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THE COMPANIES ACT, 2013Chapter XI- Appointment and

Qualifications of Directors

September 13, 2013

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“Board of Directors” or “Board”, in relation to a company, means the collective body

of the directors of the Company, as defined under Section 2(10)

Requirements u/s 149(1):

Every Company shall have a Board of Directors consisting of individuals as directors

and shall have—

Minimum number of

3 directors - Public Company

2 directors - Private Company

1 director - One Person Company (new)

Maximum number of directors have been increased from 12 to 15

Special resolution has to be passed for appointment of more than 15 directors (no

Central Government approval required)

Sec 149 - Company to have Board of Directors (Sec 252, 253, 259)

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Requirements u/s 149(1) –

For prescribed class of Companies, there should be at least 1 woman director

Draft Rules prescribe –

-Every Listed Company ( within 1 yr from commencement of related provision)

-Public Company with - Paid –up capital of Rs. 100 crore or more, or

- Turnover of Rs. 300 crore or more

(For Public Companies, 3yrs from commencement of related provision)

For all the above requirements u/s 149 (1), a transition period of 1 year from the

commencement of the Act (exception-Woman Director for Public Companies)

At least 1 director should have stayed in India for a total period of not less than 182

days in the previous calendar year (new)

Sec 149 - Company to have Board of Directors (Sec 252, 253, 259) (contd…)

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Every Listed Public Company to have minimum 1/3rd of total number of directors as

independent director (Any fraction in 1/3rd to be rounded off as 1)

In case of other class or classes of Public Companies, Central Government may

prescribe for minimum number of Independent Directors

To comply within 1 year from commencement of the Act or notification of Rules, as

may be applicable

Draft Rules prescribe-

Public Companies having

- paid-up share capital of Rs 100 crore or more or

- turnover of Rs. 300 crore or more or

- in aggregate, outstanding loans or borrowings or debentures or deposits, exceeding Rs. 200 crore.

These criteria shall continue to apply during the tenure of the Independent Director even if amounts under these criteria falls below the specified limits

Higher number of Independent Directors, if prescribed under any law/regulations governing such class of Companies

Independent Director (new)

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A term up to 5 consecutive years

Eligible for reappointment on passing of a special resolution by the Company and disclosure of such appointment in the Board’s Report

Not to hold office for more than 2 consecutive terms

However, eligible for appointment after the expiration of 3 years cooling period (Not to be associated with the Company in any capacity, either directly or indirectly during these 3 years)

Any tenure of an Independent Director on the date of commencement of this Act shall not be counted as a term

Term of Independent Director

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An Independent Director in relation to a Company is:

A director other than a Managing Director or a Whole-time Director or a Nominee Director

A person of integrity and possesses relevant expertise and experience, in the opinion of the Board

Not a promoter (present or past) of the Company or its holding, subsidiary or associate Company

Not related to promoters or directors in the Company, its holding, subsidiary or associate Company

Sec 149(6) - Who is Independent Director?

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Does not have any pecuniary relationship with the Company, its holding,

subsidiary or associate Company, or their promoters, or directors, during the

2 immediately preceding financial years or during the current financial year

None of the relatives of such person should have 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 2 immediately preceding

financial years or during the current financial year

Sec 149(6) - Who is Independent Director? (contd..)

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Neither himself nor his relative:

- is / was KMP or Employee of the Company, its holding, subsidiary or associate Company

- Is / was Employee or Proprietor or Partner of:

(i) a firm of auditor or CS in practice or Cost accountant of the Company, its holding, subsidiary or associate Company

(ii) legal or a consulting firm having any transaction with the Company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm

in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed

Does not hold (together with relatives) 2% or more of voting power of the Company

Sec 149(6) - Who is Independent Director? (contd..)

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Not a CEO or Director of a Non Profit Organisation:

(i) which receives 25% or more of its total receipts from the Company, its promoters, directors, holding, subsidiary or associate company

(ii) which holds 2% or more of the total voting power of the Company

Possess such other qualification as may be prescribed

Draft Rules prescribe-

• Appropriate balance of skills, experience and knowledge in one or more fields of finance, law, management, etc. or other disciplines related to the company’s business:

• The Board’s report made for the first time after the appointment of the independent director, shall furnish a statement that in its opinion the independent director possesses appropriate balance of skills, experience and knowledge, as required

Sec 149(6) - Who is Independent Director? (contd..)

