DUTIES OF DIRECTORS UNDER THE NEW
INDIAN CA-2013
The duties and responsibilities of directors stipulated by
the Indian Companies Act of 2013, can broadly be classified into the following
two categories: ---
[i] The duties and liabilities which encourage and promote
the sincerest investment of the best efforts of directors in the efficient and
prudent corporate management, in providing elegant and swift resolutions of
various business-related issues including those which are raised through
"red flags", and in taking fully mature and wise decisions to avert
unnecessary risks to the company.
[ii] Fiduciary duties which ensure and secure that the
directors of companies always keep the interests of the company and its
stakeholders, ahead and above their own personal interests.
The following duties and liabilities have been imposed on
the directors of companies, by the Indian Companies Act of 2013, under its
Section 166: ---
- A director of a company shall act in accordance with the Articles of Association (AOA) of the company.
- A director of the company shall act in good faith, in order to promote the objects of the company, for the benefits of the company as a whole, and in the best interests of the stakeholders of the company.
- A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
- A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
- A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
- A director of a company shall not assign his office and any assignment so made shall be void.
- If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one Lakh Rupees but which may extend to five Lac Rupees.
DUTIES OF INDEPENDENT DIRECTORS
The liability regime of the CA-2013 not only imposes the
above-mentioned duties and responsibilities on the directors of Indian
companies, but also advocates for independence and equitableness of the board
of a company, especially a public limited company. Consequently, the roles,
duties, and responsibilities of the Independent Directors have also been
stipulated by the new Indian Companies Act of 2013. An Independent Director is
that member of the board of a company, who does not possess any financial
relationship with the company (except the sitting fees), nor can own shares in
the company. The earlier Indian Companies Act of 1956 had no explicit
provisions for the independent directors, and only the Old Clause 49 of the
Listing Agreement of SEBI contained prescriptions for induction of independent
directors to the listed companies.
The new Indian Companies Act of 2013 dictates that every
listed company must contain at least one-third of the total magnitude of its
directors, as the independent directors; and it also empowers the Government of
India to include other categories of companies within the scope of this
provision or requirement (Section 149 of the CA-2013). Public limited companies
composited as per the former CA-1956, are granted a transition period of one
year for making strict compliance with this mandatory provision. Again, the
independent directors are not permitted to hold office for more than two
consecutive terms of five-year periods.
In the new regime, the roles and duties of the independent
directors attained significant expansion, and many new other areas have been
prudently covered. Broadly, they are intelligently assigned the highly
responsible role of the arbiters among various constituencies within the
corporation. Hence, the new provisions for the independent directors of the
limited companies are certainly very constructive for transparent and sound
corporate governance, and are hugely beneficial to the company and its all
shareholders. Some of the most significant functions, duties, and liabilities
of the independent directors, are the following (as per the Schedule IV of the
CA-2013): ---
- To assist in forwarding equitable and independent judgment to the board
- To secure and promote the interests of all stakeholders of the concerned company, particularly of the minority shareholders
- To conciliate and balance the conflicting interests of the stakeholders
- To attend actively and constructively most of the board and committee meetings
- To pay proper and adequate attention to Related Party Transactions (RPTs)
- To report concerns honestly and impartially about any unethical behavior, violation of the code of conduct, or any suspected fraud in the company
31 comments:
The Companies Act, 2013 (new Act) was passed by Parliament in August, 2013. It received the assent of the President on 29th August, 2013 and is notified on 30th August 2013. The new Act replaced the existing Companies Act, 1956 (existing Act). 98 Sections out of 470 Sections of the new Act came into force from 12-9-2013. The provisions relating to Duties and Responsibilities of Independent Directors are contained in Chapter XI of the new Act.
The concept of Independent Directors existed under SEBI Regulations before this Act. Therefore, it was obligatory for listed Companies to have specified number of Independent Directors. However, the New Act defines the term “Independent Director” and provides for specific duties and responsibilities of Independent Directors.
Independent Director- It is defined u/s 149(6), CA 2013, as a director other than managing director, whole-time director or a nominee director, one who qualifies the tests of Integrity, expertise and experience and fulfils the exclusionary relationships test, as laid down under the law.
Act also prescribes detailed qualifications for the appointment of an independent director. Some of these qualifications include:
a) he/she should be a person of integrity, relevant expertise and experience;
b) who is or was not a promoter of the company or its holding, subsidiary or associate company;
c) who is not related to the promoters or directors in the company, its holding, subsidiary or associate company;
d) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors during the two immediately preceding financial years or during the current financial year;
e) none of whose relatives have or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors amounting to 2 per cent or more of its gross turnover or total income or Rs. 50 lakh or higher amount which may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year.
Some of the points that I found are:
1.The only conflict or issue with the same is that, while expanding their roles and defining their liabilities, the 2013 Act fails to recognise that independent directors have a very limited ability to affect the functioning of a board.
2.One of the crucial and desired conditions for the appointment of an independent director is still missing: promoters should not have any say in his appointment. In other words, independent directors must be chosen exclusively by the non-promoter category of shareholders.
3.Under the CA1956, a director had fiduciary duties towards a company. However, the CA2013 has now defined the duties of a director.
4.Liability on Directors and Officers: The CA2013 does not restrict an Indian company from indemnifying its directors and officers like the CA1956.
ANANT GAUTAM (16BAL067)
The Companies Act, 2013 ('CA 2013') for the first time has laid down the duties of directors in unequivocal terms in section 166. In summary, the general duties of directors under the CA 2013 are as follows:
to act in accordance with the articles of the company, in other words, to act within powers;
to act in good faith in order to promote the objects of the company for the benefit of its members as a whole;
to act in the best interest of the company, its employees, shareholders, community and for the protection of environment;
to exercise due and reasonable care, skill and diligence and independent judgment;
to avoid direct or indirect conflicts of interest;
to avoid undue gain or advantage either to himself or relatives, partners or associates; and
not to assign his office to any other person.
