Appointment & Qualifications of Directors

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Topics covered in this Article are as follows:

  1. Table of Sections and Corresponding Rules

Table of Sections and Corresponding Rules

Chapter XI of Companies Act, 2013
“Appointment and Qualifications of Directors”
Companies (Appointment and Qualifications of Directors) Rules, 2014
Sec. No. Title Rule No. Title
149 Company to have Board of Directors 3 Woman director on the Board
4 Number of independent directors
5 Qualifications of independent director
150 Manner of Selection of Independent Directors (ID) and maintenance of Databank of ID 6 Compliances required by a person eligible and willing to be appointed as an independent director (w.e.f. 01.12.2019)
151 Appointment of Directors elected by Small Shareholders 7 Small shareholders’ director
152 Appointment of Directors 8 Consent to act as director
153 Application for allotment of DIN 9 Application for allotment of DIN before appointment in an existing company.
154 Allotment of DIN 10 Allotment of DIN
10A Director’s intimation of DIN to companies
11 Cancellation or surrender or Deactivation of DIN
12 Intimation of changes in particulars specified in DIN application
12A Directors KYC
12B Directors of company required to file e-form Active
155 Prohibition to obtain more than one DIN
156 Directors to obtain DIN
157 Company to inform DIN to Registrar
158 Obligation to indicate DIN
159 Punishment for contravention
160 Rights of persons other retiring directors to stand for directorship 13 Notice of candidature of a person for directorship
161 Appointment of Additional Director, Alternate Director and Nominee director
162 Appointment of directors to be voted individually
163 Option to adopt principle of proportional representation for appointment of directors
164 Disqualifications for appointment of directors 14 Disqualification of directors u/s 164(2)
165 Number of Directorships
166 Duties of Directors
167 Vacation of Office of Director
168 Resignation of Directors 15 Notice of resignation of director
16 Copy of resignation of director to be forwarded by him
169 Removal of Directors
170 Register of Directors and KMP and their shareholding 17 Register of directors and KMP
18 Return containing the particulars of directors & KMP.
171 Members right to inspect
172 Punishment

 

1.1 – Important Definitions (Sec. 2)

Sec. 2(10) Board of Directors or Board in relation to a company, means the collective body of the directors of the company.
Sec. 2(34) Directors means a director appointed to the Board of a company.
Sec. 2(47) Independent director means an independent director referred to in section 149(5).

 

1.2 – Company to have Board of Directors (Sec. 149 & Rule 3)

Number of Directors – Sec. 149(1) Every company shall have a Board of Directors consisting of individuals as directors.
Minimum Director      Public Company – 3 directors

  Private Company – 2 directors

  One Person Company – 1 Director

Maximum Director      Fifteen (15).

  First proviso to sec. 149(1) provides that a company may appoint > 15 directors after passing a special resolution.

Points to Remember

Limit of Maximum directors and their increase is not applicable to Government Companies and Sec. 8 Companies provided these companies has not committed a default in filing of their financial statements u/s 137 or annual return u/s 92 with the Registrar.

Woman Director – 2nd Proviso to
Sec. 149(1)
Prescribed companies shall have at least one woman director.
Companies requiring to appoint woman director – Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014
  (i)  Every listed company;

(ii)  Every other public company having;

(a)  paid-up share capital of ` 100 Cr. or more;

or

         (b)  turnover of ` 300 Cr. or more.

Note: The paid-up share capital or turnover as on the last date of latest audited F.S. shall be considered for this purpose.

Appointment in case of new company In case of a company, which has been incorporated under this Act and is covered under prescribed criteria, appointment shall be made within 6 months from the date of incorporation.
Filling of Intermittent Vacancy Any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or 3 months from the date of such vacancy whichever is later.
Resident Director – Sec. 149(3)      Every company shall have at least one director who stays in India for a total period of not less than 182 days during the financial year:

     Provided that in case of a newly incorporated company the requirement u/s 149(3) shall apply proportionately at the end of the financial year in which it is incorporated.

Points to remember

To support and enable Companies in India to focus on taking necessary measures to address the COVID-19 threat, MCA vide General Circular No. 11/2020 dated 24.03.2020, relaxes this requirement for financial year 2019-20. Relevant provision as stated in the circular is as follows:

“Non-compliance of minimum residency in India for a period of at least 182 days by at least one director of every company, u/s 149 of the Companies Act, 2013 shall not be treated as a non-compliance for the financial year 2019-20.”

 

1.3 – Independent Director [Sec. 149(4) – 149(13), Sec. 150, Rules 4, 5 & 6]

Companies requiring to have independent Director – Sec. 149(4)      Every listed public company shall have at least 1/3rd of the total number of directors as independent directors.

