The appointment of an alternate director is regulated by the provisions contained in Section 161(1) of the Companies Act, 2013 (hereinafter referred to as "the Act"). The pre-requisite to such an appointment would be the existence of enabling provisions in the company's articles conferring on the board of directors the authority to do so, or alternatively, the authority granted by the members to make such appointments as granted at a general meeting. In the absence of enabling provisions in the articles, it would be necessary to amend the articles appropriately with the approval of the members. If a person is appointed to the above position even in case of absence of enabling provisions in the Articles, the person so appointed cannot validly act as a director, as held in Rajan Nagindas Doshi v. British Burma Petroleum Co. Ltd. (42 Comp.Cas. 197) (Bom.).
Old Act also contemplated such appointments with a subtle difference as regards the inflection point for such appointments
It is pertinent to point out that under Section 313 of the erstwhile 1956 Act, a person could also be appointed as an Alternate Director. However, there existed a subtle difference between the present Act and the earlier Act as regards the trigger point leading to the need for appointments of such genre.
Under Section 313, a company could resort to the appointment of an alternate director where the original director, in whose place the appointment was proposed, was away from the state in which meetings of the board were held. This requirement was consistent with the requirement under the old Act, which ordained that meetings of the board shall be held in the state in which the registered office of the company was located.
The previous Act did not permit the participation of directors at meetings except through their physical presence, although a move towards encouraging virtual participation was contemplated some time in 2011 by the Department of Company Affairs by way of a green initiative, only for the proposal to be nipped in the bud prematurely for reasons obscure.
Under Section 161 of the Act, an alternate could be appointed in a situation where the original incumbent is away from India for a period of not less than three months from India.
The substitution of the requirement of the original incumbent being away from India as opposed to the state at which meetings of the Board are held as under the old Act stems from the fact that under the present Act there is no bar to a company holding its meeting of the Board anywhere in India, in fact even beyond the territorial jurisdiction of India.
The term of an alternate director is indeterminate
Considering the fact that the term of office of an alternate director is co-terminous with the return of the original director to India, it is obvious that his term is indeterminate. He has to vacate office upon the return of the original director to India, although his term would not be affected where the original director makes intermittent visits to India.
Reference in this connection may be made to the decision of the Bombay HC in Naina D Karnani v Jansen Engineering and Trading P Ltd (13 Taxmann.com95), where it was held that the alternate director would cease to hold office upon the return of the original director, irrespective of whether he attends a meeting of the Board or not upon his return.
Conditions as laid down in Section 161(2) have to be satisfied for appointing an Alternate Director
Section 161(2), inter alia, stipulates that the person proposed to be appointed as Alternate shall not be a person who is already holding any alternate directorship for any other director in the same company or where he is already holding the position of a director in the same company. The latter requirement was introduced by the Companies (Amendment) Act, 2017 with effect from 9.2.2018.In fact, after the above amendment, no person who is already a director in the company could be appointed as an alternate for another director in the same company.
The logic for the above embargo is that an alternate director is by no means acting as a proxy for the original director, and it would be therefore incongruous to allow the same person to don two hats in the same company, one as an original director and the other as an alternate.
The proviso under Sub-section (2) of Section 161 further stipulates that a person cannot be appointed as an alternate director for an independent director unless he himself satisfies all the attributes as laid down under Section 149(6) to merit consideration as an independent director.
Listing Regulations do not allow the appointment of an alternate for an independent director
In terms of an amendment made to Regulation 25(1) to the SEBI (LODR) Regulations, 2015, made effective from October 1, 2018, in the case of a listed company, no alternate can be appointed in place of an independent director.
There is a strong logic associated with the above embargo, given that an independent director is appointed in a listed company after considering his expertise in specific areas, domain knowledge, integrity, and other personal attributes, all of which may not be replicated by the alternate appointed in his place.
Besides, it is now commonplace for a company to allow participation of directors at meetings of the board/committees through the provision of video conferencing, which has negated substantially the need for a director to be present physically at a meeting.
Having said the above, unlisted public companies that satisfy the prescribed financial thresholds still need to appoint a minimum of two independent directors, and even in their case, if an Alternate has to be appointed for an Independent Director, it should be ensured, as contemplated under the Proviso to Section 161(2), that the Alternate satisfies the personal attributes of independence.
