The Chapter XII of the Companies Act, 2013 deals with the Meetings of the Board of Directors and their Powers. This chapter forms one of the most crucial parts of corporate governance as it outlines how directors must act, take decisions, and exercise powers on behalf of the company.
The chapter ensures that the company’s business is conducted responsibly, transparently, and within legal limits. It covers rules related to board meetings, quorum, resolutions, audit and nomination committees, political and charitable contributions, loans, investments, related party transactions, and restrictions on directors’ conduct.
In this blog, we have provided detailed notes on each section covered under Chapter XII of the Companies Act, 2013. You can also download the free PDF of Companies Act 2013 Notes at the end of this blog.
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List of Topics Covered Under Chapter XII of Companies Act 2013
The list of sections covered under Chapter 12 of the Companies Act, 2013 is as follows:
- Section 173 – Meetings of Board
- Section 174 – Quorum for Meetings of Board
- Section 175 – Passing of Resolution by Circulation
- Section 176 – Defects in Appointment of Directors Not to Invalidate Actions
- Section 177 – Audit Committee
- Section 178 – Nomination and Remuneration Committee and Stakeholders Relationship Committee
- Section 179 – Powers of Board
- Section 180 – Restrictions on Powers of Board
- Section 181 – Company to Contribute to Bona Fide and Charitable Funds
- Section 182 – Political Contributions
- Section 183 – Contributions to National Defence Fund
- Section 184 – Disclosure of Interest by Directors
- Section 185 – Loan to Directors, etc.
- Section 186 – Loan and Investment by Company
- Section 187 – Investments of Company to be Held in Its Own Name
- Section 188 – Related Party Transactions
- Section 189 – Register of Contracts or Arrangements in Which Directors Are Interested
- Section 190 – Contract of Employment with Managing or Whole-Time Directors
- Section 191 – Payment to Director for Loss of Office, etc.
- Section 192 – Restriction on Non-Cash Transactions Involving Directors
- Section 193 – Contract by One Person Company
- Section 194 – [Omitted]
- Section 195 – [Omitted]
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Section Wise Detailed Notes on Companies Act, 2013 Chapter 12
The section-wise detailed notes on Chapter 12 of the Companies Act, 2013 are as follows:
Section 173 Meetings of Board
This section mandates that every company must hold the first board meeting within 30 days of incorporation, and at least four board meetings every year, ensuring that the gap between two consecutive meetings does not exceed 120 days.
For One Person Companies (OPC), Small Companies, and Dormant Companies, at least one meeting in each half of the calendar year is sufficient, with a minimum gap of 90 days between the two meetings.
- Minimum 4 board meetings per year.
- Maximum gap: 120 days.
- OPC/small companies: 2 meetings per year.
- Directors may participate through video conferencing.
Section 174 Quorum for Meetings of Board
A quorum is the minimum number of directors required to validly hold a meeting.
The quorum shall be one-third of the total strength or two directors, whichever is higher.
If the number of directors falls below the quorum due to disqualification or resignation, the remaining directors can act only to increase the number of directors or call a general meeting.
- Quorum = 1/3 of total directors or 2, whichever is higher.
- Interested directors are excluded from quorum.
- Remaining directors can act only for limited purposes if quorum is lost.
Section 175 Passing of Resolution by Circulation
Certain urgent matters can be decided without a formal board meeting. A resolution can be passed by circulation, meaning it is sent in writing to all directors, and approved by a majority.
However, if at least one-third of the directors demand that the resolution be decided in a meeting, it must be placed before the next board meeting.
- Resolutions can be passed by written consent.
- Must be approved by majority of directors.
- 1/3 of directors can demand discussion at a meeting.
Section 176 Defects in Appointment of Directors Not to Invalidate Actions
If a director’s appointment is later found invalid due to some defect, any act done before discovering that defect remains valid and binding.
- Past actions by improperly appointed directors remain valid.
- Protects company decisions from minor procedural errors.
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Section 177Audit Committee
This section applies to listed companies and certain public companies as prescribed. The Audit Committee must consist of a minimum of three directors, with the majority being independent directors. The committee oversees financial reporting, internal controls, and audit processes.