  Any fraction contained in such 1/3rd number shall be rounded off as one.

  For other public companies, the C.G. may prescribe minimum number of independent directors.

Companies requiring to appoint independent director – Rule 4 of Companies
(Appointment and Qualification of Directors) Rules, 2014
Following companies shall have at least 2 directors as independent directors:

(i)  Public companies having paid up share capital > ` 10 Cr;

or

(ii)  Public Companies having turnover > ` 100 Cr;

or

(iii)  Public companies having aggregate outstanding loans, debentures and deposits > ` 50 Cr.

Note: The paid-up share capital or turnover or outstanding loans, debentures and deposits as on the last date of latest audited F.S. shall be considered for this purpose.

Exemption Where a company ceases to fulfil any of the above 3 conditions for 3 consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions.
Higher Number of Independent Directors A company shall be required to appoint a higher number of independent directors, so as to fulfil the requirement of composition of its audit committee u/s 177.
Points to Remember

Sec. 177(2) – Audit Committee shall consist of a minimum of three directors with independent directors forming a majority.

Example – ABC Ltd. is having 5 directors in its audit committee. The number of independent directors so as to form a majority should be 3.

Filling of Intermittent vacancy      Any intermittent vacancy shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or 3 months from the date of such vacancy, whichever is later.
Example – A vacancy arises in the office of Independent director on 15th June 2019. Immediate next Board meeting was held on 14th August 2019. Vacancy is to be filled up by 14th Sep. 2019.

If, however, immediate next Board meeting was held on 14th Oct. 2019, the vacancy shall be filled by 14th Oct. 2019.

Exceptions Following classes of unlisted public companies shall not be required to have minimum independent director:

(a)  A Joint venture,

(b)  A wholly owned subsidiary, and

(c)  A dormant company.

Points to remember

MCA vide its circular clarified that joint venture would mean a joint arrangement, entered into in writing, whereby the parties that have joint control of the arrangement, have rights to the net assets of the arrangement.

Meaning of Independent Director – Sec. 149(6) An independent director in relation to a company, means a director other than a MD or a WTD or a nominee director, –

(a)  Who, in the opinion of the Board*, is a person of integrity and possesses relevant expertise and experience;

(*In case of government company, which has not committed a default in filing of its financial statements u/s 137 or annual return u/s 92 with the Registrar, the word ‘Board’ shall be substituted by the words “Ministry or Department of the Central Government which is administratively in charge of the company or as the case may be the State Government”).

(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 other than remuneration as such director or having transaction not exceeding 10% of his total income or such amount as may be prescribed with

  the company, its holding, subsidiary or associate company, or

  their promoters, or directors,

during the 2 immediately preceding FYs or during the current FY.

Note: This clause is not applicable to a government company which has not committed a default in filing of its financial statements u/s 137 or annual return u/s 92 with the Registrar.

        In case a transaction entered into by an independent director with the company concerned is at par with any member of the general public and at the same price as is payable/paid by such member of public, it would not attract the bar of ‘pecuniary relationship’ under Section 149(6)(c) and therefore, an independent director will not be said to have ‘pecuniary relationship’ under this Section, in such cases.

(d)  none of whose relatives

(i)  is holding any security of or interest in the company, its holding, subsidiary or associate company during the 2 immediately preceding financial years or during the current financial year:

Provided that the relative may hold security or interest in the company of face value not exceeding ` 50 lakhs or 2% of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;

         (ii)  is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the 2 immediately preceding financial years or during the current financial year;

(iii)  has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the 2 immediately preceding financial years or during the current financial year; or

(iv)  has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to 2% or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii);

(e)  who, neither himself nor any of his relatives—

(i)  holds or has held the position of a KMP or is or has been employee of the company or its holding, subsidiary or associate company in any of the 3 FYs immediately preceding the FY in which he is proposed to be appointed:

Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding 3 financial years.

(ii)  is or has been an employee or proprietor or a partner, in any of the 3 FYs immediately preceding the FY in which he is proposed to be appointed, of-

(A)  a firm of auditors or CS 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 10% or more of the gross turnover of such firm;

(iii)  holds together with his relatives 2% 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 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company; or

(f)  who possesses such other qualifications as may be prescribed.

Qualifications of independent director – Rule 5 of Companies (Appointment and Qualification of Directors) Rules, 2014
     An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.

