Article explains provisions related to why a Person cannot be appointed as Director if debarred by SEBI/ or any other authority, Limit of Directorships, Intimation of resignation by a Director to RO, Definition of Independent Director as per 16(1)(B) of SEBI LODR, Definition of Independent Director as per sec 149(6) of Companies Act, 2013, Mandatory annual KYC of Directors via E-Form DIR-3-KYC, Disclosure of interest by Director, Participation through video conferencing on restricted items of business, Compensation or Profit Sharing Agreements (applicable to listed companies), Managerial Remuneration, System Driven Disclosures- SEBI PIT Regulations (applicable to listed companies) and Insider Trading Provisions (applicable to listed companies).

1. Person cannot be appointed as Director if debarred by SEBI/ or any other authority

SEBI had issued instructions to all the Stock Exchanges on June 14, 2018, wherein SEBI has referred to enforcement of its Orders debarring entities/individuals from accessing the capital markets and / or restraining from holding position of Directors in any listed company.

The Summary of the compliance requirements which need to be adhered by Listed Companies are given below:

As per the instructions issued by SEBI to Exchanges, all listed companies are required to adhere to the following:

Particulars Compliance Requirements
Pre requirements while considering a person for appointment as Director All Listed companies and its Nomination Committee need to verify that the said person is not debarred from holding the office of Director pursuant to any SEBI order.
Compliance while informing Exchange through corporate announcements for appointment of Director All Listed Companies need to affirm that the Director being appointed is not debarred from holding the office of Director by virtue of any SEBI order or any other such authority.

Non-inclusion of such fact in the corporate announcement will be regarded as inadequate submission and the same would be subject to action as deemed fit under Regulation 30 of the SEBI LODR.

In case an existing Director is restrained from acting as a Director by virtue of any SEBI order or any other such authority The Director shall voluntarily resign with immediate effect, failing which the listed entity shall initiate the process of removal of such Director in terms of relevant sections of the Companies Act, 2013, and inform the Exchange about the same.

2. Limit of Directorships

As per section 165(1) of the Companies Act 2013 (“Act”), a person can act as a Director:

1. In maximum 20 Companies;
(Limit of 20 Includes Alternate Directorships and Private Companies;
Limit of 20 excludes Section 8, dormant and Foreign Companies)

2. Of which maximum 10 can be Public Companies.
(For reckoning the above limit, Directorship in private companies that are either holding or
subsidiary company of a public company shall be included).

As per The Companies (Amendment) Ordinance, 2018 effective 2nd November 2018, on crossing the above threshold:

  • A Director not complying with provisions of section 165(1) of the Act i.e. maximum number of Directorships in which a person can act as a Director (20 companies of which maximum 10 companies can be public) will be disqualified to be appointed as a Director.
  • The Director will also vacate office on account of section 167 entailing vacation of office of a Director in case of any disqualification under section 164.

A Private Company which is a ‘subsidiary’ or ‘Holding’ Company of a Public Company becomes a ‘Public Company’. In case any of the private company(ies) which is being converted into a public company, or becomes a subsidiary or Holding Company of a Public Company – then it would be considered as a ‘Public Company’ and hence it would counted in the list of Public companies.

Please take note of the following additional compliance requirements under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”):

  • Pursuant to the amendments made to SEBI LODR Regulations on 9 May 2018, as per Regulation 17A of SEBI LODR, A person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in not more than seven listed entities with effect from April 1, 2020.

Provided that a person shall not serve as an ‘Independent Director’ in more than Seven Listed entities.

  • Any person who is serving as a whole time director / managing director in any listed entity shall serve as an independent director in not more than three listed entities.

As per Regulation 26 of SEBI LODR Regulations:

  • A director shall not be a member in more than ten committees across all listed entities in which he is a director.

(the limit of the committees on which a director may serve in all public limited companies, whether listed or not, shall be included and all other companies including private limited companies, foreign companies and companies under Section 8 of the Companies Act, 2013 shall be excluded)

  • A director shall not act as chairperson of more than five committees across all listed entities in which he is a director.

(For the purpose of determination of limit, chairpersonship and membership of the audit committee and the Stakeholders’ Relationship Committee alone shall be considered)

3. Intimation of resignation by a Director to ROC is made optional

E-Form DIR-11 was hitherto required to be filed by Director after his resignation for giving notice of resignation of Director to the registrar pursuant to Section 168 (1) of the Companies Act, 2013 and Rule 16 of Companies (Appointment and Qualification of Directors) Rules, 2014.

However, MCA vide its notification dated 07.05.2018, have made Filling of DIR-11 optional in the hands of the Resigning Director.

Note- Company still needs to file DIR 12 intimating the resignation of Director, but if the Company fails/ does not file within 30 days of resignation – Director can file DIR 11.

