CHAPTER XI APPOINTMENT AND QUALIFICATION OF DIRECTORS

Includes relevant rules of Appointment and Qualification of Directors Rule 2014

Prepared and presented By:Dipendra Prasad PoudelArticle Trainee (Internal Audit)N.Kochhar & co.mailfordipendra@gmail.com for the month of May

To have a bird eye view on provision regarding directors

To sum up act and rules as far as possible

To simplify the provision in such a way that even a layman can understand

Presentation Objective

SECTION 149: COMPANY TO HAVE BOARD OF DIRECTORS

(1)(a) minimum number of directors Public : Minimum three directors Private: Two directors OPC : one director (b) maximum of fifteen directors company can appoint more than 15 directors

after passing special resolution. Such class or classes of companies as may be

prescribed, shall have one women director

Company to appoint at least one female director Rule 3 1) Every public listed company, OR 2) Every other public company having a) Paid up share capital of 100 crore or more ; or b) Turnover of 300 crore or more

Explanation : For the purpose of this section it is hereby clarified that the paid up share capital and turnover are as

per last date of latest audited financial statement.

Section 149 (3 )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 in the previous calendar year.Section 149 (4) Independent DirectorI) Listed public company : At least one- third number of

directors as independent director.II) And the a Central Government may prescribe the

minimum number of independent directors in case of any class or classes of public companies.

Explanation: For the purpose of this sub- section, any fraction contained in such one-third number shall be

rounded off as one.

Rule 4 Number of Independent Directors At least two independent

directors if any one of below conditions are satisfied

Public companies

Share capital : 10 crore or

more

Public companies

Turnover: 100 crore or more

Public companies Aggregate loans,

outstanding loans, debenture and

deposits exceeding 50 crore rupee

If higher number of independent directors due to composition of its audit committee company shall appoint.

Intermittent vacancy: shall be filled by the board at the earliest but not less than immediate board meeting or three

months whichever is earlier

149(6) WHO CAN BE INDEPENDENT DIRECTORS

Director other than a managing director or a whole-time director or a nominee director.

a) Person of integrity and possesses relevant expertise and experience;

b) (i) who is or was not promoter of the company or its holding, subsidiary or associate company;

(ii) who is not related to its promoter or director in the company, its holding, subsidiary or associate company;c) No pecuniary relationship with the company, its holding, subsidiary or associate company, or to their promoters, or directors, during the two immediately financial years or during the current financial year.

(d) None of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors amounting to- (i) 2 % or more of its gross turnover or total income (ii) fifty lakhs rupees or such higher amount as may be prescribed Whichever is lower of (i) or (ii), during the two immediately preceding financial years or during the current financial year.(e) who, neither himself nor any of his relatives(i) Holds or has held the position of key managerial person (KMP)

or is or has been employee of the company or its holding, associate or subsidiary (

(ii) Is or has been employee or a proprietor or a partner, in any 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 HAS company; or (B) any legal or consulting firm that has or had any transaction with the company, its HAS company amounting to ten percent or more of the gross turnover of such firm.

(iii) Holds together with its 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 organization that receives (a) 25% or more of its receipt from the company, any of its promoters, directors or of its HAS company or (b) that holds two percent or more voting power of the company ; or (v) who posses such other qualification as may be prescribed.(7) Independent directors participation in meeting. (a) First board meeting in which he participate as the director and thereafter (b)at the first meeting of the board in every financial year or (c) Whenever there is any change in the circumstances which may affect his status as an independent director

(10) Independent director shall hold office up to 5 consecutive years on the board of the company, BUT shall be eligible for re-appointment on passing of a special resolution by the company and disclosure of such re-appointment in the boards report .

(11) No independent director shall be eligible to hold the office more than two consecutive years BUTShall be eligible for appointment after the expiration of three years of ceasing to become an Independent director.Provided that, during the three years, he shall not be appointed or associated with the company in any other way either directly or indirectly.(13) Provisions regarding retirement of directors by rotation shall not be applicable to appointment of independent directors.

