement: Companies provide additional resources for capacity

building of local employees, including technical and professional training, adult basic

education, and language classes.

Community involvement: This can include raising money for local charities, providing
volunteers, sponsoring local events, employing local workers, supporting local economic

growth, engaging in fair trade practices, etc.

Ethical marketing: Companies that ethically market to consumers are placing a higher
value on their customers and respecting them as people who are ends in themselves.

They do not try to manipulate or falsely advertise to potential consumers. This is

important for companies that want to be viewed as ethical.

impact of CSR
The movement toward CSR has had an impact in several domains. For example, many
companies have taken steps to improve the environmental sustainability of their
operations, through measures such as installing renewable energy sources or purchasing
carbon offsets. In managing supply chains, efforts have also been taken to eliminate
reliance on unethical labor practices, such as child labor and slavery. Although CSR
programs have generally been most common among large corporations, small businesses
also participate in CSR through smaller- scale programs such as donating to local
charities and sponsoring local events.

Industrial Enterprise Act 2020

CSR Requirement for Industries:

54. Provisions relating to corporate social responsibility: (1) A medium or large industry
or cottage or small industry with annual turnover of more than one hundred fifty million

(Rs. 15,00,00,000) rupees shall set aside at least one percent of its annual net profits in
each fiscal year for the purpose of performing the corporate social responsibility.

(2) The amount set aside under subsection (1) shall be spent in such areas as prescribed,
upon making annual plans and programmes.

(3) An industry shall submit details on the programmes completed in each fiscal year
under subsection (2) and amounts spent in such programmes to the concerned

industry registration body within six months after the end of the fiscal year.

43. Punishment: (1) If any person operates an industry without registration under section
3, the industry registration body may require immediate closure of the industry and

impose the following fine: (7) If an industry does not perform the corporate social
responsibility under section 54, the Ministry may, on the recommendation of the industry
registration body, impose a fine to be set by one point five percent of the yearly net
profits of the industry. The Ministry shall impose an additional fine at the rate of zero
point five percent of the yearly net profits for each year on an industry which does not
perform such responsibility for a period exceeding one fiscal year.

Area of Utilization:

The area of utilization has been categorized in the following manner;

(a) Utilization for social projects: Direct and indirect utilization in programs related to
education, health, disaster management, environment protection, cultural promotion,
infrastructural development in remote areas, and improvement in earning capabilities of
socially backward groups, financial literacy and customer protection, Travelers waiting
 room, street lamp, public toilets. Projects should be selected through proposal with public
notice by highly recognized organizations working in the related field.

(b) Financial Education: Five percent of Fund shall be spent on making women and
socially left behind class financial service literate and to increase access to financial
service by conducting different program and training on financial literacy.

(c) Direct grant expenditure: Direct expenditure towards providing grant for education
and health of backward classes or expenditure in construction of infrastructures, buying
of vehicles and cost of operating them, etc. for organizations working towards the same
cause.

(d) Sustainable development goals: Sustainable development goals of Nepal, direct and
indirect expenditure towards achievement of goals set in the 17 areas recognized by the
2016-2030 (Sustainable Development Goals, 2016-2030).

(e) Actual expenditure on prevention and treatment for maintaining staffs of bank and
financial institute safe from pandemic disease like Covid 19.

(f) The cost borne by BFIs while setting up a Child Day Care Centre for their employees.

CSR IN NEPAL

CSR has many interpretations but can be understood to be a concept imposing a liability
on the Company to contribute to the society (whether towards environmental causes,
educational promotion, social causes etc.) along with the reinforced duty to conduct the
business in an ethical manner. Corporate Social Responsibility (CSR) is a form of self-
regulation integrated into a business model. It is also known as corporate conscience,
corporate citizenship, social performance or sustainable business/responsible business.
Many countries have created laws, which incorporate CRS as a formal duty of the
company. But, the Nepalese Companies has not the provision of the CRS, but Industrial
Act and NRB directives has provide the provision of CRS. There is no specific provision
in the Company Act, 2006, but various laws have prescribed the concept of CRS.

1. The constitution of Nepal

Provisions of fundamental right which are related with CRS i.e. right to clear environment, right
to employment, right to labour, right relating to health, right to social justice, and rights of the
consumer.

