The concept of Women Directors and Independent Directors was introduced through Companies Act, 2013. Section 149 of the Companies Act, 2013 and the Companies (Appointment and Qualifications of Directors) Rules, 2014 deal with the provisions pertaining to the directors on board of a company.

WOMAN DIRECTOR

Second proviso to sub-section (1) of Section 149 of the Companies Act, 2013 prescribes that certain class of companies as prescribed shall at least have one woman director on its board.

Rule 3 of Companies (Appointment and Qualifications of Directors) Rules, 2014 deals with Woman Director in detail and it also prescribes the class of companies as referred to in Section 149 of the Act on which this provision is applicable. The said rule lays down the following:

1. The class of companies for which appointment of woman director is mandatory:

  • Every listed company;
  • 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. 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.

2. Time period given to the company for compliance with the provision.

When the provision of appointment of woman director is applicable to the company, the company shall comply with such provisions within a period of six months from the date of its incorporation.

3. Intermittent Vacancy of a Woman Director

Any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than:

i. Immediate next Board meeting; or

ii. Three months from the date of such vacancy.

Further, a Woman Director can be an executive director or a non-executive director. A woman director can hold the position of a director until the next Annual General Meeting from the date of appointment. She is also entitled to seek reappointment at the general meeting. It is pertinent to note that the tenure of a woman director is liable to retirement by rotation (Sub-section 6 of Section 152) similar to other types of directors.

Mr. Arjun Ram Meghwal, Minister of State in the Ministry of Corporate Affairs clarified in the Lok Sabha stating, “There is no prohibition for appointment of a female relative of a director on the board of a company. Further, there is no proposal to prescribe any such restriction.”[1]

PENALTY FOR NONCOMPLIANCE

Chapter XI of the Companies Act, 2013: Appointment and Qualifications of Directors – It has Sections 149 to 172 which exclusively deal with all the provisions related to directors.

By virtue of Section 172 which prescribes punishment for contraventions of any of the provisions of this Chapter (Chapter XI of the Act) and for which no specific punishment is provided therein,

1. The Company; and

2. Every officer* of the company who is in default

Shall be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5,00,000.

* The term ‘officer’ includes any director, manager or key managerial person (which includes the CFO and CS) or any other person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act.

As the penalty for noncompliance of the appointment of woman director is not mentioned separately, the punishment prescribed under Section 172 shall be applicable.

1. In the year 2015:

Almost 189 companies failed to comply with the mandatory provision of woman director on board: The Securities and Exchange Board of India (SEBI) in April 2015 announced a penalty of Rs. 50,000 for all listed companies that have failed to appoint a woman director on their Board by March 31, 2015. It further warned to take action against the promoters and directors, if the companies remain non-compliant beyond six months. It stated that the penalty would rise with passage of time and for each day of non-compliance there will be additional penalty of Rs. 1,000 per day beginning from July 1, 2015. SEBI proposed that the penalty for non-compliance would be Rs. 5,000 per day from October 1, 2015.[2]

Bombay Stock Exchange had issued notices to 530 companies in July 2015 for non-compliance of this provision by June 30, 2015, Thereafter, it imposed a fine on 370 companies for continuance of the non-compliance.[3]

2. In the year 2017

The following details were provided by Mr. P. P. Chaudhary, Minister of State for Corporate Affairs in the Lok Sabha. It is pertinent to note that the Minister has referred to the penalty prescribed under Section 172 of the Companies Act, 2013.

Listed and Unlisted companies penalised: The Registrar of Companies (ROC) has filed prosecutions against 202 non-compliant public unlisted companies. SEBI has levied fine on the companies listed on NSE and BSE, including the PSUs for non-appointment of women directors, as per the fine structure prescribed by SEBI.[4]

3. Penalty under Section 405 Re ICOMM Tele Limited before National Company Law Tribunal, Hyderabad Bench

In this case, the ROC had issued a show cause notice on August 10, 2015 to the company and its directors questioning the applicants as to why penal action under Section 405 of the Companies Act, 2013 should not be initiated against the applicants for not appointing a woman director on the board. The main question raised in this petition was whether the NCLT had the power to permit the applicants to compound the offence when there is no penalty under Section 149 for non-compliance of provisions of this section.