150. MANNER OF SELECTION OF INDEPENDENT DIRECTORS AND MAINTENANCE OF DATABANK OF INDEPENDENT DIRECTORS.

(1)Independent director may be selected from a data bank containing names, addresses and qualification of persons who are willing to act as an independent director.

Data Bank can be maintained by any body, institute or association, as may be notified by central government. The responsibility of exercising due diligence before selecting a person from the data bank shall lie with the company making such appointment.

(2) Independent director shall be appointed by the company in a general meeting and shall indicate the justification for choosing the appointee for appointment as independent director.

(3) The databank shall be maintained in such a rules as prescribed.(4) CG may prescribe the manner and procedure for selection of independent directors

RULE 5 : QUALIFICATION OF INDEPENDENT DIRECTORS(APPOINTMENT AND QUALIFICATION OF DIRECTOR RULE)

An Independent director shall possess appropriate skills, expertise and knowledge in one or more fields of :-FinanceLawManagement Sales MarketingAdministrationResearchCorporate governanceTechnical operationsOr other disciplines related to company business.

RULE 6: CREATION AND MAINTENANCE OF DATABANK OF PERSON OFFERING TO BECOME INDEPENDENT DIRECTOR

(1)Any institute or association which has been authorised by central government shall create and maintain a databank of person willing and eligible to be appointed as independent director

AND Such databank shall be published in MCA website or any other websites notified by CG(2) The databank shall include the following information to be eligible and willing to be appointed as independent director. a) DINb) Personal details, parents name and spouse name (if married)c) Contact details d) Qualification detailse) Any legal proceeding initiated or pending against such personf) The list of LLP or Companies where he held/holds the position before along with titles etc.

(3) A disclaimer shall be conspicuously displayed on the website hosting databank that a company shall carry own due diligence before appointment of any person as a Independent director. (4) Any person willing to be Independent director shall submit form DIR 1 to agency (institute or body who is managing databank) (5) The agency may charge the reasonable fee from the applicant (6) Any person whose name is hosted in databank, shall intimate to the agency about any changes in his particulars within 15 days.

(7) The databank posted in online shall be :- (a) accessible (b) substantially identical with the physical version (c) be searchable in various parameters (d) printed in formats convenient for printing and viewing online (e) contain a link to obtain the software required to view or print the particulars free of charge.

151. APPOINTMENT OF DIRECTOR ELECTED BY SMALL SHARE HOLDER

A listed company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed.

Explanation: For the purpose of this section “ small shareholders” means a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum of money as may

be prescribed.

RULE 7 : SMALL SHAREHOLDERS DIRECTORAPPOINTMENT AND QUALIFICATION OF DIRECTOR RULES

Sub rule 1- Listed company upon notice Of

Not less than one thousands share

holders

One-tenth of total number of such

shareholder

Whichever is lower have a small shareholders director

elected by small shareholder.

Nothing contained in this sub-rule 1 shall prevent a listed company to opt to have a director representing small

shareholders on its own will. None of the procedure laid down in sub-rule 2 shall be followed if the company appoints on its own

will

Sub-rule 2: Procedures to be complied by small share holders who are willing to appoint small share holders director.

1) Shall leave a notice of their intention with the company at least fourteen days before the meeting.

2) They should specify the name, address, shares hold, folio number of the person who is being proposed as director and also of the small shareholders who are proposing.3) If the proposed person doesn’t hold share in the company, the details of share held and folio number needn’t be specified

Sub rule 3 rule 7: Documents to be submitted for the post of small shareholders director

a) His director identification numberb) Stating that he is not disqualified to become director under this actc) His consent to act as a director of the company

Sub rule 4 rule 7: considering small share holders director as an independent director

Small share holders director shall be considered as independent director subject to :a) He is eligible under section 149 (6) i.e. various points like integrity, not related to company in any way etc ( we have already discussed it in previous slides)b) He has given his declaration of independence as per subsection 7 of section 149.