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The definition of Independent Director in the Companies Act, 2013 is more rigorous

than that provided under Clause 49 of the Equity Listing Agreement

However, a Listed Company (equity listed) should also consider following additional criteria provided under Clause 49, while evaluating independence of a person:

(i) he should not be related to persons occupying position at one level below the Board in the Company

(ii) he should be at least 21 years of age

(iii) No material pecuniary relationship with senior management

Independent Director – Additional Conditions in Equity Listing Agreements

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Required to declare his independence:

At the first meeting of Board in which he participates as Director

First Meeting of the Board in every Financial Year

If any change in circumstances which may affect his status as an Independent Director

Sec 149(7)-Declaration by Independent Director

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The Company and Independent Directors shall abide by the provisions

The Code includes following:

Guidelines of professional conduct

Role and functions

Duties

Manner of appointment

Re-appointment

Resignation or removal

Separate meetings

Evaluation mechanism

Code for Independent Directors (Schedule IV)

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Few important points of Code are:

The appointment of independent directors shall be formalized through a letter of appointment

The letter shall inter-alia provide expectations of Board from appointed director, list of actions which directors are not supposed to do, details of remuneration, etc

The terms and conditions of appointment shall be open for inspection by members during normal business hours and also be posted on Company’s website

Any vacancy in office of independent director to be filled within 180 days. (However, if the Company has requisite number of Independent Directors on the Board, it may not appoint any director in such vacancy)

Independent directors of the company are required to hold at least one meeting in a year, without non-independent directors and members of management attending it

Performance evaluation of Independent Directors to be done by the entire Board, excluding the director being evaluated

Highlights of the Code

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Remuneration by way of sitting fee

Profit related Commission

Reimbursement of expenses for participation in Board / Other Meetings

Independent Directors are not entitled to any stock options

Sec 149(9)-Remuneration of Independent Directors

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Notwithstanding anything contained in the Act-

An Independent Director or

A Non-executive Director (not being promoter or KMP)

shall be held liable only -

In respect of such acts of omission or commission by the Company which -occurred with his knowledge, attributable through Board processes and with his consent or connivance or where he had not acted diligently

Sec 149 (12)- Liability of Independent Directors / Non-executive Directors

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Independent Director may be selected from a data bank maintained by any body, institute or association, as may by notified by the Central Government

Responsibility of exercising due diligence before selection on the Company making such appointment

The appointment is to be approved in General Meeting

Explanatory statement annexed to Notice shall indicate the justification for choosing the appointee for appointment as Independent Director

Explanatory statement shall also include a statement that in the opinion of the Board, appointee fulfills the conditions specified in the Act for such appointment. {proviso to Section 152(5)}

Central Government may prescribe manner and procedure of selection of Independent Directors

Sec 150 - Manner of Selection & Databank (New)

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“Small shareholders” means a shareholder holding shares of nominal value of not more than Rs. 20,000 or such other sum as may be prescribed

A listed company (earlier, Public Companies with paid up capital >= Rs. 5 crore and >= 1000 shareholders) may have 1 director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed

Draft Rules prescribe-

A listed company may elect a small shareholders’ director from amongst the small shareholders:

• suo motu or

• upon the notice of not less than 500 or 1/10th of the total number of small shareholders, whichever is lower

Sec 151- Appointment of directors elected by small shareholders (Sec 252(1))

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Key highlights of Draft Rules-

Such Director shall be considered as an Independent Director subject to his giving a declaration as is required to be given by Independent Directors under Section 149 of the Act.

The small shareholders’ director shall not be liable to retire by rotation

The director’s tenure as small shareholders’ director shall not exceed a period of 3 consecutive years

On the expiry of the tenure, the director shall not be eligible for re-appointment

Such Director shall vacate office if he ceases to be a small shareholder

No person shall hold the office of small shareholders’ director in more than 2 companies at the same time

Small Shareholders’ Director

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Deemed to be First Directors –

• the subscribers to the memorandum (where no provision in Articles and until duly appointed)

• Individual member In case of one person company (until director duly appointed under provisions of this section)

Save as otherwise expressly provided in this Act, every director shall be appointed by the company in the general meeting

No person shall be appointed as a director of a company unless he has been allotted with a Director Identification Number (DIN)

Sec 152-Appointment of Directors (Sec 254, 255, 256, 264)

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A person appointed as a director shall not act as a director unless he gives his consent to hold the office as director and such consent has been filed with the Registrar within 30 days of his appointment

Draft Rules mention-

Every person who has been appointed to hold the office of a director shall on or before the appointment furnish to the company a consent in writing

Retirement by rotation – numbers to retire same as Companies Act, 1956

For the purpose of the retiring directors, independent directors shall not be included for the calculation of the total number of directors

Sec 152-Appointment of Directors (Sec 254, 255, 256, 264)