Section 450 of the Companies Act states as follows:

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

INDEPENDENT DIRECTORS

The concept of Independent Directors is laid down in Sub-section (6) of Section 149 of the Companies Act, 2013. The said Section has been amended by the Companies (Amendment) Act, 2017 and the amendment has been notified and is applicable with effect from May 7, 2018.

The Class of Companies for which the appointment of Independent Director is mandatory:

Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 prescribes that the following class or classes of companies shall have at least two directors as independent directors

1. Every other public company having –

2. paid up share capital of ten crore rupees or more; or

3. turnover of hundred crore rupees or more; or

4. in aggregate, outstanding loans or borrowings or debentures or 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.

Where a company ceases to fulfil any of three conditions laid down herein for three consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions.

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.

2. Exemption to Certain Unlisted Public Companies:

The following classes of unlisted public company shall not be covered under Sub-rule (1), namely, i.e. the class of companies who have to mandatorily appoint an independent director:

  • A joint venture;
  • A wholly owned subsidiary; and
  • A dormant company as defined under section 455 of the Act.

3. Intermittent Vacancy: Any intermittent vacancy of an independent director 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.

A company belonging to any class of companies for which a higher number of independent directors has been prescribed in or under the law/regulations governing such class of companies, shall comply with the requirements specified in such law/regulation.

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 these requirements.

4. Tenure: As per Sub-sections (10) and (11) of Section 149 of the Act, 2013 an Independent Director can be appointed for a term up to five consecutive years and thereafter can be re-appointed for another term of up to five consecutive years only after passing of a special resolution in general meeting. The reappointment shall happen only after performance evaluation is done by the entire board. However, an independent director cannot hold office for more than two consecutive terms. The Act, 2013 also provides for a cooling off period of three years after which he can again be appointed as the independent director.

In view of the representations received by Ministry of Corporate Affairs asking whether an Independent Director can be appointed for a term of less than 5 years, the clarification circular specifies that the same is permissible. However, any appointment whether of 5 or less than 5 years will be regarded as ‘one term’.

5. Penalty For NonCompliance

Chapter XI of the Companies Act, 2013: Appointment and Qualifications of Directors – It has Sections 149 to 172 which exclusively deal with all the provisions related to directors.

By virtue of Section 172 which prescribes punishment for contraventions of any of the provisions of this Chapter (Chapter XI of the Act) and for which no specific punishment is provided therein,

1. The Company; and

2. Every officer* of the company who is in default

Shall be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5,00,000.

* The term ‘officer’ includes any director, manager or key managerial person (which includes the CFO and CS) or any other person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act.

As the penalty for noncompliance of the appointment of an independent director is not mentioned separately, the punishment prescribed under Section 172 shall be applicable.

IMPACT OF NONCOMPLIANCE ON OTHER PROVISIONS OF THE COMPANIES ACT, 2013 AND THE RULES LAID THEREUNDER

1. AUDIT COMMITTEE

Section 177 as amended by the Companies (Amendment) Act, 2017 read with Rule 6 of the Companies (Meetings of the Boards and its Powers) Rules, 2014 amended vide MCA Notification No. GSR 880(E), dated July 13, 2017 provides that every listed company and a company covered under Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an Audit Committee of the Board.

Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 lays down the classes of companies.

1. Every other public company having –

2. paid up share capital of ten crore rupees or more; or

3. turnover of hundred crore rupees or more; or

4. in aggregate, outstanding loans or borrowings or debentures or deposits, exceeding fifty crore rupees.

1. Constitution of the Committee:

The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority. Provided that majority of the members of the Audit Committee including its Chairperson shall be persons with the ability to read and understand the financial statement.

2. Disclosure of the Composition of the Audit Committee in the Board’s Report:

The Board’s Report shall disclose the composition of an Audit Committee.

3. Penalty:

In case of any contravention of Section 177 (Audit Committee), Sub-section (8) of Section 178 prescribes as follows:

1. The Company – shall be punishable with a fine which shall not be less than one lakh rupees but which may extend upto five lakh rupees; and

2. Every officer of the company who is in default – shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty five thousand rupees but which may extend upto one lakh rupees or both.

2. NOMINATION AND REMUNERATION COMMITTEE

Section 178 of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of the Boards and its Powers) Rules, 2014 amended vide MCA Notification No. GSR 880(E), dated July 13, 2017 provides that every listed company and a company covered under Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute a Nomination and Remuneration Committee of the Board.

Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 lays down the classes of companies.

