New Companies Act 2013 - Insight Series - Vol V

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New Companies Act, 2013 - Insight Series – Vol V

24 September 2013

Vol-V: Directors including Related Party Transactions and General Administration

Executive Summary

Related Party Transaction required to be approved by the Board

Scope significantly enlarged; however, transactions entered in ordinary course of business at arm’s length terms are not covered.

Central Government approval removed.

Special resolution at general meeting required for prescribed transactions.

Loan to Directors and Other Specified Persons

Prohibited, unless allowed under other provisions of the Act.

Requirement of Central Government approval removed.

Allowable subject to conditions including shareholders’ approval.

© 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Loans and Investments by a Company

Restriction on having more than two layers of investment companies for making investment.

General Body approval required for loan to any person as against existing requirement applicable only in case of loan to other body corporate.

Exemptions available to private limited companies, transactions between holding– WOS, Loans given by investment companies, etc. are removed.

The provisions seem to be applicable to new loan/investment only.

Committees of the Board

Public company with paid-up capital of INR 1000 million or debt of INR 2000 million and all listed companies to have Audit Committee and Nomination and Remuneration Committee.

Companies with > 1000 stake holders, i.e. shareholder, deposit holders and other security holder at any time during the financial year, should have Stakeholder Relation Committee.

Restriction on Directors

Purchase/sale of properties by director and others for consideration other than cash requires approval of members.

Directors or Key Managerial Personnel (KMP) are prohibited from entering into forward contract in shares or debentures of the company or holding/subsidiary/associate company.

A total bar is placed on insider trading by any director, KMP or other officers of the company.

Others

In cases where there is no sufficient profit, payment of Management Remuneration without approval of Central Government is significantly relaxed.

Role of Independent Director is significantly increased.


Background In this bulletin, we have dealt with the new concepts

introduced and the changes made to the existing provisions

relating to Directors including Related Party Transactions

and General Administration. We have also discussed

certain other provisions included in the Companies Act,

2013 (the ‘New Act’ and provisions are referred to as ‘new

provisions’), but only to the extent that they impact the

Directors including Related Party Transactions and General

Administration.

Overview We have dealt with certain general issues in detail in

Volume-I which may also impact the discussion under this

bulletin; therefore, the issues and impacts thereof (No.1 and

4) are reproduced below for ready reference (for details

please refer to Volume–I) :

The discussion in this bulletin is subject to the rules yet to be issued by the Ministry of Corporate Affairs (MCA). We have considered the draft rules relating to the topics discussed in this bulletin and marked such provisions with ‘*’ at the relevant places. It should be noted that those provisions are still in draft form and may change in the final rules.

Recently, MCA has notified about 98 sections of the New Act, including some of the provisions dealt in this bulletin, to be operative wholly or in part with effect from September 12, 2013. However, corresponding sections of the Companies Act, 1956 (the ‘existing Act’ and its provisions are referred to as the ‘existing provisions’) have not been repealed. MCA has issued a clarification that the existing provisions corresponding to the 98 notified sections should cease to have effect as of 12 September 2013.

The New Act creates certain procedures to be carried out through the National Company Law Tribunal (the NCLT) and approvals to be taken from it. As discussed in Volume-I there is no clarity about when NCLT will becomes operational. Therefore, the issue is how those procedures should be carried out/those approvals obtained until the time when the NCLT becomes operational.

Meeting of Board and its Powers

Related Party Transactions The existing Act had provisions dealing with transactions in which the Director is interested. The New Act has continued with those provisions but titled them as Related Party Transactions; however, the scope is significantly increased.

The New Act provides that no company shall enter

into specified transactions with a related party without

the consent of the Board of Directors (the Board) and

special resolution at the General Body Meeting (GM)

in relation to the prescribed transactions.

The significant changes are discussed below:

Related Party Definition (new) There was no specific definition under the Existing

Act, but different sections gave different meanings

to the term. The only authoritative definition was

available in Accounting Standard -18, being an

accounting standard prescribed under the

Companies (Accounting Standard) Rules 2006.