Yash Mittal
16BAL124
The Companies Act 2013 is an Act of the Parliament of India which regulates incorporation of a company, responsibilities of a company, directors, dissolution of a company. The 2013 Act is divided into 29 chapters containing 470 sections as against 658 Sections in the Companies Act, 1956 and has 7 schedules.The Act has replaced The Companies Act, 1956 (in a partial manner) after receiving the assent of the President of India on 29 August 2013. The Act came into force on 12 September 2013 with few changes like earlier private companies maximum number of member was 50 and now it will be 200. A new term of "one person company" is included in this act that will be a private company and with only 98 provisions of the Act notified. A total of another 184 sections came into force from 1 April 2014.
The Ministry of Company Affairs thereafter published a notification for exempting private companies from the ambit of various sections under the Companies Act.
some new concepts under this act are-
One Person Company- is a company with only one person as a member. That one person will be the shareholder of the company. It avails all the benefits of a private limited company such as separate legal entity, protecting personal assets from business liability, and perpetual succession. One Person Company (OPC) is a Company registered with ONLY ONE PERSON as its shareholder. An OPC is classified as a private company under Companies Act.
Woman Director: Every Listed Company /Public Company with paid up capital of Rs 100 Crores or more / Public Company with turnover of Rs 300 Crores or more shall have at least one Woman Director.
Corporate Social Responsibility Clause (135)[7] Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
Registered Valuers - Valuation by registered valuers. Clause (247) (1) Where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities under the provision of this Act, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company.
Class action suits (clause 245) For the first time, a provision has been made for class action suits. It is provided that specified number of member(s), depositor(s) or any class of them, may, if they are of the opinion that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors. Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner. The order passed by the Tribunal shall be binding on the company and all its members, depositors and auditors including audit firm or expert or consultant or advisor or any other person associated with the company.
Duties of Independent Directors
The duties of Independent Directors of the Company, as laid down under Schedule IV to the
Companies Act, 2013, are incorporated herein pursuant to Clause 49 of the Listing Agreement
with Stock Exchanges. It shall be the duty of Independent Directors to:
a. undertake appropriate induction and regularly update and refresh their skills, knowledge
and familiarity with the Company;
b. seek appropriate clarification or amplification of information and, where necessary, take
and follow appropriate professional advice and opinion of outside experts at the expense
of the Company;
c. strive to attend all meetings of the Board of Directors and of the Board Committees of
which they are a member;
d. participate constructively and actively in the Board Committees in which they are
chairpersons or members;
e. strive to attend the general meetings of the Company;
f. ensure, where they have concerns about the running of the Company or a proposed
action, that these are addressed by the Board of Directors;
g. keep themselves well informed about the Company and the external environment in
which it operates;
h. not to unfairly obstruct the functioning of an otherwise proper Board or Board
Committee;
i. pay sufficient attention and ensure that adequate deliberations are held before approving
related party transactions and assure themselves that the same are in the interest of the
Company;
j. ascertain and ensure that the Company has an adequate and functional vigil mechanism
and ensure that the interests of a person who uses such mechanism are not prejudicially
affected on account of such use;
k. report concerns about unethical behaviour, actual or suspected fraud or violation of the
Code of Conduct;
l. act within their authority and assist in protecting the legitimate interests of the Company,
shareholders and its employees;
m. not to disclose confidential information, including commercial secrets, technologies,
advertising and sales promotion plans and unpublished price sensitive information, unless
such disclosure is expressly approved by the Board of Directors or required by law.
Section 2(34) of Companies Act, 2013 defines director as- “A director appointed to the board of company.”
Section 166 defines the duties of directors that he/she has to perform
Section 166 of the 2013 Act stipulates the following:
(a) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of a company.
(b) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
(c) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
(d) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
(e) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain of the company.
(f) A director of a company shall not assign his office and any assignment so made shall be void. The duties set out in this Section are not exhaustive. Apart from the duties set out in Section 166, directors are also responsible for various obligations provided under other Sections of the 2013 Act.
For example: The board needs to lay the financial statements for approval and adoption at the annual general meeting of the shareholders (Section 129);
The directors are responsible for devising proper systems to ensure compliance with the provisions of all applicable laws and to ensure that such systems are adequate and are operating effectively (Section 134);
Director needs to ensure that the company complies with obligations relating to corporate social responsibility provided under Section 135;
The board is responsible for appointing first auditors (Section 139);
A director needs to disclose his interest in a contract with the company (Section 184);
A director is prohibited from engaging in forward dealing of securities (Section 194);
The board is responsible for appointment of whole time key managerial personnel (Section 203);
The directors are responsible for issuance of notice ad holding of board meetings and general meetings etc.
After reading this, an important question arose to me as to why there was a need to include Independent directors ?
In India, the gravity of Independent Directors was recognized with the introduction of corporate governance.Corporate governance is basically a system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. The Companies Act, 1956 do not directly talks about ID's, as no such provision exists regarding the compulsory appointment of ID's on the Board. A need was felt to update this Act and make it globally compliant and more meaningful in the context of investor protection and customer interest.
One of the sections of the companies Act 2013 is section 149 which also deals with the appointment and qualification of ID's on the board of the Company and their importance in good corporate governance in the Company.The Act, 2013 has specifically defined the roles, duties, liabilities and the manner of selection of ID's in board and various committees of the Company which have been briefly defined in the blog.
The need for the ID's aroused due to the need of a strong framework of corporate governance in the functioning of the company. He helps a company to protect the interest of minority shareholders and ensure that the board does not favour any particular set of shareholders or stakeholders. The role they play in a company broadly includes improving corporate credibility, governance standards, and the risk management of the company. These ID's are basically the trustees of good corporate governance.
