APPOINTMENT AND

QUALIFICATIONS OF

DIRECTORS

________ f l_�
LEARNING OUTCOMES

By t h e e n d of t h i s c h a p t e r , s t u d e n t s w i ll be a b l e t o :

□ Comprehend the p ro v i s i o n s relating to the appointment of directors,

n u m b e r of d i r e c t o r s , r e s i d e n t d i r e c t o r , a p p o i n t m e n t of w o m a n d i r e c t o r a n d

others.

□ E x p l a i n t h e D i r e c t o r I d e n t i fi c a t i o n N u m b e r ( D I N ) , its a l l o t m e n t a n d o t h e r

matters r e l a t i n g to D I N .

□ Elaborate as to who are Independent Directors, their appointment,

q u a l i fi c a t i o n s , t e n u r e etc.

□ Specify and recognise the p ro v i s i o n s relating to the first director,

additional director, a l t e rn a t e director, nominee director and casual

v a c a n c y of t h e d i r e c t o r .

□ E x p l a i n t h e p ro v i s i o n s r e l a t i n g to s m a l l s h a r e h o l d e r s ' d i r e c t o r , retirement

by ro t a t i o n , principle of proportional representation for appointment,

m a x i m u m d i r e c t o r s h i p s etc.

□ D e s c r i b e t h e d i s q u a l i fi c a t i o n s p e r t a i n i n g to t h e a p p o i n t m e n t as director,

d u t i e s of d i r e c t o r s , v a c a t i o n of office of d i r e c t o r , r e s i g n a t i o n of d i r e c t o r ,

r e m o v a l of d i r e c t o r , etc.

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

G 4. INTRODUCTION

A c c o r d i n g to S e c t i o n 2 (1 0 ) of t h e C o m p a n i e s Act, 2 0 1 3 ( i n s h o r t 'the A c t') , " B o a r d of Directors" or

" B o a r d " , i n r e l a t i o n to a c o m p a n y , m e a n s the c o l l e c t i v e body of the d ir e c t o r s of the c o m p a n y .

A c c o r d i n g to s e c t i o n 2 ( 3 4 ) " d i r e c t o r " m e a n s a d i r e c t o r a p p o i n t e d to t h e Board of a c o m p a n y .

T h e d i r e c t o r s are t h e i n d i v i d u a l s w h o are a p p o i n t e d to m a n a g e the b u s i n e s s affairs of a c o m p a n y .

A c o m p a n y is a n a r t i fi c i a l p e r s o n created by l a w h a v i n g s e p a r a t e l e g a l e x i s t e n c e b u t w i t h o u t a n y

p h y s i c a l b o d y or m i n d of its o w n . It n e e d s to be m a n a g e d t h ro u g h the h u m a n b e i n g s . T h o u g h the

s h a r e h o l d e r s b e i n g owners are p h y s i c a l l y a v a i l a b l e to m a n a g e t h e i r c o m p a n y b u t as t h e i r n u m b e r

g ro w s , a l l of t h e m t o g e t h e r m a y not be a b l e to m a n a g e the a ff a i r s ; a n d if t h e y d o so it s h a ll be

m i s m a n a g e m e n t a n d n o t h i n g e l s e . T h a t' s why t h e c o n c e p t of directors h a s e m e r g e d . T h e directors

( w i t h i n the p e r m i s s i b l e l i m i t ) m a y be elected from a m o n g t h e s h a r e h o l d e r s o r o u t s i d e r s .

Legal position of Directors

As r e g a r d s l e g a l p o s i t i o n of d i re c t o r s i n r e l a t i o n to a c o m p a n y , they can be c o n s i d e r e d both a g e n t s

a n d t r u s t e e s . As a g e n t s , they b i n d the c o m p a n y as t h e i r p r i n c i p a l as s o o n as they e n t e r i n t o v a r i o u s

t r a n s a c t i o n s on its b e h a l f . T h e law of a g e n c y c o m e s into p l a y a n d it g o v e rn s the r e l a t i o n s h i p between

t h e c o m p a n y a n d its d i r e c t o r s . At t i m e s , the c o m p a n y i t s e l f is p r i n c i p a l as w e l l as a g e n t i n respect

of c e r t a i n acts w h i c h c a n n o t be d e l e g a t e d . T h e C o m p a n i e s Act, 2 0 1 3 lays down p ro v i s i o n s r e q u i r i n g

as to w h e n the c o m p a n y n e e d s to act both as p r i n c i p a l as w e l l as a g e n t a n d w h e n the directors n e e d

to act as a g e n t of the c o m p a n y . It m a y be noted that w h e r e directors are e m p o w e r e d to take certain

d e c i s i o n s , t h e c o m p a n y c a n n o t n e g a t e t h e m or i s s u e d i r e c t i o n s to the d ir e c t o r s d i r e c t i n g t h e m to go

for a p a r t i c u l a r d e c i s i o n e x c e p t t h a t it m a y r e p l a c e the d ir e c t o r s with t h e o n e s of its c h o i c e . As

t r u s t e e s , the directors are r e q u i r e d to take care of p ro p e r t i e s , m o n e y s , trade secrets, etc. b e l o n g i n g

to the c o m p a n y . I n fact, as trustees t h e directors are i n a fi d u c i a r y r e l a t i o n s h i p with the c o m p a n y

( a n d not with a n y i n d i v i d u a l s h a r e h o l d e r ) a n d if s u c h r e l a t i o n s h i p is b ro k e n a n d the c o m p a n y suffers

l o s s e s b e c a u s e of the i l l e g a l acts of the d i r e c t o r s , the e r r i n g d ir e c t o r s w i l l be r e q u i r e d to c o m p e n s a t e

t h e l o s s e s suffered by the c o m p a n y . T h e office of d i r e c t o r s h i p is a n office of t r u s t.

T h e d e fi n i t i o n of 'officer' g i v e n i n S e c t i o n 2 ( 5 9 ) of the Act, inter-alia, i n c l u d e s 'director' w h i c h m e a n s

a d i re ct or, at c e r t a i n t i m e s , is a l s o the o ffi c er of the c o m p a n y . S i n c e a n o ffi c e r is a n e m p l o y e e of the

c o m p a n y , the d i r e c t o r as o ffi c er is a l s o a n e m p l o y e e so far as c e r t a i n p r o v i s i o n s of the C o m p a n i e s

Act, 2 0 1 3 are c o n c e rn e d .

Collective body of the directors

T h e c o l l e c t i v e body of the d i r ec t o r s is c a l l e d t h e ' B o a r d of D i r e c t o r s ' or s i m p l y the ' B o a r d ' .

It is the B o a r d w h i c h takes d e c i s i o n s at its m e e t i n g s a n d not a n y i n d i v i d u a l d i r e c t o r . T h i s is the

r e a s o n w h y a q u o r u m (i . e . p r e s e n c e of m i n i m u m directors at the B o a r d m e e t i n g s ) is p r e s c r i b e d so

t h a t c o l l e c t i v e d e c i s i o n s are t a k e n . At t i m e s , if p e r m i tt e d , t h e d e c i s i o n s can be t a k e n by the B o a r d

w i t h o u t c a l l i n g a m e e t i n g b u t i n that case too they are c o l l e c t i v e d e c i s i o n s .

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

C 2. COMPANY TO HAVE BOARD OF DIRECTORS[SECTION 149]

S e c t i o n 1 4 9 of the Act c o n t a i n s p ro v i s i o n s w h i c h r e q u i r e t h a t every c o m p a n y s h a ll have to constitute

B o a rd of D i r e c t o r s . The p r o v i s i o n s of c o n s t i t u t i o n of Board of Directors are stated as u n d e r :

N u m b e r of D i r e c t o r s : A c c o r d i n g to s e c t i o n 1 4 9 ( 1 ) of the C o m p a n i e s Act, 2 0 1 3 , every c o m p a n y s h a ll

h a v e a Board of Directors c o n s i s t i n g of i n d i v i d u a l s as d i r e c t o r s . Thus, a n y person other than

i n d i v i d u a l s l i k e a body c o r p o r a t e , firm or a s s o c i a t i o n of p e r s o n s c a n n o t be a p p o i n t e d as a d i r e c t o r .

