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
Evaluation of the performance of independent directors.
Remuneration
An independent director is entitled to the following perks, by the sections 197 (Remuneration in case of inadequacy of profits) and 198 (Calculation of profits):
i) Fee as provided under section 197(5);
ii) Reimbursement of expenses for participating in meetings for or on behalf of the company; and
iii) Commission for profit earned as approved by the board.
In case a company has inadequate or no profits, the independent director may receive remuneration, exclusive of his fees payable under sec. 197(5) and according to schedule V.
Tenure of Independent Director:
The independent director shall have a term up to 5 years and maybe reappointed after that, but can’t hold his position for more than two consecutive terms or 10 years; whichever is earlier.
He/she can be reappointed as an independent director only after passing a Special Resolution in a general board meeting of the company and such re-appointment has to be disclosed in the Board’s report.
Independent director who has held his position for two consecutive terms can be appointed after the expiring of 3 years of ceasing to become an independent director. Such a person, during the 3 years or requisite cooling-off, can’t be appointed in or be associated with the organization in any other capacity, either directly or indirectly, and has to fulfill the criteria of an independent director.
Liability
An Independent Director; or a non-executive director not being Promoter or Key Managerial Personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
E. Woman Directors
The concept of Women Director, Resident Director, and Independent Director has been recently introduced under the Act and previously was no provision under the Companies Act, 1956.
By subsection 149(1) of the Act and Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014; the prescribed companies which should have at least one Woman Director are:
i) Every Company that is listed;
ii) Every Other Public Company with –
a) paid-up share capital equal to or more than ₹100 crores; or
b) turnover equal to or more than ₹300 crores.
The Paid-up share capital and turnover as existing on the last date of the latest audited financial statements shall only be taken into consideration.
The Last date for the appointment:
A company, which is incorporated under the Companies Act and falls within the category of prescribed companies unsubsectiontion 149(1) of the Act; shall appoint a woman director within six months from the date of its incorporation.
Filling Vacancy of Woman Directors:
As per the second provision of Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the vacancy of woman 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.
Section 149 of the Companies Act, 2013
(1) Every company shall have a Board of Directors consisting of individuals like directors and shall have--
(a) a minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a Person Company; and
(b) a maximum of fifteen directors:
Provided that a company may appoint more than fifteen directors after passing a special resolution:
Provided further that such class or classes of companies as may be prescribed shall have at least one woman director.
(2) Every company existing on or before the date of commencement of this Act shall within one year from such commencement comply with the requirements of the provisions of sub-section (1).
1[(3) Every company shall have at least one director who stays in India for a total period of not less than one hundred and eighty-two days during the financial year:
Provided that in the case of a newly incorporated company the requirement under this subsection shall apply proportionately at the end of the financial year in which it is incorporated];
(4) Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.
Explanation.-- For this subsection, any fraction contained in such a one-third number shall be rounded off as one.
(5) Every company existing on or before the date of commencement of this Act shall, within one year from such commencement or from the date of notification of the rules in this regard as may be applicable, comply with the requirements of the provisions of sub-section (4).
(6) An independent director of a company, means a director other than a managing director--
or a whole-time director or a nominee director,
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or bits holding subsidiary, or associate company;
(ii) who is not related to promoters or directors in the company's holding subsidiary or associate company;
(c) who has or had no 2[pecuniary relationship, other than remuneration as such director or having transactions on it exceeding ten percent. of his total income or such amount as may be prescribed,] 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;
3[(d) none of whose relatives--
(i) is holding any security for interested in the company it holding subsidiary or associate company during the two immediately preceding financial years or during the current financial year:
Provided that the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two percent. of the paid-up capital of the company, its holding, subsidiary or associate company, or such higher sum as may be prescribed;
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or director more than such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or
(iv) has any other pecuniary transaction or relationship with the company, its subsidiary, or its holding or associate company amounting to two percent percent. or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii,) or (iii);]
(e) who, neither himself nor any of his relatives
(i) holds or has held the position of key managerial personnel or has been an employee of the company company or its holding subsidiary, or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;
4[Provided that in the case of a relative who is an employee, the restriction under this clause shall not apply to his employment during the preceding three financial years.]
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary, or associate company; or
(B) any legal or consulting firm that has or had any transaction with the company, its holding, subsidiary, or associate company amounting to ten percent. or more of the gross turnover of such firm;
(iii) holds together with his relatives two percent. or more of the total voting power of the company; or
(iv) is a Chief Executive or direct by whatever by whatever name called not being, of any non profit organization the subsidiary receives twenty five percent. or more of its receipts from the company, any of its promoters, director or its holding subsidiary or associate company or that holds two percent. or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.
(7) Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6).
Explanation.-- For this section, nominee director means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests.
(8) The company and independent directors shall abide by the provisions specified in Schedule IV.
(9) Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of sections 197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.
5[Provided that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 197, by the provisions of Schedule V.]
(10) Subject to the provisions of section 152, an independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on the passing of a special resolution by the company and disclosure of such appointment in the Board's report.
(11) Notwithstanding anything contained in sub-section (10), no independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director:
Provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.
Explanation.-- For sub-sections (10) and (11), any tenure of an independent director on the date of commencement of this Act shall not be counted as a term under those sub-sections.
(12) Notwithstanding anything contained in this Act,-
(i) an independent director;
(ii) any one executive directory not being aa promoter or key managerial personnel,
shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
(13) The provisions of sub-sections (6) and (7) of section 152 in respect of the retirement of directors by rotation shall not apply to the appointment of independent directors.