PALAK DHEER
16BAL090
There is a term "Related Party Transaction" which came here, so i would like to throw some light on it.
A related-party transaction is a business deal or arrangement between two parties who have a relationship prior to the deal. I will define related-party transactions and discuss the requirements companies must follow for the purposes of financial reporting and auditing to avoid any risk that these transactions may present, such as misstatement of accounts and fraudulent financial reporting.
Understanding Related-Party Transactions
Maintaining tight controls over financial reporting requires oversight of many different business transactions. One such transaction involves related parties. The main consideration with a related party is does a relationship exist, prior to the business transaction, that could affect the decision making or impact the financial reporting for the organization? An example would be if the Vice President of Marketing for a company recommended their nephew's company to perform services for their organization. Due to the relationship between the two parties, it would require that any transactions be fully disclosed. Most companies have an annual review with all employees and require them to submit a related-party transaction screening form to help self-identify these relationships for reporting and auditing purposes. While these transactions are not illegal, the reporting and disclosure requirements, if not followed, can result in significant fines and penalties, and create a red flag for investors.
Definition of Related Party
Most companies have policies and procedures in place to document and disclose related-party transactions. Oftentimes, management approval, significant additional oversight, and internal audit may apply to these transactions, ensuring they follow all legal and ethical guidelines. There are several different definitions for related parties, but many are very common:
The party could be a partner, colleague, or associate of the company.
One of the parties has significant or common control over the other party.
The party is a close family member of a business owner or key management staff. A close family member is defined as spouse, children, or dependents of the individual or spouse.
The party is a joint venture partner.
The party is significantly controlled or influenced by the business owner or key management staff.
The party is a key management member or a parent company's key management member.
The party provides post-employment benefit plans for the company's employees.
Related-Party Disclosures
There are many different ways to define a related party, however, financial reporting standards have guidelines that define situations in which a related party must be disclosed. The US Financial Accounting Standards Board (FASB), the International Accounting Standards Board (IASB) as well as US Generally Accepted Accounting Principles (GAAP) all provide standards and guidance regarding related-party transactions. Each of the governing agencies has published disclosures which further explain the effect of related-party transactions on an organization's financial statements. The definitions of a related party are broadly similar, and industry standards require that the nature of the relationship, a description of the transaction and the amounts involved (including outstanding balances) be disclosed for related-party transactions. None of the standards contain any measurement or recognition requirements for related-party transactions. Those responsible for financial reporting should fully understand the disclosure requirements for each reporting agency that has authority to audit their financial statements.
WHO CAN BE AN INDEPENDENT DIRECTOR
Section 149(6) of the Companies Act, 2013 provides that:
“An independent director in relation to a company, means a director
other than a managing director or a whole-time director or a nominee
director, –
(a) who, in the opinion of the Board, is a person of integrity and
possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding,
subsidiary or associate company;
(ii) who is not related to promoters or directors in the company,
its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship with the company, its
holding, subsidiary or associate company, or their promoters, or
directors, during the two immediately preceding financial years
or during the current financial year;
(d) none of whose relatives has or had pecuniary relationship or
transaction with the company, its holding, subsidiary or associate
company, or their promoters, or directors, amounting to 2% or
more of its gross turnover or total income or Rs. 50 lakh or such
higher amount as may be prescribed, whichever is lower, during
the two immediately preceding financial years or during the
current financial year;
(e) who, neither himself nor any of his relatives –
(i) holds or has held the position of a key managerial personnel
or is or has been employee of the company or its holding,
subsidiary or associate company in any of the three financial
years immediately preceding the financial year in which he
is proposed to be appointed;
(ii) is or has been an employee or proprietor or a partner, in
any of the three financial years immediately preceding the
financial year in which he is proposed to be appointed, of –
(A) a firm of auditors or company secretaries in practice or
cost auditors of the company or its holding, subsidiary
or associate company; or
(B) any legal or a consulting firm that has or had any
transaction with the company, its holding, subsidiary
or associate company amounting to ten per cent. or
more of the gross turnover of such firm;
(iii) holds together with his relatives two per cent. or more of
the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called,
of any non-profit organisation that receives twenty-five per
cent. or more of its receipts from the company, any of its
promoters, directors or its holding, subsidiary or associate
company or that holds two per cent. or more of the total
voting power of the company; or
(f) who possesses such other qualifications as may be prescribed”.
LIMIT ON NUMBER OF DIRECTORSHIPS
The Companies Act, 2013 does not provide any specific limit on the
number of independent directorships. As per the provisions of section
165 of the Companies Act, 2013, the maximum number of directorships:
(a) Maximum directorships in aggregate (including alternate
directorships) is Twenty companies;
(b) Maximum directorship in public companies is 10 companies. This
includes directorship in private companies that are either holding
or subsidiary company of a public company.
The members of a company may, however by passing a special resolution specify any lesser number of companies in which a director of the company may act as director.
The restriction on number of directorships is however, laid down in revised clause 49 of the Listing Agreement which provides:
(a) A person may serve as an Independent Director in maximum
seven (7) listed companies.
(b) Any person serving as a Whole-time Director in any listed company
shall serve as an Independent Director in maximum three (3) listed
companies.