2. Company Act, 2006

Establishment of company not distributing profit, 166 Any company may be incorporated
to develop and promote any profession or occupation or to protect the collective rights
and interests of the persons engaged in any specific profession or occupation or to carry
 on any enterprise for the fulfilment of any scientific, academic, social, or public utility or
welfare objective on the condition of not distributing dividend.

3. Consumer Protection Act, 2054

Consumer Protection Act has many provisions relating to consumer’s right, quality of
goods, services etc.This act deals with the consumers rights, obligations of
manufacturers, quality of goods and services, prohibition of unfair trade practices, ,
consu,er protection council and regulation of suppliers, regulation of prce and
measurement of goods and services.

4. Income Tax Act, 2058

Exemption for the companies from paying tax for the contribution or donation to the
social welfare activities. CSR involves both internal as well as external stakeholders.
Internal stakeholders include the employees of the company whereas external
stakeholders include community & environment, customers, vendors, shareholders,
government etc. To carry out CSR effectively, it is essential that it has to be driven from
top.

5. Labour Act, 2017

this Act has various legal provision to maintain internak CSR : employment, security,
working hours, health, remuneration, safety and welfare.
6. Bank and Financial InstitutionAct, 2017
This Act accelerates corporate sector more responsible to its stakeholders by imposing
obligation to invest in social welfare as directed by NRB.
7. the environment protection Act, 2019(2076)
it has provision to control and manage the environmental impacts in the field of corporate
sectors.

case related to it
surya prasad dhungel v. Goddawari marbel factory , writ no. 85, 2019

VI.3 CORPORATE ENVIRONMENT RESPONSIBILITY

Corporate Environmental Responsibility (CER) refers to a company’s duties to abstain

from damaging natural environments. The term derives from corporate social
responsibility (CSR). The environmental aspect of CSR has been debated over the past
few decades, as stakeholders increasingly require organizations to become more
environmentally aware and socially responsible. In the traditional business model,
environmental protection was considered only in relation to the “public interest”
Hitherto, governments had maintained principal responsibility for ensuring
environmental management and conservation. The public sector has been focused on the
development of regulations and the imposition of sanctions as a means to facilitating
environmental protection. Recently, the private sector has adopted the approach of co-
responsibility towards the prevention and alleviation of environmental damage. The
sectors and their roles have been changing, with the private sector becoming more active
in the protection of the environment. Many governments, corporations, and big
companies are now providing strategies for environmental protection and economic
growth.

The World Commission on Environment published the Brundtland Report in 1987 to

address sustainable development. Since then, managers, scholars, and business owners
have tried to determine why and how big corporations should incorporate environmental
aspects into their policies. In recent years, an increasing number of companies have
pledged to protec natural environments.

CER is, in many ways, connected to CSR, as both of them influence environmental
protection. CER, however, is strictly about the consideration of environmental
implications and protection within corporate strategy. The understanding of CER cannot
be separated from CSR—both are interconnected and based on environmental protection.
There are three major areas related to these two concepts—economic, environmental and
social. CER is focused more on economic and environmental while CSR relates to social
and environmental aspects. Economy, society, and environment all play significant roles
in the development of an efficient and effective company strategy.

Main elements

These cover the environmental implications of a company's operations:

 Eliminate waste and emissions

 Maximize the efficient use of resources and productivity

 Minimize activities that might impair the enjoyment of resources by future

generations.

Drivers and challenges

Among the main drivers for CER are government policies and regulations. Many states
provide their own legislation, regulations and policies, which are important in creating a
positive environmental attitude within companies. Subsidies, tariffs and taxes play a vital
role in the implementation of these policies. Another significant factor is the competitive
environment among companies generated by media, public, shareholder and NGO
awareness, which are also major drivers of CER.

Challenges include the cost of regulation and difficulties in predicting economic gains,
which could become problematic for a company's management. Additionally, new
technologies are frequently too expensive for a lot of companies. Another challenge is the
lack of harmonization of regulations among different states—often there is a mosaic of
propositions, leading to unclear strategies for environmental behavior, especially in
multinational corporations.

Worldwide Perspectives on Corporate Environmental Responsibility

The majority of international CSR studies focus on business practices and its aspects,
such as business economics and the legality of environmental law. Most companies are
noticing the importance of taking into account one of its most important stakeholders:
employees and customers and their commitment to sustainability. Studies have
demonstrated that oncecompanies place sustainability practices they can be directly
linked to financial success and customer satisfaction, which in turn can be used as a
marketing tool. Although every country has a different culture, and each country
determines their own scale of environmental responsibility, research has shown that there
is a standard global human values that drive customer needs and wants. Companies have
taken initiatives to take sustainability and align it with each company’s economic goals.
Managers and other people at the top, play the key role in decision-making and
implementing the firm’s sustainability practices.

