Company Law CS Executive Notes
Notes of Chapter 16 of Company Law - Directors
Company Law CS Executive Notes – Topics covered in this Article
Qualifications of Independent Director [Rule 5 of Companies (Appointment and Qualification of Directors) Rules, 2014]
Compliance required by a person eligible and willing to be appointed as an independent director [Rule 6]
Definition of Director
According to Section 2 (34), “director” means a director appointed to the Board of a company.
According to Section 2 (10), “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.
The term ‘Board of Directors’ means a body duly constituted to direct, control and supervise the affairs of a company.
Only individual can be appointed as Director
As per Section 149, the Board of directors of every company shall consist of individual only. Thus, no body corporate, association or firm shall be appointed as director.
Office of Director can’t be assigned
Section 166(6) of Companies Act, 2013 prohibits assignment of office of director to any other person. Thus, any assignment of office made by a director shall be void.
Indian resident director [Section 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 under this sub-section shall apply proportionately at the end of the financial year in which it is incorporated.
Director Identification Number (DIN)
According to Section 152(3), no person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154 [or any other number as may be prescribed under section 153.]
According to Section 153, every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number to the Central Government (RD Noida) in such form and manner and along with such fees as may be prescribed.
Provided that the Central Government may prescribe any identification number which shall be treated as Director Identification Number for the purposes of this Act and in case any individual holds or acquires such identification number, the requirement of this section shall not apply or apply in such manner as may be prescribed.
According to Section 154, the Central Government shall, within 1 month from the receipt of the application under section 153, allot a Director Identification Number to an applicant in such manner as may be prescribed.
Procedure for application for allotment of DIN – Section 153 & Rule 9
|1||Every applicant, who intends to be appointed as director of an existing company shall make an application electronically in Form DIR-3, to the central Government for allotment of a Director Identification Number (DIN) along with such fees as provided under the companies (Registration offices and Fees) Rules, 2014. Provided that in case of proposed directors not having approved DIN, the particurars of maximum three directors shall be mentioned in Form No.INC-32 (SPlCe) and DIN may be allotted to maximum three proposed directors through Form INC-32 (SPLCe)|
|2||The Central Government shall provide an electronic system to facilitate submission of application for the allotment of DIN through the portal on the website of the Ministry of Corporate Affairs.|
|3||(a)||The applicant shall download Form DIR-3 from the portal, fill in the required particulars sought therein, verify and sign the form and after attaching copies of the following documents, scan and file the entire set of documents electronically-|
|ii||proof of identity;|
|iii||proof of residence;|
|iv||board resolution proposing his appointment as director in an existing company|
|v||specimen signature duly verified|
|(b)||Form DIR-3 shall be signed and submitted electronically by the applicant using his or her own Digital signature certificate and shall be verified digitally by
|4||In case the name of a person does not have a last name, then his or her father’s or grandfather’s surname shall be mentioned in the last name along with declaration in Form-DIR-3A. This declaration will be submitted along with Form DIN-3.|
Procedure for Allotment of DIN [Section 154 and Rule 10]
The Central Government shall, within 1 month from the receipt of the application under section 153, allot a DIN to an applicant in such manner as mentioned below:
- On the submission of the Form DIR-3 on the portal and payment of the requisite amount of fees through online mode an application number shall be generated by the system automatically.
- After generation of the application number, the Central Government shall approve or reject the application and communicate the same to the applicant within a period of 1 month from the receipt of application.
- If the Central Government, on examination, finds such application to be defective or incomplete in any respect, it shall give intimation to the applicant, directing the applicant to rectify such defects or incompleteness by resubmitting the application within a period of 15 days.
- In case of rejection or invalidation of application, the fee so paid with the application shall neither be refunded nor adjusted with any other application.
- The DIN so allotted under these rules is valid for the life-time of the applicant and shall not be allotted to any other person.
Cancellation/Surrender/Deactivation of DIN [Rule 11]
In the following cases, DIN can be cancel or deactivate –
- the DIN is found to be duplicated in respect of the same person provided the data related to both the DIN shall be merged with the validly retained number;
- the DIN was obtained in a wrongful manner or by fraudulent means;
- in case of the death of the concerned individual;
- the concerned individual has been declared as a lunatic or of unsound mind by a competent Court;
- if the concerned individual has been adjudicated an insolvent.
- on an application made in Form DIR-5 by the DIN holder to surrender his or her DIN along with declaration that he has never been appointed as director in any company and the said DIN has never been used for filing of any document with any authority.