The duties provided above are the the key ones. Apart from them there are several other duties also provided in various sections of the act. In layman's words, the C.A. 2013 says to directors that-
1. DON’T FORGET TO MEET YOUR OTHER BOARD MEMBERS ATLEAST ONCE IN 12 MONTHS.
2. YOU NEED TO MAKE SURE THAT PROPER SYSTEMS ARE INTACT FOR COMPLIANCE OF ALL APPLICABLE LAWS.
3. PLEASE KEEP AN EYE ON TRANSACTIONS WITH YOUR RELATIVES.
4. ONE OF YOU MUST HAVE STAYED IN INDIA FOR ATLEAST 180 DAYS IN PREVIOUS CALENDAR YEAR
5. YOU NEED TO REVEAL YOUR RELATED ENTITIES.
6. EMPLOYEES APPOINTED AS DIRECTOR TO BE CONSIDERED AS WTD(WHOLE TIME DIRECTOR).
7. YOU ARE ALWAYS THERE IN THE DEFINITION OF OFFICER IN DEFAULT.
It is very important to understand the qualifications of directors in a company-:
Who can be appointed as a Director: Appointment of a Director is not only a crucial
administrative requirement, but is also a procedural requirement that has to be fulfilled by every company. Under the Companies Act, only an individual can be appointed as a
Director; a corporate, association, firm or other body with artificial legal personality cannot be appointed as a Director.
Appointment of Directors: Generally, in a public company or a private company subsidiary of
a public company, two-thirds of the total numbers of Directors are appointed by the
shareholders and the remaining one-third is appointed in accordance with the manner
prescribed in Articles failing which, the remaining one-third of the Directors must be
appointed by the shareholders. The Articles of a public company or a private company
subsidiary of a public company may provide for the retirement of all the Directors at every
AGM.
In a private company, which is not a subsidiary of a public company, the Articles can
prescribe the manner of appointment of any or all the Directors. In case the Articles are
silent, the Directors must be appointed by the shareholders.
The Companies Act also permits the Articles to provide for the appointment of two-thirds of
the Directors according to the principle of proportional representation, if so adopted by the company in question.
Nominee Directors can be appointed by a third party or by the Central Government in case of
oppression or mismanagement.
Firstly we need to know that who is a Director of a company?
He/she is an appointed member of the board of directors of a company who has the responsibility for determining and implementing the company’s policy.
A company director need not be a shareholder or an employee or may hold only the office of director under the provisions of the Act.
There are several duties of director of a company:-
1. A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
2. A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
3. A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
4. A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates.
The Companies Act 2013 is an Act of the Parliament of India which regulates incorporation of a company, responsibilities of a company, directors, dissolution of a company. The 2013 Act is divided into 29 chapters containing 470 sections as against 658 Sections in the Companies Act, 1956 and has 7 schedules.The Act has replaced The Companies Act, 1956 (in a partial manner) after receiving the assent of the President of India on 29 August 2013. The Act came into force on 12 September 2013 with few changes like earlier private companies maximum number of member was 50 and now it will be 200. A new term of "one person company" is included in this act that will be a private company and with only 98 provisions of the Act notified.A total of another 184 sections came into force from 1 April 2014.
The term “Independent Director” is defined in clause 49(iii) of the Listing Agreement. This definition is not as exhaustive as in the new Act. It is also provided that a nominee Director shall not be considered as Independent Director. Under Clause 49, the Board has to lay down a Code of Conduct for all Directors, including an Independent Director.
Concept of Independent Directors under the New Act
As stated earlier, the concept of Independent Directors does not exist under the existing Act. However, Section 149 of the New Act recognises the concept of an “Independent Director”. This term is defined to mean a
person —
(i) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience.
(ii) Who possesses such other qualifications as may be prescribed.
(iii)Who is or was not a promoter of the company, or its holding, subsidiary or associate company (hereinafter referred to as associate companies).
(iv) Who is not related to promoters or directors of the company or any of its associate companies.
(v) Who has or had no pecuniary relationship with any of the above persons/companies during the current or two immediately preceding financial years.
(vi)None of his relatives has or had pecuniary relationship or transaction with the above persons amounting to 2% or more of its gross turnover or total income or Rs. 50 lakhs (or such higher amount which is prescribed) – whichever is lower during the current or two preceding financial years.
(vii)Who or any of his relatives –
(a) Holds or held the position of a key managerial personnel or as employee of the company or any of its associate companies in any of the 3 financial years immediately preceding the year of his appointment.
(b) Is or has been an employee, proprietor or partner of the following during any of the 3 preceding financial years.
• A firm of Auditors, Company Secretaries or Cost Auditors of the company or any of its associate companies.
• Any legal or consulting firm which has or had transaction with the company in or any of its associate companies amounting to 10% or more of the gross turnover of the firm.
(c) Holds, together with his relatives, 2% or more of the voting power of the company, or
(d) Is a Chief Executive or Director of any non-profit organisation that receives 25% or more of its receipts from the company, any of its promoters, directors or its associate companies or that holds 2% or more of the total voting power of the company.
(viii) Who is not a Managing/Whole Time/Nominee Director.
After reading about the concept of independent director , I thought why did the need to have one arose.
I found that the need for Independent Directors was felt by the Indian Legislators and the Corporate experts after the Satyam Debacle in the year 2009. Satyam case was perhaps the biggest corporate fraud case where M/S Satyam Computer Services Ltd caused loss to the investors to the tune of Rs. 14162 crores. The company head Ramalinga Raju and members of his family secured illegal gains to the tune of Rs. 2743 crores by various tricks. The fraud was perpetrated by inflating the revenue of the company through false sales invoices and showing corresponding gains by forging the bank statements with the connivance of the Statutory and Internal Auditors.
The annual financial statements of the company with inflated revenue were published for several years and this led to the higher price of the scrip in the market. In the process innocent investors were lured to invest in the company. Attempts were made to conceal the fraud by acquiring the companies of kith and kin. In order to avoid such scams in the future and to protect the interests of the investors, especially the minority share holders the concept of Independent Directors emerged.