Every c o m p a n y s h a l l h a v e -

(a) m i n i m u m n u m b e r of d i r e c t o r s :

(A) i n case of a P u b l i c C o m p a n y - 3 D i r e c t o r s ,

(B) i n case of a Private C o m p a n y - 2 D i r e c t o r s , a n d

(C) i n case of a O n e P e r s o n C o m p a n y ( O P C ) - 1 D i r e c t o r

(b) m a x i m u m n u m b e r of d i r e c t o r s : 1 5 Directors

Note:lf the c o m p a n y wants to a p p o i n t m o r e t h a n 1 5 d i r e c t o r s , it can do so after p a s s i n g a

special resolution.

N u m b e r of directors in company

Minimum Maximum

15
P u b l i c company Private company OPC
(more directors

can be appointed

by passing a
3 Directors 2 Directors 1 Director special resolution)

Exemptions

(A) A Government company is exempted:

(i) from the application of Section 149 (1) (b) which requires a company to have a

maximum of fifteen directors only; and

(ii) from the application of First Proviso to Section 1 4 9 (1) which enables a company to

appoint more than fifteen directors after passing a special resolution.

However, above exemption is applicable only if such Government company has not

committed a default in filing its financial statements under Section 1 3 7 or Annual return under

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

Section 92 with the registrar. [Notification N o . G . S . R . 463(E), dated 5June, 2 0 1 5 as amended

by Notification No. GSR 582 (E), dated 1 3 - 0 6 - 2 0 1 7 ].

(B) Similar exemption, as above, is also applicable to company incorporated under Section

8 of the Companies Act, 2013 subject to the condition that such a company has not

committed a default in filing its financial statements under Section 1 3 7 or Annual return under

Section 92 with the registrar. [Notification No. 466 (E), dated 5June, 2 0 1 5 (as amended by

Notification No. 584 (E), dated 1 3 June, 2 0 1 7 ) ]

(c) W o m a n d i r e c t o r : At l e as t o n e w o m a n d i r e c t o r s h a l l be

on the B o a r d of s u c h c l as s o r c l a s s e s of c o m p a n i e s as

has been prescribed in Rule 3 of the Companies

(Appointment and Q u a l i fi c a t i o n s of Directors) Rules,

2 0 1 4 [ S e c o n d proviso to s e c t i o n 1 4 9 ( 1 )]

R u l e 3 p r o v i d e s that the fo l l o w i n g c l a s s e s of c o m p a n i e s

shall appoint at least one woman director-

( every listed company

]

[ every other p u b l i c company having

]

p a i d u p s h a r e c a p i t a l of 1 0 0 crore or m or e , or

turnover of 300 crore or more

Explanation-For the p u r p o s e s of h a v i n g a w o m a n d i r e c t o r o n the b o a r d , it is cl a r i fi e d t h a t the

p a i d u p s h a r e c a p i t a l o r t u rn o v e r , as the case m a y b e , as on the last date of latest a u d i t e d

fi n a n c i a l s t a t e m e n t s s h a l l be t a k e n i n t o a c c o u n t.

C o m p l i a n c e by a newly i n c o r p o r a t e d c o m p a n y : A c o m p a n y , w h i c h h a s b e e n i n c o r p o ra t e d

u n d e r the Act a n d is covered by the p r o v i s i o n s r e q u i r i n g a p p o i n t m e n t of a w o m a n d ir e c t o r ,

shall comply with such p ro v i s i o n s within a period of six months from the date of its

incorporation.

F i lli n g of I n t e r m i tt e n t V a c a n c y of W o m a n D i r e c t o r : A n y i n t e r m i tt e n t v a c a n c y of a w o m a n

d i r e c t o r s h a l l be fi l l e d - u p by the B o a r d at the e a r l i e s t b u t not later t h a n i m m e d i a t e next Board

M e e t i n g or 3 m o n t h s from the date of s u c h vacancy w h i c h e v e r is l a t e r .

E x a m p l e 1 : S h e e t a l was o c c u p y i n g the office of w o m a n director in a c o m p a n y b u t d u e to h e r

s u d d e n d e at h on 1 7 t h M a r c h , 2 0 1 9 , the i n t e r m i tt e n t v a c a n c y so occurred was r e q u i r e d to be

fil l e d - u p at the e a r l i e s t b e c a u s e s h e was the o n l y w o m a n director on the b o a r d . The i m m e d i a t e

B oa r d m e e t i n g was h e l d on 25th J u n e , 2 0 1 9 . T h e v a c a n c y of the w o m e n director m u s t be

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

fil l e d - u p l a t e s t by 2 5 t h J u n e , 2 0 1 9 o r w i t h i n t h r e e m o n t h s from the date of s u c h v a c a n c y

i . e . 1 6 th J u n e , 2 0 1 9 w h i c h e v e r i s l a t e r i . e . , by 2 5 " J u n e 2 0 1 9 .

(d) R e s i d e n t D i r e c t o r : E v e r y c o m p a n y s h a l l h a v e at l e a s t o n e d i r e c t o r w h o stays i n I n d i a fo r a

total p e r i o d of n o t l e s s t h a n o n e h u n d r e d a n d e i g h t y - t w o d a y s d u r i n g the fi n a n c i a l y e a r .

However, in case of a newly incorporated c o m p a n y the above r e q u i r e m e n t s h a ll apply

p ro p o r t i o n a t e l y at t h e e n d of t h e fi n a n c i a l y e a r i n w h i c h it is i n c o r p o r a t e d . [ S e c t i o n 149(3)]

(e) I n d e p e n d e n t D i r e c t o r : S p e c i fi e d p u b l i c c o m p a n i e s are r e q u i r e d

to a p p o i n t i n d e p e n d e n t d i r e c t o r s o n t h e i r B o a r d with a v i e w to

boost the level of corporate g o v e rn a n c e . Such S p e c i fi e d

c o m p a n i e s are t h e b a c k b o n e of a n y e c o n o m y a n d t h e r e fo r e , t h e y

must be managed in the best possible manner including

adhereing to the s p e c i fi e d legal p ro v i s i o n s . An independent

d i r e c t o r n e e d s to h a v e a n i n d e p e n d e n t m i n d s e t w h i c h s h o u l d not

be u n d u l y i n fl u e n c e d by t h e o t h e r m e m b e r s of t h e B o a r d ; a n d if

s u c h m e m b e r s take a n y d e c i s i o n w h i c h i s i l l e g a l o r n o t i n t h e best i n t e r e s t of t h e c o m p a n y

o r e c o n o m y , it m u s t be h i n d e r e d by the i n d e p e n d e n t d i r e c t o r s at t h e o u t s e t. T h e p ro v i s i o n s

re l a t i n g to i n d e p e n d e n t d i r e c t o r s are d i s c u s s e d l a t e r i n the C h a p t e r .

(f) I n t e r e s t e d D i r e c t o r : An i n t e r e s t e d d i r e c t o r is o n e a m o n g t h e o t h e r d i re c t o r s w h o c o n s t i t u t e

B o a r d of D i r e c t o r s . I n fact, w h e n a n e x i s t i n g d i r e c t o r b e c o m e s i n t e r e s t e d i n a t r a n s a c t i o n

of t h e c o m p a n y , h e i s c a l l e d i n t e r e s t e d d i r e c t o r ; a n d h e n e e d s to d i s c l o s e h i s i n t e r e s t at the

a p p ro p r i a t e fo r u m a n d at a p p ro p r i a t e t i m e . T h e p ro v i s i o n s r e g a r d i n g i n t e r e s t e d d i r e c t o r are

discussed in another Chapter.