The definition under the New Act is way beyond all the existing definitions and defines the term Related Party in the widest possible manner. In relation to a company the following are covered by the definition:

Director, KMP and their relatives

Firms in which Director/Manager or his relative is a partner

Private Company in which Director/Manager is a member or director

A director holding even one share in another company is also covered

Public company in which Director/Manager is director or holds, along with his relatives, > 2 percent of paid up share capital

Body corporate whose Board or managing director (MD) or manager are accustomed to act on advice of Director/Manager, other than in professional capacity

Any person on whose advice, other than in professional capacity, the Board, MD or Manager is accustomed to act

Holding/Subsidiary/Fellow subsidiary/ Associate company

Director/KMP of Holding / Subsidiary /Associate company or his relative*

_______________ * In accordance with the draft rules, which may change


Senior management, i.e. member of core management group one level below the Executive Director including functional heads of company or of Holding/Subsidiary/Associate company*.

The definition of Relative is narrowed as compared to the Existing Act and excludes (a) daughter’s children and spouse; (b) spouses of son’s children (c) spouses of brother/sister. However, Central Government (CG) has power for prescribing other relationships.

Type of transactions covered

The type of transactions covered has significantly

expanded. Besides sale, purchase or supply of any

goods, material or services and underwriting contract

covered under the Existing Act, the new provisions

cover the following transactions involving:

Buying, selling, or otherwise disposing of property of any kind

Leasing of property of any kind

Appointment as agent for any of above

Appointment to place of profit in company or of subsidiary/associate of the company.

Thus, all transactions defined above and entered into with any of the related parties would be regarded as Related Party Transactions.

However, the provisions discussed below are not applicable to transactions carried out in the ordinary course of business of the company provided they are on an arm’s length basis, i.e. the transaction as would have been entered into between two unrelated parties without any conflict of interest. In other words the transaction is on terms, including price, which are not biased by fact of relationship between the parties.

Whether the transaction is at arm’s length would be a subjective decision. What the Board may regard to be arm’s length may not be so to others, such as a Transfer Pricing Officer.

There is no clarity whether the Board/Committee of Directors’ (Committee) decision should be final or whether subsequent development will result in the transaction being treated as a violation of the provisions.

Greater clarity on this issue is required, otherwise availing of this exclusion may become very difficult.

_____________ * In accordance with the draft rules, which may change

The transactions to which the provisions are applicable are referred to as ‘specified transactions’.

Board Approval

All specified transactions should be approved by the Board at its meeting.

Prescribed details of the specified transaction being put up before the Board should be circulated in the notice of the Board meeting*.

Any Director interested in a transaction is not to remain present in the discussion during the meeting*.

Director’s interest is not defined.

Shareholders’ Approval Additionally, prior approval of the shareholders

through Special Resolution is required for the following specified transactions:

Entered into by company having paid-up capital > INR 10 million*. The Existing Act provided for CG approval.

Involving appointment to place of profit exceeding monthly remuneration of INR 1 lakh*.

Involving underwriting agreement for a remuneration > INR 1 million*.

Involving other transactions if the value of the transaction in aggregate together with previous transactions for the financial year exceeds the higher of (a) 5 percent of turnover or (b) 20 percent of net worth as per last audited financials*.

Likely to cover all previous specified transactions entered into during the financial year with all the Related Parties and not only such transactions between the company and a specific party.

Prescribed details of the proposed specified transactions should be given in the explanatory statement attached to the notice calling the meeting.

________________

* In accordance with the draft rules, which may change


Member, if a related party, should not vote on

special resolutions at the general meeting

Related party is defined in relation to a company and not with reference to a transaction or a person. Therefore, it seems that all the related parties cannot vote, whether interested in the transaction or not

In case of transaction between holding company and wholly owned subsidiary (WOS), such resolution passed in the general meeting of the holding company should be sufficient*.

All specified transactions should be reported in the Board Report with justification for entering into each of the relevant transactions.

All Related Party Transactions and their modifications need to be approved by Audit Committee, if any

It seems that, while all arm’s length transactions with Related Parties are not required to seek approval of the Board or shareholders, they would still require approval of the Audit committee.

In case a specified transaction is entered into without prior approval of the Board or special resolution as applicable, the transaction needs to be ratified by necessary resolution within three months.

Existing Act allowed entering into such transactions without approval only in case of urgent necessity. There is no such requirement under the new provisions.

If the transaction is not so ratified, same is voidable at the instance of the Board and concerned director/employee need to compensate the company for loss incurred.

Conviction of a director or a person in relation to Related Party Transaction during the preceding five years could be regarded as a disqualification for appointment as a director.

Loan to Directors, etc. The Existing Act provided that a public company

should obtain prior approval of CG for directly or indirectly granting any loan/giving guarantee/providing security to its directors and other specified persons (specified loan).