- Minimum 3 directors, majority independent.
- Oversees financial statements and audit integrity.
- Works closely with statutory and internal auditors.
Section 178 Nomination and Remuneration Committee & Stakeholders Relationship Committee
The Nomination and Remuneration Committee (NRC) recommends appointment and remuneration of directors, key managerial personnel, and senior executives.
The Stakeholders Relationship Committee resolves grievances of shareholders, debenture holders, and other security holders.
- NRC ensures fair appointments and pay structures.
- Stakeholders Committee handles investor grievances.
- Ensures ethical HR and governance practices.
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Section 179 Powers of Board
The Board of Directors holds powers to manage and control the company’s affairs, such as:
- Borrowing money
- Investing funds
- Issuing shares
- Approving financial statements
- Granting loans and guarantees
Certain powers must be exercised only by passing resolutions at board meetings.
- Board responsible for company management.
- Some powers require formal board resolutions.
Section 180 Restrictions on Powers of Board
Certain powers need special resolution approval from shareholders, such as:
- Selling or leasing company undertakings
- Borrowing money beyond paid-up capital and free reserves
- Investing compensation from mergers
- Remitting debts owed by directors
- Safeguards shareholders’ interests.
- Board cannot exceed financial powers without approval.
Section 181 Contribution to Charitable Funds
A company may contribute to bona fide charitable and other funds. If such contributions exceed 5% of average net profits of the last three financial years, prior approval of shareholders is required.
Section 182 Political Contributions
Companies may contribute to political parties or electoral trusts if:
- It is not a government company, and
- It has existed for at least 3 financial years.
Contributions must be disclosed in the profit and loss account.
- Only eligible companies can make political contributions.
- Disclosure in financial statements is mandatory.
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Section 183 Contributions to National Defence Fund
Boards may contribute to the National Defence Fund or other government-approved national causes, and such contributions are deemed valid.
Section 184 Disclosure of Interest by Directors
Every director must disclose his interest or concern in any company or firm at:
- The first board meeting he participates in,
- The first meeting of every financial year, and
- Whenever a change occurs in his interest.
Failure to disclose leads to penlty or disqualification.
- Mandatory annual disclosure.
- Promotes transparency in director conduct.
Section 185 Loan to Directors, etc.
This section prohibits companies from directly or indirectly giving loans, guarantees, or securities to:
- Any director, or
- Any person in whom a director is interested.
However, certain exemptions exist, such as loans to managing directors or whole-time directors under approved schemes, or loans by holding companies to wholly-owned subsidiaries.
- Prevents conflict of interest.
- Allows loans only under specified conditions.
- Violation leads to severe penalties.
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Section 186 Loan and Investment by Company
A company can make investments, loans, or guarantees only up to 60% of paid-up capital, free reserves, and securities premium, or 100% of free reserves and premium, whichever is higher. Beyond these limits, a special resolution is needed. Companies must also disclose details of such loans or investments in financial statements.
- Defines investment and lending limits.
- Requires shareholder approval beyond limits.
- Disclosure in financial statements is mandatory.
Section 187 Investments to be Held in Own Name
All company investments must be held in the company’s own name. Exceptions are allowed when shares are held by nominees to maintain statutory membership limits or for security purposes.
- Ensures ownership transparency.
- Few exceptions like nominee holdings or depository holdings.
Section 188 Related Party Transactions
Companies must obtain Board approval for transactions with related parties (such as directors, relatives, subsidiaries, etc.). For larger transactions or specified thresholds, shareholder approval by resolution is required.
- Board/Shareholder approval needed for RPTs.
- Must be at arm’s length and in ordinary course of business.
- Details must be reported in Board’s report.
Section 189 Register of Contracts in Which Directors Are Interested
Companies must maintain a register of all contracts and arrangements in which directors are interested under Sections 184 and 188. This register must be signed, updated, and open for inspection at the registered office.