The Companies Act, 2013 was enacted with a view to improve the standards of Corporate Governance and ensure transparency to the minority shareholders. The new act contains provisions pertaining to Independent Directors. Section 149(6) of the Act defines Independent Directors. Section 150 deals with the manner of selection of Independent Directors. Section 149 (12) talks about the liability of Independent Directors. Schedule IV of the said Act lays down a code for Independent Directors.
The presence of Independent Directors on the Board of a company would improve corporate governance, particularly for public companies or companies with a significant public interest. Corporate experts felt that independent directors would be able to bring an element of objectivity to the Board process in the general interest of the company and thereby to the benefit of minority interests and small shareholders. Finally it was felt by the corporate experts that the inclusion of independent director often brings a different point of view, a more knowledgeable view, and a more professional view.
It also ensures the interest of stakeholders in the financial market and is a sign of moving towards strong economy.
New definition- Sec 2(34) as "director" means a director appointed to the board of company. It is much more comprehensive than older one.
Who are the directors? Why directors needs to be individual.
In case of Oriental Metal pressing Works pvt. ltd. v BK thakur, SC held that directos should be individual becuase coroporate interst also involves people interest.
1.The following duties and liabilities have been imposed on the directors of companies, by the Indian Companies Act of 2013, under its Section 166: ---
-A director of a company shall act in accordance with the Articles of Association (AOA) of the company.
-A director of the company shall act in good faith, in order to promote the objects of the company, for the benefits of the company as a whole, and in the best interests of the stakeholders of the company.
-A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
-A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
-A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
-A director of a company shall not assign his office and any assignment so made shall be void.
-If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one Lakh Rupees but which may extend to five Lac Rupees.
- Duty not to mislead by offer document ( sec 34 and 35).
- Duty not to induce the investors for buying share subscription (Sec 36).
-Duty not to issue irredeemable preference shares (sec 55 )
- Duty to hold stautory meetings of companies (sec 96)
- Duty to maintain books , and auditing of books, appoint directors (128sec).
- Duty to ensure CSR initiatives.(sec 135).
-Duty to get DIN.
Liablity
Mistatement in prospectus held director criminally liable.(sec 35).
In this act, criminally liablity has been increased.
Shubham Gupta
16bal113
The Companies Act, 2013 was enacted with a view to improve the standards of Corporate Governance and ensure transparency to the minority shareholders. The new act contains provisions pertaining to Independent Directors. Section 149(6) of the Act defines Independent Directors. Section 150 deals with the manner of selection of Independent Directors. Section 149 (12) talks about the liability of Independent Directors. Schedule IV of the said Act lays down a code for Independent Directors.
Section 2(34) of Companies Act, 2013 defines director as- “A director appointed to the board of company.”
Section 166 defines the duties of directors that he/she has to perform
Section 166 of the 2013 Act stipulates the following:
(a) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of a company.
(b) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
(c) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
(d) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
(e) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain of the company.
(f) A director of a company shall not assign his office and any assignment so made shall be void. The duties set out in this Section are not exhaustive. Apart from the duties set out in Section 166, directors are also responsible for various obligations provided under other Sections of the 2013 Act.
For example: The board needs to lay the financial statements for approval and adoption at the annual general meeting of the shareholders (Section 129);
The directors are responsible for devising proper systems to ensure compliance with the provisions of all applicable laws and to ensure that such systems are adequate and are operating effectively (Section 134);
Director needs to ensure that the company complies with obligations relating to corporate social responsibility provided under Section 135;
The board is responsible for appointing first auditors (Section 139);
A director needs to disclose his interest in a contract with the company (Section 184);
A director is prohibited from engaging in forward dealing of securities (Section 194);
The board is responsible for appointment of whole time key managerial personnel (Section 203);
The directors are responsible for issuance of notice ad holding of board meetings and general meetings etc.
The role of an ID is considered to be of a great significance. The guidelines, role and functions and duties and etc are broadly set out in a code described in Schedule IV of the Act, 2013. The code lays down certain critical functions like safeguarding the interest of all stakeholders, particularly the minority holders, harmonizing the conflicting interest of the stakeholders, analyzing the performance of management, mediating in situations like conflict between management and the shareholder’s interest and etc.
The code also lays down certain important duties like keeping themselves updated about the company and the external environment in which it operates, not disclosing important and confidential information of the company unless approved by the board or required by law, actively participating in committees of the board in which they are chairperson or members, keeping themselves update and undertaking appropriate induction and refreshing their knowledge, skills and familiarity with the company, regularly attend the general meetings of the company and etc.
16bal071
Ayushi Mukherjee
The Listing Agreement requires independent directors
to disclose their shareholding in a listed company prior to
their appointment to that company’s board. Under the new
act, independent directors must give a declaration of independence
at the first meeting of the board in which they
participate and thereafter at the first meeting of the board
in every financial year or whenever there is a change in circumstances
which affects their status as an independent
director. As the new act does not override the provisions
of the Listing Agreement, the conflicts highlighted above
require a clarification or an amendment to the Listing
Agreement to bring it in conformity with the new act.
Several other restrictions have also been built into the
new act to ensure that there is no financial nexus between
an independent director and the company. For instance,
the new act prohibits independent directors from receiving
stock options of the company. The Listing Agreement does
not prohibit the issue of stock options. Rather it provides
that the maximum limit on stock options to be granted to
independent directors can be decided by a shareholders’
resolution.
The new act makes a considerable effort to bring the
role of independent director in line with changing needs.
The primary objective behind the new act’s provisions on
independent directors is to ensure transparency and independence
and at the same time to bring value to the company
by providing input on strategy, business, marketing,
legal, compliance and other matters, including performance
of monitoring functions.
While on the one hand the new act imposes a higher
level of responsibility by clearly defining independent
directors’ role and liability in cases of failure, on the other
hand it imposes limits on their remuneration. These may
prove to be disincentives for individuals to accept appointments
as independent directors. Imposing a high degree
of liability on independent directors may prove to be
counter-productive, as independent directors cannot be
held liable for transgressions of the board.