(g) Executive and Non-Executive Directors: The Board of D i r e c t o r s may comprise both

executive and non-executive directors. The executive directors are responsible fo r

managing d i ff e r e n t business operations undertaken by the company. It is their

r e s p o n s i b i l i t y that the d e p a r t m e n t s w h i c h t h e y h e a d o p e r a t e s m o o t h l y . A w h o l e t i m e d i r e c t o r

and managing director are covered in this category of d i r e c t o r s . In contrast, the non­

e x e c u t i v e d i r e c t o r s p a r t i c i p a t e t h ro u g h B o a r d m e e t i n g s i n d i s c u s s i o n s r e l a t i n g to fr a m i n g

of policies fo r the e ffi c i e n t management of the company. Professional directors and

n o m i n e e d i r e c t o r s are c o v e r e d i n t h i s c a t e g o r y of d i r e c t o r s . I n d e p e n d e n t d i r e c t o r s are a

type of n o n - e x e c u t i v e d i r e c t o r s . T h e y a r e n o t as active as e x e c u t i v e d i r e c t o r s on t h e b o a r d

of t h e c o m p a n y . T h e y are h e l d to be l i a b l e o n l y if t h e y k n o w i n g l y c o n s e n t e d to t h e w ro n g f u l

acts.

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

CG 3. A P P O I N T M E N T OF DIRECTORS [SECTION 152]

S e c t i o n 1 5 2 of the Act d e a l s with the matters re l a t i n g to a p p o i n t m e n t of d i r e c t o r s .

(i) A p p o i n t m e n t of F i r s t Directors

W her e no p ro v i s i o n is m a d e in the a r t i c l e s of a c o m p a n y for the a p p o i n t m e n t of the first

d i r e c t o r s , t h e s u b s c r i b e r s to t h e m e m o r a n d u m w h o are i n d i v i d u a l s s h a l l be d e e m e d to be

the first directors of the c o m p a n y u n t i l the d i r e c t o r s are d u l y a p p o i n t e d . [ S e c t i o n 1 5 2 ( 1 )]

I n case of a O n e P e r s o n C o m p a n y ( O P C ) , a n i n d i v i d u a l b e i n g m e m b e r s h a l l be d e e m e d to

be its first director until the director or directors are duly appointed by the member in

a c c o r d a n c e with t h e p ro v i s i o n s of t h i s s e c ti o n . [ S e c ti o n 1 5 2 ( 1 ) ]

I n s i m p l e w o r d s , u s u a l l y , articles of the c o m p a n y c o n t a i n the

names of the first d i r e c t o r s . In case it is not so, then the

i n d i v i d u a l s u b s c r i b e r s to the m e m o r a n d u m are d e e m e d to be

the first directors. The c or p or a t e bodies, if they are also

s u b s c r i b e r s , s h a l l not be c a p a b l e of b e c o m i n g d i r e c t o r s . T h e

first directors s h a l l h o l d the office u n t i l the directors are d u l y

appointed. I n fact, t h e term of first directors is l i m i t e d to the

h o l d i n g of first A n n u a l G e n e r a l M e e t i n g ( A G M ) . S o far as O P C is c o n c e rn e d , the i n d i v i d u a l

m e m b e r of the OPC is deemed as first d i r e c t o r . T h e r e a ft e r , such m e m b e r may appoint

d i r e c t o r o r d i r ec t or s as p e r h i s r e q u i r e m e n t s .

(ii) A p p o i n t m e n t of s u b s e q u e n t Directors

Save as o t h e r w i s e e x p r e s s l y p ro v i d e d i n t h i s Act, every d i r e c t o r s h a l l be a p p o i n t e d by t h e

c o m p a n y in g e n e r a l m e e t i n g . [refer S e c t i o n 1 5 2 ( 2 ) ]

At a g e n e r a l m e e t i n g , t h e s h a r e h o l d e r s of the c o m p a n y (i.e. the o w n e r s ) g a t h e r a n d take

d e c i s i o n s . G e n e r a l l y , every d i r e c t o r s h a l l be a p p o i n t e d by the c o m p a n y i n g e n e r a l m e e t i n g

e x c e p t w h er e t h e C o m p a n i e s Act e x p r e s s l y p ro v i d e s s o m e o t h e r p r o c e d u r e fo r a p p o i n t m e n t

of directors.

F o r e x a m p l e , it is e x p r e s s l y p ro v i d e d i n the Act that a d d i t i o n a l directors o r a l t e rn a t e directors

c a n be a p p o i n t e d by the Board of Directors if the a r t i c l e s of the c o m p a n y e m p o w e r Bo a r d i n

1.
this respect

(iii) O t h e r R e q u i r e m e n t s of A p p o i n t m e n t

(a) A ll o t m e n t of D i r e c t o r I d e n t i fi c a t i o n N u m b e r ( D I N ) : A p e r s o n s h a l l be a p p o i n t e d a s

a d i r e c t o r of a c o m p a n y o n l y w h e n h e h a s b e e n a l l o tt e d D I N u n d e r section 1 5 4 o r a n y

o t h e r n u m b e r as m a y be p r e s c r i b e d u n d e r s e c t i o n 1 5 3 . [referSection 1 5 2 ( 3 ) ]

' A s per Section 1 6 1 , explained later on.

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

(b) P r o v i d i n g of D I N a n d fu rn i s h i n g of D e c l a r a t i o n by the p r o p o s e d D i r e c t o r : E v e r y

p e r s o n p r o p o s e d to be a p p o i n t e d as a director by the c o m p a n y i n g e n e r a l m e e t i n g o r

o t h e r w i s e , s h a l l f u rn i s h h i s D i r e c t o r I d e n t i fi c a t i o n N u m b e r ( D I N ) or s u c h o t h e r n u m b e r

as m a y be p r e s c r i b e d u n d e r S e c t i o n 1 5 3 . F u r t h e r , h e s h a l l a l s o f u rn i s h a d e c l a r a t i o n

t h a t h e is not d i s q u a l i fi e d to b e c o m e a d i r e c t o r u n d e r t h i s Act. [refer S e c t i o n 1 5 2 ( 4 )]

(c) W r i tt e n C o n s e n t to act as D i r e c t o r : A person a p p o i n t e d as a d i r e c t o r s h a l l n o t act as

a director u n l e s s h e g i ves h i s written c o n s e n t to h o l d the office as a d i re c t o r . T h e

c o n s e n t s h a l l be f u rn i s h e d to the c o m p a n y on or before h i s a p p o i n t m e n t as a d i r e c t o r

i n Form D I R - 2 .

T h e c o m p a n y s h a ll fi l e the c o n s e n t of the d i r e c t o r with the R e g i s t r a r w i t h i n 30 days of

s u c h a p p o i n t m e n t i n Form D I R - 1 2 a l o n g with the p r e s c r i b e d fee as p r e s c r i b e d [refer

Section 152 (5) and Rule 8 of the Companies (Appointment and Q u a l i fi c a t i o n s of

Directors) R u l e s , 2 0 1 4 ] .

Provided further t h a t i n case the person seeking appointment is a national of a

country w h i c h s h a r e s l a n d b o r d e r with I n d i a , n e c e s s a r y s e c u r i t y c l e a r a n c e from the

M i n i s t r y of H o m e A ff a i r s , G o v e rn m e n t of I n d i a s h a l l a l s o be a tt a c h e d a l o n g w i t h the

c o n s e n t.

E x a m p l e 2 : M r . N a r e s h wants to a p p o i n t h i m s e l f as director i n G l o b a l S e r v i c e s Private

Limited. Mr. Naresh is required to apply for DIN (if he does not have the DIN)

thereafter, he can be a p p o i n t e d as a director i n G l o b a l S e r v i c e s Private Li m i t e d by

g i v i n g written c o n s e n t i n Form D I R - 2 to the c o m p a n y .

G l o b a l Services Private Li m i t e d s h a l l have to fi l e the c o n s e n t of M r . N a r e s h with the

R e g i s t r a r w i t h i n 30 days of such a p p o i n t m e n t i n Form D I R - 1 2 .