Section 190 Contract of Employment with Managing or Whole-Time Directors
Companies must keep a copy of the service contract with managing or whole-time directors at the registered office, open for member inspection.
- Transparency in director contracts.
- Members can inspect such documents.
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Section 191 Payment to Director for Loss of Office
Directors cannot receive compensation for loss of office or retirement in connection with transfer of property or shares unless approved by members in a general meeting.
Section 192 Restriction on Non-Cash Transactions Involving Directors
Companies cannot enter into non-cash transactions (like asset exchanges) with directors or connected persons unless approved by shareholders and valued by a registered valuer.
Section 193 Contract by One Person Company
When a One Person Company enters into a contract with its sole member who is also the director, the terms must be recorded in writing or noted in the minutes of the first board meeting after the contract.
Sections 194 and 195 [Omitted]
Both sections, earlier related to forward dealings and insider trading by directors, were omitted by the Companies (Amendment) Act, 2017.
Download Companies Act 2013 Chapter 4 Free PDF
Aspirants preparing for the UGC NET Commerce paper, SEBI Grade A exam, and various other government exams can download the complete details of the Companies Act, 2013 through the direct link provided below. Specifically, to check Chapter 12 of the Companies Act, 2013, refer to pages 117 to 131 of the PDF.
Questions Based on Companies Act 2013 Chapter 12
1. How many board meetings must a company hold each year?
a) 2
b) 3
c) 4
d) 5
e) 6
Correct Answer: c) 4
Explanation:
According to Section 173, every company must hold at least four board meetings in each year, with not more than 120 days between two consecutive meetings.
2. What is the minimum quorum required for a board meeting?
a) One director
b) Two directors
c) One-third of total strength or two directors, whichever is higher
d) One-fourth of total strength
e) Half of total strength
Correct Answer: c) One-third of total strength or two directors, whichever is higher
Explanation:
As per Section 174, the quorum for a board meeting shall be one-third of the total number of directors or two directors, whichever is higher.
3. A resolution by circulation must be approved by which of the following?
a) All directors
b) Majority of directors entitled to vote
c) Chairman only
d) Managing Director
e) Company Secretary
Correct Answer: b) Majority of directors entitled to vote
Explanation:
Under Section 175, resolutions passed by circulation must be approved by a majority of directors entitled to vote on the matter.
4. The Audit Committee must have at least how many directors?
a) Two directors
b) Three directors
c) Four directors
d) Five directors
e) None of the above
Correct Answer: b) Three directors
Explanation:
Section 177 states that every Audit Committee shall consist of a minimum of three directors, and the majority of them must be independent.
5. Who should chair the meetings of the Audit Committee?
a) Managing Director
b) Company Secretary
c) An Independent Director
d) Chief Executive Officer
e) Non-Executive Director
Correct Answer: c) An Independent Director
Explanation:
The Audit Committee must be chaired by an independent director to ensure objectivity and fairness in financial oversight.
6. Section 180 of the Companies Act, 2013 deals with which of the following?
a) Powers of Board
b) Restrictions on Powers of Board
c) Audit Committee
d) Loans to Directors
e) Related Party Transactions
Correct Answer: b) Restrictions on Powers of Board
Explanation:
Section 180 specifies the powers that can only be exercised by the Board with the prior approval of shareholders through a special resolution.
7. A company can make political contributions only if:
a) It is a private company
b) It is a government company
c) It has been in existence for at least three financial years
d) It has approval from the Registrar
e) It has more than five directors
Correct Answer: c) It has been in existence for at least three financial years
Explanation:
Section 182 allows companies that are not government companies and have existed for at least three financial years to make political contributions.
8. Disclosure of a director’s interest in other companies or firms is required under which section?
a) Section 177
b) Section 184
c) Section 186
d) Section 189
e) Section 190
Correct Answer: b) Section 184
Explanation:
Under Section 184, every director must disclose his interest in other companies, firms, or bodies corporate to maintain transparency.
9. What is the maximum gap allowed between two consecutive board meetings?
a) 60 days
b) 90 days
c) 120 days
d) 150 days
e) 180 days
Correct Answer: c) 120 days
Explanation:
As per Section 173, the maximum gap between two board meetings cannot exceed 120 days.