The Central Government or Regional Director (Northern Region), or any officer authorized by the Central Government or Regional Director (Northern Region) shall, deactivate the Director Identification Number (DIN), of an individual who does not intimate his particulars in e-form DIR-3-KYC or the web service DIR-3-KYC-WEB as the case may be within stipulated time in accordance with rule 12A.
The de-activated DIN shall be re-activated only after e-form DIR-3-KYC or the web service DIR-3-KYC-WEB as the case may be is filed along with fee as prescribed under Companies (Registration Offices and Fees) Rules, 2014.
Intimation of changes in particulars of Director [Rule 12)
- Every individual having DIN in the event of any change in his particulars as stated in Form DIR-3, intimate such change(s) to the Central Government within a period of 30 days of such change(s) in Form DIR-6 (Intimation of change in particulars of Director to be given to the Central Government). Form requires precertification by the professional CA/CS/CMA in practice.
- The DIN cell of the MCA shall also intimate the change(s) in the particulars of the director submitted to it in Form DIR-6 to the concerned Registrar(s) under whose jurisdiction the registered office of the company(s) in which such individual is a director is situated.
- The concerned individual shall also intimate the change(s) in his particulars to the company or companies in which he is a director within 15 days of such change.
Directors KYC [Rule 12A]
Every individual who holds a Director Identification Number (DIN) as on 31st March of a financial year as per these rules shall, submit e-form DIR-3-KYC for the said financial year to the Central Government on or before 30th, September of immediate next financial year.
Where an individual who has already submitted e-form DIR-3 KYC in relation to any previous financial year, submits web-form DIR-3 KYC-WEB through the web service in relation to any subsequent financial year it shall be deemed to be compliance of the provisions of this rule for the said financial year.
In case an individual desires to update his personal mobile number or the e-mail address, as the case may be, he shall update the same by submitting e-form DIR-3 KYC only.
Directors of company required to file e-form ACTIVE [Rule 12B]
- Where a company governed by Rule 25A of the Companies (Incorporation) Rules, 2014, fails to file the e-form ACTIVE within the period specified therein, the Director Identification Number (DIN) allotted to its existing directors, shall be marked as “Director of ACTIVE non-compliant company”.
- Where the DIN of a director has been marked as “Director of ACTIVE non-compliant company”, such director shall take all necessary steps to ensure that all companies governed by rule 25A of the Companies (Incorporation) Rules, 2014, where such director has been so appointed, file e-form ACTIVE.
- After all the companies referred to in sub-rule (2) file the e-form ACTIVE, the DIN of such director shall be marked as “Director of ACTIVE compliant company”.
General Provisions regarding DIN
Prohibition to obtain more than one DIN
According to Section 155, no individual shall apply for/obtain/possess another DIN who has already been allotted a Director Identification Number under section 154.
Director to intimate DIN
Section 156 stipulated that every existing director shall intimate his DIN to the company or all companies wherein he is a director within 1 month of the receipt of DIN from the Central Government.
Company to inform DIN to Registrar [Section 157(1)]
Every company shall, within 15 days of the receipt of intimation of DIN from director, furnish the DIN to the Registrar/authorised office by the Central Government in e-form DIR-3C. The e-form is to be digitally signed by Company Secretary of the company or Company Secretary in Practice.
If any company fails to furnish the Director Identification Number under Section 157(2),
- such company shall be liable to a penalty of
- Rs25,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of 1 lakh rupees, and
- every officer of the company who is in default shall be liable to a penalty of
- not less than Rs. 25,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of one lakh rupees.
Obligation to mention DIN
Section 158 specified that every person or company shall mention the DIN in return, information or particulars as required to be furnished under this Act, in case such return etc. relate to the director or contain any reference of any director.
Punishment for Contravention
- Section 155 of the Act provides that no individual who has already been allotted a Director Identification Number under section 154, shall apply for, obtain or possess another Director Identification Number.
- Section 159 of the Act, if any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156, such individual or director of the company shall be liable to a penalty
- which may extend to Rs. 50,000 and
- where the default is a continuing one, with a further penalty which may extend to Rs. 500 for each day after the first during which such default continues.
Disqualifications for appointment of director [Section 164]
Personal Grounds of Disqualification [Sub-section 1]
A person shall not be eligible for appointment as a director of a company, if —
- he is of unsound mind and stands so declared by a competent court;
- he is an undischarged insolvent;
- he has applied to be adjudicated as an insolvent and his application is pending;
- he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than 6 months and a period of 5 years has not elapsed from the date of expiry of the sentence.