VARIOUS POINTS ABOUT SMALL SHAREHOLDERS DIRECTOR

a)Such directors are not liable to retire by rotation

b)The tenure of such director can’t exceed three years

c)On the expiry of tenure they are not eligible for re-appointment.

d)A person is not allowed to be appointed as small shareholders director if he is disqualified as mentioned in section 164. ( Disqualification of Director)

e)The small shareholders director shall immediately vacate the office if he attracts any disqualification ( section 164 and section 167) f)No person shall hold the position of small shareholders director in two companies at the same time provided the second company in which he has been appointed relates to same businessg)Small shareholder director shall not, for the period of three years from which he ceases to be director can’t relate to company either directly or indirectly.

152. APPOINTMENT OF DIRECTORS

(1) Where no provision is made in the article then subscribers of the memorandum shall be deemed to be the first directors of the company.

(2)Otherwise every director shall be appointed by the company in general meeting.

(3)No person shall be appointed as director unless he has been allotted DIN

(4) Every person proposed to be appointed shall furnish DIN and a statement mentioning that he is not disqualified.

(5) Appointed director shall not act as director unless he gives his consent to hold office

(6) Unless the articles provide for retirement of all directors at every annual general meeting, not less than 2/3 of the total number of directors of public company shall

• i) Whose period of office is liable to determination by retirement of directors by rotation; and

• ii) Save as otherwise provided in this act, be appointed by company in general meeting.

(d)The directors to retire by rotation at every general meeting shall be those who have been longest in office since their last appointment, but as between those persons who became directors on the same day, those who are to retire shall, in default subject to any agreement between themselves, be determined by lot.

(e) At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing retiring director or some other person thereto

If vacancy

of retiring director is not so filled up in the

meeting

The meeting shall stand

adjourned till the same day

in the next week at the same time and place

If that they is a national holiday,

till the next succeeding day which is not a holiday at the same time and

place

Section 7(a) Vacancy of retiring director and filling up

Retiring director shall be deemed to be re-appointed at adjourned meeting unless

i) At that meeting or previous meeting a resolution for re-appointment of such director has been put to the meeting and lost;

ii) Retiring director by notice in writing addressed to the company or its board of directors, expressed his unwillingness to be so re-appointed;

iii) He is not qualified or disqualified for appointment;

iv) Resolution is required to be passed by virtue of any provisions of this act

Section 7(b) : In case adjourned meeting can’t appoint the Director

153. APPLICATION FOR ALLOTMENT OF DIN

Every Individual intending to be appointed as director of the company shall make an application for allotment of DIN in such form and

manner along with such fees as may be prescribed.

Rule 9 : Application for allotment of DIN.

Every person shall make application electrically in FORM DIR 3The applicant shall download the form from the website and fill the form and sign the form after attaching the required documents and scan and file entire document electricallyDocuments include photograph, proof of identity, proof of residence, verification in DIR 4 This should be signed with digital signature and shall be verified by CA, CS or CWA in practice , company secretary full time in employment, managing director or director in which he is to be director

154. ALLOTMENT OF DINThe central government shall, within one month from the application under section 153, allot a DIN to an applicant

in such a way as may be prescribed.

Section 155 : Prohibition to obtain more than one DINNo individual, who has already been allotted DIN under section 154, shall apply for, obtain or possess another DIN.

Section 156 : Director to Intimate DINEvery existing Director shall, within one month of the receipt of DIN from the Central Government, intimate his Director Identification Number to the company or all companies wherein he is a director.

SECTION 157: COMPANY TO INFORM DIRECTOR IDENTIFICATION NUMBER TO REGISTRAR

(1) What should

company do?

Within fifteen days of the receipt of intimation under

section 156, furnish the DIN

To the concerned department along

with prescribed fees or with additional

fees

(2) What if company fails to submit?If the company fails to submit the DIN

within time specified or within additional

time (403)

The company as well as officer in default shall be

fined not less than 25000 up to 1

Lakhs

SECTION 158. OBLIGATION TO INDICATE DIN

Every person or company, while furnishing any return, information or the particulars as are required to be furnished under this Act, shall mention the Director Identification Number in such return, information or particulars in case such return, information or particulars relate to director or contain any reference of director.

