Ch 1 - Appointment and qualification of Directors - High Importance

Question 1

COMPANY TO HAVE BOARD OF DIRECTORS [SECTION 149] - What is the minimum and Maximum No. of directors the company should have and what is the requirements when the company intends to appoint more than the maximum Number of directors?

Answer 1

According to section 149(1) of the Companies Act, 2013, every company shall have a Board of Directors consisting of individuals as directors. Thus, any person other than individuals like a body corporate, firm or association of persons cannot be appointed as a director.

Every company shall have-
(a) minimum number of directors:
(A) in case of a Public Company-3 Directors,
(B) in case of a Private Company-2 Directors, and
(C) in case of a One Person Company (OPC)-1 Director.

(b) maximum number of directors:15 Directors

Note: If the company wants to appoint more than 15 directors, it can do so after passing a special resolution(And also by altering the AOA by passing special resolution appropriately)

Question 2

COMPANY TO HAVE BOARD OF DIRECTORS [SECTION 149] - What are some exemptions to these provisions provided as per the companies act, 2013?

Answer 2

Question 3

Woman director - Second proviso to section 149(1)] - what is the requirement for appointment of woman directors as per the provisions of the companies act, 2013?

Answer 3

at least one woman director shall be on the Board of such class or classes of companies as has been prescribed in Rule 3 of the Companies (Appointment and Qualifications of Directors) Rules, 2014

Imp Points - If the company is an unlisted company, but other than a public company it need not comply with the aforesaid requirements.

Compliance by a newly incorporated company :A company, which has been incorporated under the Act and is covered by the provisions requiring appointment of a woman director, shall comply with such provisions within a period of six months from the date of its incorporation(Latest RTP/MTP question was based on this provision).

Question 4

Woman director - Second proviso to section 149(1)] - what is the provision for filling of Intermittent vacancy of women director as per the act?

Answer 4

Filling of Intermittent Vacancy of Woman Director: Any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board Meeting or 3 months from the date of such vacancy whichever is later.

Important Points - If the woman director is an Independent women director, in addition to seeing the requirements under this provision we shall also look compliance with the provisions of section 149(4) in relation to minimum Independent directors requirement.

Also the Immediate next board meeting should be the first board meeting that is being conducted after the aforementioned resignation. Also will have to comply with the minimum 120 day requirement for conducting of board meeting should be seen.

It is not mandatory for women directors to be Independent Directors, It is nowhere provided inside the act.

Question 5

What is the requirement for Resident director as per the provisions of section 149(3)?

Answer 5

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

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

Question 6

Retirement of Directors by Rotation [Section 152(6)] - what are the basic provisions for rotational directors and No. of Directors who are liable to retire by rotation, Appt of non rotational Directors and retirement?

Answer 6

Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors** of **public company shall—
(A) be persons whose period of office is liable to determination by retirement of directors by rotation; and
(B) save as otherwise expressly provided in this Act, be appointed by the company in general meeting.

Appointment of non-rotational directors: The remaining directors in the case of any such company shall, in default of, and subject to any regulations in the articles of the company, also be appointed by the company in general meeting.

Question 7

Retirement of Directors by Rotation [Section 152(6)] - What is the meaning of the term total number of directors?

Answer 7

The term total number of directors” shall not include independent directors, whether appointed under the Companies Act, 2013 or any other law for the time being in force, on the Board of a company. Thus, independent directors are not liable to retire by rotation and therefore, they are non-rotational directors.

Further, any person appointed as a nominee director being nominated by any institution in pursuance of the provisions of any law or any agreement (like when a financial institution that has been created by an Act of Parliament nominates a person as its nominee director on the Board of a company which has availed financial assistance from such institution) cannot be considered as a director liable to retire by rotation. Nominee director may also be appointed by the Central Government or the State Government by virtue of its shareholding in a Government company.

Question 8

Deemed re-appointment of retiring Directors under certain circumstances [Section 152(7)] - What are the main provisions in relation to this and what are some exception to deemed re appointment?