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153- Application for DIN 154- Allotment of DIN by Central Government within 30 days 155- Unique and single DIN for a single individual 156- Intimation of DIN to Company in which he is a Director within 30 days 157-Company to furnish to ROC within 15 days of receipt of intimation (penal

provisions, if not complied) 158-DIN to be mentioned while furnishing any returns, information, etc. as

required under the Act, in case such return relate to, or contain any

reference of director 159-Penal provision for non-compliance with Sec 152, 155, 156 (made

stringent)

Key highlights of Draft Rules- Concerned Director to intimate company within 15 days of change in

particulars specified in DIN application Company to disclose the changes in particulars of the concerned Director in

the Annual Return

Sec 153-159-DIN related provisions (Sec 266A-266G)

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Sec 160- Right of persons other than retiring directors to stand for directorship (Sec 257)

Notice in writing not less than 14 days before the meeting to be left by such person or a member at registered office of the Company along with a deposit of Rs. 1 lakh or such higher amount as may be prescribed (previously, deposit of Rs. 500 was required)

This deposit amount shall be refunded to such person/member, as the case may be, if-

• The proposed person 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

The Company shall inform the members of the candidature in such manner as may be prescribed

Draft Rules prescribe-- Similar manner as before, however shall inform in electronic mode, if opted

by member and by placing on website of the Company, if any

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Additional Director: The articles may confer on its Board the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next AGM or the last date on which the AGM should have been held, whichever is earlier

Alternate Director: The Board by its articles or by a resolution passed in general meeting, appoint a person, to act as an alternate director for a director during his absence for a period of not less than 3 months from India

One Alternate Director to any Director in the Company cannot act as Alternate Director to other Director(s) of that Company

Alternate Director to an Independent Director should also be qualified to be appointed as Independent Director

Sec 161- Appointment of Additional, Alternate and Nominee Director (Sec 260, 262, 313)

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Alternate Director not to hold office for period longer than that permissible to Original Director and shall vacate office when the Original Director returns to India

Nominee Director- Subject to the Articles, the Board may appoint any person as a director nominated by any institution in pursuance of provisions of any law for the time being in force or of any agreement or by the Central/State Government by virtue of its shareholding in a Government Company – Sec. 161(3)

Casual vacancy in the office of a Director may, in default of and subject to any regulations in the Articles of the Company, be filled up by the Board at its meeting

Sec 161- Appointment of Additional, Alternate and Nominee Director (Sec 260, 262, 313)

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Now applicable to Private Companies as well

Now applicable to Private Companies as well

Sec 162-Appointment of Directors to be voted individually (Sec 263)

Sec 163-Option to adopt principle of proportional representation for appointment of Directors (Sec 265)

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Criteria in addition to Sec 274 of Companies Act, 1956:

convicted by a court of any offence, whether involving moral turpitude or otherwise

convicted of any offence and sentenced to imprisonment for a period of 7 years or more, he shall not be eligible to be appointed as a Director in any Company ( i.e. disqualified for his life time)

an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force (now under any Act) (earlier, under specified section 203 of Companies Act, 1956)

convicted of the offence dealing with related party transactions under Section 188 at any time during the last preceding 5 years; or

not complied with Section 152(3) (i.e. not allotted with a DIN)

Sec 164- Disqualifications for Appointment of Director (Sec 274)

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No person who is or has been a director of any company (now includes private companies also) which –

a. has not filed financial statements or annual returns for any continuous period of 3 financial years; or

b. has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for 1 year or more

shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of 5 years from the date on which said company fails to do so

The power of Central Government to exempt the disqualification application has been dispensed with

A private company may, by its Articles, provide for additional grounds of disqualifications

Sec 164- Disqualifications for Appointment of Director (Sec 274) (contd…)

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Disqualifications regarding conviction for offences shall not take effect-

i. for 30 days from the date of conviction or order of disqualification

ii. where an appeal or petition is preferred within 30 days as aforesaid against the conviction resulting in sentence or order, until expiry of 7 days from the date on which the appeal or petition is disposed off; or

iii. where any further appeal or petition is preferred against order or sentence within 7 days, until such further appeal or petition is disposed off.