Section 159: Punishment for Contravention

Contravention of section 152 and section 156Imprisonment up to 6 months or with fine which may extend up to 50000If the contravention is continuing one, with a further fine which may extend up to 500 per everyday after the first during which contravention continues

160. RIGHT OF THE PERSON OTHER THAN RETIRING DIRECTOR TO STAND FOR DIRECTORSHIP

Person should not be

retiring director

under section 152

Eligible to be appointed to the office of

director

If he or someone

proposes him as a director not less than

14 days before

meeting

Notice should be left at registered

office

Deposit of one lakh or

higher amount as

may be prescribed

TREATMENT OF DEPOSIT AMOUNT

Shall be refunded to

the person , it the person

gets elected.

Shall be refunded if he

gets more than 25% of total valid

votes

IF not it shall be forfeited

by the company

SECTION 161. APPOINTMENT OF ADDITIONAL DIRECTOR, ALTERNATE DIRECTOR AND NOMINEE DIRECTOR

(1) Who can be additional

director

If articles of a company have conferred BOD the power to

appoint

Any person at any time who shall hold office up to next AGM or last date in which AGM should have been held whichever is

earlier

(1) Who can’t be additional

director

Person who has failed to be

appointed as an director in AGM

(2) Who can be alternate directors

If authorized by the articles or by resolution passed by company in General meetingAppoint a person, not being person holding any alternate directorship for any other director in the companyTo act as an alternate director during his absence for a period of not less than 3 months from India

Some conditions for alternate directors

No person shall be appointed as alternate director for Independent director unless he is qualified to be appointed as independent director.Alternate director shall not hold office for a period longer than permissible to director

If the term of office of the original director is determined so before so he returns to India, any provision for the automatic re-appointment shall apply to original not to the alternate director.

Can company appoint director nominated by any other institution or authority ?

Yes, subject to the articles of the company board may appoint any person as a director

Nominated by any institution in pursuance of the provision of any law or time being in force or byAny agreement or by central government or the state government by virtue of its shareholding in a government company

161(4) IN CASE OF VACATION OF OFFICE OF DIRECTOR APPOINTED IN AGM

In case of public company

Director appointed in GM

Vacates his office before his terms expires

THEN,

The resulting casual vacancy may, in default of and subject

To any regulations in the articles of the company, may filled by BOD at a meeting of

board

The person so appointed shall hold office only up to the date up to which director in whose place he is appointed would have held

office if it had not been vacated

162. APPOINTMENT OF DIRECTORS TO BE VOTED INDIVIDUALLY

(1)At a general meeting of the company, a motion or more persons as directors of the company by a single resolution • Shall not be moved, unless a proposal to move such a motion has first

been agreed to at the meeting without any vote against it

(2) A resolution moved in contravention of sub-section (1) shall be void, whether or not any objection was taken when it was moved.

(3) A motion for approving a person for appointment, or for nominating a person for appointment as a director, shall be treated as a motion for his appointment.

163. OPTION TO ADOPT PRINCIPLE OF PROPORTIONAL REPRESENTATION FOR APPOINTMENT OF DIRECTORS

Not withstanding anything mentioned in this act , the articles of the company

May provide for the appointment of not less than two thirds of the directors of the total number of directors of the company in accordance with the principle of proportional representation

Whether by the single transferable vote or by a system of cumulative voting or otherwise and such appointments may be made once in every three years and casual vacancy shall be filled with the provisions laid down in sub-section 4 of section 161

164. DISQUALIFICATION FOR APPOINTMENT OF DIRECTOR

(1) Shall not be eligible for appointment

Unsound mind, undischarged insolvent, has not paid any calls in respect of any shares held by him

Order disqualifying him for appointment has been passed by court or tribunal, he has been convicted of the offence dealing with related party

transaction at any time during preceding five years

Convicted to court for any moral offence and sentenced thereof for not less than six months and five years has not been elapsed since then from the date of expiry of

sentence

Director who are not eligible to be re-appointed or appointed

(a) Has not filed financial statements or annual returns for any continuous period of three financial years

(b) Has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date thereon or pay any dividend declared and such failure to pay or redeem continues for one or more yearThose director in default are not eligible for re-appointed or appointed in other company for a period of five years from the date on which the said company fails to do so.