Note: If a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;
- an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
- he has not paid any calls in respect on any shares of the company held by him, whether alone or jointly with others, and 6 months have elapsed from the last day fixed for the payment of the call;
- he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding 5 years; or
- he has not been allotted DIN [or any other number as may be prescribed under section 153.].
- he has not complied with the provisions of sub-section (1) of section 165 (Holding directorships in more companies than allowed).
Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.
Disqualification by reasons of default made by a company in which the person is already director [Sub-section 2]
No person who is or has been a director of a company 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
- 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 the said company fails to do so.
Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.
- If after the disqualification under section 164(2) is attracted, the default is made good by the company, the directors shall continue to remain disqualified.
- The provisions of section 164(2) shall not apply to Government Company.
Additional grounds of disqualification [Sub-section 3]
A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2) of section 164 as stated above.
But a public company can’t provide any additional disqualifications.
Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014
- Every director who is disqualified u/s 164 (2), shall inform to the company concerned in Form DIR-8 (Intimation by Director) before he is appointed or re-appointed.
- Whenever a company fails to file the financial statements/annual returns/fails to repay any deposit, interest, dividend/fails to redeem its debentures as specified u/s 164 (2), the company shall immediately file Form DIR-9 (Report by the company to Registrar), to the Registrar furnishing therein the names and addresses of all the directors of the company during the relevant financial years.
- Any application for removal of disqualification of directors shall be made in Form DIR-10.
Summary of DIN Forms
|DIR 3A||Application to consider father’s or grandfather’s surname as last name|
|DIR 2||Consent to act as a director of the proposed company|
|DIR-3||Application for allotment of Director Identification Number before appointment in an existing company|
|DIR-3 B||Intimation of DIN to Company (By every director, functioning as a director in one or more companies on or before the 30th June, 2007 & not yet intimated his DIN)|
|DIR-3 C||Intimation of Director Identification Number by the company to the Registrar DIN services|
|DIR-3 KYC/DIR-3 KYC Web||Application for KYC of Directors|
|DIR-5||Application for surrender of Director Identification Number|
|DIR-6||Intimation of change in particulars of Director to be given to the Central Government|
|DIR 7||Verification of applicant for change in DIN particulars (to be attached with DIR 6)|
|DIR-8||Intimation by Director of disqualification or non-disqualification|
|DIR-9||Report by the company to Registrar w.r.t failure to file the financial statements/annual returns/fails to repay any deposit, interest, dividend/fails to redeem its debentures|
|DIR-10||Application for removal of disqualification of directors|
|DIR 11||Notice of resignation of a director to the Registrar|
|DIR 12||Particulars of appointment of directors and the key managerial personnel and the changes among them|
Types of Directors
Executive Directors – Directors who are in the whole time employment of the company like MD & WTD. They receive remuneration for their employment and sitting fee for attending the board meeting.
Non-Executive Directors – Directors who are not in the whole time employment of the company (all directors except MD & WTD). Non-Executive Directors are either Independent Directors or Non-Independent Directors.
Independent Directors are those who satisfy the conditions specified u/s 149(6). In general they are those directors who do not have any monetary or other relations with company or its BODs, KMP, Promoters etc. which may affect the independence of their decisions at the Board Meeting.
Non-Independent Directors are those who do not satisfy the conditions specified u/s 149(6).
General Rule: Board of any company must have optimum combination of Executive and Non-Executive Directors. Further, large number of independent directors means more unbiased and transparent decision making which will lead to common welfare and growth of company as a whole.
Private companies are free to maintain the combination of Executive and Non-Executive Directors in any ratio. Moreover, generally, concept of independent directors is missing in private companies. But public companies must maintain optimum combination of Executive and Non-Executive Directors as per company laws. Further, in case of listed companies, along with company laws, provisions of SEBI (Listing Obligations and Disclosures Requirement) Regulations 2015 and SEBI notifications/circulars are also applicable.
Appointment of Directors [Section 152]
First Directors [Sub Section 1]
Where no provision is made in the AOA of a company for the appointment of the first director,
- the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed
and in case of a One Person Company
- an individual being member shall be deemed to be its first director until the director or directors are duly appointed by the member in accordance with the provisions of this section.
Appointment of Directors in general meeting [Sub Section 2]
Except as provided in the Act, every director shall be appointed by the company in general meeting.