While the new act intends to bestow broader roles,
greater independence and defined liabilities on independent
directors, it also limits their effective functioning on
account of their being a minority (i.e. one-third) of the
board. Further, certain provisions pertaining to independent
directors in the new act conflict with the Listing
Agreement, requiring changes in the Listing Agreement to
ensure that it continues to apply along with the new act.
Ojasvi Sharma
16bal036
New Section 149 provides that the minimum number of directors in the case of a public company shall be three and in the case of a private company it shall be two. The maximum number of directors can be 15.
Section 149 recognizes the concept of an “Independent Director”.
This term is defined to mean a person -
(i) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience.
(ii) Who possess such other qualifications as may be prescribed.
(iii) Who is or was not a promoter of the company, or its holding, subsidiary or associate company (hereinafter referred to as Group Companies)
(iv) Who is not related to promoters or directors of the company or any of its group companies.
(v) Who has or had no pecuniary relationship with any of the above persons/companies during the current or two immediately preceding financial years.
The Companies Act, 2013 for the first time has laid down the duties of directors in unequivocal terms in section 166. In summary, the general duties of directors under the CA 2013 are as follows:
(i) He has to act in good faith in order to promote the objects of the company for the benefit of its members as a whole.
(ii) He has to act in the best interest of the company, its employees, shareholders, community and for the protection of environment.
(iii) He has to carry on his duties with due and reasonable care, skill and diligence and exercise independent judgment.
(iv) He shall not involve in a situation in which he may have a direct or indirect interest that conflicts or likely to conflict with the interest of the company.
(v) He shall not achieve or attempt to achieve any undue gain or advantage either to himself, his relatives, partners or associates.
(vi) He shall not assign his office to any other person.
If he contravenes any of the above provisions of section 166, he shall be punishable with fine which shall not be less than Rs.1 lac which may tend to 5 lacs
The Companies Act, 2013 has come into existence on 29.08.2013 that replaces a nearly six decade-old legislation and overhauls the way corporate function and are regulated in the country.
This article contains the description of some provisions related to directors which have been modified in Companies Act, 2013.
Board of Directors: Every Company shall have a minimum number of three directors in case of public company, two directors in private company and one director in one person company; and a maximum of fifteen directors in its Board of Directors. Only individual can be appointed as Directors. A company may appoint more than fifteen directors after passing a special resolution.
Prescribed class or classes of company shall have at least one woman director.
Resident Director: Every company shall have at least one Director who has stayed in India for a total period of not less than 182 days in the previous calendar year.
Independent Directors: Every listed public company shall have at least one third of the total number of directors as independent directors and CG may prescribe the minimum number of independent directors in case of any public company.
Small Shareholder Director: A listed company may have one director elected by small shareholders. Small Shareholder means a shareholder holding shares of nominal value of not more than twenty thousand rupees.
Right of other persons to stand for directorship: A person who is not a retiring director be eligible to be appointed as director if he or any member gives a notice proposing him to be appointed as director. The notice must be sent at the registered office of the company, not less than 14 days before the meeting, along with the deposit of one lakh rupees. The deposit of one lakh rupees shall be refunded to the person if he gets elected as a director or gets more than 25% of total valid votes cast either on show of hands or on poll on such resolution.
Alternate Director: Alternate director shall be appointed for a director during his absence for 3 months or more from India. The Board of directors, if so authorized by articles or by a resolution passed in general meeting, appoint a person to act as an alternate director.
Independent Director: An independent director is not a managing director or whole time director or a nominee director.
Remuneration of independent director: An independent director shall not be entitled to any stock option and may receive remuneration by way of fee provided under sub section 5 of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as approved by members.
Tenure of independent director: An independent director shall hold office for a term up to five consecutive years, but shall be eligible for reappointment by passing special resolution and require disclosure in Board’s report. He shall not hold office for more than two consecutive but shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director.
roll no.- 16BAL117
Director according to the definition in sec 2(34) means a chief delegated to the leading group of organization.
Why Directors should be individual?
In case of Oriental Metal pressing Works pvt. ltd. v BK thakur, SC held that directos should be individual because corporate interest also involves people interest.
further, we need to understand that, The Companies Act, 2013 was instituted with a view to enhance the principles of Corporate Governance and guarantee straightforwardness to the minority shareholders. The new demonstration contains arrangements relating to Independent Directors. Section 149(6) of the Act characterizes Independent Directors. Plan IV of the said Act sets out a code for Independent Directors.
While from one viewpoint the new act forces a higher
level of duty by unmistakably characterizing free executives' part and obligation in instances of disappointment, on the other hand it forces restrains on their compensation. These may turn out to be disincentives for people to acknowledge arrangements as free chiefs. Forcing a high degree of obligation on autonomous chiefs may turn out to be counter-beneficial, as autonomous chiefs can't be held at risk for transgressions of the board.
In a privately owned business, which is not an auxiliary of an open organization, the Articles can recommend the way of arrangement of any of the Directors. On the off chance that the Articles are quiet, the Directors must be selected by the shareholders. The Companies Act likewise allows the Articles to accommodate the arrangement of 66% of the Directors as indicated by the standard of relative portrayal, if so embraced by the organization being referred to. Nominee Directors can be appointed by a third party or by the Central Government in case of
oppression or mismanagement.