(d) E x p l a n a t o r y Statement i n case of a p p o i n t m e n t of I n d e p e n d e n t D i r e c t o r : l n case

a n i n d e p e n d e n t d i r e c t o r is a p p o i n t e d i n the g e n e r a l m e e t i n g , a n e x p l a n a t o r y s t a t e m e n t

fo r s u c h a p p o i n t m e n t a n n e x e d to the notice fo r the g e n e r a l m e e t i n g , s h a l l i n c l u d e a

s t a t e m e n t that i n the o p i n i o n of the B o a r d , he f u l fi l l s the c o n d i t i o n s s p e c i fi e d i n t h i s Act

fo r s u c h a n a p p o i n t m e n t [refer P ro v i s o to S e c t i o n 1 5 2 ( 5 ) ] .

Exemptions

Non-applicability of Section 152 (5):

(1) Section 1 5 2 (5) regarding 'furnishing of consent to act as a director' shall not apply in

case of Government company where appointment of the director is done by the Central

Government or State Government.[Notification No. G . S. R . 463(E), dated 5 June, 2 0 1 5

as amended by Notification No. GSR 582 (E), dated 1 3 - 0 6 - 2 0 1 7 ].

(2) Similar exemption from Section 152(5) is also applicable to a section 8 company.

[Notification No. 466 (E), dated 5June, 2 0 1 5 as amended by Notification No. 584 (E),

dated 1 3 June, 2017].

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

Note:/n both the above cases, the exemption is applicable only if the company has not

committed a default in filing its financial statements under Section 1 3 7 or Annual Return

under Section 92 with the Registrar.

(iv) R e t i r e m e n t of Directors by Rotation [ S e c t i o n 1 5 2 ( 6 )]

S e c t i o n 1 5 2 ( 6 ) d e a l s with re t i r e m e n t of directors by ro t a t i o n . T h e r e a s o n b e h i n d i n c o r p o r a t i o n

of s u c h a p ro v i s i o n i n the Statute is t h a t at n o s t a g e a s e l f - p e r p e t u a t i n g m a n a g e m e n t s h o u l d

take control of the c o m p a n y . U n d e r the m o d e l of s e l f - p e r p e t u a t i n g m a n a g e m e n t , the B o a r d

of Directors is a l l o w e d to c o n t ro l its own c o m p o s i t i o n i . e . s u c h board can dictate t h e terms

l i k e h o w l o n g a d i r e c t o r c a n serve, a n d even it can elect a n d re-elect directors itself. T h i s type

of m o d e l may n o t be c o n d u c i v e to the h e a l t h y growth of the c o m p a n y . I n effect, s h a r e h o l d e r s

are the o w n e r s of the c o m p a n y b u t they c a n n o t u s u r p the powers of the directors a n d interfere

i n the matters of m a n a g i n g the c o m p a n y . T h e c o n c e p t of ro t a t i o n a l directors e n a b l e s t h e m

not to re-elect a r e t i r i n g d i r e c t o r for w h o m they have a n u n f a v o u r a b l e o p i n i o n .

T h e p ro v i s i o n s of S e c t i o n 1 5 2 (6) are stated as u n d e r :

(a) A p p o i n t m e n t of R o t a t i o n a l d i r e c t o r & n o . of directors l i a b l e to retire by r o t a t i o n :

U n l e s s the a r t i c l e s p ro v i d e for the r e t i r e m e n t of a l l d i r e c t o r s at every a n n u a l g e n e r a l

m e e t i n g , not less t h a n t w o - t h i r d s of the total n u m b e r of directors of p u b l i c c o m p a n y

shall-

(A) be p e r s o n s w h o s e p e r i o d of office is l i a b l e to d e t e r m i n a t i o n by r e t i r e m e n t of

directors by ro t a t i o n ; a n d

(B) save as o t h e r w i s e e x p r e s s l y p ro v i d e d i n t h i s Act, be a p p o i n t e d by the c o m p a n y

in general m e e t i n g .

(b) A p p o i n t m e n t of n o n - r o t a t i o n a l d i r e c t o r s : T h e r e m a i n i n g directors i n the case of any

s u c h c o m p a n y s h a ll , i n d e f a u l t of, a n d s u b j e c t to a n y r e g u l a t i o n s i n the a r t i c l e s of the

c o m p a n y , a l s o be a p p o i n t e d by the c o m p a n y i n g e n e r a l m e e t i n g .

(c) R e t i r e m e n t from office of r o t a t i o n a l d i r e c t o r : At the first a n n u a l g e n e r a l m e e t i n g of

a p u b l i c c o m p a n y h e l d next after the d a t e of t h e g e n e ra l m e e t i n g at w h i c h the first

d i r e c t o r s are a p p o i n t e d a n d at every s u b s e q u e n t a n n u a l g e n e r a l m e e t i n g , o n e - t h i r d of

s u c h of the directors for t h e t i m e b e i n g as are l i a b l e to retire by r o t a t i o n , or if t h e i r

n u m b e r is n e i t h e r three n o r a m u l t i p l e of t h r e e , t h e n , the n u m b e r n e a r e s t to o n e - t h i r d ,

s h a l l retire from office.

It is to be noted t h a t the p ro v i s i o n r e g a r d i n g ' r e t i r e m e n t by r o t a t i o n ' is a p p l i c a b l e to a

p u b l i c c o m p a n y o r a private c o m p a n y w h i c h is s u b s i d i a r y of a p u b l i c c o m p a n y . I n o t h e r

words, a private l i m i t e d c o m p a n y w h i c h is not a s u b s i d i a r y of a p u b l i c c o m p a n y , i s

e x e m p t e d a n d t h e r e fo r e , if the a r t i c l e s p e r m i t it can a p p o i n t a l l its d i r e c t o r s as n o n ­

r o t a t i o n a l directors or p e r m a n e n t d i r e c t o r s .

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

T h e a r t i c l e s of a p u b l i c c o m p a n y m a y p ro v i d e fo r the r e t i r e m e n t of a l l the directors at

every a n n u a l g e n e r a l m e e t i n g . If s u c h is not t h e c a s e , then not less t h a n t w o - t h i r d s of

t h e total n u m b e r of d i re c t o r s of that p u b l i c c o m p a n y s h a l l be the p e r s o n s who are l i a b l e

to retire by rotation. I n o t h e r w o r d s , the a r t i c l e s m u s t p r o v i d e t h a t m i n i m u m two-thirds

of the total n u m b e r of directors s h a l l be l i a b l e to r e ti r e m e n t by ro t a t i o n . S u c h d i r e c t o r s

are c a l l e d ro t a t i o n a l d i r e c t o r s .

T h e term"total n u m b e r of directors" s h a l l n o t i n c l u d e i n d e p e n d e n t d i r e c t o r s , w h e t h e r

a p p o i n t e d u n d e r the C o m p a n i e s Act, 2 0 1 3 o r a n y o t h e r law for the t i m e b e i n g i n force,

o n the Board of a c o m p a n y . T h u s , i n d e p e n d e n t directors are not l i a b l e to retire by

rotation a n d t h e r e fo r e , they are n o n - r o t a t i o n a l d i r e c t o r s .

2
Further, any person appointed as a nominee director being nominated by any

i n s t i t u t i o n i n p u r s u a n c e of t h e p ro v i s i o n s of a n y law or a n y a g r e e m e n t ( l i k e w h e n a

fi n a n c i a l i n s t i t u t i o n that has been created by a n Act of P a r l i a m e n t n o m i n a t e s a person

as its nominee director on the Board of a company which has availed fi n a n c i a l

a s s i s t a n c e from s u c h i n s t i t u t i o n ) c a n n o t be c o n s i d e r e d as a d i r e c t o r l i a b l e to retire by

ro t a t i o n . N o m i n e e d i r e c t o r m a y a l s o be a p p o i n t e d by the C e n t r a l G o v e rn m e n t or the

State G o v e rn m e n t by v i r t u e of its s h a r e h o l d i n g i n a G o v e rn m e n t c o m p a n y .

