APPOINTMENT AND QUALIFICATIONS OF DIRECTORS - Proposed Amendments in the Companies Act, 2013

Residence requirement for Directors

11.1 Section 149(3) requires a company to have at least one Director to have stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year. The Committee felt that it would be more appropriate that such a requirement is in relation to the director’s stay in India during the financial year and not the calendar year, with the requirement effective after a period of six months from incorporation. It was also pointed out that the requirements for residency in the previous year forces a new subsidiary of a company incorporated outside India to appoint an individual/professional unconnected with the company as Director, which did not aid in any way in Board decision making and many a time leads to unnecessary disputes. The Committee recommended that it would be more appropriate that the residence requirement is for the current financial year. On the suggestion to align the requirements of residency with that of the Income Tax Act, 1961, the Committee felt that it may not be appropriate as its requirements are more expansive rather than restrictive and would defeat the purpose of prescribing the residency criteria.

Independent Directors

11.2 The Committee noted that the requirement for a company to have Independent Directors, as prescribed in Section 149, has been included in the Companies Act, 2013 for the first time, though listed companies were required to appoint Independent Directors in accordance with SEBI Regulations since 2000. Section 149(6) prescribed certain qualifications and criteria for the selection of an Independent Director with the sole purpose of securing his independence. Clause (c) of sub-section (6) prescribes that an independent director must not have or had any pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters or directors, during the two immediately preceding financial years or during the current financial year. The Committee observed that even minor pecuniary relationships are covered within this clause (c) even though such transactions may not compromise the independence of the directors, whereas, Regulation 16 of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 prohibits only ‘material’ pecuniary relationships for disqualifying appointment of persons as Independent Directors. In this regard, the Committee also noted that Dr. J.J. Irani Committee in its report, used the word ‘material pecuniary relationships or transactions’ and also explained what the term ‘material transaction’ should mean. International best practices also indicate adoption of such a test. The Committee also noted that the 2010 Standing Committee Report on the Companies Bill also recommended that Independent Directors should not have any kind of pecuniary relationship at all with the company. It was also noted that the Standing Committee Report, 2012 had, however, suggested regulatory harmonization between the Companies Act, 2013 and SEBI’s listing agreement. After deliberations, the Committee recommended that, in view of the difficulties being faced, the test of materiality for the purpose of determining whether pecuniary relationships could impact the independence of an individual to be an independent director may be introduced.

11.3 Section 149(6)(d) further prescribes that a director can be appointed as an Independent Director only if none of his relatives has or had a pecuniary relationship or transaction of a prescribed value with the company, its holding, subsidiary or associate company or their promoters or directors during the two immediately preceding financial years, or during the current financial year. In this regard, the Committee felt that the scope of the restriction on “pecuniary relationship or transaction” entered into by a relative be made more specific by clearly categorising the types of transactions as provided under Section 141(3)(d).

11.4 While deliberating on the suggestion to allow professional fee not exceeding ten percent of the gross total income from a company in the case of a firm of auditors or company secretaries in practice or cost auditors, on the lines of the provisions in Section 149(6)(e)(ii)(B) for employees, proprietors or partners of legal or consulting firms, if appointed as an Independent Director, the Committee did not agree to the suggestion since in the case of other professionals as specified in Section 149(6)(e)(ii)(A), it could impact the independence of the professionals.

11.5 Clauses 149(6)(e) (i), inter-alia, restricts the appointment of an individual as an Independent Director in case his relative is or was a KMP or an employee in the company, its holding, subsidiary or associate company during any of the preceding three financial years. In this regard, the Committee recommended that the scope of the restriction be modified. At the point of time when a director’s independence is under consideration, it is likely to be impacted where his / her relative has held a significant position such as a director or key managerial personnel, and not at lower levels during the preceding years. For the preceding years, the restriction should, therefore, be for relatives holding Board or KMP/one level below Board position similar to that contained in Section 141(3)(f). However, it would be possible to influence an Independent Director in case his relative is also working in the situations referred to in the section irrespective of the position he holds. This scope of restriction after appointment should, therefore, be retained as prescribed.

Nominee Directors

11.6 The Committee noted that whilst provisions relating to “nominee director” are provided under Sections 161(3) and 149(7), the term ‘nominee director’ has been defined only in the explanation to Section 149(7) with specific reference to Independent Directors. The Committee felt that a definition of ‘Nominee Director’ should be specifically included as a definition clause.

Rights of persons other than retiring directors to stand for directorships

11.7 Section 160 provides that an individual (who is not a retiring director under Section 152) shall be eligible to be appointed as a director, if he or some member proposing him as a director, leaves a written notice of candidature at the registered office of the company, at least fourteen days prior to the date of the general meeting along with a deposit of Rupees One Lakh, or such higher amount, as may be prescribed. In this regard, the Committee noted that the exemptions/modifications have already been notified for wholly owned Government companies, Section 8 companies and Nidhis.