- Director Identification Number (DIN) or or any other number as may be prescribed is compulsory for appointment of director of a company.
- Every person proposed to be appointed as a director shall furnish his Director Identification Number or any other number as may be prescribed and a declaration that he is not disqualified to become a director under the Act.
- A person appointed as a director shall on or before the appointment give his consent to hold the office of director in physical form DIR-2 i.e. Consent to act as a director of a company.
- Company shall file Form DIR-12 (particulars of appointment of directors and KMP along with the form DIR-2 as an attachment within 30 days of the appointment of a director and necessary fee.
- The consent to act as director and intimation to Registrar is not required in case of section 8 company and where appointment of such director is done by the Central or State Government, as the case may be.
Retirement by Rotation in case of Public Companies only [Section 152(6)]
Minimum numbers of directors liable to retire by rotation
If there is no provision in the article, then not less than two-thirds of the total number of directors of a public company shall be persons whose period of office is liable to determination by retirement by rotation and eligible to be reappointed at annual general meeting.
But AOA of the Company may provide the provisions relating to retirement of the all directors.
‘Total number of directors’ shall not include
- independent directors
- Nominee directors appointed by a financial institution or by Central Government under section 408
But an additional director shall be included in the ‘total number of directors’.
Minimum numbers of rotating directors which shall retire at every AGM
- At the annual general meeting of a public company one-third of such of the directors for the time being as are liable to retire by rotation.
- If their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office.
- The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment.
- As between the persons who became directors on the same day, the directors who shall retire may be determined by agreement among themselves.
- In the absence of any such agreement the persons liable to retire shall be chosen by lot.
Government companies have been exempted vide notification dated June 5, 2015 from the applicability of this section. Accordingly, directors in Government Companies are not liable to retire by rotation.
Vacancy in case of retiring director [Section 152 (7)]
- At the AGM at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other person thereto.
- If the vacancy of the retiring director is not so filled-up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a national holiday, till the next succeeding day which is not a holiday, at the same time and place.
- If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been reappointed at the adjourned meeting, unless—
- a resolution for the re-appointment of such director has been put to the meeting and lost;
- the retiring director has expressed his unwillingness to be so re-appointed;
- he is not qualified or is disqualified for appointment;
- a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of any provisions of this Act
Punishment [Section 159]
If any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156, such individual or director of the company shall be liable to a penalty which may extend to Rs. 50,000 and where the default is a continuing one, with a further penalty which may extend to Rs. 500 for each day after the first during which such default continues
Right of persons other than retiring directors to stand for directorship [Section 160]
A person who is not a retiring director in terms of section 152 shall be eligible for appointment to the office of a director at any general meeting, if he, or some member intending to propose him as a director, has, not less than 14 days before the meeting, left at the registered office of the company, a notice in writing under his hand signifying his candidature as a director or, as the case may be, the intention of such member to propose him as a candidate for that office, along with the deposit of one lakh rupees which shall be refunded to such person or, as the case may be, to the member, if the person proposed gets elected as a director orgets more than 25% of total valid votes cast either on show of hands or on poll on such resolution.
Provided that requirements of deposit of amount shall not apply in case of appointment of
- an independent director or
- a director recommended by the Nomination and Remuneration Committee, or
- a director recommended by the Board of Directors of the Company, in the case of a company not required to constitute Nomination and Remuneration Committee.
- In case of Nidhi Company, instead of Rupees One Lakh, the deposit of Rs 10,000 is required with the notice.
- Section 160 is not applicable to
- Government Company where the entire paid up share capital is held by Central Government or by any State Government or Governments or by the Central Government and one or more State Governments
- Subsidiary of Government Company in which the entire paid up capital is held by that Government Company
- Private Companies,
- Section 8 Companies whose article provide for election of directors by Ballot
Notice of candidature of a person for directorship [Rule 13 of Companies (Appointment and Qualifications of Directors) Rules, 2014]
The company shall, at least 7 days before the general meeting, inform its members of the candidature of a person for the office of a director or the intention of a member to propose such person as a candidate for that office-
- by serving individual notices,
- on the members through electronic mode to such members who have provided their email addresses to the company for communication purposes, and
- in writing to all other members; and
- by placing notice of such candidature or intention on the website of the company, if any.
It shall not be necessary for the company to serve individual notices upon the members as aforesaid, if the company advertises such candidature or intention, not less than 7 days before the meeting
- at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and circulating in that district, and
- at least once in English language in an English newspaper circulating in that district.