________________ * In accordance with the draft rules, which may change

The New Act provides that except as provided under other provisions of the New Act, no company should give specified loans except for the following:

Loan to MD or whole-time director (WD) as a part of the conditions of service extended by the company to all its employees or pursuant to any scheme approved by the members by a special resolution; or,

Specified loan given by company in the ordinary course of its business charging interest on loans at a rate not less than the specified bank rate.

The exemptions to private company, banking company and specified loan between holding company and its subsidiary company are removed under the New Act. The provisions are also applicable to private companies.

It seems that a specified loan can be given subject to what is discussed below under the head ‘Loan and Investment by company’.

It should be noted that the provisions relating to Loan to directors are notified and are operative; however, the provisions relating to Loan and Investment by company are not notified. Therefore, currently it is not clear whether, until the time other provisions are notified, a specified loan can be given or not.

Powers of Board to be exercised only at the meeting of Board Both the Acts provided that the Board of Directors

can exercise certain powers by means of resolution passed at a Board meeting. However, the list of such powers is significantly enlarged in the new provisions. Some significant additions are as follows:

Issue of securities

Approve financials including board report, amalgamation, merger or reconstruction

Commencement of new business* or to diversify business

Takeover or acquire substantial or controlling stake in another company

Fill in casual vacancy in board*

Appointment of internal auditor*

________________ * In accordance with the draft rules, which may change


Removal of KMP, etc.*

Enter into JV/collaboration*

Plant location shifting*

Sell investment held if investment sold is 5 percent or more of paid-up share capital and free reserves of the investee company.

The above resolutions are required to be filed with the Registrar of Companies (the ROC) (new).

Restrictions on Powers of Board

Both the Acts have provisions dealing with the Power of

Board which can be exercised only with the consent of

shareholders in a general meeting, except that the

Existing Act required ordinary resolution whereas the

New Act requires special resolution. This provision is

already notified.

The following are the key changes to these provisions:

Under the Existing Act these provisions were not applicable to private limited companies. Under the New Act they are made applicable even to private limited companies.

The disposal of the whole or substantially the whole of the undertaking of the company continues to be the same except that the following terms are now defined: ‘Undertaking’ means an undertaking in which the

company invested > 20 percent of its net worth as per

the last audited balance sheet, or which generated 20

peracent of the total income of the company during

the previous financial year (new)

‘substantially the whole’ means 20 percent or more of

the value of the undertaking as per the audited

balance sheet of the preceding financial year (new).

Therefore, shareholders’ approval may not be

required for disposal or assets/undertaking not

meeting the above criteria.

The provision relating to restriction on power to invest the amount of compensation received by it as a result of any merger or amalgamation otherwise than in trust securities is unclear. The existing provisions dealt with compensation for compulsory acquisition.


Loan and Investment by Company

The following are the key changes:

A company cannot make investment through more than two layers of investment companies subject to the following exclusions (new):

Acquisition of a company incorporated outside India if this company has more layers of investment subsidiaries under the laws of the relevant country.

Subsidiary company having a greater number of investment subsidiaries for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

The provisions are applicable to investments by each company. Therefore, two layers need to be determined in relation to an investing company and not the ultimate holding company of that investing company.

The New Act has amended the definition of “subsidiary” which provides that certain types of companies are not to have more than the prescribed layers of subsidiaries. The above condition should also be considered over and above the aforesaid conditions.

The Existing Act restricted a company from giving a loan to other body corporates or making investment in other body corporates in excess of the specified limit of 60 percent of its paid-up share capital, free reserves and securities premium account, or 100 percent of its free reserves and securities premium account.

The scope of section is enlarged to include loans to persons other than body corporates (new).

The Existing Act provided that free reserves should be as per the latest audited balance sheet. No such clarity is provided in the New Act.

The provisions seem to apply only to new investments/loans; therefore, existing investments/loans seem to be impliedly grandfathered.


The company shall disclose in its financial statements full particulars of loan/investment/guarantee/security given and the purpose for which it is given as well as the purpose for which the recipient of the guarantee will use it (new).

A company, registered as broker or other intermediary under section 12 of the SEBI Act and such class of companies as may be prescribed, cannot take inter-corporate loan or deposits exceeding the prescribed limit (new). According to the rules the prescribed limits would be as notified by SEBI under the relevant regulations*

The rate of interest on the loan which was linked to the bank rate under the Existing Act is now linked to the prevailing yield on approved Government Security closest to the tenor of the loan.