11.8 The Committee noted that, under Section 149(10), an independent director is eligible for appointment for a term of five consecutive years. As per the present provisions, on completion of the tenure, for his re-appointment also, the requirements under Section 160 will need to be complied with, which is unreasonable as such appointments will be recommended by the Board. Similar will be the case for other persons recommended by the Nomination and Remuneration Committee, as also by the Board, to be considered for appointment. As there are considered recommendations of the Board, NRC, the requirement for a deposit etc. should not be applicable. The Committee, therefore, recommends that in case of appointment of Independent Directors and Directors recommended by the Nomination and Remuneration Committee, the requirements of Section 160 ought to be dispensed with.

Appointment of additional, alternate and nominee directors

11.9 Section 161(2) deals with the appointment of a person as an alternate director by the Board. The Committee noted that this Section does not prohibit the appointment of an existing director as an alternate director and that same individual acting as a director and alternate director for some other director of the same company leads to conflict of interest and also ambiguity in the calculation of quorum. The Committee recommended that there should be a prohibition in the Act for appointing a director of a company as an alternate director in the same company.

11.10 Section 161(4) authorises the Board of a public company to fill a vacancy caused by vacation of the office of any director before the expiry of his term, however subject to the AOA of the company. The Committee was of the view that this right should be available to the Boards of private companies as well.

Number of directorships

11.11 Section 165 prescribes the maximum number of companies in which a person may hold office as a director, including any alternate directorship, that is, not more than 20 companies. While comments were received during the public consultation process that directorship in a subsidiary by a director of the holding company should not be counted while calculating the maximum number prescribed, the Committee felt that the prescription of maximum number of directorships should not be diluted as the subsidiary would also be as important as the holding company for the time and attention of the Director.

11.12 The Committee also deliberated on the suggestion for excluding directorship in a dormant company for the purposes of the limit under Section 165 and felt that dormant companies can be excluded from the ceiling. Such companies would be inactive and having insignificant transactions and therefore not impacting on the temporal resources of the Director and that in case such an exemption is not given, persons would be dis-incentivised from accepting the position of a director in such companies. The Committee, therefore, recommended for excluding the directorship in a dormant company for reckoning the limit.

Disqualifications from appointment as, and vacation of office of director

11.13 Section 167(1)(a) dealing with vacation of office by a director triggers an automatic vacation of office of the director if he incurs any of the disqualifications stipulated under Section 164. Section 164(1) provides for disqualifications which are incurred by a director in his personal capacity such as being an undischarged bankrupt, of unsound mind, convicted of an offence etc., and Section 164(2) lists out disqualifications related to the company such as non-compliance of annual filing requirements, etc. The Committee acknowledged that this Section created a paradoxical situation, as the office of all the directors in a Board would become vacant where they are disqualified under Section 164(2), and a new person could not be appointed as a director as they would also attract such a disqualification. In this regard, the Committee recommended that the vacancy of an office should be triggered only where a disqualification is incurred in a personal capacity and therefore, the scope of Section 167(1)(a) should be limited to only disqualifications under Section 164(1).

11.14 The Committee also recommended that a disqualification under Section 164(2) be only applicable to a person who was a director at the time of the non-compliance, and in case of a continuing non-compliance, there should be a period of six months’ time allowed for a new Director to make the company compliant.

11.15 The Committee felt that the proviso to Section 164 (appearing under sub-section (3) of the section) creates an inconsistent situation when read with the proviso to Section 167(1)(f), as these provide for a person to be appointed as a Director if he has been convicted/disqualified by a Court but has an appeal preferred in a Court whereas for a sitting Director, it does not allow such consideration and he has to vacate office on conviction, even if an appeal had been preferred against such conviction and sentence. The Committee, therefore, recommended that such inconsistency be corrected and in case of requirement for vacation of office of a Director, it should not take effect until the appeals are disposed off, while in case of disqualification, it is not required to provide for period of pendency of appeal.

11.16 The Committee considered and did not agree to the suggestion to amend Section 167(1)(h), because in the Committee’s opinion, the provision was clear, and referred to an automatic vacation of the office of a Director where a person was appointed as such a Director, by virtue of his holding any office, or other employment in the holding, subsidiary or associate company.

Resignation of Director

11.17 The proviso to Section 168(1) requires that a resigning Director should file a copy of his resignation along with the reasons for resignation with the Registrar, within thirty days. The intent is to address likely misuse by some companies of the Director’s name after his resignation. However, since majority of the companies will not fall in this category, the Committee felt that it would be appropriate if an option of intimating such resignation to the Registrar was given to the Director instead of making it mandatory. The requirement of mandatory filing by the company in the prescribed Form should continue. This would also facilitate foreign Directors.

11.18 The Committee considered and recommended that necessary flexibility may be provided in the Act to do away with the requirement of DIN or provide an option to shift to AADHAAR or any other universally accepted identification number at a future date.