1. Every other public company having –

2. paid up share capital of ten crore rupees or more; or

3. turnover of hundred crore rupees or more; or

4. in aggregate, outstanding loans or borrowings or debentures or deposits, exceeding fifty crore rupees.

5. Constitution of the Committee:

The Nomination and Remuneration Committee shall consist of three or more non-executive directors out of which not less half should be independent directors.  Provided that the chairperson of the company (whether executive or non-executive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.

2. Penalty:

In case of any contravention of Section 178 (Nomination and Remuneration Committee), Sub-section (8) of Section 178 prescribes as follows:

i. The Company – shall be punishable with a fine which shall not be less than one lakh rupees but which may extend upto five lakh rupees; and

ii. Every officer of the company who is in default – shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty five thousand rupees but which may extend upto one lakh rupees or both. 

COMPOUNDING OF OFFENCES UNDER THE COMPANIES ACT, 2013

Section 441 notified vide Notification No. S.O. 1934(E), dated June 1, 2016 and amended by the Companies (Amendment) Act, 2017 provides for the compounding of certain offences as under:

Scenario A [Applicable for Section 172 and compoundable by Regional Director]

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence punishable under this Act (whether committed by a company or any officer thereof) not being an offence punishable with imprisonment only, or punishable with imprisonment and also with fine, may, either before or after the institution of any prosecution, be compounded by—

1. the Tribunal; or

2. where the maximum amount of fine which may be imposed for such offence does not exceed five lakh rupees, by the Regional Director or any officer authorised by the Central Government, on payment or credit, by the company or, as the case may be, the officer, to the Central Government of such sum as that Tribunal or the Regional Director or any officer authorised by the Central Government, as the case may be, may specify.

Provided that the sum so specified shall not, in any case, exceed the maximum amount of the fine which may be imposed for the offence so compounded.

Scenario B [Applicable for Subsection (8) of Section 178 and compoundable by Special Courts]

Notwithstanding anything contained in the Code of Criminal Procedure, 1973,—

1. any offence which is punishable under this Act, with imprisonment or fine, or with imprisonment or fine or with both, shall be compoundable with the permission of the Special Court, in accordance with the procedure laid down in that Act for compounding of offences;

2. any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.

(Chapter XXVIII – Section 435 to 446B deals with Special Courts.)

1. Penalty for noncompliance of the Order:

Any officer or employee of the company who fails to comply with any order made by the Tribunal or Regional Director or any officer authorized by the Central Government, shall be punishable with imprisonment for a term which may extend to six months, or with fine upto one lakh rupees or with both.

2. Effect of compounding of an offence:

  • Where such composition is done before the institution of any prosecution, no prosecution can be launched in relation to such offence under the Companies Act.
  • Where the composition of the offence is made after the institution of any prosecution and such composition is brought by the Registrar in writing to the notice of the court in which the prosecution is pending, the company or its officer in relation to whom the offence is compounded shall be discharged by the court.

Scenario B (as mentioned above)

Where the offence falls within the purview of Subsection (6) (a) of Section 441, the composition shall have the effect of an acquittal of the accused in the case as provided in Section 320(8)* of the Code of Criminal Procedure, 1973.

*Section 320(8) of the Code of Criminal Procedure, 1973 states as follows: “The composition of an offence under this section shall have the effect of an acquittal of the accused with whom the offence has been compounded.”

Compounding of an offence does not amount to conviction by a Court of Law.

 CONCLUSION

Therefore, in our opinion, the punishment for non-compliance with regard to appointment of Women Directors and Independent Directors, per se, is only monetary in nature (leviable on the company as well as the officers in default) and does not involve imprisonment. The compounding of this nature of offence can be done by the Regional Director.

However, as the non-appointment of Independent Directors directly impacts the composition of the Audit Committee and the Nomination & Remuneration Committee, punishment is in the form of fine or imprisonment or both. The compounding of this nature of offence can be done by the Special Court.

[1] Release ID: 148845, Press Information Bureau, Government of India, Ministry of Corporate Affairs, August 12, 2016.

[2] Women Directors: Non-compliant firms to face R50K penalty, ENS Economic Bureau, The Indian Express, April 9, 2015

[3] BSE fines 370 firms for not having women director, Live Mint, October 8, 2015

[4] 142 listed companies fined for not employing women directors on the board, TNN, Times of India, December 27, 2017

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