Benefits of Corporate Environmental Responsibility

Corporate social responsibility can prove to be more profitable for companies and to
extend it survivability in markets because greater awareness on this topic, in both social
and business markets, has been in higher demand. Customers have responded with
overall satisfaction and loyalty when companies have a better CSR, especially in
countries like Spain and Brazil. Culture has an impact on the CSR ratings and studies, as
well as human values across different nations. This topic can also be found under
sustainable development. This area is concerned with not only protecting the environment
but maintaining economical growth. There were several agreements internationally to
help adopt new business practices that held these standards, but they were considered
individual and there was no law-abiding body to regulate nor implement them.

One of the other factors that is considered an integral part of sustainable development are
human beings, and specific groups and their habitat. Counties and companies that more
developed would lead, and other small countries and business would slowly make gains.
It is important to recognize that just because corporate environmental responsibility is
being recognized that consumption is something that is not discouraged.

The idea of corporate environmental responsibility (CER) is for humans to be more

aware of the environmental impact and counteract their pollution/carbon footprint on the
natural resources. One of the main factors is to reduce carbon footprint and carbon
emissions. Many of the studies focus on trying to find a balance between economic
growth and reducing waste and cleaner environments.
 Furthermore, many firms are discovering that there is an advantage to advocating for
environmental regulations and preparing for them to be implemented before they become
law. In a recent study, the researcher found that firms support climate change legislation
as a means of gaining power over their competitors. Essentially, even if a new regulation
hurts a firm in the short term, the firm may embrace it because they know that it will hurt
their competitors even more. This allows them to come out on top in the long run.

Environment Protection Act, 2019

Environment Protection Regulation, 2020

Environment Protection Act, 2053

Yogi Narihari Nath V. PM G. P. Kairala

Surya Prasad Dhungel V. Godawari Marbel Factory

VI.4 WORKERS PARTICIPATION IN THE MANAGEMENT

Participatory management is the practice of empowering members of a

group, such as employees of a company or citizens of a community, to
participate in organizational decision

making. It is used as an alternative to traditional vertical management

structures, which has shown to be less effective as participants are growing
less interested in their leader’s

expectations due to a lack of recognition of the participant’s effort or

opinion. While group leaders still retain final decision-making authority
when participatory management

is practiced, participants are encouraged to voice their opinions about their

current environment. In the workplace, this concept is sometimes
considered industrial democracy.

The participatory management model or at least techniques for

systematically sharing authority emphasize concerns with the delegation of
decision making authority to employees.

Participatory management has cut across many disciplines such as public

administration, urban planning, and public policy making. In theory, the
model does much more than recognize that employees ought to be able to
recommend changes or course of action, but rather reflect a belief that
authority should be transferred to and shared with employees. The belief in
this theory stems from understanding what the culture of an organization or
institution represents.

Participatory Management may contribute to a more productive

environment by:

 Promoting sustainable management practices.

 Increasing social acceptability levels.

 Minimizing social conflicts, for example: eliminating competition.

 Allowing the use of local values and knowledge to be utilized during

management.

 Greater job satisfaction which in turn increases productivity

 Reduced costs through increased efficiency and a lesser need for

supervision and delegation.

 Participatory Management can lead to the empowerment of employees

which in turn

could lead to employees taking more risks. These risks can be successful or
harmful to

the project;s productivity level.

In corporate governance, codetermination (also “copartnership” or &

“worker participation”;) is a practice where workers of an enterprise have
the right to vote for representatives on the board of directors in a company.
It also refers to staff having binding rights in work councils on issues in
their workplace. The practice of board level representation is widespread in
developed democracies.

The first laws requiring worker voting rights include the Oxford University
Act 1854 and the Port of London Act 1908 in the United Kingdom, a
voluntary Act on Manufacturing Companies of 1919 in Massachusetts in the
United States, and the Supervisory Board Act 1922 in Germany, which
codified collective agreement from 1918. Most countries with
codetermination laws have single-tier board of directors in their corporate
law (such as Sweden, France or the Netherlands), while a number in central
Europe (particularly

Germany and Austria) have two-tier boards.