10. Which section governs the rules relating to loans to directors?
a) Section 184
b) Section 185
c) Section 186
d) Section 188
e) Section 189
Correct Answer: b) Section 185
Explanation:
Section 185 prohibits companies from giving loans, guarantees, or securities to directors or persons connected to them, except in certain permitted cases.
11. The limit for loans and investments under Section 186 is:
a) 30% of paid-up capital
b) 50% of free reserves
c) 60% of paid-up share capital and free reserves or 100% of free reserves, whichever is higher
d) 40% of net worth
e) No limit applies
Correct Answer: c) 60% of paid-up share capital and free reserves or 100% of free reserves, whichever is higher
Explanation:
Section 186 sets financial limits on the company’s ability to give loans, investments, or guarantees without special resolution approval.
12. Related party transactions require approval of which authority?
a) Registrar of Companies
b) The Board or Shareholders
c) Company Secretary
d) Tribunal
e) Independent Auditor
Correct Answer: b) The Board or Shareholders
Explanation:
Section 188 requires that related party transactions be approved by the Board or, if they cross prescribed limits, by shareholders through a resolution.
13. Which directors are excluded from quorum while discussing an interested matter?
a) Managing Directors
b) Independent Directors
c) Interested Directors
d) Nominee Directors
e) Alternate Directors
Correct Answer: c) Interested Directors
Explanation:
Interested directors are not counted towards the quorum for board meetings when the matter of their interest is being discussed.
14. A loan given to a wholly owned subsidiary company is:
a) Prohibited
b) Allowed with conditions
c) Requires NCLT approval
d) Requires Central Government permission
e) None of the above
Correct Answer: b) Allowed with conditions
Explanation:
Under Section 185, loans to wholly owned subsidiaries are permitted if the loan is used for the principal business activities of the subsidiary.
15. As per Section 187, investments made by a company should be held:
a) In the name of its directors
b) In the name of its holding company
c) In the company’s own name
d) In the name of any nominee shareholder
e) In the name of the Registrar
Correct Answer: c) In the company’s own name
Explanation:
Section 187 requires companies to hold all investments in their own name to ensure transparency and ownership authenticity.
16. Compensation to a director for loss of office can be paid only with:
a) Board approval
b) Shareholder approval
c) Auditor’s approval
d) Registrar’s consent
e) Central Government sanction
Correct Answer: b) Shareholder approval
Explanation:
Section 191 allows compensation for loss of office only when approved by members in a general meeting.
17. Who is responsible for maintaining a register of contracts in which directors are interested?
a) Auditor
b) Company Secretary
c) The Company
d) SEBI
e) Registrar
Correct Answer: c) The Company
Explanation:
Section 189 mandates that the company must maintain a register of contracts or arrangements in which directors are interested.
18. The Nomination and Remuneration Committee is responsible for:
a) Declaring dividends
b) Recommending director remuneration
c) Managing CSR activities
d) Conducting board meetings
e) Appointing auditors
Correct Answer: b) Recommending director remuneration
Explanation:
Section 178 empowers the Nomination and Remuneration Committee to recommend policies for appointment and pay of directors and senior management.
19. Non-cash transactions involving directors can be entered into only when:
a) No approval is needed
b) There is shareholder approval and valuation by a registered valuer
c) Central Government approval is taken
d) Auditor certifies the transaction
e) It is below ₹1 lakh
Correct Answer: b) There is shareholder approval and valuation by a registered valuer
Explanation:
Section 192 prohibits non-cash transactions with directors unless approved by shareholders and valued by a registered valuer.
20. Sections 194 and 195 of the Companies Act, 2013 were:
a) Repealed
b) Still applicable
c) Related to CSR
d) Applicable to foreign companies only
e) Never introduced
Correct Answer: a) Repealed
Explanation:
Sections 194 and 195, relating to forward dealings and insider trading by directors, were omitted by the Companies (Amendment) Act, 2017.
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