Answer 8

Question 9

DIRECTOR IDENTIFICATION NUMBER (DIN) [SECTION 152 (3) AND SECTIONS 153 TO 159 - what is the prohibition for obtaining DIN?

Answer 9

Prohibition on obtaining more than one DIN: According to Section 155, no individual, who has already been allotted a DIN under section 154, shall apply for, obtain or possess another DIN.
Example 9: Mr. Tahir was appointed as a director in Bombay Textiles Private Limited with DIN 00658400. Now, He wants to be appointed as a director in another company. Here, Mr. Tahir shall have to use existing DIN for appointment as a director in new company. He can not apply for another DIN.

Question 10

DIRECTOR IDENTIFICATION NUMBER (DIN) [SECTION 152 (3) AND SECTIONS 153 TO 159 - what is the procedure for cancellation or surrender or De activation and Re activation of DIN?

Answer 10

Rule 11 of the Companies (Appointment and Qualifications of Directors) Rules, 201410 lays down the procedure for cancellation or surrender or deactivation and re-activation of DIN as under:
(1) The Central Government or Regional Director (Northern Region), Noida or any officer authorised by the Regional Director may, upon being satisfied on verification of particulars or documentary proof attached** with the application received along with prescribed fee from any person, **cancel or deactivate the DIN in case -

on an application made in Form DIR-5 by the DIN holder to surrender his or her DIN along with declaration that he has never been appointed as director in any company and the said DIN has never been used for filing of any document with any authority, the Central Government may deactivate such DIN.
However, before deactivation of any DIN in the above case (f), the Central Government shall verify e-records.

Question 11

RIGHT OF PERSONS OTHER THAN RETIRING DIRECTORS TO STAND FOR DIRECTORSHIP [SECTION 160] - what is the requirement of deposit as per the act?

Answer 11

Question 12

RIGHT OF PERSONS OTHER THAN RETIRING DIRECTORS TO STAND FOR DIRECTORSHIP [SECTION 160] - what is the requirement of refund of deposit under the act?

Answer 12

The amount of deposit shall be refunded to such person or, as the case may be, to the member, if the person proposed gets selected as a director or gets more than 25% of the total valid votes cast either on show of hands or on poll.
Explanation – No deposit fees shall be refunded to those candidates who are not appointed as directors or do not get more than 25% of total valid votes in favour of their appointment.

Question 13

APPOINTMENT OF DIRECTOR ELECTED BY SMALL SHAREHOLDERS [SECTION 151] - what is the basic provisions of the act with respect to the manner of appointment of SSH and strength of the SSH required for appointment of their director?

Answer 13

According to Section 151 of Act, a listed company may have one director elected by the small shareholders. This provision enables the small shareholders to place their representative on the Board of Directors of a listed company so that their voice is also listened effectively.

The term “small shareholders” means a shareholder holding shares of nominal value of not more than 20,000 or such other sum as may be prescribed.

Manner of appointment of small shareholders’ director and terms and conditions of such appointment are prescribed by Rule 7 of the Companies (Appointment and Qualifications of Directors) Rules, 2014. These provisions are discussed below:

Question 14

APPOINTMENT OF DIRECTOR ELECTED BY SMALL SHAREHOLDERS [SECTION 151] - what is the requirement for serving of notice by small shareholders? and what is the requirement of statement to be annexed with the notice?

Answer 14

The small shareholders intending to propose a person as a candidate for the post of small shareholders’ director shall give a notice of their intention with the company at least fourteen days before the meeting under their signature specifying the name, address, shares held and folio number of the person whose name is being proposed for the post of director and of the small shareholders who are proposing such person for the office of director.
However, if the person being proposed does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.

• *Statement to be annexed with notice: The notice shall be accompanied by a statement signed by the person whose name is being proposed for the post of small shareholders’ director stating-
  (a) his Director Identification Number (DIN);**
  (b) that he is not disqualified to become a director under the Act; and
  (c) his consent to act as a director of the company.