The threshold of a company’s size where co-determination must apply

varies between countries: in Denmark it is set at 20 employees, in Germany
over 500 (for 1/3 representation) and 2000 (for just under a half), and in
France for over 5000 employees. Sweden has had a law of codetermination
since 1980. In economies with codetermination, workers in large companies
may form special bodies known as works councils. In smaller companies
they may elect worker representatives who act as intermediaries in
exercising the worker’srights of being informed or consulted on decisions
concerning employee status and rights. They also elect or select worker
representatives in managerial and supervisory organs of companies.

In codetermination systems the employees are given seats on a board of

directors in one-tier management systems, or seats in a supervisory board
and sometimes management board in

two-tier management systems.In two-tier systems the seats in supervisory

boards are usually limited to one to three members. In some systems the
employees can select one or two members of the supervisory boards, but a
representative of shareholders is always the president and has the deciding
vote. Employee representatives on management boards are not present in all
economies. They are always limited to a Worker-Director, who votes only
on matters concerning employees.

In one-tier systems with codetermination the employees usually have only

one or two representatives on a board of directors. Sometimes they are also
given seats in certain committees (e.g. the audit committee). They never
have representatives among the executive directors.

The typical two-tier system with codetermination is the German system.

The typical one-tier system with codetermination is the Swedish system.
There are three main views as to why codetermination primarily exists:

 to reduce management-labour conflict by improving and systematizing

communicationchannels;

 to increase bargaining power of workers at the expense of owners by

means of legislation; and

 to correct market failures by means of public policy.

The evidence on “efficiency”; is mixed, with codetermination having either

no effect or a positive but generally small effect on enterprise performance.

In the UK, the earliest examples of codetermination in management were

codified into the Oxford University Act 1854 and the Cambridge University
Act 1856. In private enterprise, the

Port of London Act 1908 was introduced under Winston Churchill’s Board
of Trade. While most enterprises do not have worker representation, UK
universities have done so since

the 19th century. Generally the more successful the university, the more
staff representation on governing bodies: Cambridge, Oxford,[20]
Edinburgh, Glasgow and other Scottish Universities, have rights for staff
election of councils in statute, while other universities have a wide variety
of different practices. Under the UK Corporate Governance Code 2020,
listed companies must comply or explain with one of three worker
involvement options including having a worker director on board. However,
companies have not yet ensured workers have the right to vote for
representatives on the board.

In USA, a large number of universities also enable staff to vote in the

governance structure. In the 1970s, a number of large corporations
including Chrysler appointed workers to their board of directors pursuant to
collective agreement with the labor union. Massachusetts has the world’s
oldest codetermination law that has been continually in force since 1919,
although it is only voluntary and only for manufacturing companies. Worker
representation on corporate boards of directors, also known as board-level
employee representation (BLER) refers to the right of workers to vote for
representatives on a board of directors in corporate law. In 2018, a majority
of Organisation for Economic Co-operation and Development, and a
majority of countries in the European Union, had some form of law
guaranteeing the right of workers to vote for board representation. Together
with a right to elect work councils, this is often called “codetermination”

Some of the forms of workers participation prevalent in India are:- 1.

Works committees 2. Joint management councils 3. Joint councils 4. Unit
councils 5. Plant councils 6. Shop councils 7. Workers’ representative on
the Board of Management 8. Workers’ participation in share capital 9.
Participation through quality circles 10. Participation through Collective
Bargaining.

Additionally, there are eleven forms of workers participation in corporates:-

1. Participation at the Board Level

2. Participation through Ownership

3. Participation through Complete Control

4. Participation through Works Councils

5. Participation through Joint Committee

6. Participation through Collective Bargaining

7. Participation through Job Enlargement 8. Participation through

Suggestions Schemes 9. Participation through Quality Circles 10.
Empowering Teams 11. Total

Quality Management (TQM).

In India the workers’ participation in management scheme is vogue in

three forms, viz.:

(i) The works committees (set up under the Industrial Disputes Act, 1947);

(ii) The joint management councils (set up as a result of the Labour-

Management Co-operation Seminar, 1958); and

(iii) The scheme for workers’ Representative on the Board of Management

(under the Management and Miscellaneous Scheme, 1970) on some public
and private sector enterprises,
including industrial undertakings and nationalised banks. Since July 1975, a
two-tier participation model, namely, the shop council at the shop level and
to joint council at the enterprise level, were introduced. On 7th January
1977, a new scheme of workers’ participation in management in
commercial and service organisations in public sector undertakings was
launched with the setting up of unit councils. On 30th December 1983, a
comprehensive scheme for workers’ participation in public undertakings
was introduced. It was decided that workers would be allowed to participate
at the shop level, the plant level and the board level.