Alternate director should provide his consent for the appointment
An alternate does not act in any way as a proxy for the original director. He is a director in his own right, and he does not have to take instructions from the original director while articulating his views on matters that come to the table of the boardroom.
It follows from the above that he should submit his consent for appointment in DIR-2 and also confirm that he is not in any way disqualified in terms of Section 164.
The company shall also file the required form in relation to the appointment along with his consent for the appointment.
Further, in the case of a listed company where an alternate is appointed in lieu of a non-executive, non-independent director, the company should provide the required intimation to the stock exchanges as regards the appointment.
Appointment of an alternate director does not result in the assignment of office by the original director
Under the Act, a director is himself, in a sense, a delegate of the shareholders who have appointed him; the law does not permit the director to delegate his office to others. The question that becomes important is whether the appointment of an alternate tantamount to the assignment of office by the original director. The above question has been answered in the negative by the decision in Oriental Metal Pressing v. Bhaskar Kashinath Thakoor (31 Comp. Cases 143).
Legal position of alternate director
We have already noted above that an alternate does not deputize the original director. He has a mind of his own and should therefore take decisions in his own capacity and shall be responsible for decisions taken by him.
It is also his responsibility to disclose his interest in other entities in Form MBP-1, and he should recuse himself from any transaction in which he is interested to avoid any conflict of interest with the interest of the company.
Appointment of Alternate Director has been rendered infructuous in the context of the dynamics of modern business
Section 173(2) of the Act sets out, inter alia, that directors could participate at a meeting of the Board either by being present physically or through video conferencing or other audiovisual means as prescribed.
Rule 3 of the Companies (Meetings of Board and its powers) Rules, 2014 lay down the ground rules that are to be followed where the facility of attendance through video conferencing is extended by the company.
During the years of the pandemic, holding meetings through virtual means became a necessity, and the trend continues even today, given the fact that virtual meetings cut out the cost as well as the paraphernalia associated with the holding of a physical meeting. A director can therefore attend a meeting whilst being in any part of the world through the internet.
Further, the Board is empowered to discuss any item considered necessary as part of the Agenda, and the negative list, which earlier on prevented the participation of directors virtually on sensitive matters such as adoption of financial results, corporate restructuring, etc., as set out earlier in Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014, has been obliterated effective from 15.6.2021 through the Companies (Meetings of Board and its Powers) Amendment Rules, 2021.
The attendance of directors through virtual means is now possible in relation to any item of business, thus obviating substantially the need for appointing an alternate, as the original director could continue to remain outside India indefinitely and yet attend meetings of the board virtually.
Vacation of Office by Director under Section 167 for failure to attend meetings of the Board held in a period of twelve months also makes appointment of Alternate an undesirable alternative
Under Section 167(1)(b) of the Act, the office of a director becomes vacant if he absents himself from all the meetings of the Board of Directors held during a period of twelve months, with or without seeking leave of absence from the Board.
The Section does not exonerate the original director from disqualification if he absents himself from all the meetings of the board held during a period of twelve months following his appointment, even if he seeks leave of absence from the board.
The term of the original director will be short-lived if he falls prey to the dictates of Section 167(1)(b). Therefore, to avert such an unenviable consequence, the original director will definitely not miss out on attending a meeting of the board, albeit through audiovisual means.
The above sub-section has also made the appointment of an alternate an unattractive proposition.
Need to revisit the law with regard to appointing alternate directors
We have already observed that SEBI does not allow, in the case of listed companies, the appointment of an alternate for an independent director.
In addition, there is really no need for a director to be present physically at a meeting of the board where the facility of attending through video conferencing is allowed. Besides, the original director will invite disqualification under Section 167(1)(b) if he is absent from all meetings during a period of twelve months, and he will forestall such a catastrophe by being present at least through virtual means.
Considering the above fallouts, it is no longer meaningful to appoint alternate directors. Reportedly, the Central Government is looking at amending some of the onerous provisions in the Act, having regard to the need to ease the business environment. It would therefore be appropriate if the provisions relating to the appointment of an alternate are given a go-by, as they have outlived their utility and are an anachronism in modern times.
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