Sec 164- Disqualifications for Appointment of Director (Sec 274) (contd…)

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Number of directorships, including any alternate directorship not in more than 20 companies at the same time (earlier 15 companies with certain exceptions)

Maximum number of public companies in which a person can be appointed as a director shall not exceed 10

Directorship, in private companies that are either holding or subsidiaries of public companies shall be included in the said limit of 10 public companies

Members of a company may by special resolution specify any lesser number of directorships to be held by its Directors

Sec 165 - Number of Directorships (Sec 275-279)

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If holding directorships more than the prescribed numbers, then, within a period of 1 year from commencement of the Act-

a. choose not more than the specified limit of those companies, as companies in which he wishes to continue to hold the office of director

b. resign his office as director in the other remaining companies and

c. intimate the choice made by him to each of the companies in which he was holding the office of Director before such commencement and to the Registrar having jurisdiction in respect of each such company

Sec165- Number of Directorships (Sec 275-279) (contd…)

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Such resignation to reduce number of directorships shall become effective immediately on the dispatch thereof to the company concerned

Penalty- fine of not less than Rs. 5000 but which may extend to Rs. 25000 for every day after the first during which the contravention continues

Sec165- Number of Directorships (Sec 275-279) (contd…)

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A director shall –

• act in accordance with the Articles of the company

• 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

• exercise his duties with due and reasonable care, skill and diligence and exercise independent judgement

• not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company

Sec 166-Duties of Directors

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A director shall –

• not assign his office and any assignment so made shall be void.

• not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners or associates (if found guilty, is liable to pay an equal amount of that gain, to the Company)

If there is a contravention to provisions of this section, director shall be punishable with fine of not less than Rs. 1 lakh but which may extend to Rs. 5 lakhs.

Sec 166-Duties of Directors (contd…)

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The office of a director shall become vacant in the following cases-

a. If he incurs any of the disqualifications specified in Section 164

b. he absents himself from all the meetings of the Board of Directors held during a period of 12 months with or without seeking leave of absence of the Board

c. he fails to disclose his interest in any contract or arrangement or acts in contravention of Section 184 in this regard

d. he becomes disqualified by an order of a court or the Tribunal (under any Act)

Sec 167-Vacation of office (Sec 283)

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e. he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months:

Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court

f. he is removed in pursuance of the provisions of this Act

g. he ceases to hold any office or other employment in the holding, subsidiary or associate by virtue of which he was appointed

Private Companies may, by its Articles, provide for additional grounds for vacation of office by Director

Penalty- if continues as Director, even though disqualified as above- imprisonment which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 lakhs, or both

Sec 167-Vacation of office (Sec 283) (contd…)

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A director may resign from office by giving a notice in writing and –

• the Board shall on receipt of such notice, take note of the same and

• the Company shall intimate the same to the Registrar and

• The Company shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company

The Director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within 30 days

The resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later

Director shall be liable even after his resignation, for offence which occurred during his tenure

Sec 168- Resignation of Directors

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Draft Rules mention-

The Company shall within 30 days from the date of receipt of notice of resignation from a director

intimate the Registrar and

post the information on its website, if any.

A director who resigns from his office, may within 30 days from the date of resignation, forward to the Registrar a copy of his resignation along with reasons for the resignation and along with the prescribed fee

Notice of resignation of director

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Sec 169-Removal of Directors (Sec 284)

By ordinary resolution (with certain exceptions), after giving a reasonable opportunity of being heard

Copy of representation in writing, given by Director may be sent to members of the Company to whom notice of the meeting is sent, or, the notice may state the fact of such representation being made

Representation, if not sent to members, may be required by the Director, to be read at the meeting, without prejudice to his right to be heard orally (Tribunal may disallow, on application by Company/member, if this right is abused by Director for defamatory matter)

Special notice (Sec 115) is required for removal/appointment of Director in place of such Director, at the meeting at which he is removed. If appointment is not made in same meeting, the vacancy can be filled as a casual vacancy

Members holding not less than 1% total voting power or aggregate sum not exceeding Rs. 5 lakh paid up may move resolution by special notice

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Single register for Directors/KMPs and their security-holdings to be kept at registered office containing particulars as may be prescribed

Details of securities in the company or its holding, subsidiary, subsidiary of company’s holding company or associate companies

Filing with ROC within 30 days from the appointment and change of every director and key managerial personnel

Register shall be open for inspection during business hours (earlier could restrict to 2 or more business hours)

Members have a right to take extracts. Copies, if requested, to be provided within 30 days, free of cost

Register shall be made accessible to any person (includes proxies) attending the AGM (earlier this requirement was not there for Register u/s 303)

Sec 170 & 171-Register of Directors and KMPs and Members’ right to inspect (Sec 303, 304, 307)

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Draft Rules prescribe certain new additions in Register

Spouse’s name (if married) – earlier, it was required for married women only

Residential address (present as well as permanent) Reasons for cessation of office Office of KMP held or relinquished in any other body corporate Membership number of ICSI in case of Company Secretary

If a company contravenes any of the provisions of this Chapter XI and for which no specific punishment is provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs

Sec 170 & 171-Register of Directors and KMPs and Members’ right to inspect (Sec 303, 304, 307)

Sec 172-Punishment

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Thank You