The existing provisions exempted (a) private limited companies and (b) loan given or investment made in WOS from applicability of provisions. Under the New Act, these exemptions are withdrawn and the new provisions are applicable to both the categories.

The exemption to investment companies relating to the giving of loans and providing securities is withdrawn.

Committees of the Board

A. Audit Committee

All listed companies and public companies with paid-up capital of INR 1000 million* or debt of INR 2000 million* to have an Audit Committee.

Audit Committee should be constituted of:

Minimum three directors

Independent directors should be in majority. Also, majority of directors should have ability to read and understand financials

Existing committees, if any, to transition and comply with above within one year

Terms of reference to include certain processes, the significant being:

Approval of related party transactions and their modifications.

Scrutiny of inter-corporate loans and investments.

_______________


Evaluation of internal financial controls.

Monitoring of end use of proceeds of public offerings and related matters.

The Existing Act provided that the Audit Committee recommendation should be binding on the Board. Also the Chairman of the Committee was required to attend the general meeting. No such provisions are included in the New Act.

The New Act provides that companies accepting public deposits or borrowings > INR 500 million form public financial institutions or banks* and should have prescribed a vigil mechanism to be operated through the Audit Committee, if there is one, or through a designated director.

B. Nomination & Remuneration Committee

All listed companies and public companies with paid-up capital of INR 1000 million* or debt of INR 2000 million* are to have a Nomination and Remuneration Committee*

The Committee should consist of:

Minimum three non-executive directors

Independent directors should be in majority

Company chairperson cannot be chairperson of the committee

Nomination and Remuneration Committee shall formulate eligibility criteria for directors, recommend remuneration policy for directors, KMP and other employees to the Board, and identify eligible candidates for the post of Director.

C. Stakeholders Relationship Committee

Companies with > 1000 stake holders, i.e.

shareholders, deposit holders and other security

holders, at any time during the financial year, should

have a Stakeholder Relation Committee

The Chairman of the Committee to be a Non-Executive Director.

The Committee shall consider and resolve grievances of the security holders of the company.

__________________



It seems that the decision to appoint a committee is to be decided every year.

D. Corporate Social Responsibility Committee

Provisions relating to the Corporate Social

Responsibility (CSR) Committee are already

discussed in Volume IV.

Restrictions on Directors/KMP

Non-cash transactions

The New Act provides that the Director of a company or its holding/subsidiary/associate company or a person connected with this director should neither acquire assets from the company nor sell the assets to the company for consideration other than cash without approval of shareholders in general meeting (new). This provision is already notified and in effect.

In case of the Director of a holding company, additionally approval of shareholders of holding company also is required.

Notice of general meeting should include full detail of the arrangement and valuation of assets as valued by registered valuer.

If transaction is carried out in contravention, except in a case where (a) restitution of consideration is not possible and the company is compensated for loss, or (b) third party rights are created, the transaction should be voidable at the instance of the company.

Directors or KMP are prohibited from entering into forward contract in shares or debentures of the company or its holding/subsidiary/associate company. This provision is already notified.

A total bar is placed on insider trading by any director, KMP or other officers of the company. This provision is already notified.

‘Insider trading’ means:

Dealing in shares by a person having non-public price sensitive information; or

Communicating such information to any person

In relation to listed companies, SEBI should have the power to enforce the above provisions.

These provisions are applicable to unlisted public companies as well as private companies.

Disclosure of Interest

The provisions are applicable to private limited companies also.

It is provided that the director interested in a contract should not participate in the meeting. A private limited company with two directors may not be able to comply with the quorum requirement.

In case the contract is entered into without disclosing interest of a director, the contract will be voidable at the instance of the company.

Other Provisions

The existing provisions required circulation to members of contract relating to appointment of MD/WD. The New Act only provides for taking inspection or taking extract by members.

It is provided that in case the company has defaulted in payment of specified statutory dues or deposits, compensation cannot be paid to MD/WD for loss of office due to transfer of undertaking, etc.*

Appointment and Remuneration of

Managerial Personnel

The key changes are as follows:

The Board Report of every listed company is to disclose the ratio of the remuneration of each director to the median employee’s remuneration.

Sitting fees to a director for attending meeting of Board or a committee thereof can be decided by Board of Directors of the Remuneration Committee to be an amount < INR 1 lakh per meeting.* A different sitting fee amount can be decided for independent directors and for non-independent directors.*

________________

*In accordance with the draft rules, which may change


Every unlisted company, including private companies, with paid-up capital of INR 50 million* or more and listed companies* are to have whole time KMP.