Question 15

APPOINTMENT OF DIRECTOR ELECTED BY SMALL SHAREHOLDERS [SECTION 151] - what is the requirement for serving of notice by small shareholders? and what is the requirement of statement to be annexed with the notice?

Answer 15

The small shareholders intending to propose a person as a candidate for the post of small shareholders’ director shall give a notice of their intention with the company at least fourteen days before the meeting under their signature specifying the name, address, shares held and folio number of the person whose name is being proposed for the post of director and of the small shareholders who are proposing such person for the office of director.
However, if the person being proposed does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.

• *Statement to be annexed with notice: The notice shall be accompanied by a statement signed by the person whose name is being proposed for the post of small shareholders’ director stating-
  (a) his Director Identification Number (DIN);**
  (b) that he is not disqualified to become a director under the Act; and
  (c) his consent to act as a director of the company.

Question 15

APPOINTMENT OF DIRECTOR ELECTED BY SMALL SHAREHOLDERS [SECTION 151] - what is the requirement for serving of notice by small shareholders? and what is the requirement of statement to be annexed with the notice?

Answer 15

The small shareholders intending to propose a person as a candidate for the post of small shareholders’ director shall give a notice of their intention with the company at least fourteen days before the meeting under their signature specifying the name, address, shares held and folio number of the person whose name is being proposed for the post of director and of the small shareholders who are proposing such person for the office of director.
However, if the person being proposed does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.

• *Statement to be annexed with notice: The notice shall be accompanied by a statement signed by the person whose name is being proposed for the post of small shareholders’ director stating-
  (a) his Director Identification Number (DIN);**
  (b) that he is not disqualified to become a director under the Act; and
  (c) his consent to act as a director of the company.

Question 16

APPOINTMENT OF DIRECTOR ELECTED BY SMALL SHAREHOLDERS [SECTION 151] - what is the requirement for serving of notice by small shareholders? and what is the requirement of statement to be annexed with the notice?

Answer 16

The small shareholders intending to propose a person as a candidate for the post of small shareholders’ director shall give a notice of their intention with the company at least fourteen days before the meeting under their signature specifying the name, address, shares held and folio number of the person whose name is being proposed for the post of director and of the small shareholders who are proposing such person for the office of director.
However, if the person being proposed does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.

• *Statement to be annexed with notice: The notice shall be accompanied by a statement signed by the person whose name is being proposed for the post of small shareholders’ director stating-
  (a) his Director Identification Number (DIN);**
  (b) that he is not disqualified to become a director under the Act; and
  (c) his consent to act as a director of the company.

Question 17

APPOINTMENT OF DIRECTOR ELECTED BY SMALL SHAREHOLDERS [SECTION 151] - can SSD can act as an Independent director? and what is the requirement for vacation of office requirement?

Answer 17

Small shareholders’ director as independent director: Such director shall be considered as an independent director. Therefore, he should meet the eligibility criteria pertaining to independent director as given under section 149(6) and should give a declaration of his independence in accordance with section 149(7) of the Act - This is not true for a nominee director accordingly.

• *Vacation of office: A person appointed as small shareholders’ director shall vacate the office if -
  (a) the director incurs any of the disqualifications specified in Section 164;
  (b) the office of the director becomes vacant in pursuance of Section 16713;
  (c) the director ceases to meet the criteria of independence** as provided in Section 149 (6).

Question 18

APPOINTMENT OF DIRECTOR ELECTED BY SMALL SHAREHOLDERS [SECTION 151 - What is the maximum number of directorships and cooling period requirement?

Answer 18

(viii) Maximum number of directorships: No person shall hold the position of small shareholders’ director in more than two companies at the same time.
However, the second company in which he has been so appointed shall not be in a business which is competing or is in conflict with the business of the first company.

(ix) Cooling period: A small shareholders’ director shall not be appointed in or be associated with such company in any other capacity, either directly or indirectly for a period of three years from the date on which he ceases to hold office as a small shareholders’ director in a company.

Question 19

APPOINTMENT OF ADDITIONAL DIRECTOR, ALTERNATE DIRECTOR, A DIRECTOR TO FILL CASUAL VACANCY AND NOMINEE DIRECTOR [SECTION 161] - what are the basic requirements for additional directors as per section 161(1)?