4. Definition of Independent Director as per 16(1)(B) of SEBI LODR

“Independent Director” means a non-executive Director, other than a nominee Director of the listed entity:

(i) who, in the opinion of the board of Directors, is a person of integrity and possesses relevant expertise and experience;

(ii) who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity;

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

(iv) who, apart from receiving Director’s remuneration, has or had no material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or Directors, during the two immediately preceding financial years or during the current financial year;

(v) none of whose relatives has or had pecuniary relationship or transaction with the listed entity, its holding, subsidiary or associate company, or their promoters, or Directors, amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed from time to time, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(vi) who, neither himself, nor whose relative(s) —

(A) holds or has held the position of a key managerial personnel or is or has been an employee of the listed entity 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;

(B) 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 —

1) a firm of auditors or company secretaries in practice or cost auditors of the listed entity or its holding, subsidiary or associate company; or

2) any legal or a consulting firm that has or had any transaction with the listed entity, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm;

(C) holds together with his relatives two per cent or more of the total voting power of the listed entity; or

(D) is a chief executive or Director, by whatever name called, of any non-profit organisation that receives twenty-five per cent or more of its receipts or corpus from the listed entity, 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 listed entity;

(E) is a material supplier, service provider or customer or a lessor or lessee of the listed entity;

(vii) who is not less than 21 years of age.

(viii) who is not a non-independent Director of another company on the board of which any non-independent Director of the listed entity is an independent Director

Note: Text in Red font has been inserted vide 9 may 2018 SEBI LODR Amendment

Illustration and Impact of amendment:

i. Mr. X is sought to be appointed as an Independent Director in Company B (Listed Company).

ii. Mr. X is also a non-independent Director in Company A.

iii. No non-independent Director of Company B should be an Independent Director in Company A. (i.e Board interlock is not allowed)

5. Definition of Independent Director as per sec 149(6) of Companies Act, 2013

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 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 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 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 Director, by whatever name called, of any non-profit organisation that receives twenty-five percent or more of its receipts from the company, any of its promoters, Directors 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.

Note : The text in red is Substituted by the Companies (Amendment) Act, 2017- Amendment Effective from 7th May 2018

Impact of key amendments:

i. If a Director is having any pecuniary relationship to the extent of ten per cent. of his total
income 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, it would not affect his independence.

6. Mandatory annual KYC of Directors via E-Form DIR-3-KYC

(MCA vide notification dated 5 July 2018 had amended Companies (Appointment and Qualification of Directors) Rules, 2014, further by Rules called Companies (Appointment and Qualification of Directors) fourth Amendment Rules, 2018. They came into force w.e.f. 10 July 2018)

Every individual who has been allotted a Director Identification Number (DIN) as on 31st March of a financial year as per these rules shall, mandatorily submit e-form DIR-3-KYC to the Central Government on or before 30th April of immediate next financial year. (Annual Requirement for Directors to submit their KYC).

While filing the form, the Unique Personal Mobile Number and Personal Email ID would have to be mandatorily indicated and would be duly verified by One Time Password (OTP). The form should be filed by every Director using his own DSC (Digital Signature) and should be duly certified by a practicing professional (CA/CS/CMA). Filing of DIR-3 KYC would be mandatory for Disqualified Directors also.

7. Disclosure of interest by Director

184. (1) Every 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 disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.

(2) Every Director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into—

(a) with a body corporate in which such Director or such Director in association with any other Director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) with a firm or other entity in which, such Director is a partner, owner or member, as the case may be, shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting:

As per Amendment in SS1 w.e.f. 1 Oct 2017- If the transaction is  a related party transaction, then  Director shall not be present at the meeting, whether physically or through Electronic Mode, during  discussions and voting on such item, shall not vote and shall not be reckoned for the purpose of quorum.

As per MCA notification dated 5 June 2015- In case of a private company, a Director shall be entitled to participate in respect of such item after disclosure of his interest.

Provided that where any Director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.

(3) A contract or arrangement entered into by the company without disclosure under sub-section (2) or with participation by a Director who is concerned or interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.

(4) If a Director of the company contravenes the provisions of sub-section (1) or subsection (2), such Director shall be punishable with imprisonment for a term which may extend to one year or with fine which may extend to one lakh rupees, or with both.

(5) Nothing in this section—

(a) shall be taken to prejudice the operation of any rule of law restricting a Director of a company from having any concern or interest in any contract or arrangement with the company;

(b) shall apply to any contract or arrangement entered into or to be entered into between two companies or between one or more companies and one or more bodies corporate where any of the Directors of the one company or body corporate or two or more of them together holds or hold not more than two percent of the paid-up share capital in the other company or the body corporate.

Substituted by the Companies (Amendment) Act, 2017 :- Amendment effective from 9th February 2018.