  None of the relatives of an independent director, for the purposes of sub-clauses (ii) and (iii) of clause (d) of sub-section (6) of section 149,-

(i)  is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors; or

(ii)  has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company,

        for an amount of ` 50 lakhs, at any time during the 2 immediately preceding financial years or during the current financial year.
Declaration by independent Directors – Sec. 149(7) Every independent director shall

  at the first meeting of the Board in which he participates as a director,

and

  thereafter at the first meeting of the Board in every financial year,

or

  whenever there is any change in the circumstances which may affect his status as an independent director,

give a declaration that he meets the criteria of independence as provided in Sec. 149(6).

Code for Independent Director – Sec. 149(8) The company and independent directors shall abide by the provisions specified in Schedule IV.
Remuneration of Independent Directors – Sec. 149(9) Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of Sections 197 & 198, an independent director

  shall not be entitled to any stock option

and

  may receive remuneration by way of

(i)  fee provided u/s 197(5),

(ii)  reimbursement of expenses for participation in the Board and other meetings, and

(iii)  profit related commission as may be approved by the members.

Tenure of Independent Director – Sec. 149(10) & 149(11) Sec. 149(10)      Subject to the provisions of Sec. 152, an independent director shall hold office for a term up to 5 consecutive years on the Board of a company,

  but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.

Points to Remember

  It is clarified by MCA that one tenure of independent directors may be for a period of less than 5 years.

Sec. 149(11)      Notwithstanding anything contained in Sec. 149(10), no independent director shall hold office for more than 2 consecutive terms,

  but such independent director shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director,

  provided that an independent director shall not, during the said period of 3 years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Points to Remember

It is clarified by MCA that if tenure of independent directors is fixed for a period less than 5 years, than cooling period of 3 years arises on completion of two tenures even if the total number of years of his appointment in such two consecutive terms is less than 10 years.

Liability – Sec. 149(12) Notwithstanding anything contained in this Act,

  (i)  an independent director, and

(ii)  a non-executive director not being promoter or KMP

shall be held liable, only in respect of such acts of:

  omission or commission by a company which had occurred with his knowledge,

  attributable through Board processes, and

  with his consent or where he had not acted diligently.

Retirement by rotation – Sec. 149(13) The provisions of Sec. 152(6) and 152(7) in respect of retirement of directors by rotation shall not be applicable to appointment of independent directors.
Selection of Independent directors – Sec. 150      An independent director may be selected from a data bank.

  The responsibility of exercising due diligence before selecting a person from the data bank, as an independent director shall lie with the company making such appointment.

  The appointment of independent director shall be approved by the company in general meeting and the explanatory statement annexed to the notice of the general meeting shall indicate the justification for choosing the appointee for appointment as independent director.

  The Central Government may prescribe the manner and procedure of selection of independent directors who fulfil the qualifications and requirements specified under section 149.

Data Bank
     It contains names, addresses and qualifications of persons who are eligible and willing to act as independent directors.

  Such data bank is maintained by any body, institute or association, as may be notified by the CG, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors.

        C.G. notifies the Indian Institute of Corporate Affairs at Manesar (Haryana), as an institute to create and maintain a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, for the use of the company making the appointment of such directors. (Notification will be effective from 01.12.2019)

  The data bank shall create and maintain data of persons willing to act as independent director in accordance with such rules as may be prescribed.

Compliances required by a person eligible and willing to be appointed as an independent director – Rule 6 of Companies (Appointment and Qualification of Directors) Rules, 2014
Online Application for inclusion of name to Institute – Rule 6 (1) Every individual –

(a)  who has been appointed as an independent director in a company, on the date of commencement of the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 (i.e. 01.12.2019), shall within a period of 13 months from such commencement; or

(b)  who intends to get appointed as an independent director in a company after such commencement, shall before such appointment,

apply online to the institute for inclusion of his name in the data bank for a period of 1 year or 5 years or for his life-time, and from time to time take steps as specified in Rule 6(2), till he continues to hold the office of an independent director in any company:

Provided that any individual, including an individual not having DIN, may voluntarily apply to the institute for inclusion of his name in the data bank.

Application for renewal – Rule 6 (2) Every individual whose name has been so included in the data bank shall file an application for renewal for a further period of 1 year or 5 years or for his life-time, within a period of 30 days from the date of expiry of the period upto which the name of the individual was applied for inclusion in the data bank, failing which, the name of such individual shall stand removed from the data bank of the institute
Point to remember

No application for renewal shall be filed by an individual who has paid life-time fees for inclusion of his name in the data bank.

