Appointment & Qualifications of Directors

Table of Sections and Corresponding Rules

1.1 – Important Definitions (Sec. 2)

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

  Private Company – 2 directors

  One Person Company – 1 Director

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

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.

(ii)  Every other public company having;

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

or

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

     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.

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]

  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.

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

or

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

(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.

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.

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

(a)  A Joint venture,

(b)  A wholly owned subsidiary, and

(c)  A dormant company.

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.

(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;

(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.

  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,

  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).

  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.

  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.

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

  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.

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.

  (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.

  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.

  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.

(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

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.

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.

(a)  listed public company; or

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

(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.

  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)

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

  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.

  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.

(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

(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.

(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).

  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.