It seems that such companies need to appoint all the categories of persons included in the definition of ‘KMP’.

KMP can hold office only in one company and in two companies, if agreed by all the directors. A KMP holding office in more than one company has to decide within six months, from notification of section, in which company he wants to continue.

The Existing Act provided a person convicted for an offence involving moral turpitude cannot be appointed as MD/WD/manager.

The New Act provides that a person convicted by court for any offence and sentenced for a period exceeding six months cannot be appointed as MD/WD/Manager.

Provisions relating to Appointment of MD/WD/Manager are also made applicable to private companies.

All listed companies and companies having paid-up capital of INR 1000 million or more are required to obtain a compliance report for Practicing Company Secretary and attach it to the Director’s report*.

The New Act provides that a MD/WD receiving any

commission from the company may also receive

remuneration or commission, from holding company

or subsidiary company of such company, subject to

disclosure in the Board’s report.

Appointment of MD/WD

Schedule-V replaces Schedule–XIII of the Existing Act dealing with appointment of managing/whole time directors without CG approval. Key changes in the Schedule are as follows:

Single limit prescribed as compared to multiple slabs.

Subject to conditions, separate limit provided for non-security/small security holder managerial person, if that provides higher remuneration than above.

____________


The remuneration payment in excess of the limits is allowed if it is paid by any other company taking approval of its shareholders for such payment and the total managerial remuneration of such company including this payment is within limit specified under Section 197 or if it is paid by a foreign company.

Subject to specified conditions, a newly incorporated company is allowed to pay higher remuneration than specified in the Schedule for a period of seven years from date of incorporation.

Sick company with revival scheme is allowed to pay remuneration computed at double the specified limit for five years from sanction of the Scheme.

Subject to certain conditions, payment of remuneration higher than the specified limit is permitted to directors of companies other than listed companies and subsidiaries thereof without CG approval.*

Management and Administration Extraordinary General Meeting – these provisions

are already notified

The Existing Act provided that persons requisitioning the meeting should hold at least 10 percent of paid-up capital carrying voting right relating to the matter to be resolved. The New Act provides that such persons should hold at least 10 percent paid-up capital carrying voting rights.

Requirement of voting power in relation to matter for which the meeting is called is removed.

Preference shareholders may not be able to requisition meeting for matters impacting them.

Provisions relating to general meetings:

For calling general meeting at a shorter notice, the New Act provides for approval of 95% of members as against approval of members holding 95 percent of paid-up voting capital required under the Existing Act. This may pose a challenge.

One proxy cannot represent more than 50 members or any number below 50 if their aggregate holding exceeds 10 percent of total share capital carrying voting rights*

_____________



The New Act requires that the explanatory statement be attached to the notice calling a general meeting for each item of special business should include the following (these provisions are already notified):

Disclosure of nature of interest of relatives of directors/manager/KMP in each resolution proposed to be passed is additionally required. Existing Act required such disclosure only in relation to directors/manager.

If the special business relates to or affects any other company, then shareholding of promoter, director, manager and KMP in that company exceeding 2 percent should be disclosed. Under existing provisions the limit was 20 percent.

In case any such person derives any benefit consequent to insufficient disclosures, the benefit derived needs to be reimbursed to the company.

Quorum for public company is prescribed to be 5-30 depending upon number of total members. The Existing Act prescribed quorum to be 5. These provisions are already notified.

Listed companies and unlisted companies with > 500 members may provide electronic voting facilities*.

Demand for poll:

Poll can be demanded by members holding at least 10 percent in total voting power or share with paid-up value of at least INR 5 lakhs

The Existing Act provided that members should hold at least 10 percent of shares carrying voting right in relation to the resolution or with paid-up value of INR 50,000.

Requirement of voting power in relation to matter for which the meeting is called is removed.

Preference shareholders may not be able to demand poll even in relation to matters impacting them.


Under the New Act the requirement of one of the Scrutineers to be a member is removed.

Postal ballots are not allowed in relation to:

Annual General Meetings

Resolutions allowing Directors/Auditors to represent before general meeting.

List of businesses mandatorily requiring resolution through postal ballot is made applicable to all the companies having > 50 members.

Change in objects for which money is raised from public and money is not fully utilised is added as a mandatory business.

Minutes of the meeting need to comply with the secretarial standards approved by CG.

Listed companies are required to file change in shareholding of promoters and top ten shareholders within 15 days of such change.