Submission of declaration of Compliance – Rule 6 (3) Every independent director shall submit a declaration of compliance of Rule 6(1) and Rule 6(2) to the Board, each time he submits the declaration required u/s 149(7) of the Act.
Online proficiency self-assessment test – Rule 6 (4) Every individual whose name is so included in the data bank under rule 6(1) shall pass an online proficiency self-assessment test conducted by the institute within a period of 1 year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the data bank of the institute:
Exemption from online proficiency self-assessment test
An individual shall not be required to pass the online proficiency self-assessment test, when he has served as a director or KMP, for a total period of not less than 10 years, as on the date of inclusion of his name in the data bank, in one or more of the following, namely:-

(a)  listed public company; or

(b)  unlisted public company having a paid-up share capital of rupees ten crore or more; or

(c)  body corporate listed on a recognized stock exchange.

For the purpose of calculation of the period of 10 years referred above, any period during which an individual was acting as a director or as a KMP in 2 or more companies or bodies corporate at the same time shall be counted only once.
Explanation to Rule 6 For the purposes of this rule,-

(a)  the expression “institute” means the ‘Indian Institute of Corporate Affairs at Manesar’ notified u/s 150(1) of the Companies Act, 2013 as the institute for the creation and maintenance of data bank of Independent Directors;

(b)  an individual who has obtained a score of not less than 60% in aggregate in the online proficiency self-assessment test shall be deemed to have passed such test;

(c)  there shall be no limit on the number of attempts an individual may take for passing the online proficiency self-assessment test.

Points to remember

  Provisions of Sec. 149(4), 149(5), 149(6), 149(7), 149(8), 149(9), 149(10), 149(11), 149(12)(i), 149(13) & Sec. 150 shall not be applicable over Section 8 Company, which has not committed a default in filing of its financial statements u/s 137 or annual return u/s 92 to the Registrar.

  Detailed provisions as to creation and maintenance of data bank are covered in Companies (Creation and Maintenance of data bank of Independent Directors) Rules, 2019, effective from 01.12.2019. (Refer Annexure 1 at the end of this chapter)

 

1.4 – Appointment of Directors elected by Small shareholders (Sec. 151 & Rule 7)

Sec. 151 A listed company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed.

Small shareholders: A shareholder holding shares of nominal value of not more than ` 20000 or such other sum as may be prescribed.

Rules for appointment of Small shareholder’s director – Rule 7 of The Companies (Appointment and Qualification of Directors) Rules, 2014
Appointment of Small Shareholder Director On Application of members A listed company, may upon notice of not less than-

  1000 small shareholders

or

  1/10th of the total number of such shareholders,

whichever is lower, have a small shareholders’ director elected by the small shareholders.

Suo motu appointment A listed company may opt to have a director representing small shareholders suo motu.
Requirement w.r.t. Notice      Small shareholders intending to propose a person as a candidate for the post of small shareholders shall leave a notice of their intention with the company at least 14 days before the meeting under their signatures specifying the name, address, shares held and folio number of the person whose name is being proposed for the post of director and of the small shareholders who are proposing such person for the office of director.

  Provided that if the person being proposed does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.

Statement to be accompanied with notice The notice shall be accompanied by a statement signed by the person whose name is being proposed for the post of small shareholders’ director stating –

(a)  his Director Identification Number;

(b)  that he is not disqualified to become a director under the Act; and

(c)  his consent to act as a director of the company

Status of Small Shareholder Director Such director shall be considered as an independent director subject to, his being eligible u/s 149(6) and his giving a declaration of his independence in accordance with Sec. 149(7).
Conditions as to appointment The appointment of small shareholders’ director shall be subject to the provisions of section 152 except that-

(a)  such director shall not be liable to retire by rotation;

(b)  such director’s tenure as small shareholders’ director shall not exceed a period of 3 consecutive years; and

(c)  on the expiry of the tenure, such director shall not be eligible for re-appointment.

Ineligibility A person shall not be appointed as small shareholders’ director of a company, if the person is not eligible for appointment in terms of Sec. 164.
Vacation of Office by Small Shareholder Director A person appointed as small shareholders’ director shall vacate the office if –

(a)  he incurs any of the disqualifications specified in Sec. 164;

(b)  the office of the director becomes vacant in pursuance of section 167;

(c)  he ceases to meet the criteria of independence as provided in Sec. 149(6).

Limit on number of companies      No person shall hold the position of small shareholders’ director in more than two companies at the same time.

  Second company in which he has been appointed shall not be in a business which is competing or is in conflict with the business of the first company.

Further Disqualification A small shareholders’ director shall not, for a period of three years from the date on which he ceases to hold office as a small shareholders’ director in a company, be appointed in or be associated with such company in any other capacity, either directly or indirectly.
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