O n e - t h i r d of directors to retire at A G M : O n c e the n u m b e r of directors w h o are l i a b l e

to retire by rotation is d e t e r m i n e d , o n l y o n e - t h i r d o u t of that n u m b e r s h a l l r e t i r e . If s u c h

n u m b e r is n e i t h e r three n o r a m u l t i p l e of t h r e e , t h e n , the n u m b e r n e a r e s t to o n e - t h i r d ,

s h a l l be c o n s i d e r e d a n d s u c h of the d i r e c t o r s s h a l l retire from o ffi c e .

E x a m p l e 3 : Khatkhata Advisory Li m i t e d c o n s t i t u t e d its board with 1 2 d i r e c t o r s i n w h i c h

2 directors are i n d e p e n d e n t directors a n d 1 director is a n o m i n e e d i r e c t o r . As per the

p ro v i s i o n of section 1 5 2 of the C o m p a n i e s Act, 2 0 1 3 , the c o n c e p t of r e t i r e m e n t by

rotation of rotational directors shall be applicable to public company. T h e r e fo r e ,

K h a t k h a t a Advisory Li m i t e d s h a ll be r e q u i r e d to c a l c u l a t e the n u m b e r of ro t a t i o n a l

directors w h i c h is l i a b l e to retire by rotation.

Total n u m b e r of directors who are h o l d i n g t h e i r office is 1 2 d i r e c t o r s . It s h o u l d be noted

that at l e a s t 2/3 of total n u m b e r of directors sh a ll be li a bl e to retire by rotation.

However, i n d e p e n d e n t director a n d n o m i n e e director s h a ll not be c o u n t e d in "total

n u m b e r of the directors". T h u s , 1 2 Directors l e s s 3 Directors i . e . 9 directors s h a l l be

counted for "total n u m b e r of the directors".

H e r e , 6 directors (9 2 / 3 = 6 ) sh a ll be l i a b l e to retire by r o t a t i o n . N o w , 1 / 3 of directors

l i a b l e to retire by rotation ( i . e . 6 1 / 3 = 2 directors), s h al l a c t u al l y retire by rotation at

AGM.

2
Refer S e c t i o n 1 6 1 ( 3 ) .

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

E x a m p l e 4 : A c o m p a n y is h a v i n g 6 directors.

Directors l i a b l e to retire by r ot at i on : 6 2 / 3 i . e . 4

N o . of directors to retire at A G M : 4 1 / 3 , i.e. 1 . 3 3 or n e a r e s t to 1 / 3 is 1 .

E x a m p l e 5 : A c o m p a n y is h a v i n g 7 d i r e c t o r s .

Directors l i a b l e to retire by rotation 7*2/3 i . e . 4 . 7 or 5 ( n o t less t h a n two-third)

N o . of directors to retire at A G M : 5' 1 / 3 i . e . 1 . 6 7 or nearest to 1 / 3 is 2.

E x a m p l e 6 : A c o m p a n y is h a v i n g 9 directors out of w h i c h 3 are i n d e p e n d e n t directors.

T h e 'total n u m b e r of directors' for the p u r p o s e of c a l c u l a t i o n of n u m b e r of r o t a t i o n a l

directors s h a l l be 6 o n l y b e c a u s e 3 i n d e p e n d e n t directors are to be e x c l u d e d . Rest of

t h e c a l c u l a t i o n s s h a l l be as per E x a m p l e g i v e n a b o v e .

(d) D i r e c t o r s l i a b l e to retire by r o t a t i o n : T h e directors w h o a c t u a l l y retire by ro t a t i o n at

every a n n u a l g e n e r a l m e e t i n g s h a l l be t h o s e w h o have been l o n g e s t in office s i n c e

their last a p p o i n t m e n t.I f two or more directors were appointed on the same day,

r e t i r e m e n t by rotation w i l l be decided between them by m u t u a l agreement among

t h e m s e l v e s o r by lot as the case m a y b e .

The above provision ( d ) c l a r i fi e s the b a s i c q u e s t i o n that after the d e t e r m i n a t i o n of

n u m b e r of directors l i a b l e to retire by r o t a t i o n , w h o s h o u l d a c t u a l l y retire at the A G M ?

F o r t h i s p u r p o s e it is provided that the directors who have b e e n l o n g e s t i n the office

s i n c e t h e i r l a s t a p p o i n t m e n t are the directors w h o n e e d to beretired first. H o w e v e r , it

m a y h a p p e n that s o m e of t h o s e were a p p o i n t e d as directors on the s a m e d a y . I n t h a t

case, if t h e r e exists any mutual understanding relating to retirement a m o n g such

d i r e c t o r s , that s h o u l d be fo ll o w e d ; o t h e r w i s e the d e t e r m i n a t i o n s h a l l be d o n e by d r a w

of l o t s .

(e) F ill i n g of v a c a n c y of r o t a t i o n a l d i r e c t o r : At the a n n u a l g e n e r a l m e e t i n g at w h i c h a

d i r e c t o r retires as a fo r e s a i d , the c o m p a n y m a y fi l l u p the v a c a n c y by a p p o i n t i n g the

r e t i r i n g d i r e c t o r or s o m e o t h e r p e r s o n t h e r e t o .

R e - a p p o i n t m e n t : W h e n a d i r e c t o r is retired a v a c a n c y is c r e a t e d . To fi l l that v a c a n c y ,

the company may r e - a p p o i n t the retiring director i t s e l f at the AGM. If the re t i r i n g

d i r e c t o r is not r e - a p p o i n t e d , the c o m p a n y m a y a p p o i n t s o m e o t h e r p e r s o n at h i s p l a c e

3
b u t i n t h a t case p ro v i s i o n s of S e c t i o n 1 6 0 are to be c o m p l i e d w i t h .

The clause regarding a p p o i n t m e n t of directors for fi l l i n g the vacancies created by

r e t i r i n g directors is q u i t e i m p o r t a n t. H o w e v e r , the n u m b e r of directors s h o u l d not fall

s h o r t of m i n i m u m directors r e q u i r e d i n a c o m p a n y at a n y s t a g e . H o w e v e r , so l o n g as

3
S e c t i o n 1 6 0 is d i s c u s s e d l a t e r in the C h a p t e r .

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

the clause regarding minimum required directors is f u l fi l l e d the company may also

r e s o l v e n o t to a p p o i n t a n y o n e i n p l a c e of r e t i r i n g d i r e c t o r .

In case Annual General Meeting is not held on due date, then the retirement of

ro t a t i o n a l directors c a n n o t be postponed to that particular date when the AGM shall

be h e l d i n f u t u r e . T h e d i r e c t o r s w h o are l i a b l e to retire m u s t v a c a t e t h e office of d i r e c t o r

i m m e d i a t e l y w h e n the AGM is o u g h t to h a v e b e e n held.

Non-rotational Directors: Remaining 1/3or less number of total directors (after

d e t e r m i n i n g t h e n u m b e r of r o t a t i o n a l d i r e c t o r s ) a r e not li a b l e to r e t i r e by ro t a t i o n . T h e s e

are c a l l e d n o n - r o t a t i o n a l d i r e c t o r s . T h e y m a y a l s o be a p p o i n t e d at t h e g e n e r a l m e e t i n g

o r as p e r t h e p ro v i s i o n s c o n t a i n e d i n t h e a r t i c l e s of t h e c o m p a n y .

(v) Deemed re-appointment of retiring Directors under certain circumstances

[ S e c t i o n 1 5 2 ( 7 )]

Section 1 5 2 ( 7 ) p r o v i d e s t h e way fo r d e e m e d a p p o i n t m e n t of a r e t i r i n g d i r e c t o r as u n d e r :

(a) A d j o u rn m e n t of g e n e r a l m e e t i n g : l f t h e v a c a n c y of t h e r e t i r i n g d i r e c t o r is n o t so fi l l e d ­

u p a n d t h e m e e t i n g h a s n o t e x p r e s s l y r e s o l v e d n o t to fi l l t h e v a c a n c y , t h e m e e t i n g s h a l l

s t a n d a d j o u rn e d t i l l t h e s a m e d a y i n t h e n e x t w e e k , at t h e s a m e t i m e a n d place.

