Introduction:
In my previous article, a detailed coverage was given to provisions relating to Independent directors.
The Companies Act, 2013 - Provisions relating to Independent Directors
It is more appropriate and useful to give coverage to the left out parts relating to appointment of Directors and significant changes brought in by the new Act in this article.
Importance of the Board: The Board of Directors is an important body elected by the shareholders and responsible for running of the company. It is collectively responsible for making policies for good governance. The Board should act in the best interests of the Company and stakeholders. The Companies Act, 2013(hereinafter referred as” the Act or new act”) enhanced the accountability and responsibilities of directors by mandating certain disclosures such as evaluation of performance of board, CSR policy, whistle blower mechanism, risk policies etc in the Directors report.
What are the significant changes brought in by the Companies Act, 2013?
Since many of the readers are acquainted with the provisions of the old Act, it is felt that changes brought in by the New Act should be highlighted first.
The Act, 2013 has for the first time –
- defined duties of directors
- defined the role of independent directors
- requires the Board to device proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.
- made provision for appointment of woman director
- Increased the maximum number of directors from existing limit of 12 to 15 and provided for increase beyond 15 by a special resolution
- Kept the power with
- prohibited insider trading
- stringent penalties for violation of duties and non disclosure of interest in related party transactions
Definition of a Board and Directors:
Let us first examine the definitions in the New Act
‘Board of Directors’ or ‘Board’ in relation to a company, means the collective body of the directors of the company. {Section 2(10)}.
Director means a director appointed by the Board of a company.{Section 2(34) of New Act}
Independent director mean an independent director referred to in Section 149(5).
Definition of independent director was not there in the Old Act and listed companies are guided by the definition of independent director in the clause no.49 of listing agreement of stock exchanges.
Number of directors:
There is no change in the minimum number of directors that a company must have. Section 149 (1) provides that every public limited company shall have a minimum number of 3 directors while a private limited company shall have a minimum number of 2 directors. The maximum number of directors permitted is now is 15 and the same can be increased by passing a special resolution. Approval of Central government is not required. Readers may note that in the old Act, a maximum number of 12 directors was permitted and permission of Central Government was required for increasing it beyond this number.
Mandatory requirements for Appointment: Director shall give to the company his consent and DIN Number and also a declaration to the effect that he is not disqualified before his appointment. Section 152(3)(4)(5).The Board must ensure that director to be appointed is not hit by any disqualification specified in Section 164 and meets the requirements of the company.
What are the various ways for appointing Directors?
The Articles of association generally contains provisions with regards to appointment, retirement rights duties and remuneration of directors. Directors are appointed
- by naming first directors in the articles of association (If no mention is made by default, individual subscribers (other than body corporate) to the memorandum will be first directors. In case of one person company, individual being a subscriber to the Memorandum of association, he shall be deemed to be its first director until the director or directors are duly appointed. ( Section 152(1)
- by the shareholders in General meeting {Section 152(2)}
- by the board of directors following categories
a. Additional directors, if articles confer such power(persons who fail to get elected at General meeting can not be appointed as additional director)
b.Alternate directors, nominee directors, if articles confer such power or by a resolution passed in the General meeting
c. Causal vacancy caused by resignation of a duly appointed director before expiry of his term
Composition of Board:
The Board of directors consists of whole time director/Managing director and other directors including independent directors. Whole time directors as the name itself implies devote whole time and are treated as employees. Similar is the position of Managing director and this category of directors are entrusted with substantial powers of management to look after the day to day affairs of the company.
Listed companies have to comply with Clause no.49 which deals with Corporate Governance. As per Corporate Governance clause, the Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors. If chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors.
Unless the articles provide for retirement of all directors not less than 2/3rds of the total number of directors shall be liable to retire by rotation at every Annual General meeting of a public Limited company {Section 152 (6)} and are eligible to be reappointed. The remaining 1/3 directors shall be permanent directors. There is no change in the provisions relating to retirement of (1/3rd of 2/3rds) directors at every Annual General meeting. Directors to retire shall be those who have been longest in the office
Category of directors:
The Act has classified directors and given a name to directors either on the basis of their function or on the basis of representation. These are as follows:-
Independent directors {Section 149(6)}: Every Listed Public Company shall have at least one-third of the total number of directors as independent directors. Government may prescribe the minimum number of independent directors in case of any class or classes of public companies. The new act prescribes the attributes of an Independent director. The Rules which are currently on display for comments mandate that
- Public companies with a paid up capital of Rs.100 crores or more or
- Public companies which have in aggregate, outstanding loans or borrowings, debentures, deposits in excess of Rs.200 crores.