Section (165) Number of directorship

No person after commencement of this act, shall hold office as a director, or any alternate directorFor more than 20 c0mpany at a same time, also provided the maximum number of public companies shall not exceed ten.For reckoning the limit of public companies in which a person can be appointed as a director, directorship in private companies that are holding of subsidiary or public company is also included as public company.

166. Duties of Directors

i) Should act in accordance with articles of the company

Act in good faith in order to promote the objects of the company.

Shall exercise his duties with due and reasonable care, skill and diligence

Shall not involve in a situation in which he may have a direct or indirect interest that conflicts ,or possibly may conflict with the interest of the companyShall not achieve or attempt to achieve any undue advantage

Director shall not assign his office or assignments so made shall be void.

Directors contravention shall be punishable with fine which shall not be less than one lakh rupees but which may extend up to 5 lakhs rupees

167(1). Vacation of

Office of Director

• He is disqualified• Absents himself from all the meetings during a year with or without seeking leave of absence of board

• Contravention of section 184 ( Disclosure of interest of director)

• Disqualified by order of tribunal• Convicted by court for any offence• Removed in pursuance of the provision of this act• Appointed as employee in the holding subsidiary or any associate company.

167(2)

• Fuctions as a director even when he knows he has become disqualified• Punishable with the imprisonment for a term which may extend to one year or with a fine which

shall not be less than five lakhs rupees or with both

16(3)• Where all the directors vacate their offices under any of the

disqualification • The promoter or in his absence CG shall appoint the directors

167(4)

• A private company may by its article, provide any other ground for vacation of office of the director

• In addition to any specified in sub- section

168. Resignation of DirectorsNotice in writing to the company

Board shall on receipt of such notice of the same and intimate the registrar

In such a manner, within such time and in such forms as may be prescribed and shall also place the fact of such resignation

Provided that director shall also forward a copy of his resignation within thirty days of resignation in such a manner as may be prescribed.

The resignation of the director shall take effect from the date on which notice is received by the company or the date, if any, specified by the director whichever is later.

Directors shall be liable even after his resignation for the offences which incurred during his tenure. Every director resigned then promoter or in

his absence CG shall appoint

169.Removal of Directors(1) By

ordinary resolutio

n

Can’t remove director

appointed by tribunal

Nothing contained in this sub-section shall apply if

company has availed itself to the principle of

proportional representationSpecial notice is required of any resolution, to appoint any director under this section, or to appoint somebody in place of a director so removedSend a notice of a resolution, to remove any director to the concerned directorDirector can make representation in writing and request its notification to members of the company, the company, if the time permits to do so• State the fact that representation has been made• Send the copy of the resolution to every member of the company to whom notice of

the meeting is sent.• If the notice is not send due to insufficient time or for the company’s default director

without any prejudice of being heard orally require that the representation shall be read out at the meeting

Representation need not be sent out and the representation need not be read out at the meeting either of the company or of any other aggrieved, the tribunal is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter.

170. Register of directors and key managerial personnel and their shareholding• (1) Books at the registered office and it shall contain the

details• (2) A return containing such particulars and documents as

may be prescribed shall be filed with the registrar within thirty days from the appointment• Any changes shall also be filed within thirty days of

change.171. Members right to inspectShall be open for inspection during business hours and it shall be free of cost

Members shall have right to take extracts therefrom and copies thereof, on request of members, be provided free of cost within thirty days

Shall also be kept open for inspection at every annual general meeting of the company and shall be accessible to any person attending the meeting if inspection is refused, or any copy required is not sent within thirty days from the date of receipt of such request, the registrar shall on an application made to him order immediate inspection and supply of copies required thereof

172. Punishment• If a company contravenes any of the provisions

of this chapter and for which no specific punishment is provided therein

• The company and every officer in default shall be punishable with fine which shall not be less than fifty thousands rupees but which may extend up to five lakh rupees

Special Thanks To:

CA Himanshu Rawat

This mightn’t have been possible without his guidance and support.