In case that day is a national holiday, the meeting shall be a d j o u rn e d till the next

s u c c e e d i n g d a y w h i c h is n o t a h o l i d a y , at t h e s a m e t i m e a n d place.

(b) Deemed re-appointment:lf at t h e a d j o u rn e d m e e t i n g a l s o , t h e v a c a n c y of t h e r e t i r i n g

d i r e c t o r is n o t fi l l e d u p a n d that m e e t i n g a l s o h a s not expressly resolved n o t to fil l t h e

vacancy, the retiring director shall be deemed to have been re - a p p o i n t e d at the

a d j o u rn e d m e e t i n g with i m m e d i a t e effect.

E x c e p t i o n s to d e e m e d re-appoinment: In the fo l l o w i n g circumstances, a retiring

d i r e c t o r s h a l l n o t be d e e m e d as r e - a p p o i n t e d :

(A) if at t h a t m e e t i n g or at t h e p r e v i o u s m e e t i n g , a r e s o l u t i o n for t h e r e - a p p o i n t m e n t

of s u c h director has been p u t to the meeting and lost i.e. his re-appointment

h a s not b e e n c o n s i d e r e d fa v o u r a b l y b e c a u s e of n o n - p a s s i n g of r e s o l u t i o n ;

(B) if t h e retiring director h a s , by a n o t i c e in writing a d d r e s s e d to t h e c o m p a n y o r

its B o a r d of d i r e c t o r s , e x p r e s s e d h i s u n w i l l i n g n e s s to be so r e - a p p o i n t e d ;

(C) if he is d i s q u a l i fi e d fo r a p p o i n t m e n t as p e r t h e p ro v i s i o n s of t h e Act;

(D) if a resolution, whether special or o r d i n a r y , is required for h i s a p p o i n t m e n t o r

r e - a p p o i n t m e n t by v i r t u e of a n y p r o v i s i o n s of t h i s Act; o r

(E) if S e c t i o n 1 6 2 is a p p l i c a b l e to t h e case i . e . w h e r e a s i n g l e r e s o l u t i o n was u s e d

to appoint two or more persons as directors without first moving a p ro p o s a l

w h i c h was r e q u i r e d to be a g r e e d to at t h e m e e t i n g a n d no vote was b e i n g cast

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

against it. In such a case, Section 162 is contravened and two or more

appointments made by a single resolution are void. Consequently, retiring

d i r e c t o r is not d e e m e d to be r e - a p p o i n t e d .

Note: F o r the p u r p o s e s of S e c t i o n 1 5 2 , the " r e t i r i n g director" m e a n s a d i r e c t o r retiring by

4.
ro t a t i o n

Exemptions

Non-applicability of Sections 152(6) and 152(7):Section 152(6) and 1 5 2 (7) of the A c t of

2 0 1 3 , shall not apply to:

(a) a Government company, which is not a listed company, in which not less than fifty-one

per cent of paid up share capital is held by the Central Government, or by any State

Government or Governments or by the Central Government and one or more State

Governments;

(b) a subsidiary of a Government company, referred to in (a) above.

subject to the condition that such a company has not committed a default in filing its financial

statements under Section 1 3 7 or Annual Return under Section 92 with the Registrar.

[Notification N o . G . S. R . 463(E), dated 5June, 2 0 1 5 as amended by Notification No. GSR 582

(E), dated 1 3 - 0 6 - 2 0 1 7 ].

C 4. DIRECTOR IDENTIFICATION N U M B E R ( D I N ) [SECTION

1 5 2 (3) AND SECTIONS 1 5 3 TO 159]

5
"Director I d e n t i fi c a t i o n Number" (DIN) :DIN means an i d e n t i fi c a t i o n number a l l o tt e d by the

C e n t r a l G o v e rn m e n t to a n y i n d i v i d u a l , i n t e n d i n g to be a p p o i n t e d as d i re c t o r or to a n y e x i s t i n g d i r e c t o r

of a c o m p a n y , for the p u r p o s e of h i s i d e n t i fi c a t i o n as a d i r e c t o r of a c o m p a n y .

It is p ro v i d e d that the Director I d e n t i fi c a t i o n N u m b e r ( D I N ) o b t a i n e d by t h e i n d i v i d u a l s p r i o r to the

n o t i fi c a t i o n of the 'Specification of Definitions Details Rules' s h a l l be t h e D I N for the p u r p o s e of the

C o m p a n i e s Act, 2 0 1 3 .

F u r t h e r , it is to be noted that " D i r e c t o r I d e n t i fi c a t i o n N u m b e r " ( D I N ) s h a l l i n c l u d e the D e s i g n a t e d

P a r t n e r s h i p I d e n t i fi c a t i o n N u m b e r ( D P I N ) i s s u e d u n d e r s e c t i o n 7 of the L i m i t e d L i a b i l i t y P a r t n e r s h i p

Act, 2 0 0 8 a n d the r u l e s m a d e t h e r e u n d e r .

Example 7: Mr. Rajesh having DIN 00452568 and already appointed in Raj Industries Private

L i m i t e d . N o w , h e wants to a p p o i n t h i m s e l f i n M / s . K a rn a w a t I n d u s t r i e s L L P as a d e s i g n a t e d p a r t n e r .

4
E x p l a n a t i o n to S e c t i o n 1 5 2 ( 7 ) .
5
As p e r R u l e 2 ( 1 ) ( e ) of t h e C o m p a n i e s ( S p e c i fi c a t i o n of D e fi n i t i o n s D e t a i l s ) R u l e s , 2 0 1 4

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

H e r e , he does not r e q u i r e to a p p l y fo r D P I N . As per section 7 of the L i m i t e d L i a b i l i t y P a r t n e r s h i p Act,

2 0 0 8 , D I N can be u s e d as D P I N fo r D e s i g n a t e d P a r t n e r .

R e q u i r e m e n t of D I N : A c c o r d i n g to S e c t i o n 1 5 2 ( 3 ) , no p e r s o n s h a l l be a p p o i n t e d a s a d i r e c t o r of a

c o m p a n y u n l e s s h e h a s b e e n a l l o tt e d the D i r e c t o r I d e n t i fi c a t i o n N u m b e r ( D I N ) u n d e r section 1 5 4 o r

a n y o t h e r n u m b e r as may be p r e s c r i b e d u n d e r s e c t i o n 1 5 3 .

Filing of A p p l i c a t i o n fo r a ll o t m e n t of D I N : S e c t i o n 153 d e a l s with the fi l i n g of a p p l i c a t i o n for

a ll o t m e n t of D I N . A c c o r d i n g l y , e v e r y i n d i v i d u a l i n t e n d i n g to be a p p o i n t e d as d i r e c t o r of a c o m p a n y

s h a l l m a k e a n a p p l i c a t i o n fo r a l l o t m e n t of D I N to the C e n t r a l G o v e rn m e n t i n the p r e s c r i b e d form a n d

m a n n e r a n d a l o n g with p r e s c r i b e d fees.

It is p r o v i d e d that the C e n t r a l G o v e rn m e n t m a y p r e s c r i b e a n y i d e n t i fi c a t i o n n u m b e r w h i c h s h a l l be

treated as Director I d e n t i fi c a t i o n Number and in case any individual holds or acquires such

i d e n t i fi c a t i o n n u m b e r , the r e q u i r e m e n t of S e c t i o n 1 5 3 s h a l l not a p p l y o r a p p l y i n s u c h m a n n e r as

m a y be p r e s c r i b e d .