As the scheme of shop council and workers’ representation on the board of

directors were already functioning, greater emphasis was placed on the
setting up of unit councils. In Nepal, Labour Act 2017 and Trade Union Act
1992 were enacted with the intention of maintaining good relation between
Capital and Labour and thereby ensuring good industrial relations. In
Government owned companies and corporations, there are provisions of
having employee’s participation in Board of Directors.

International agreement and laws

 International labour Organization (ILO)

 EU Resolution and directives,

 Right to association and collective bargaining convention , 1949,

 Companies Act, 2063, allotment of share to employee.

Bonus Act, 2030.

 Labour Act, 2048

- Labour relation committee,

- Collective claiming procedure,

- Minimum wage fixation committee

UNIT 7 COMPANY SECRETARY: APPOINTMENT, ROLES AND
DUTIES OF COMPANY SECRETARY

7.1 legal provision

The Chamber's 20th Century Dictionary defines secretary as a person

employed to write or transact business for another or for a society,
company, etc. The word secretary is derived from the word secret implying
that there is something confidential and secretive about his job through there
is another view that the word secretary has been derived from the Latin
word secretaries which means a notary or scribe.

Companies Act 2063

2. Definitions: In this Act, unless the subject or the context otherwise

requires,

(j) “Officer” includes director, chief executive, manager, company

secretary, liquidator and any employee undertaking departmental
responsibility of the company.

20. Articles of association: (1) A company shall frame the articles of

association in order to attain the objectives set forth in its memorandum of
association and carry out its activities in a well–managed manner.

(2) The articles of association shall state the following matters:

(q) Appointment of a company secretary,

185. Appointment of company secretary: (1) A public company with the

paid –up capital of ten million rupees or more shall appoint to the post of
company secretary a Nepalese citizen who has the qualification mentioned
in Sub-section (2).

(2) A Nepalese citizen who has worked in the related field for at least two
years after obtaining the professional certificate of company secretary
issued by a native or foreign body authorized to issue the professional
certificate of company secretary pursuant to the prevailing law or who has
worked in the related field or in the field of company management for at
least three years after doing at least bachelor degree in law, management,
 commerce or economics may be appointed to the post of company
secretary.

Provided, however, that this provision shall not apply to the company
secretary who is incumbent at the time of commencement of this Act for
three years after the date of commencement of this Act.

(3) No director of the concerned company shall be eligible to be appointed

as the company secretary of such company.

(4) A person shall not be appointed to the post of company secretary of

more than one company at the same time.

Provided, however, that this provision shall not bar the appointing of the
company secretary of any principal company to the post of company
secretary of the subsidiary company of such company.

(5) Where it is provided by this Act, the prevailing law or articles of

association that any act has to be done by or through the company secretary,
and the post of company secretary remains vacant in the company or any
reason the incumbent company secretary fails to do such act or shows has
inability to do such act, then any such employee of the company, who has
the qualification referred to in this Act, as designated by the board of
directors to do such act may perform such act in the capacity of company
secretary.

A Company Secretary shall not hold office in more than one company
except in its subsidiary company at the same time.

186. Functions, duties and powers of company secretary: (1) It shall be the duty
of the company secretary to implement, or cause to be implemented, the decisions
made by the board of directors and the general meeting and the matters directed by
the Office or the concerned bodies and to submit such returns, documents,
decisions etc. as required to be submitted by the company to the Office or any
other body pursuant to this Act or the prevailing law within the specified period.

(2) Subject to this Act, the memorandum of association and articles of association,
the company secretary shall perform the following functions:
(a) To call the meeting of the board of directors or the general meeting;

(b) To prepare the agenda to be discussed in the meeting of the board of

directors or the general meeting and send it to the concerned directors or
shareholders;

(c) To maintain the records of, authenticate and take charge of, the decisions of
the meeting of the board of directors or the general meeting;

(d) To send a notice of the allotment of shares and a call on shares pursuant to
the decision of the board of directors;

(e) To accurately an properly maintain, take charge of, and authenticate, the
shareholder register and the records of shareholders and debenture-holders;

(f) To refer the matter to the board of directors or the chief executive to record
the pledge or mortgage of, and execute the transferal or transmission of any shares
or debentures;

(g) In cases where a claim, petition, grievance, suggestion, advice etc. has been
made by any shareholder or debenture-holder in writing, to transmit such matter to
the board of directors or chief executive or Office or other bodies; and to inform in
writing the concerned shareholder or debenture-holder of the results of any act and
action done and taken in regard thereto;

(h) To perform such other functions as specified to be performed by the

company secretary under the prevailing law or such other functions as prescribed.