Answer 19

According to the section:
(i) The articles of a company may confer on its Board of Directors the power to appoint any person as an additional director at any time.
(ii) A person, who fails to get appointed as a director in a general meeting, cannot be appointed as an additional director.
(iii) Additional director shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held(If the meeting is adjourned, cannot continue beyond this date whatsoever), whichever is earlier.
With a view to meet urgent requirements of management, the Board of Directors is empowered to appoint any person as an additional director at any time if such power is granted by the articles. The notable point is that it is not Section 161 (1) but the articles which confer such power.

Important Point - Members not to have any power whatsoever with respect to appointment of additional director.

If time period for holding of the meeting is granted and extended by the registrar, then the office shall be held until that date permitted by the registrar. This is not similar to adjournment.

Question 20

APPOINTMENT OF ADDITIONAL DIRECTOR, ALTERNATE DIRECTOR, A DIRECTOR TO FILL CASUAL VACANCY AND NOMINEE DIRECTOR [SECTION 161] - what are the basic requirements for Alternate directors as per section 161(1)?

Answer 20

i) The Board of Directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting,** appoint a person, **not being a person holding any alternate directorship for any other director in the company or holding directorship in the same company**, to act as an alternate director for a director during his absence **for a period of not less than three months from India.
(ii) No person** shall be appointed as an alternate director for an independent director **unless he is qualified to be appointed as an independent director under the provisions of this Act.
(iii) An alternate director shall not hold office for a period longer than that permissible to the original director in whose place he has been appointed and shall vacate the office if and when the original director returns to India.
(iv) If the term of office of the original director is determined before he so returns to India, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate director.

Important Points - The above provision applies to all the types of directors, MD,ED,WTD etc.

This type of director not to be included in the total No. of directors as per the provisions of section 152(6) of the act.

But, for the purposes of maximum number of directorships as per section 165, alternate directorship shall be considered and it can be in multiple companies as well, but a person can hold the 1 position of alternate directorship in the said one company.

Question 21

APPOINTMENT OF ADDITIONAL DIRECTOR, ALTERNATE DIRECTOR, A DIRECTOR TO FILL CASUAL VACANCY AND NOMINEE DIRECTOR [SECTION 161] - Nominee Director as per section 161(3)?

Answer 21

It is very important that there should first be an agreement which should be able to enforce this and there should be mandatory provision in the articles for appointment of a nominee director accordingly.

Question 22

APPOINTMENT OF DIRECTORS TO BE VOTED INDIVIDUALLY [SECTION 162] - what are the basic provisions in relation to this?

Answer 22

(i) Two or more directors of a company c_annot be elected as directors by a single resolution_. It implies that each person shall be appointed as director by a separate resolution.
(ii) As an exception, two or more persons can be appointed as directors by a single resolution if a proposal to move such a resolution (i.e. appointing two or more persons as directors by a single resolution) has first been agreed to at the general meeting without any vote being cast against it.

(iii) A resolution moved in contravention of the provision stated in point (ii) above shall be void, whether or not objection thereto was raised at the time when it was so moved.
(iv) 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.

Question 23

DISQUALIFICATIONS FOR APPOINTMENT OF DIRECTOR [SECTION 164] -Sub section 2 disqualification under the act?

Answer 23

Sub-section (2) of Section 164 prescribes disqualifications which get attached to a person if he is or has been a director of a company which has committed default as under—
(a) his company has not filed financial statements or annual returns for any continuous period of 3 financial years; or
(b) his company has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for 1year or more.- This will not include any default of payment to any public financial institution as such.
In both the above cases of default, the director concerned shall not be eligible to be reappointed as a director of such defaulting company or appointed in some other company for period of 5 years from the date on which the said company has committed default.

Where a person is appointed as a director in a defaulted company: However, in case a person is appointed as a director of a company which has committed default as per clause (a) or clause (b) above, he shall not incur the disqualification for a period of six months from the date of his appointment

Question 24

MAXIMUM NUMBER OF DIRECTORSHIPS[SECTION 165] - what is the maximum no. of directorships that is allowed under the act?