8. Participation through video conferencing on restricted items of business

Earlier Directors were not allowed to participate through Electronic Mode (Video Conference) in the discussion on certain restricted items. Such restricted items of business include approval of the annual financial statements, Board’s report, prospectus and matters relating to amalgamation, merger, demerger, acquisition and takeover etc.

Insertion of proviso under Section 173 (2)

Any Director may participate through video conferencing or other audio visual means in such meeting on any restricted items, provided there is quorum in a meeting through physical presence of Directors.

Note: Inserted by The Companies (Amendment)Act, 2017 :- Amendment Effective from 7th May 2018.

Impact: In Board meetings to be held in April/ May for approval of annual financial results, you may participate in Board meeting through audio visual means, provided there is quorum in a meeting through physical presence of Directors.

9. Compensation or Profit Sharing Agreements (applicable to listed companies)

Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2016 w.e.f. 4 Jan 2017

As per Regulation 26(6) of SEBI LODR,

No employee including key managerial personnel or director or promoter of a listed entity shall enter into any agreement for himself or on behalf of any other person, with any Shareholder or any other third party with regard to compensation or profit sharing in connection with dealings in the securities of such listed entity, unless prior approval for the same has been obtained from the Board of Directors as well as public shareholders by way of an ordinary resolution.

Further existing agreements need to be disclosed.

A compensation agreement (synonymously known as upside sharing agreement or reward agreement) is an agreement between the private equity investor and the management of the listed companies wherein the parties agree to share the profits/ returns which may arise at the time of sale of investment by the private equity investor or upon fulfilment of certain conditions in terms of the agreement. Such agreements are incentive instruments for the employees and/or management of the listed companies.

10. Managerial Remuneration

The Ministry of Corporate Affairs has vide its Circular dated 12 September, 2018, notified five sections of the Companies (Amendment) Act, 2017 viz., Sections 196, 197, 198, 200 and 201 of the Companies Act, 2013 (“Act 2013”) to be effective from 12 September, 2018.

The provisions of Managerial Remuneration have been eased substantially.

Executive Summary of the amendments is given below:-

1. Company can pay total managerial remuneration exceeding 11% with Shareholders’ approval. No Central Government approval required.

2. In case of inadequate profits or no profits, approval of CG not required. Any amount of Remuneration can be paid with a Special Resolution.

Now, a Person can be appointed as MD/WTD/Manager on the pay-roll of the loss making company as market linked managerial remuneration can be paid with a special resolution.

11. System Driven Disclosures- SEBI PIT Regulations (applicable to listed companies)

With a view to make real time monitoring and disclosures of the share transactions of certain Designated Persons, SEBI had vide issued Circular dated 28 May 2018, enabled ‘System driven Disclosures’.

As a result of above NSDL and CDSL System would be able to track and capture live data w.r.t to your transactions, if any, in shares of ‘Listed Companies’ (where you are Director’) and will report the same to Stock Exchanges, who will disseminate on their respective websites.

12. Insider Trading Provisions (applicable to listed companies)

SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 – 31.12.2018

Directors are included in the definition of ‘Designated Persons’ and need to abide by the respective Code(s) of Conduct on prevention of Insider Trading.

Designated persons (“DP”) are required to provide disclosures on annual basis. In addition to the current applicable disclosures, the DP are now required to provide the following additional disclosures:

1. DP shall disclose names, PAN, cell number etc. of the Immediate Relative & persons with whom such DP shares a material financial relationship to the company on an annual basis and also as and when it changes.

The term “material financial relationship” shall mean a relationship in which one person is a recipient of any kind of payment such as by way of a loan or gift during the immediately preceding twelve months, equivalent to at least 25% of such payer’s annual income but shall exclude relationships in which the payment is based on arm’s length transactions.

2. DP shall also disclose names of the educational institutions from which they have graduated and names of their past employers shall also be disclosed on a one time basis.

Key Amendments from July 2018 have been incorporated in this document. For more details on above provisions , you may please refer to relevant Sections under Companies Act 2013 pertaining to Directors including Sections 153, 164, 165, 166, 167, 168, 177, 178, 184 read with related rules, 149 read with Schedule IV, SEBI LODR, SEBI PIT Regulations etc.

Key acronyms used in this document:

  • Securities Exchange Board of India (“SEBI”)
  • Ministry of Corporate Affairs (“MCA”)
  • Securities Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2015 (“SEBI LODR” / “SEBI LODR Regulations”)
  • Registrar of Companies (“ROC”)
  • SEBI (Prohibition of Insider Trading) Regulations, 2015 [“SEBI (PIT) Regulations”]

Disclaimer: All views in this are expressed by the concerned individuals only and are not the views of the Company, they work for.

Prepared by Brijbala Batwal, Iram Shaikh 15 February 2019

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