The New Act provides that a company may maintain required registers etc. in electronic mode as may be prescribed. However, the rules, besides prescribing other things, provide that listed companies and unlisted companies with members > 1000 shall maintain registers etc in electronic mode.*

Appointment and Qualification of

Directors

Composition of Board

Maximum number of directors increased from 12 to 15 under the New Act.

Number can be further increased by a special resolution at GM. The Existing Act required CG approval for increasing number beyond 12.

Every listed company should have a woman director within one year and unlisted companies with paid-up capital of INR 1000 million or more should have a woman director within three years from date of

notification of section*.

Every company to have at least one director who has stayed in India for > 182 days in previous calendar year.



Every listed company, public company having paid-up capital of INR 1000 million or more or public company having debt > INR 2000 million should have 1/3 of total number of directors to be Independent Directors (IDs)*

Existing companies to comply with the above requirements within one year from notification of section or rule, whichever is earlier.

In case of public companies, even if above criteria are not satisfied subsequently, the provisions shall continue to apply until end of tenure of the IDs.*

Appointment of Director

Provisions relating to appointment of director under the

New Act are similar to corresponding provisions under the

Existing Act except for the following:

Director Identification Number is a must for appointment (new).

A new person proposed to be appointed as a director in place of the retiring director or the member proposing him needs to deposit INR 1 lakh which shall be refunded if he is elected or he gets at least 25 percent of valid votes.

Small shareholder director requirement is restricted to listed companies only to be considered an ID. Under the Existing Act it was applicable to certain public companies also.

Provision relating to requirement of holding qualification shares is removed.

Additional director appointed by the Board to hold office until the date of the next AGM or the last date on which the AGM should have been held, whichever is earlier.

A director retiring by rotation and failing to get reappointed should not be appointed as additional director.

Independent Director (new)

The expression ‘ID’ is defined, specifying their qualification/restrictions/disqualifications in detail.

_______________ * In accordance with the draft rules, which may chang

Nominee directors are not considered Ids.

A small shareholder director providing declaration of independence is to be considered an ID*.

ID needs to declare to the board that he is independent at the time of his appointment and also whenever there is a change that may impact his independence.

Company and the ID should follow the code given in Schedule IV.

ID should not be entitled to any stock option. However ID may receive profit-based commission in addition to sitting fees.

ID can be appointed for a maximum term of five years and can be renewed for one more term. However, appointment thereafter can be only after expiry of a period of three years of ceasing to be an ID.

ID should be liable only in respect of those acts by the company which had occurred with his knowledge through board processes or with his consent, or where he had acted negligently.

ID is not liable to retire by rotation

For ascertaining number of directors liable to retirement by rotation, total number of directors is not to include Ids.

CG may notify agencies to maintain database of willing candidates for appointment as ID.

Disqualification for appointment of Director

Provisions relating to director’s disqualification under the

New Act are similar to corresponding provisions under

the Existing Act except for the following:

Conviction for any offence and sentence to imprisonment for a period of seven years or more (new).

Conviction for offence relating to Related Party Transactions at any time during the preceding five years (new).

_______________ * In accordance with the draft rules, which may chang


Being director of a company which has defaulted in relation to repayment of deposit, redemption of debenture or payment of dividend declared and such failure continues for one year or more.

Disqualified for reappointment in that company and appointment in any other company for five years.

Other Provisions

Number of companies in which a person can be a director is increased from 15 under the Existing Act to 20 under the New Act. However, the New Act provides a sub-limit to the effect that a person cannot hold directorship in more than ten public companies.

Private company which is a holding/subsidiary company of a public company should be treated as public company for computing limit of ten public companies.

Director of existing companies, not meeting with above limitation about the number of companies, should make choice of companies in which he wants to continue as director and should resign from other companies. He should be compliant with number of limitations within one year from notification of section and inform the Registrar about his choice of continuation of directorship.

Provisions relating to vacation of office of director continue to be the same under the New Act except for the addition of the following reasons for vacation of office:

Remaining absent from all the meetings held during a period of 12 months, whether with or without leave of absence.

Failure to disclose interest in any contract in contravention of provisions relating to disclosure of interest.

If all the directors vacate their office the promoter, or in his absence the CG, can appoint the required number of directors to hold that office until directors are appointed in GM.

Provision relating to resignation of director is inserted:

The director continues to be liable, even after resignation, for events that occurred during his tenure.

If all the directors resign, the promoter, or in his absence the CG, can appoint the required number of directors to hold that office until directors are appointed in GM.


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