(3) Except as per the decision of the general meeting, the company secretary shall
not do, or cause to be done, any such act from or through the company as is to
yield benefits to him/her.

(4) The company secretary shall observe the code of conduct as prescribed.

work

Statutory Officer: The company secretary is an officer responsible for compliance

with numerous legal requirement under different Acts including the Companies
Act, 2006 as applicable to companies. The responsibilities of company secretary
has also increased as he has been included in the definition of Key Managerial
Personnel as defined in section 2(j) of the Act, who are also liable to punishment
by way of imprisonment, fine or otherwise for violation of the provisions of the
Companies Act which hold the “officers in default” under Section 160.

Company Secretary is one of the key managerial person of a company. All

companies (including Private Companies) are required to appoint Company
Secretary in whole time or part time employment whose paid up Share Capital is
one crore rupees of more. The most important task of the company pertaining to
statutory and legal obligations comes upon the secretary. Under the Companies
Act, he has to either comply with the various provisions of the Act or is liable to be
fined or imprisoned for non-compliance of his obligations. Thus the responsibility
of a secretary as a statutory officer has been greatly expanded by enactment of
various economic statutes.

Coordinator: The Company Secretary as a coordinator has an important role to

play in administration of the company’s business and affairs. It is for the secretary
to ensure effective execution and implementation of the management policies laid
out by the Board. The position that the company secretary occupies in the
administrative set-up of the company makes his function as one of coordinator and
link between the top management and other levels. He is not only the
communicating channel between the Board and the management but he also co-
ordinates the actions of other executives vis-a-vis the Board. The ambit of his role
as a coordinator also extends beyond the Company and he is the link between the
Company and its shareholders, the society and the Government. Thus, the role of a
company secretary as a coordinator has two aspects, namely internal and external.
The internal role of a coordinator extends to the Board including the Chairman and
Managing Director, various line and staff personnel, the trade unions and the
auditors of the company. His role as an external coordinator extends to the
relationship of the company with shareholders, Regulators, Government, Stock
Exchange Ltd., and Society.

Assistance to Board : Whilst the Directors discuss and decide policy matters as a
body, the Secretary is responsible for transmitting the policies and decisions of the
Board, to all levels in the company and outsiders. His duties in relation to the
Board include amongst others:

 Facilitating the convening of meetings, Board, General and committee meetings,

drafting out the minutes andreports.

 Keeping the Board informed as an advisor on matters regarding legal, financial

and other laws and problems as far as they relate to the company. This will include
advising the Board of the various obligations imposed on the directors by various
statutes, including changes in laws which will have a bearing on the activities of
the company.

 He must ensure that all decisions taken by the Board are in consonance with
legal requirements, and the powers they exercise do not require approval of the
shareholders, Central Government or any other authority.

 Since meetings of the Board are confidential in nature, he should ensure secrecy
regarding matters discussed at such meetings.

He is also required to keep the chairman and managing director apprised of

changes in policies of the Government,obligations under various statutes and to
give balanced advice on matters which have legal ramifications. He has to assist
and advise the Board in ensuring good corporate governance and in complying
with Corporate Governance requirements and best practices.

Apart from the statutory audit, services of the company’s auditors are required for
certifications required under various statutes and, therefore, the Secretary must
liaise very closely with the auditors. It may be pointed out that copies of minutes of
Board meetings and general meetings should be made available for the inspection
of the auditors during the statutory annual audit. The company secretary, on behalf
of the company is required to file a notice with the Registrar about appointment
within 30 days of the annual general meeting.

