Board of Directors: Section 149 of Companies Act, 2013

Summary: Section 149 of the Companies Act, 2013, mandates every company to have a Board of Directors comprising individuals within prescribed limits. A public company must have at least three directors, a private company two, and a one-person company one, with a maximum of 15 directors unless a special resolution is passed. Listed companies and certain public companies are required to appoint at least one woman director. All companies must have at least one resident director who resides in India for at least 182 days in a financial year. For listed public companies, one-third of directors must be independent, with specific qualifications and independence criteria defined under the Act. Independent directors are not entitled to stock options but may receive fees and approved remuneration. They serve a maximum of two consecutive five-year terms, subject to special resolution, with a three-year cooling-off period. Independent directors’ liability is limited to acts done with their knowledge or consent. These provisions ensure proper governance and accountability within companies.

SECTION 149 OF COMPANIES ACT, 2013 – COMPANY TO HAVE BOARD OF DIRECTORS

➢ NUMBER OF DIRETORS

Every Company shall have a Board of Directors consisting of individuals as directors. The limit of directors is as follows: –

The maximum number of directors that can be appointed in a company is fifteen. In case a company wants to appoint more than 15 directors, company shall pass a Special Resolution.

➢ WOMAN DIRECTOR

As per Rule 3 of Companies (Appointment and Qualifications of Directors) Rules, 2014, the following companies shall have at least one woman director on the Board: –

(i) every listed company;

(ii) every other public company having –

(a) paid–up share capital of one hundred crore rupees or more; or

(b) turnover of three hundred crore rupees or more;

Explanation. – For the purposes of this rule, it is hereby clarified that the paid up share capital or turnover, as the case may be, as on the last date of latest audited financial statements shall be taken into account.

In Case of an intermittent vacancy of a woman director, the vacancy shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy whichever is later.

➢ REQUIREMENT OF RESIDENT DIRECTOR

Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days during the financial year

In case of a newly incorporated company, the requirement of resident director shall apply proportionately at the end of the financial year in which it is incorporated.

➢ NUMBER OF INDEPENDENT DIRECTORS

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 the purposes of this sub-section, any fraction contained in such one-third number shall be rounded off as one.

As per Rule 4 of Companies (Appointment and Qualifications of Directors) Rules, 2014, The following class or classes of companies shall have at least two directors as independent directors –

(i) the Public Companies having paid up share capital of ten crore rupees or more; or

(ii) the Public Companies having turnover of one hundred crore rupees or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees;

√ In case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it

√ In Case of an intermittent vacancy of an independent director, the vacancy shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.

√ Where a company ceases to fulfil any of three conditions laid down in sub-rule (1) for three consecutive years, it shall not be required to comply with these provisions  until such time as it meets any of such condition.

Explanation. – For the purposes of this rule, it is here by clarified that, the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account.

√ A company belonging to any class of companies for which a higher number of independent directors has been specified in the law for the time being in force shall comply with the requirements specified in such law.

The following classes of unlisted public company shall not fall under the above limits of sub-rule (1):-

(a) a joint venture;

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act.

➢ WHO CAN BE AN INDEPENDENT DIRECTOR?

An independent director in relation to 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 its holding, subsidiary or associate company;

(ii) who is not related to promoters or Directors in the company, its holding, subsidiary or associate company;

(c) who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. 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;

(d) none of whose relatives—

(i) is holding any security of or interest in the company, its 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 per cent. 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 Directors, in excess of 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, or its subsidiary, or its holding or associate company amounting to two per cent. 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 a key managerial personnel or is or has been employee of the 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;

Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during 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 a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, Directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

➢ DECLARATION OF INDEPENDENCE BY INDEPENDENT DIRECTOR

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).

➢ REMUNERATION OF INDEPENDENT DIRECTOR

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.

In case company has no profits, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 197, in accordance with the provisions of Schedule V.

➢ TERM OF INDEPENDENT DIRECTOR

√ Sub-section(10) of Section 149 states that 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 passing of a special resolution by the company and disclosure of such appointment in the Board’s report.

√ 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.

√ 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.

➢ LIABILITY OF INDEPENDENT DIRECTORS

An independent director and 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.

➢ NON-APPLICABILITY OF PROVISION OF SUB-SECTIONS (6) AND (7) OF SECTION 152

The independent director shall not be liable to retire by rotation.