Proportional representation for appointment of directors [Section 163]
The articles of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a company in accordance with the principle of proportional representation, whether
- by the single transferable vote or
- by a system of cumulative voting or
and such appointments may be made once in every three years.
Casual vacancies of such directors shall be filled as provided in section 161(4).
The provisions of proportional representation of directors shall not apply in case of
- a Government company in which the entire paid up share capital is held by the Government, Central or State, jointly or severally or
- subsidiary of a Government company, in which the entire paid up share capital is held by that Government company
Director elected by Small Shareholders [Section 151]
“Small shareholder” means a shareholder holding shares of nominal value of not more than Rs. 20,000 or such other sum as may be prescribed.
Requirement of Director elected by Small Shareholders
Every listed company may have one director elected by such small shareholders in such manner and on such terms and conditions as may be prescribed.
Rule 7 of Companies (Appointment and Qualification of Directors) Rules, 2014
Following are the terms and conditions for appointment of small shareholder’s director:
Election of small shareholders’ director:
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 shareholder’s director elected by the small shareholder.
Further, a ‘Small Shareholders’ Director’ may be elected voluntarily by any listed company.
Notice of intention to propose a candidate for the post of Small Shareholders’ Director
The small shareholders intending to propose a person as a candidate for the post of small shareholder’s director shall leave a signed notice of their intention with the company at least 14 days before the meeting specifying the their details and proposed director’s details. The details include name, address, shares held and folio number etc. If the proposer does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.
The notice shall be accompanied by a statement signed by the proposed director 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
Small shareholders’ director to be an independent director
Small shareholders’ director shall be considered as an independent director, if-
- he is eligible for appointment as an independent director as per sub-section (6) of section 149; and
- he gives a declaration of his independence as per sub-section (7) of section 149.
Tenure of office and no retirement by rotation
The tenure of small shareholders’ director shall not exceed a period of 3 consecutive years and he shall not be liable to retire by rotation. Further he shall not be eligible for re-appointment after the expiry of his tenure.
A person shall not be appointed as small shareholders’ director of a company, if the person is not eligible for appointment in terms of section 164.
Grounds of vacation of office
A Small shareholders’ director shall vacate the office if –
- he ceases to be a small shareholder, on and from the date of cessation;
- he incurs any of the disqualifications specified in section 164;
- the office of the director becomes vacant in pursuance of section 167 (Vacation of office of Director);
- he ceases to meet the criteria of independence as provided section 149 (6).
Number of small shareholders’ Directorship
A person shall not hold the office of small shareholders’ director in more than 2 companies. If second company is in competitive business or is in conflict with business of the first company, he shall not be appointed in second company.
No association with the company for next 3 years
He shall directly or indirectly not be appointed or associated in any other capacity with the company either directly or indirectly for a period of 3 years from the date of cessation as a small shareholder’s director.
- A small shareholders’ director may be removed by passing an ordinary resolution in the general meeting in accordance with the provisions of section 169 of the Act. At the time of voting on such resolution, every equity shareholders shall have a right to vote irrespective of the fact as to whether he is a small shareholder or not.
- A small shareholders’ director shall be included in the ‘total number of directors’.
APPOINTMENT OF DIRECTORS BY BOARD OF DIRECTORS
Board of Directors may appoint
- Additional Directors
- Alternate Directors
- Nominee Directors
- Directors in Casual Vacancy
- the date of the next AGM or
- the last date on which the AGM should have been held,
- The number of directors and additional directors together shall not at any time exceed maximum strength fixed for the Board by the articles.
- Additional Directors can be appointed by private as well as public companies.
Alternate Director [Section 161 (2)]
The Board of Directors of a company may, if so authorised
- by its articles or
- by a resolution passed by the company in general meeting,
appoint a person,
- not being a person holding any alternate directorship for any other director in the company or holding directorship in the same company
to act as an alternate director for a director during his absence for a period of not less than 3 months from India.
Only independent director can be appointed as alternate director
No person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act.
- An alternate director shall not hold office for a period longer than that permissible to the director in whose place he has been appointed and shall vacate the office if and when the director in whose place he has been appointed returns to India.
- If the term of office of the original director is determined before he so returns to India, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate director.
- An alternate directorship in a company shall also be included while counting the number of directorship held by a director.
- Section 161(2) of the Act applies to all companies, whether public or private.
Appointment of Directors by Nomination [Section 161(3)]
Subject to the articles of a company, the Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company.