Vivek Garg
16BAL123
Section 2(47) of the Act prescribed that “Independent director” means an independent director referred to in sub section (5) of section 149 of the Act. In fact reference should have been made to sub section (6) of 149 as it specified the qualifications of independent director with clarity. Every listed public company shall have at least one-third of the total number of directors as independent directors (fraction is to be rounded off to one). Central Government has prescribed under Rule 4, public companies with specified limits as on the last date of latest audited financial statements mentioned below shall also have at least 2 directors as independent directors:- paid up share capital of Rs. 10 crore or more; or turnover of Rs. 100 crore or more; or in aggregate, outstanding loans/borrowings/ debentures/ deposits/ exceeding Rs. 50 crore or more. In case a company covered under this rule is required appoint higher number of independents directors due to composition of its audit committee and then they shall appoint such higher number of independent directors. Further if there is any intermittent vacancy of an independent director then it shall be filled up by the board of directors within 3 months from the date of such vacancy or not later than immediate next board meeting, whichever is later. Once the company covered under above sub-rule (i) to (iii) of Rule 4, ceases to fulfil any of three conditions for three consecutive years then it shall not be required to comply these provisions until such time as it meets any of such conditions. Definition of an Independent Director – Section 149 (6) An independent director means a director other than a managing director or a whole-time director or a nominee director who does not have any material or pecuniary relationship with the company/ directors. Section 149(6) of the Act prescribes the criteria for independent directors.
Directors, is required to discharge the following specific duties as prescribed under the Companies Act:
1. Administration and Compliance Directors are vested with a number of administrative responsibilities in order to enable them to manage and administer the company.
2. Restriction on Activities and Disclosure of Information The Companies Act has prescribed and / or supplemented the common law duties with certain other obligations on Directors that relate to their position
3. Duties during Voluntary Winding Up of a Company The Directors must file the petition for winding up of the company (in a voluntary liquidation situation) before the relevant court. The Directors are also required to file a statement of the affairs prior to the voluntary winding up of the company, upon appointment of an official liquidator by the court.
4. Duties During Involuntary Winding Up of a Company In cases of involuntary winding up, the Directors must defend the Company in the winding up petition filed by a creditor or any other person recognized by the Companies Act.
The revised companies act by revising its sections proven to be beneficial to the interests of the company and its stakeholders but by precisely mentioning the duties and roles of the independent directors have made the motive more fulfilling. It is logical that any director must not hold any share of the company not only to avoid his personal interests to be above the company's good, but also to ensure that the director profusely ensures his duties of safe guarding the rights of the minority stakeholders or the company in all. These precisely mentioned provisions keep them away from taking part in the the financial transactions the company undertakes but rather these guide lines make sure that they facilitate the people and the company engaging in this process. This can surely not have any vested interests of the directors as many sections prohibit certain activities to happen from their side only to make sure that the other are properly performed and that are those for which actually independent directors are hired on the very first basis. The revised provisions secure the interests of the company and its stake holders considering all possible ways.
Also, section 465 (1) of the companies act 2013 lays few more interesting benefits worth considering:
581E. BENEFITS TO MEMBERS
(1)
Subject to provisions made in articles, every Member shall initially receive only such value for the produce or products pooled and supplied as the Board of Producer Company may determine, and the withheld price may be disbursed later in cash or in kind or by allotment of equity shares, in proportion to the produce supplied to the Producer Company during the financial year to such extent and in such manner and subject to such conditions as may be decided by the Board.
(2)
Every Member shall, on the share capital contributed, receive only a limited return:
Page
4
of
13
Provided
that every such Member may be allotted bonus shares in accordance with the provisions contained in section
581ZJ.
(3)
The surplus if any, remaining after making provision
for payment of limited return and reserves referred to in section
581ZI, may be disbursed as patronage bonus, amongst the Members, in proportion to their participation in the
business of the Producer Company, either in cash or by way of allotment of equity
shares, or both, as may be
decided by the Members at the general meeting.
Frenny Patel
16BAL021
The following duties and liabilities have been imposed on the directors of companies, by the Indian Companies Act of 2013, under its Section 166: ---
A director of a company shall act in accordance with the Articles of Association (AOA) of the company.
A director of the company shall act in good faith, in order to promote the objects of the company, for the benefits of the company as a whole, and in the best interests of the stakeholders of the company.
A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
A director of a company shall not assign his office and any assignment so made shall be void.
If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one Lakh Rupees but which may extend to five Lac Rupees.
“An independent director in relation to a company, means a director
other than a managing director or a whole-time director or a nominee
director, –
(a) who, in the opinion of the Board, is a person of integrity and
possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding,
subsidiary or associate company;
(ii) who is not related to promoters or directors in the company,
its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship with the company, its
holding, subsidiary or associate company, or their promoters, or
directors, during the two immediately preceding financial years
or during the current financial year;
(d) none of whose relatives has or had pecuniary relationship or
transaction with the company, its holding, subsidiary or associate
company, or their promoters, or directors, amounting to 2% or
more of its gross turnover or total income or Rs. 50 lakh or such
higher amount as may be prescribed, whichever is lower, during
the two immediately preceding financial years or during the
current financial year;
(e) who, neither himself nor any of his relatives –
(i) holds or has held the position of a key managerial personnel
or is or has been employee of the company or its holding,
subsidiary or associate company in any of the three financial
years immediately preceding the financial year in which he
is proposed to be appointed;
(ii) is or has been an employee or proprietor or a partner, in
any of the three financial years immediately preceding the
financial year in which he is proposed to be appointed, of –
(A) a firm of auditors or company secretaries in practice or
cost auditors of the company or its holding, subsidiary
or associate company; or
(B) any legal or a consulting firm that has or had any
transaction with the company, its holding, subsidiary
or associate company amounting to ten per cent. or
more of the gross turnover of such firm;
(iii) holds together with his relatives two per cent. or more of
the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called,
of any non-profit organisation that receives twenty-five per
cent. or more of its receipts from the company, any of its
promoters, directors or its holding, subsidiary or associate
company or that holds two per cent. or more of the total
voting power of the company; or
(f) who possesses such other qualifications as may be prescribed”.