Relationship with Shareholders: The relationship with the shareholders is an

important sphere of his coordinating role and, therefore, the Secretary will have to
maintain proper relationships with the shareholders of the company. He should
ensure that there is no delay in the inspection of books and registers required by a
shareholder provided all formalities are complied with. He must ensure that
extracts of registers demanded by shareholders are furnished to them within the
prescribed time. The most important thing for a Secretary is to ensure that all
correspondence from shareholders is dealt with promptly and their queries are
answered as far as possible keeping the statutory provisions in mind. As part of
public relations, he should be able to give time without prior notice to shareholders
who personally come for information, to furnish documents or any other matter.
He must also ensure that requests for issues of duplicate certificates/dividend
warrants and intimation of address are dealt with properly and promptly. This is
important as the image of the company will, to a great extent, depend on the
relationship of the Secretary with the shareholders.
Maintenance of Records of Company: The Secretary is required to maintain
certain other records in addition to those specified under the Companies Act. The
secretary also has to ensure that the statutory time limits relating to directors’ and
shareholders’ meetings, payment of dividend and interest, filing of returns under
the Companies Act, 2006, Income-tax Act, etc., renewals of contracts and leases
and the formalities under stock exchange and SEBON regulations and the listing
agreements are complied with. The secretary has an important role to play in
safeguarding the company’s interest in property matters. He has to ensure that all
properties are properly maintained and insured and maintain a suitable register for
each property containing relevant information. He should have a good knowledge
of relevant rules and bye-laws applicable to. He should also ensure that registration
of trademarks, patents, licenses or other intellectual property rights are done from
time to time and take legal action in respect of infringement of such rights. He is
also responsible for devising and maintaining systems to safeguard the valuable
company records, or information against loss, theft, fire, etc. He is to review these
from time to time to ensure that the properties of the company are adequately
insured. The company secretary should have good knowledge of insurance law and
practice.

Liability of Company Secretary

Apart from general secretarial duties with regards to organizing Board of Directors
and general meetings, keeping minutes of meeting, recording approved share
transfers, corresponding with directors and shareholders, maintaining statutory
records, filing necessary returns with Registrar of Companies etc., the Companies
Act, 2006 has also prescribed some duties and authorities, which are as follows:

Authentication of documents, proceedings and contracts : Authentication is more

than simply attestation.

Authentication is attestation made by proper officer by which he certifies that a

record is in due form of law and that the person who certifies is the officer
appointed to do so. A document or proceeding requiring authentication by a
company or contract made by or on behalf of a company may be signed by any key
managerial personnel or an officer or employee of the company duly authorized by
the Board in this behalf.section 26

Signing share certificate: Share certificates of the company should be signed by

two directors (out of which one should be Managing Director or whole time
director, if appointed) and Secretary or other person authorized by Board. section
33

Signing annual return : Annual return to be filed with Registrar of Companies has
to be signed by a director and Company Secretary. If Company does not have
Company Secretary, the return can be signed by company secretary in practice.

Additional duties : In addition to statutory duties of company secretary, he is often

entrusted with additional duties like looking after legal matters, personnel matters,
finance and sometime even general administration.

Other Responsibilities:

The annual return, filed by a listed company or, by a company having such paid-up
capital and turnover as may be prescribed, shall be certified by a company
secretary in practice in the prescribed form, stating that the annual return discloses
the facts correctly and adequately and that the company has complied with all the
provisions of this Act.

Every listed public company shall prepare a report on each annual general meeting
including the confirmation to the effect that the meeting was convened, held and
conducted as per the provisions of the Act and the rules made thereunder. A copy
of this report shall be filed with the Registrar. Company Secretary is authorized to
sign the report on every Annual General Meeting along with two directors one of
whom shall be the Managing Director if there is one.

The traditional view as propounded by Lord Esher in his judgement in Neland v.