Appointment of Directors in causal vacancy [Section 161(4)]
If the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by members in the immediate next general meeting.
Any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.
Appointment of directors to be voted individually [Section 162]
- At a general meeting of a company, a motion for the appointment of two or more persons as directors of the company by a single resolution shall not be moved unless a proposal to move such a motion has first been agreed to at the meeting without any vote being cast against it.
- A resolution moved in contravention of sub-section (1) shall be void, whether or not any objection was taken when it was moved.
- A motion for approving a person for appointment, or for nominating a person for appointment as a director, shall be treated as a motion for his appointment.
- Provisions related to appointment of directors to be voted individually shall be applicable to public companies only.
- However, a Government company in which the entire paid up share capital is held by the Government, Central or State, jointly or severally or the subsidiary of a Government company, in which the entire paid up share capital is held by that Government company and private companies are exempted from compliance of aforesaid provisions.
Duties of directors [Section 166]
- Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.
- A director of a company shall 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.
- A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
- A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
- A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
- A director of a company shall not assign his office and any assignment so made shall be void.
If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
Vacation of office of director [Section 167]
|1||The office of a director shall become vacant in case—|
|a.||he incurs any of the disqualifications specified in section 164; Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.|
|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 acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;|
|d.||he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;|
|e.||he becomes disqualified by an order of a court or the Tribunal;|
|f.||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 6 months|
|Provided that the office shall not be vacated by the director in case of orders referred to in clauses (e) and (f)-|
|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 such appeal or petition is disposed of; 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 of.|
|g.||he is removed in pursuance of the provisions of this Act;|
|h.||he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.|
|2.||If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in subsection (1), he shall be punishable with fine which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees [by the Companies (Amendment) Act, 2020]|
|3.||Where all the directors of a company vacate their offices under any of the disqualifications specified in subsection (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.|
|4.||A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1).|
Resignation of directors [Section 168]
- A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in Form DIR 12, within 30 days and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company:
Provided that a director may also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within 30 days of resignation in e-Form 11.
- 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:
Provided that the director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure.
- Where all the directors of a company resign from their offices, or vacate their offices under section 167, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in general meeting.
Removal of directors [Section 169]
|1.||A company may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under section 242, before the expiry of the period of his office after giving him a reasonable opportunity of being heard.
|2.||A special notice (as per section 115) shall be required of any resolution, to remove a director under this section, or to appoint somebody in place of a director so removed, at the meeting at which he is removed.|
|3.||On receipt of notice of a resolution to remove a director under this section, the company shall forthwith send a copy thereof to the director concerned, and the director, whether or not he is a member of the company, shall be entitled to be heard on the resolution at the meeting.|
|4.||Where notice has been given of a resolution to remove a director under this section and the director concerned makes with respect thereto representation in writing to the company and requests its notification to members of the company, the company shall, if the time permits it to do so,—|
|a.||in any notice of the resolution given to members of the company, state the fact of the representation having been made; and|
|b.||send a copy of the representation to every member of the company to whom notice of the meeting is sent (whether before or after receipt of the representation by the company)|
|and if a copy of the representation is not sent as aforesaid due to insufficient time or for the company’s default, the director may without prejudice to his right to be heard orally require that the representation shall be read out at the meeting. But copy of the representation need not be sent out and the representation need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the Tribunal is satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter|
|5.||A vacancy created by the removal of a director under this section may, if he had been appointed by the company in general meeting or by the Board, be filled by the appointment of another director in his place at the meeting at which he is removed, provided special notice of the intended appointment has been given under sub-section (2).|
|6.||A director so appointed shall hold office till the date up to which his predecessor would have held office if he had not been removed.|
|7.||If the vacancy is not filled under sub-section (5), it may be filled as a casual vacancy in accordance with the provisions of this Act. The director who was removed from office shall not be re-appointed as a director by the Board of Directors.|
|8.||Nothing in this section shall be taken—|
|a.||as depriving a person removed under this section of any compensation or damages payable to him in respect of the termination of his appointment as director as per the terms of contract or terms of his appointment as director, or of any other appointment terminating with that as director; or|
|b.||as derogating from any power to remove a director under other provisions of this Act.|
Meaning of independent director [Section 149(6)]
|An independent director in relation to a company, means a director other than a MD or WTD or a nominee director,—|
|(a)||who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;|
|(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 financial years or during the current financial year;|
|(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 lakh rupees 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 (50 Lakhs) during the two 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 (50 Lakhs) 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 key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the 3 financial years immediately preceding the financial year 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 three financial years immediately preceding the financial year in which he is proposed to be appointed, of—|
|(A)||a firm of auditors or company secretaries 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;|
|(f)||who possesses such other qualifications as may be prescribed.|
|(1)||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.|
|(2)||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 rupees, at any time during the two immediately preceding financial years or during the current financial year.|
Clarification of MCA on `Pecuniary Interest’
- Whether a transaction entered into by an ‘ID’ with the company concerned at par with any member of the general public and at the same price as is payable/paid by such member of public would attract the bar of ‘pecuniary relationship’ under section 149(6)(c).