LIMIT ON NUMBER OF DIRECTORSHIPS
The Companies Act, 2013 does not provide any specific limit on the
number of independent directorships. As per the provisions of section
165 of the Companies Act, 2013, the maximum number of directorships:
(a) Maximum directorships in aggregate (including alternate
directorships) is Twenty companies;
(b) Maximum directorship in public companies is 10 companies. This
includes directorship in private companies that are either holding
or subsidiary company of a public company.
The members of a company may, however by passing a special resolution specify any lesser number of companies in which a director of the company may act as director.
The restriction on number of directorships is however, laid down in revised clause 49 of the Listing Agreement which provides:
(a) A person may serve as an Independent Director in maximum
seven (7) listed companies.
(b) Any person serving as a Whole-time Director in any listed company
shall serve as an Independent Director in maximum three (3) listed
companies.
I believe that the Act empowers independent directors with proper checks and balances, so that such extensive powers are not exercised in an unbridled manner, but in a rational and accountable way. The changes are a step in the right direction. They should enhance corporate governance and ensure the management and affairs of the companies are conducted in the interest of stakeholders. It is expected that these changes will thwart corporate scandals in future and insulate shareholders interest.
one of the major criteria that was introduces was the evaluation of these directors for re appointment.
The Schedule IV of the Act i.e. “Code for Independent
Directors” also provides for the evaluation of Independent
Directors. It requires that the performance evaluation of
independent directors shall be done by the entire Board
of Directors, excluding the director being evaluated. On
the basis of the report of performance evaluation, it shall
be determined whether to extend or continue the term of
appointment of the independent director. This also means
that Independent Directors (other than the Independent
Director being evaluated) also become a part to assess
the Independent Director being evaluated.
The revised Listing Agreement provides that the
Nomination Committee shall lay down the evaluation
criteria for performance evaluation of independent
directors. The company shall disclose the criteria for
performance evaluation, as laid down by the Nomination
Committee, in its Annual Report. The performance
evaluation of independent directors shall be done by the
entire Board of Directors (excluding the director being
evaluated).
In addition to the parameters laid down for Directors,
which shall be common for evaluation to both
Independent and Non- executive directors, an
Independent director shall also be evaluated on the
following parameters:
• Exercise of objective independent judgment in the
best interest of Company;
• Ability to contribute to and monitor corporate
governance practice; and
• Adherence to the code of conduct for independent
directors.
The law laid down by section 166 under the new Act 2013 is in line with the jurisprudence in this regard.
How Director Shall Act
Acting In Good Faith and in Best Interest
• The next sub section {2}, at the outset, provides that a director shall act in good faith. This, apparently, is a subjective matter. What is termed as good faith would be difficult to define but it should be judged from the view and actions of a reasonable, prudent and ordinary man in the best interests of the company with no ulterior or mala fide motive to harm the company or take undue benefits from it.
• This provision also lays down the purposes and objectives of the action to be taken in good faith by the director. Such actions will, therefore, have to be taken to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
Acting with Care, Skill & Independent Judgement
• The sub section {3} goes on to lay down that the director shall exercise his duties with due and reasonable care. Moreover, skill and diligence are also required from him. Exercise of independent judgment is also mandated. Pertinently, one might appreciate that exercise of duties of care, skill and diligence can be subjective and judgemental and may vary from case to case or circumstances. The touch stone of such performance in terms of common law could be that of a reasonable, prudent and ordinary person acting bonafide for the benefit of the company. Further, exercise of independent judgment would indicate that while carrying out his duties, the director should make assessments without being influenced by extraneous factors and by persons hampering his sovereign views. It is of course to be understood that the director can seek information, clarification and advises to enable him to take free decisions on his own.
No Conflict of Interest
• The following sub section {4} stipulates that a director shall avoid conflict of interest. This means that he should not be involved in a situation in which he may have a direct or indirect interest which conflicts, or possibly may conflict, with the interest of the company. As a corollary this means that where there is conflict of interest, there are probabilities that the interest of the director may prevail over that of the company which may be detrimental to the company. This law accentuates the position that the directors are in the position of agents of the company with consequent duties.
No Undue Gain or Advantage
• The provision of the sub section {5} takes forward, logically, the duties encapsulated in the earlier sub sections. In addition to the fiduciary duty of a director not to have any conflict of interest with that of the company, he shall also not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates.
• The terms “Undue gain” or “advantage” indicate an unwanted or improper benefit. It is also laid down here that if a director is found guilty of making any undue gain he shall be liable to pay an amount equal to that gain to the company.
No Assignment
• The penultimate sub section {6} prohibits a director, as a duty, not to assign his office and any assignment if so made by him shall be void. Assignment would mean transfer of rights of his office by a director to another person which is prohibited.
• This is not a new concept. As per section 312 of the Erstwhile Companies Act 1956, any assignment of his office by any director of a company was prohibited and was void. This section does not appear in the new Act 2013 but the provision has been made a part of the Duties of Directors as laid down herein.
The term ‘Derivative’ stands for a contract whose price is derived from or is dependent upon an underlying asset. The underlying asset could be a financial asset such as currency, stock and market index, an interest bearing security or a physical commodity.
It’s hard to make an example of “derivative market”, as it’s not a state of the market. “Bullish market” or “Bearish market” is a state, but “derivative” is more a type of the market. Feel the difference.
Derivative market is a market in which the conclusion of terminal contracts (forwards, futures, options) takes place.
Derivative market can be the stock exchange (for example - the futures market) as well as OTC (the market, where forward contracts are negotiated).
For example, if you buy a crude oil CFD, you are not actually buying into an agreement to buy crude oil (like with a futures contract) rather you are just entering into an agreement with your broker that if the price goes up, you make money, and if the price goes down you lose money. A CFD is like a "side bet" on another market.
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