National Employer's Accident Association Ltd. and reiterated by Cout of of Appeal
in the case of Barnett Hoares & Co. v. South London Tramways Company C.A.
(1887) Q.B.D 815 and George White Church Ltd. V. Carangh 1902 AC 117 was:
A secretary is a mere servant, his position is that he is to do what he is told and no
person can assume that he as any authority to represent anything at all nor can
any assume that statement made by him are necessarily to be accepted as
trustworthy without further enquiry and more than in the case of a merchant it
can assumed that one who is only a clerk has authority to make representation to
induce persons to enter into contract.
Accordingly, in past it had been held that a company is not liable for the act of its
secretary in fraudulently making representations to induce person to take shares
in the company, or in issuing a forged share certificate. The secretary is, however,
the proper official to issue share certificates and so the company is estopped to
barred from denying the truth of genuine share certificate issued by him without
the authority of the company.
It has also been held that
a. He cannot participate in the management of the company's affairs. Barnett
v. The South London Tramways Co.
b. He cannot negotiate contracts on behalf of the company other than the
contract necessary for carrying on the administration of the company's
organization such as contract for the employment of staff, the acquisition
of office equipment or hiring of transport for customers visiting company
factory. Panorama Development (Guilford) Ltd. v. Fidelis Furnishing Fabrics
Ltd. (1971) 3 All ER 16 C.A.
c. He cannot borrow money in the company's name. Cleadon Trust Ltd., Re
(1938) 4 AII ER 518
d. He cannot register transfer of shares without the Board's authority. Chida
Mines Ltd. v. Anderson (1905) 22 TLR 27.
e. He cannot call meeting of members. An act done by the secretary after
mentioning the matter to some of the directors, but without any express
approval of the directors and without a board meeting being held to
consider the question will be considered the act of directors. Haycraft Gold
Reduction & Mining Co. Re, (1900) 2 Ch 230; State of Wyoming Syndicate
Re. (1901) 2 Ch. 431.
f. He has no power to strike a name off the Register of Members, without
authority by the Board of directors. Wheatcroft' case, Re. Matlock Old Bath
Hydropathic Co. (1873) 29 L.T. 324.
g. He has no independent authority to bind the company by contract.
Houghton (JC) & Co. V. Nothard. Lowe and Wills (1928) A.C.I.H.C.
h. But times have changed. A company secretary is much more important
person now-a-days than he was in 1997. He is an officer of the company
with extensive duties and responsibilities. This appears not only in the
modern companies Act but also by the role which he plays in the day-to-
day business of the company. He is no longer a mere clerk. He regularly
makes representation on behalf of the company and enters into contracts
 on its behalf which come within the day-to-day running of the company's
business. So much so that he may be regarded as having been held out as
having authority to do such things on behalf of the company. He is certainly
entitled to sign contracts connected with the administrative side of a
company's affairs, such as employing staff and ordering cars and so forth.
All such matters now come within the ostensible authority of a company
secretary. Panorama Development (Guildford) Ltd. v. Fidelis Furnishing
Fabrics Ltd. - Lord Denning in the Court of Appeal 26 May 1971

The Supreme Court of Nepal has decided a number of cases with regards to
employment of different professionals.

With regards to employment of the company secretary, the case between Chilime
Jalvidyout Company Ltd. (CJCL) vs. Labour Court and others is noteworthy herein.

In this case, Mr. Kamal Prasad Timalsina, who was appointed as company
secretary of CJCL on contractual basis, filed an application to the Labour Office,
Bagmati stating that the position of company secretary is a permanent position
and as he has been working in CJCL for more than 240 days as company secretary,
he should be confirmed as permanent staff in the position of the company
secretary as per Section 4(2) of the Labour Act, 1992. The Labour Office ordered
CJCL to appoint Mr. Timalsina as permanent in the position of the company
secretary and the same was upheld by the Labour Court. The matter was referred
to the Supreme Court by CJCL through writ petition. The Supreme Court heard the
case and annulled the decisions of the Labour Office and the Labour Court by
issuing a Writ of Certiorari on following principle grounds:

- The position of the company secretary is created and maintained as per the
Company Act as position of special nature;

- The decision of the Labour Office and Labour Court for ordering CJCL to provide
the permanent employment to Mr. Timalsina as company secretary is against the
accepted principle, usage and practice of the company law;

- The position of company secretary is regarded as the position entrusted

important responsibilities. This position is not fulfilled based on the personnel
regulation of the company. The company secretary is appointed and terminated
as per the resolution of the board of directors of the company;
- Therefore, this matter does not fall under the jurisdiction of the Labour Officer
under the Labour Act, 1992. This decision has recognized the individuality of the
position of the company secretary with important responsibilities and separate
procedures of appointment in and termination from the position of the company
secretary.

Responsibilities of the company secretary are include: the preparation and

keeping of minutes of board and general meeting; dealing with share transfers,
and issuing share and debenture certificates; keeping and maintaining the register
of shareholders and debenture holders; keeping and maintaining the register of
directors and secretary; sending notices of meeting; keeping the company’s
memorandum and article of association’s article uo to date; preparation and
submission of the annual return; payment of dividents and the preparation of
dividend warrants.