Answer: The matter was examined and it was hereby clarified that in view of the provisions of section 188 which take away transactions in the ordinary course of business at arm’s length price from the purview of related party transactions, an ‘ID’ will not be said to have ‘pecuniary relationship’, under section 149(6)(c) in such cases.
- Whether receipt of remuneration, (in accordance with the provisions of the Act) by an ‘ID’ from a company would be considered as having pecuniary interest while considering his appointment in the holding, subsidiary or associate company of such company.
Answer: The matter was examined in consultation with SEBI and it was clarified that ‘pecuniary relationship’ provided in section 149(6)(c) of the Act does not include receipt of remuneration, from one or more companies, by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission approved by the members, in accordance with the provisions of the Act.
Number of Independent Directors [Section 149(4)]
Every listed company shall have at least one-third of the total number of directors as independent directors. Any fraction contained in such one third numbers shall be rounded off as one.
According to Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 the following class or classes of unlisted companies are required to have at least two directors as independent directors –
- the Public Companies having paid up share capital of 10 crore rupees or more; or
- the Public Companies having turnover of 100 crore rupees or more; or
- the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding 50 crore rupees.
The following classes of unlisted public company shall not be covered under sub-rule (1), namely:-.
- a joint venture
- a wholly owned subsidiary; and
- a dormant company
- A small shareholder’s director may also be considered as an independent, if he fulfills the eligibility criteria and if he gives the declaration of his independence under section 149(6).
- Nominee Directors are not independent directors.
- Where a company ceases to fulfill any of 3 conditions laid down in sub-rule (1) for three consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions;
Where company has Audit Committee
According to Section 177(2) of the Companies Act, 2013, the Audit Committee shall consist of a minimum of three directors with independent directors forming a majority.
Thus, if a company, who is required to constitute an audit committee, is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it.
Suppose, ABC Ltd. is having 6 directors in its Audit Committee, then 4 directors out of 6 must be Independent Directors (4 is forming majority).
Filling of intermittent vacancies of Independent Directors
Any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than
- immediate next Board meeting or
- three months from the date of such vacancy,
whichever is later.
Manner of selection of an Independent Director
- An independent director may be selected from a data bank containing names, addresses and qualifications of persons eligible and willing to act as independent directors.
- The data bank may be maintained by the agency (Any body, institute or association as may be authorised by Central Government) having expertise in creation and maintenance of such data bank.
- Such agency shall put data bank of independent directors on the website of Ministry of Corporate Affairs or any other notified website.
|With effect from the 1st day of December, 2019, Central Government has notified 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.|
Compliance required by a person eligible and willing to be appointed as an independent director [Rule 6]
Sub-rule 1 (Application for Registration)
(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, 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 sub-rule (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.
Sub-rule 2 (Application for Renewal)
Provided that 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.
Sub-rule 3 (Declaration to BOD)
Approval of appointment of independent director by the members
Appointment of independent directors has to be approved by members in a General meeting and the explanatory statement annexed to the notice must indicate justification for such appointment.
Declaration by independent director [Section 149(7)]
Every independent director shall
- at the first meeting of the Board in which he participates as a director and
- 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 sub-section (6) of section 149.
Remuneration to Independent Directors [Section 149(9)]
An independent director shall not be entitled to any stock option and may receive remuneration by way of
- fee provided under sub-section (5) of section 197 (sitting fee),
- reimbursement of expenses for participation in the Board and other meetings and
- profit related commission as may be approved by the members.
Provided that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any sitting fees, in accordance with the provisions of Schedule V. [Notification dated 28th September, 2020 Amendment Effective from 21st December 2020]
Tenure of Independent Director [Section 149(10)/(11)]
Subject to the provisions of section 152 (Appointment of Directors),
- An independent director shall hold office for a term up to 5 consecutive years on the Board of a company.