F u r t h e r , R u l e 9 of the C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of D i r e c t o r s ) R u l e s , 2 0 1 4 states

t h e fo ll o w i n g p r o c e d u r e fo r m a k i n g a n a p p l i c a t i o n for a ll o t m e n t of D I N before a p p o i n t m e n t i n

an existing company:

(1) F i l i n g of a p p l i c a t i o n : Every a p p l i c a n t , w h o i n t e n d s to be a p p o i n t e d as director of an e x i s t i n g

6
c o m p a n y s h a l l m a k e a n a p p l i c a t i o n e l e c t r o n i c a l l y i n Form D I R - 3 , to the C e n t r a l G o v e rn m e n t

fo r a l l o t m e n t of a D i r e c t o r I d e n t i fi c a t i o n N u m b e r ( D I N ) a l o n g with the p r e s c r i b e d f e e s .

It is p ro v i d e d t h a t i n case of p r o p o s e d d i r e c t o r s not h a v i n g D I N , the p a r t i c u l a r s of m a x i m u m

three directors s h a l l be m e n t i o n e d i n Form N o . l N C - 3 2 ( S P I C e ) a n d D I N m a y be a l l o tt e d to

m a x i m u m three p ro p o s e d directors t h ro u g h Form I N C - 3 2 ( S P I C e ) .

E x a m p l e 8- M r . V a r u n , M r . A n k i t a n d M r . Parag are p l a n n i n g to incorporate a private l i m i t e d

c o m p a n y . T h e y do not have D I N b e c a u s e they are b e c o m i n g directors i n any c o m p a n y fo r

the first t i m e . H e r e , they can a p p l y for a l l o t m e n t of D I N a l o n g with the form of i n c o r p o r a t i o n

of the C o m p a n y i . e Form I N C - 3 2 ( S P I C e ) .

(2) P r o v i d i n g of e l e c t r o n i c system to fa c i l i t a t e s u b m i s s i o n of a p p l i c a t i o n : T h e C e n t r a l

G o v e rn m e n t s h a l l p ro v i d e an e l e c t r o n i c system to facilitate s u b m i s s i o n of a p p l i c a t i o n for the

a l l o t m e n t of D I N t h ro u g h the portal o n the w e b s i t e of the M i n i s t r y of Corporate Affairs.

(3) (a) F ill i n g of r e q u i r e d i n fo r m a t i o n i n Form a tt a c h e d with relevant d o c u m e n t s : T h e

applicant s h a l l download Form D I R - 3 from the p o r t a l , fi l l i n the r e q u i r e d p a r t i c u l a r s

6
V i d e N o t i fi c a t i o n N o . S . O . 1 3 5 4 ( E ) dated 2 1 s t M a y , 2 0 1 4 , i s s u e d by M C A , t h e powers a n d f u n c t i o n s of the

C e n t r a l G o v e rn m e n t i n r e s p e c t of a l l o t m e n t of D i r e c t o r I d e n t i fi c a t i o n N u m b e r u n d e r Sections 1 5 3 and 154

s t a n d d e l e g a t e d to the R e g i o n a l D i r e c t o r , J o i n t Director, D e p u t y D i r e c t o r or A s s i s t a n t D i r e c t o r posted i n the

office of R e g i o n a l Director at N e i d a .

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

s o u g h t t h e r e i n , verify a n d s i g n t h e form a n d after a tt a c h i n g c o p i e s of the fo l l o w i n g

d o c u m e n t s , scan a n d file the e n t i r e set of d o c u m e n t s e l e c t r o n i c a l l y -

(i) photograph;

(ii) proof of i d e n t i t y ;

(iii) proof of r e s i d e n c e ;

(iiia) b o a r d r e s o l u t i o n p ro p o s i n g h i s a p p o i n t m e n t as d i r e c t o r i n a n e x i s t i n g c o m p a n y

(iv) s p e c i m e n s i g n a t u r e d u l y v e r i fi e d .

(b) S u b m i s s i o n of d i g i t a ll y s i g n e d F o r m : Form D I R - 3 s h a l l be s i g n e d a n d s u b m i tt e d

e l e c t ro n i c a l l y by the a p p l i c a n t u s i n g h i s or h e r own D i g i t a l S i g n a t u r e Certificate a n d

shall be v e r i fi e d digitally by a company secretary in full time employment of the

c o m p a n y o r by the m a n a g i n g d i r e c t o r o r d i r e c t o r or C E O or C F O of the c o m p a n y i n

w h i c h the a p p l i c a n t is i n t e n d e d to be a p p o i n t e d as director i n a n e x i s t i n g c o m p a n y .

(4) In case the name of a person does not have a last name, then his or h e r fa t h e r ' s or

g r a n d f a t h e r ' s s u rn a m e s h a ll be m e n t i o n e d i n the l a s t n a m e a l o n g with the d e c l a r a t i o n i n Form

No.DIR-3A.

A ll o t m e n t of DIN: According to section 154, the Central G o v e rn m e n t shall allot a Director

I d e n t i fi c a t i o n N u m b e r ( D I N ) to the a p p l i c a n t i n the p r e s c r i b e d m a n n e r w i t h i n o n e m o n t h from the

r e c e i p t of a p p l i c a t i o n .

R u l e 1 0 of t h e C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of D i r e c t o r s ) R u l e s , 2 0 1 4 p r o v i d e s the

fo l l o w i n g p r o c e d u r e fo r rejection or a l l o t m e n t of D I N :

(i ) G e n e r a t i o n of a p p l i c a t i o n n u m b e r - O n the s u b m i s s i o n of the Form D I R - 3 on the portal a n d

on p a y m e n t of the r e q u i s i t e fees, a n a p p l i c a t i o n n u m b e r s h a l l be g e n e r a t e d by the system

automatically.

P ro v i d e d t h a t n o a p p l i c a t i o n n u m b e r s h a l l be g e n e ra t e d i n case of the person a p p l y i n g fo r

D i r e c t o r I d e n t i fi c a t i o n N u m b e r is a n a t i o n a l of a c o u n t r y w h i c h s h a r e s l a n d b o r d e r with I n d i a ,

u n l e s s n e c e s s a r y s e c u r i t y c l e a r a n c e from the M i n i s t r y of H o m e Affairs, G o v e rn m e n t of I n d i a

h a s b e e n a tt a c h e d a l o n g w i t h a p p li c a t i o n for D i r e c t o r I d e n t i fi c a t i o n N u m b e r .

(ii) Communication of issue of DIN-After generation of application number, the Central

G o v e rn m e n t s h a l l process the a p p l i c a t i o n s received fo r a l l o t m e n t of D I N a n d d e c i d e on the

a p p ro v a l or rejection thereof a n d c o m m u n i c a t e the s a m e to the a p p l i c a n t a l o n g with the D I N

a l l o tt e d i n c a s e of a p p r o v a l by way of a l e tt e r by post or e l e c t ro n i c a l l y or i n a n y o t h e r m o d e ,

w i t h i n a p e r i o d of o n e m o n t h from the receipt of s u c h a p p l i c a t i o n .

(iii) I n case of d e f e c t i v e / i n c o m p e l e t e a p p l i c a t i o n - I f the C e n t ra l G o v e rn m e n t , on e x a m i n a t i o n ,

fi n d s s u c h a p p l i c a t i o n to be defective o r i n c o m p l e t e i n a n y respect, it s h a l l g i v e i n t i m a t i o n of

s u c h defect or i n c o m p l e t e n e s s , by p l a c i n g it on the w e b s i t e a n d by e m a i l to the a p p l i c a n t w h o

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

has filed such application. The applicant s h a ll be directed to rectify the defects or

i n c o m p l e t e n e s s by r e s u b m i tt i n g the a p p l i c a t i o n w i t h i n a p e r i o d of 1 5 days of s u c h p l a c i n g

on the w e b s i t e a n d e m a i l.

It is p ro v i d e d that the C e n t r a l G o v e rn m e n t s h al l ­

(a) reject the a p p l i c a t i o n a n d d i r e c t the a p p l i c a n t to file fresh a p p l i c a ti o n with c o m p l e t e

a n d correct i n fo r m a t i o n , w h e r e the defect h a s b e e n rectified p a r t i a l l y or the i n fo r m a t i o n

g i v e n is s t i l l fo u n d to be defective;

(b) treat a n d l a b e l s u c h a p p l i c a t i o n as i n v a l i d i n the e l e c t r o n i c record i n case the

defects are not r e m o v e d w i t h i n the g i v e n t i m e ; a n d

(c) i n fo r m the a p p l i c a n t e i t h e r by way of letter by post o r e l e c t r o n i c a l l y o r i n a n y o t h e r

mode.