Answer 24

However, the limit of directorships of 20 companies shall not include the directorship in a dormant company; as also in a Section 8 company - However this will include directorship in subsidiary companies as well.

Question 25

INDEPENDENT DIRECTORS - What is the eligibility requirement criteria for No. of Independent directors for listed and other public companies as per the act?

Answer 25

Number of Independent Directors21: Following companies are required to appoint specified number of independent directors:
(i) Listed Companies :Every listed public company shall have a_t least one-third of the total number of directors_ as independent directors. [Section 149(4)]
Note: Any fraction contained in such 1/3rd number shall be rounded off as one.
(ii) Other Public Companies :The Central Government is empowered to prescribe certain minimum number of independent directors in case of any class or classes of public companies. Taking a step in this direction, Rule 4(1) of the Companies (Appointment and Qualifications of Directors) Rules, 2014 has been framed which states that the

Question 26

INDEPENDENT DIRECTORS - What is the duration of conditions after non fulfilment of which no appointment required?

Answer 26

company which was obligated to appoint independent directors, shall not be required to make such appointment if it ceases to fulfill any of the three conditions relating to paid-up share capital or turnover or outstanding loans, etc. [as laid down above in Rule 4(1)] for three consecutive years. It shall again be required to appoint independent directors if it starts meeting any of such conditions.
Clairification: Explanation to Rule 4 (1) clarifies that the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account.

Question 27

INDEPENDENT DIRECTORS - who can become an Independent director as per the provisions of section 149(6) of the act?

Answer 27

In relation to a company, an independent director means a director(other than a managing director or a whole-time director or a nominee director23), and who fulfills the following criteria:
(1) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(2) (A) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(B) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

who, neither himself nor any of his relatives—
(A) 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 3 financial years immediately preceding the financial year in which he is proposed to be appointed;
However, in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding 3 financial years;
(B) is or has been an employee or proprietor or a partner, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed, of—

(i) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
(ii) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;
(C) holds together with his relatives 2% or more of the total voting power of the company; or

(D) is a Chief Executive or director, by whatever name called, of any non- profit organisation that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company; or

There are other conditions as well, only important ones are mentioned here - see page 1.37 for more details on this.

Question 28

INDEPENDENT DIRECTORS - Remuneration of ID as per section 149(9) of the act?

Answer 28

Question 29

INDEPENDENT DIRECTORS - what is the tenure of ID as per section 149(10) and (11) of the act?

Answer 29

a) Term: Subject to the provisions of section 152 (Appointment of Directors), an independent director shall hold office for a term up to 5 consecutive years on the Board of a company.

(b) Eligibility for Re-appointment: He shall be eligible for re-appointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.
Note: According to First Proviso to Section 169 (1), an independent director re-appointed for second term under Section 149(10) shall be removed by the company only by passing a special resolution.

(ii) Limit on holding of office: An independent director shall not hold office for more than 2 consecutive terms - Shall also be less than 10 years in total
Cooling period for appointment: However, he shall be eligible for appointment after the expiration o_f 3 years of ceasing to be an independent director._
However, during the said period of 3 years he shall not be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Question 30

RESIGNATION OF DIRECTOR [SECTION 168] - Explain basic provisions in relation to the same?

Answer 30

Signing and Filing of Form DIR-11 in case of a Foreign Director40 :In case a company has already filed Form DIR-12 with the Registrar, a foreign director of such company resigning from his office may authorise in writing a practising chartered accountant or cost accountant in practice or company secretary in practice or any other resident director of the company to sign Form DIR-11 and file the same on his behalf intimating the reasons for the resignation.

Question 31

RESIGNATION OF DIRECTOR [SECTION 168] - what is the effective date of resignation of the director? when shall the same take effect from?

Answer 31

This provision will have effect irrespective of the fact that the company has failed to inform the registrar in form DIR 11 accordingly.