Explanation to the rules further indicates that the criterion shall apply at the time of appointment. But applicability continues even though the criterion limits prescribed may fall below subsequent to the appointment. Rules also prescribed qualifications to be possessed
Attributes of independent director
He must be a person of integrity, and possess expertise and experience. He should not be related to promoters, directors, holding or subsidiary company. He must abide by the code of conduct specified in Schedule IV. Neither he nor his nor his relatives should have pecuniary relationship. He shall not be entitled to any remuneration, other than sitting fee, reimbursement of expenses for attending Board meetings and profit related commission as approved by the members. His term of appointment is up to five consecutive years and shall be eligible for re- appointment by a special resolution
Additional directors: The board of directors can appoint additional directors, if such power is conferred on them by the articles of association. Such additional directors hold office only upto the date of next annual general meeting. As per the new Act, the board can not appoint a person who failed to get appointed as a director at a General meeting. Section 161(1)
Alternate directors: The Board of directors or shareholders in General meeting can appoint an alternate director to represent a director who is out of the country and he will hold office only up to the date of return of the original director and up to the term of original director. The appointed alternate director can not represent any other directors in the same company. Further restriction is that he also can not represent an independent director unless he is possesses the attributes of an independent director. Section 161(2)
Woman directors: Companies with such criteria to be announced shall appoint woman directors. A lot of women nowadays occupy top positions in corporate even without this mandatory provision. It is a welcome provision. Rules displayed on the MCA web site indicate a time frame for appointment of at least one woman director on the Board of the following companies :-
- Every listed company shall appoint at least one woman director within one year from the commencement of the second proviso to Section 149(1)
- Every other company having paid up capital of 100 crores or more have to appoint within 3 years from the commencement of second proviso to Section 149(1) of the Act
Small shareholders director; A listed company may appoint one director elected by small shareholders. By way of an explanation it is clarified that members with a holding shares having a nominal value of not more than Rs.20,000/- or such sum as may be prescribed. The selection procedure will be prescribed. (Section 151).Rules recently released rules clarify that a listed company may suo motu or on the application of 500 small shareholders or 1/10 of total number of shareholder which ever is lower, may appoint a small shareholders director. The procedure for election of small shareholders director i.e. notice, declaration, and consent of director are dealt with. The notable feature is that he shall be considered as an independent director with a tenure of 3 years. While disqualifications are spelt out, it is also stipulated that he can not hold the directorship representing more than 2 companies.
Nominee directors: The board can appoint nominee directors, if its articles permit. Other wise it has to amend its articles for such power. It is usual for the financial Institutions which lend money to the companies to impose a condition to the effect that it can appoint its nominee to be on the board of the company. The term of office of such nominee director shall be decided by the institution only. {Section 161(3)}.
Directors in causal vacancy: If any vacancy is caused by death or resignation of a director appointed by the shareholders in General meeting, before expiry of his term, the Board of directors can appoint a director to fill up such vacancy. The appointed director shall hold office only up to the term of the director in whose place he is appointed. Section {161(4)}
DIN requirements: In the new act Sections 154-159 deal with DIN requirements. Every Director shall apply for allotment of DIN and intimate to all companies in which he is a director or likely to be appointed as a director. Company is bound to intimate the same within 15 days of intimation to the Registrar of companies or to any authority as may be prescribed by the Government
Other important points
- At least one director of the company shall be in
- While proposing the name of a person other than the retiring director for directorship, it mandatory to deposit of Rs. 1,00,000/- either by the candidate or by the member proposing. Deposit shall be refunded in the event the candidate is elected or secures more than 25% of votes cast either by proxy or on poll. This increase from Rs.500/- is intended to eliminate frivolous applications. (Section 160 }
- New Act has added one more to the list of disqualifications one more. If a director is convicted of the offence for dealing with related party transactions at any time during the last 5 years, it becomes a disqualification for appointment. Section 164((1)(g)
- Although the maximum number of directorships a person can hold is increased to 20 (old limit 15), it has come with a rider that number of directorships in public companies shall be limited to 10.(Section 165). Further the company can restrict limit by passing a special resolution
- Manner of resignation and its effective date has been incorporated in Section 168 of the Act itself putting to rest the controversies surrounding this aspect. Director may resign from office by giving a notice in writing to the company and it becomes effective from the date of receipt by the board or any effective date mentioned in the resignation. The new rules provide that company has to file resignation of director with the ROC company within 30 days of receipt of notice in form no.11.8. The director shall inform about his resignation by filing prescribed form no. 11.7 with the Roc. The word used in the Rule 11.13 is “May”. Instead of May, “shall” should have been used in its place. This measure helps director who resigns to disown any decisions / liabilities arising out of such decisions after his resignation.
Conclusion:
The Act ensures that qualified persons are appointed as directors. Independent directors are empowered for evaluating the performance of other directors. The additional disclosures in directors’ report such as directors appointment and remuneration policy, CSR policy, risk management policy, etc., guarantee transparency and good governance. Let us hope that the corporate world will appoint good professionals to create wealth for shareholders and substantial contribution to the nation in the form of taxes and duties,
G
DGM(Legal),OCL India Limited
Tags: Appointment of Directors, The Companies Act, 2013
Disclaimer:
This article contains interpretation of the Act and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.
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