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

News and Press Release - Dated:- 2-2-2016 - 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 si .....

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o 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 requi .....

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ncial 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 .....

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2 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 .....

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ed 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 professi .....

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or 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 .....

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ominee 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 d .....

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ion 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 rec .....

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mpany 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 .....

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e 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 .....

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r 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 dir .....

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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 .....

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