Delegation of the power to invest – absolute or conditional?

– Nitu Poddar | corplaw@vinodkothari.com

As per section 186(5), any investment has to be approved by the board in its meeting by all the directors present in the meeting. First proviso to section 179(3) allows delegation of power of the board with respect to investing the funds of the company. This power can be delegated to a committee of directors / MD / manager or any principal officer. Are these two provisions contradictory? No, delegation allowed in section 179 is to remove bottlenecks in terms of activities being carried out by the company in its day-to-day operations. There are several investment opportunities which are available only at opportune times. If these opportunities have to wait for the board meeting to happen, the very opportunity may be lost. Also, companies need to ensure that they do not sit with idle funds. For this, they are often required to make investment decisions – investments which are non-strategic, short term and have to be reinvested soon enough. 

So how to deal with the mandate of getting the decision of investment approved at the board meeting u/s 186(5)? It is a settled principle that two provisions should be read harmoniously, so as to preserve the content of both the provisions, unless one of them overrides the other. A harmonious construction of the two provisions above shall be that the power to invest in securities may be delegated; however, that delegation must be done with the unanimous consent of the board. Therefore, the power to invest may be delegated in accordance with sec 179 (3), but with unanimous board approval as per sec. 186 (5).

Having said this, it is important to understand the intent, the limits and the fetters of a delegated power. Hence, the general statement about the right to delegate should be read with the following:

1. Operational power may be delegated: As mentioned above, the idea of delegation is to ease operational difficulties in obtaining approval of the Board for day to day activities. Power of approving significant actions should be retained by the Board. 
2. Core functions can never be delegated: Delegation implies an extension of the functions of the delegating authority, with the idea of extending the outreach or capability of the delegator, and never with the view to absolve the delegator of the core functions. Thus, in the context of investments, it is only liquid, short-term, non-strategic and temporary investments which may be made by the delegated authority. Illiquid, long-term or strategic investments imply parking of the funds of the company, which requires board’s decision-making. Board has the ultimate responsibility of safeguarding the assets of the company – hence, illiquid or long-term investments, or investments of strategic nature, should not be made by the delegated authority.
3. Delegation is only for a fraction of the investible funds: Board cannot and should not delegate whole of its power to a committee. For eg, if the limit of investments by the company u/s 186 is Rs 3000 crores, the Board cannot delegate the power to invest whole of Rs 3000 crore to the committee. As discussed before, the idea of delegated power is only such short-term and opportunistic investments which cannot advantageously wait for the board meeting. A strategic investment decision does not have to be made abruptly. Further, the delegated power should only be for so much of the investible funds which is earmarked for safe and liquid investments. Having said so, there is no question of delegating an authority which the Board itself does not have.
4. The delegation should not be absolute: The Board should not absolutely delegate the power as specified above, the delegation should be made restrictive and be fenced by appropriate fetters/ restrictions / conditions. Eg, in case of investment – amount of investment, purpose of investment (whether in normal course of business of the company or otherwise), type of securities in which investment can be made (equity/ convertibles / listed / unlisted / rated / secured etc).
5. Investments constituting related party transactions (RPTs) cannot be delegated: Considering that RPTs have an element of conflict of interest, the same is required to be appropriately approved by the audit committee and the board of directors in its meeting. Further, it should also be noted that considering RPT agendas require deliberation, passing such resolutions by circulation limits / prevents the opportunity of detailed discussion on such agendas. 
6. Recording of the rationale of the action taken by the committee: Detailed rationale of the action taken by the committee should be recorded in the minutes of the committee
7. Prompt reporting: It should be noted that irrespective of the delegation, the ultimate power and responsibility remains vested with the Board. Hence, it is important for the delegated committee to promptly report the actions taken by it to the Board for its consideration and weighing of the rationale for the action taken / proposed to be taken. The same may be done by sharing the information over email to the Board for their comments. If no comments are received within a specified time, the committee may proceed with the action. However, all actions taken by the committee should be ratified by the board in its meeting, held immediately after the approval by the committee.

As regards investment by the company is concerned, as per section 177(4)(v) of the Act read with Para A of Part C of Schedule II of Listing Regulations, the details of the loans and investments made by the company shall be brought before the audit committee periodically. The committee shall undertake a detailed scrutiny of the same to assess the rationality involved while making a decision to grant loans/ invest funds vis- a- vis the motive/ outcome of the same. 

Conclusion

While the parameters mentioned above are specifically for delegation of power to invest, the same may be used mutatis mutandis as a broad guidance for any delegation of power.