- He shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.
- No independent director shall hold office for more than 2 consecutive terms.
- An independent director shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director. During the said period of 3 years, an independent director shall not be appointed in or be associated with the company in any other capacity, either directly or indirectly.
Liability of Independent Directors [Section 149(12)]
Notwithstanding anything contained in this Act,—
(i) an independent director;
(ii) a non-executive director not being promoter or key managerial personnel,
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 connivance or
- where he had not acted diligently.
Independent Directors are not liable to retire by rotation
According to Section 149(13), the provisions in respect of retirement of directors by rotation shall not be applicable to appointment of independent directors.
Independent Directors are not liable to retire by rotation
According to Section 149(13), the provisions in respect of retirement of directors by rotation shall not be applicable to appointment of independent directors.
Code of Conduct for an Independent Director
Section 149(8) provides that the company and independent directors shall abide by the provisions specified in Schedule IV (Code of Conduct for Independent Director).
Code of Conduct includes
- guidelines of professional conduct,
- role, functions and duties,
- manner of appointment and re-appointment,
- resignation or removal,
- separate meetings,
- evaluation mechanism.
Important extract of Code of Conduct
Resignation or removal of Independent Directors
- The resignation or removal of an independent director shall be in the same manner as is provided in sections 168 and 169 of the Act.
- An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within a period of not more than 180 days from the date of such resignation or removal, as the case may be.
- Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.
Separate meetings of Independent Directors
- The independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management;
- All the independent directors of the company shall strive to be present at such meeting;
- The meeting shall:
- review the performance of non-independent directors and the Board as a whole;
- review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;
- assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.
Role of Independent Director
Independent directors are required because they perform the following important role:
- Balance the often conflicting interests of the stakeholders.
- Facilitate withstanding and countering pressures from owners.
- Fulfill a useful role in succession planning.
- Act as a coach, mentor and sounding Board for their full time colleagues.
- Provide independent judgment and wider perspectives.
As per Schedule IV of the Companies Act, 2013, the Independent Director shall –
- uphold ethical standards of integrity and probity;
- act objectively and constructively while exercising his duties;
- exercise his responsibilities in a bonafide manner in the interest of the company;
- devote sufficient time and attention to his professional obligations for informed and balanced decision making;
- Not allow any extraneous considerations that will vitiate his exercise of objective independent judgment in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making;
- Avoid abusing his position to the detriment of the company or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person;
- Refrain from any action that would lead to the loss of his independence;
- Inform the Board immediately whose circumstances arise which makes an Independent Director lose his independence;
- Assist the company in ensuring best corporate governance practices.
Obligations with respect to independent directors as per SEBI (LODR) 2015
A person shall not serve as an independent director in more than 7 listed entities:
|2||The maximum tenure of independent directors shall be in accordance with the Companies Act, 2013 and rules made thereunder, in this regard, from time to time.|
|3||The independent directors of the listed entity shall hold at least one meeting in a year, without the presence of non-independent directors and members of the management and all the independent directors shall strive to be present at such meeting.|
|4||The independent directors in the meeting referred in sub-regulation (3) shall, inter alia|
|–||review the performance of non-independent directors and the board of directors as a whole;|
|–||review the performance of the chairperson of the listed entity, taking into account the views of executive directors and non-executive directors;|
|–||assess the quality, quantity and timeliness of flow of information between the management of the listed entity and the board of directors that is necessary for the board of directors to effectively and reasonably perform their duties.|
|5||An independent director shall be held liable, only in respect of such acts of omission or commission by the listed entity which had occurred with his knowledge, attributable through processes of board of directors, and with his consent or connivance or where he had not acted diligently with respect to the provisions contained in these regulations.|
|6||An independent director who resigns or is removed from the board of directors of the listed entity shall be replaced by a new independent director by listed entity at the earliest but not later than|
|–||the immediate next meeting of the board of directors or|
|–||three months from the date of such vacancy,|
whichever is later.
Where the listed entity fulfils the requirement of independent directors in its board of directors without filling the vacancy created by such resignation or removal, the requirement of replacement by a new independent director shall not apply.
|7||The listed entity shall familiarise the independent directors through various programmes about the listed entity, including the following:|
|a.||nature of the industry in which the listed entity operates;|
|b.||business model of the listed entity;|
|c.||roles, rights, responsibilities of independent directors; and|
|d.||any other relevant information.|