Section 149 Of Companies Act 2013: Appointment Of Board Of Directors
Updated: Oct 7, 2022
What is a Board of Directors (BoD)?
A board of directors (BoD) is a group of elected individuals who manage the organization and represent the shareholders.
A. Minimum and Maximum number of Directors
A company must have a minimum number of directors in BoD as per their class:
A public company should have at least 3 directors;
A private company should have minimum 2 members; and
In the case of a one-person company, one director is necessary.
Every company may appoint a maximum of 15 directors and can exceed this limit after passing a special resolution. Such companies exceeding the limit of BoD should’ve at least one female director.
B. Application of the section
Every company which was in existence on or before the enactment of the Companies Act, 2013 should adhere to the rules of this section within one year.
C. Residency of Director
Every company should have at least one director who stays in India for a minimum of 182 during the financial year and for a newly incorporated company, the minimum days are proportionate for its initial year. For eg. A company that has commenced on the 166th day of the financial year will have a total of 200 days; proportionately one of the directors should be present for at least 99 days in India.
The Ministry of Corporate Affairs (MCA) has clarified on 26th June 2014 through a General Circular No. 25/2014 that newly incorporated companies between 01-04-2014 to 30-9-2014 should have a resident director either at the incorporation stage itself or within six months of their incorporation and companies that are incorporated on or after 30th September 2014 should have the resident director from the date of incorporation itself.
D. Independent Directors:
An independent director is a part of BoD who does not have a substantial pecuniary connection with the company or connected persons, except sitting fees.
Criteria for Independent Director Appointment:
A person can be appointed as an independent director only if he possesses/fulfills, the following qualities/criteria:
1) The director should’ve adequate experience, expertise, and knowledge in the field and should be a person of integrity.
2) The director shouldn’t be a promoter of the organization or its holding, associate, or subsidiary organization and shouldn’t be related to promoters or directors in the company, its holding, associate, or subsidiary organization.
3) The director can’t have or had any pecuniary relationship like debt or has been guarantor with the company, its holding, associate or subsidiary organization, or their promoters or other directors promoters, during the current or immediately preceding two financial years.
4) Any person can’t be appointed as a director whose relatives have or had pecuniary relationship or transaction equal to or more than 2% of its total income or gross turnover or security of interest in the company of ₹50 lakh or more as prescribed, whichever is lesser, with the organization, it's holding, associate or subsidiary organization, or their promoters or other directors during current or immediately preceding two financial years.
5) The independent director himself or his relatives shouldn’t:
(i) hold or has held the position of employee or post of manager in the company or its holding, associate, or subsidiary organization, in any of the immediately preceding three financial years;
(ii) hold or has held the position of employee or proprietor or a partner, in any of the immediately preceding three financial years, of—
(A) Any association of auditors or cost auditors off the company or company secretaries in practice holding associated or subsidiary organizations subsidiary organization; or
(B) Company and legal or consulting association that has had any transaction with the organisation the company is holding associated torr subsidiary organization equal to or more than 10% of the gross turnover of such association;
(iii) hold in equal to or more than 2% of the total voting power of the company together with his relatives; or
(iv) hold the position of Chief Executive or director, or any other head position, of any NGO that receives equal to or more than 25% of its receipts from the organization, any of its promoters, directors, or its holding, associate or subsidiary organization or that holds equal to or more than 2% of the total voting power of the organization.
6) An independent director as prescribed in the 5th rule of Companies (Appointment and Qualification of Directors) Rules, 2014 should have adequate skills in the field of administration, sales, marketing, finance, research, corporate governance, law, technical operations, the management or other areas of expertise as required or related to the firm’s business.
7) An independent director can’t be a person who is currently in the position of a Whole-time Director (WD) Managing Director (MD) or a Nominee Director (ND). A nominee director is nominated by a financial institution or government to represent its interests.
Declaration of an Independent Director:
Every independent director should declare that he’s eligible:
i) at the first board meeting after his appointment; and
ii) at the first board in each financial year of his/her tenure; or
iii) whenever there are any allegations or changes in the organization.
Minimum and Maximum Number of Independent Directors:
Every company should have one-third of its members as independent directors and the Central government has the power to decide such a minimum number for any class of public company. In case the answer is an infraction it should be rounded up to one. Rules regarding public companies shall be adhered to within one year of enactment or from the date of notification by the government. The central government in Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, has prescribed that the following class or classes of Public Companies shall have a minimum of two independent directors:
i) The Public Companies that have paid-up share capital equal to or more than ₹10 crores; or
ii) The Public Companies having turnover equal to or more than ₹100 crores; or
iii) The Public Companies that have aggregate or outstanding debentures, loans, and deposits of more than ₹50 crores.
The Paid-up share capital, turnover, or aggregate or outstanding debentures, loans, and deposits as existing on the last date of the latest audited financial statements shall only be taken into consideration. If a company doesn’t fulfill any of the three conditions laid down above for 3 consecutive years, it shall not be required to follow these provisions till it meets any of such conditions.
A company belonging to any class for which a maximum number of independent directors or its composition has been prescribed in law or any rules as notified by the government shall adhere to such requirements as specified.
Filling Vacancy of Independent Directors:
The vacancy of independent director shall be filled up at the earliest by the board not later than the next board meeting or within 3 months, whichever is later as per Rule 4(2) of the Companies (Appointment and Qualification of Directors) Rules, 2014.
Retirement of directors by Rotation:
The appointment of independent directors shouldn’t be affected by the retirement of directors by rotation.
Code for independent directors:
The company and independent directors should adhere to the provisions prescribed in Schedule IV of the Act regarding:
Guidelines regarding professional conduct for independent directors;
Role and functions of independent director;
Duties to be followed by the independent director;
Procedure and manner to appoint independent director;
Re-appointment, resignation, and removal of independent director;
Separate meetings of independent directors; and