(iv) I n case of rejection or i n v a l i d a t i o n of a p p l i c a t i o n , the fee so p a i d with the a p p l i c a t i o n s h a l l

n e i t h e r be r e f u n d e d n o r a d j u s t e d with a n y o t h e r a p p l i c a t i o n .

Note 1 : A l l D I N s a l l o tt e d to i n d i v i d u a l ( s ) by the C e n t r a l G o v e rn m e n t before the c o m m e n c e m e n t of

t h e s e r u l e s s h a l l be d e e m e d to have b e e n a l l o tt e d to t h e m u n d e r t h e s e r u l e s .

Note 2 : T h e D I N so a l l o tt e d u n d e r t h e s e r u l e s is v a l i d fo r t h e l i f e - t i m e of the a p p l i c a n t a n d s h a l l not

be a l l o tt e d to a n y o t h e r p e r s o n .

Procedure for allotment of D I N

• On submission of Form and fees, application no. is generanted on the system

• CG shall process such application

• approval or rejection is communicated to the applicant within 1 month from

receipt of such application

in case of approval, DIN alloted will be sent through by post/electronically/in any

other manner

In case of defective/incomplete application, CG shall place it on website and

intimate by email to the applicant

• direct to rectify the defects/incompletness by resubmitting the application

within 1 5 days of placing on website and email.

• CG shall reject and direct to file fresh application, where defect rectified

partially /information given is defective

• In case of non -removal of defect- treat and label as invalid in electronic

records.

• inform applicant of rejection /invalidation and no-refund or adjustment of paid

fees

P r o h i b i t i o n on o b t a i n i n g more t h a n o n e D I N : A c c o r d in g to S e c t i o n 1 5 5 , n o i n d i v i d u a l , who h a s

a l r e a d y b e e n a l l o tt e d a D I N u n d e r s e c t i o n 1 5 4 , s h a l l a p p l y fo r , o b t a i n o r possess a n o t h e r D I N .

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

Example 9: M r . T a h i r was a p p o i n t e d as a d i r e c t o r i n B o m b a y Textiles Private Li m i t e d with DIN

0 0 6 5 8 4 0 0 . N o w , H e wants to be a p p o i n t e d as a director i n a n o t h e r c o m p a n y . H e r e , M r . T a h i r s h a ll

h a v e to use existing D I N fo r a p p o i n t m e n t as a director in new c o m p a n y . H e can not a p p l y fo r a n o t h e r

DIN.

D i r e c t o r to i n t i m a t e D I N : A c c o r d i n g to S e c t i o n 1 5 6 , every e x i s t i n g director s h a l l , w i t h i n o n e m o n t h

of the r e c e i p t of D I N from the C e n t r a l G o v e rn m e n t , intimate his DIN to t h e c o m p a n y o r a l l the

c o m p a n i e s w h e r e i n he is a d i r e c t o r .

C o m p a n y to i n fo r m D I N to R e g i s t r a r : A c c o r d i n g to section 1 5 7 ( 1 ) , every c o m p a n y s h a l l , w i t h i n

1 5 days of t h e r e c e i p t of i n t i m a t i o n u n d e r s e c t i o n 1 5 6 , f u rn i s h the D I N of a l l its directors to the

R e g i s t r a r o r a n y o t h e r offi c e r o r a u t h o r i t y as m a y be s p e c i fi e d by the C e n t r a l G o v e rn m e n t w i t h s u c h

fees o r a d d i t i o n a l fees as may be prescribed. Every s u c h intimation shall be f u rn i s h e d in the

p r e s c r i b e d form a n d m a n n e r .

A c c o r d i n g to R u l e 1 0A of the C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of Directors) R u l e s , 2 0 1 4 :

(1) Every d i r e c t o r , f u n c t i o n i n g as a d i r e c t o r i n o n e o r more c o m p a n i e s o n or before the 30th J u n e ,

2 0 0 7 a n d who h a s not yet i n t i m a t e d h i s D I N to s u c h c o m p a n y or c o m p a n i e s s h a l l , w i t h i n o n e

m o n t h of the r e c e i p t of Director I d e n t i fi c a t i o n N u m b e r from t h e C e n t r a l G o v e rn m e n t , i n t i m a t e

h i s D i r e c t o r I d e n t i fi c a t i o n N u m b e r to the c o m p a n y o r a l l c o m p a n i e s w h e r e i n he is a d i r e c t o r

a s p e r Form D I R - 3 B .

(2) The intimation by the company of Director I d e n t i fi c a t i o n Number of its d i re c t o r s under

s e c t i o n 1 5 7 s h a l l be f u rn i s h e d i n Form D I R - 3 C w i t h i n 1 5 d a y s of r e c e i p t of i n t i m a t i o n u n d e r

section 1 5 6 .

P u n i s h m e n t fo r f a i l u r e to f u rn i s h the DIN to Registrar: According to Section 157(2) if a n y

c o m p a n y fails to f u rn i s h t h e D I N to R e g i s t ra r , it s h a l l be l i a b l e to a p e n a l t y as u n d e r :

• ? 2 5 , 0 0 0 a n d i n case of c o n t i n u i n g f a i l u r e , with a f u r th e r p e n al t y of ? 1 0 0 for e a c h d a y after

the first d u r i n g w h i c h s u c h f a i l u r e c o n t i n u e s , s u b j e c t to a m a x i m u m of 1 , 0 0, 0 0 0 .

• F u r t h e r , every d e fa u l t i n g officer of the c o m p a n y s h a l l be l i a b l e to a p e n a l t y as u n d e r :

Minimum p e n a l t y of 2 5, 0 0 0 a n d in case of c o n t i n u i n g fa i l u r e , with a f u r t h e r p e n a l t y of

� 1 0 0 fo r each d a y after t h e first d u r i n g w h i c h s u c h f a i l u r e c o n t i n u e s , subject to a m a x i m u m

of 1 , 0 0, 0 0 0 .

O b l i g a t i o n to i n d i c a t e D I N : A c c o r d i n g to S e c t i o n 1 5 8 , e v e r y p e r s o n o r c o m p a n y , w h i l e f u rn i s h i n g

a n y r e t u rn , i n fo r m a t i o n or p a r t i c u l a r s as are r e q u i r e d to be f u rn i s h e d u n d e r the C o m p a n i e s Act, 2 0 1 3 ,

s h a l l m e n t i o n the Director I d e n t i fi c a t i o n N u m b e r i n s u c h r e t u rn , i n fo r m a t i o n or p a r t i c u l a r s i n case

s u c h r e t u rn , i n fo r m a t i o n o r p a r t i c u l a r s relate to the d i r e c t o r or c o n t a i n a n y reference of a n y d i r e c t o r .

P u n i s h m e n t fo r c o n t r a v e n t i o n of S e c t i o n s 1 5 2 , 1 5 5 and 156:Section 1 5 9 p r o v i d e s t h a t if a n y

i n d i v i d u a l o r d i r e c t o r of a c o m p a n y m a k e s a n y d e f a u l t in c o m p l y i n g with a n y of the p ro v i s i o n s of

section 1 5 2 , s e c t i o n 1 5 5 a n d s e c t i o n 1 5 6 , s u c h i n d i v i d u a l o r d i r e c t o r of the c o m p a n y s h a l l be l i a b l e

to a p e n a l t y as u n d e r :

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

• P e n a l t y u p t o 5 0, 0 0 0 a n d w h e r e t h e d e fa u l t is a c o n t i n u i n g o n e , with a further p e n a l t y u p to

500 fo r each d a y after the first d u r i n g w h i c h s u c h d e f a u l t c o n t i n u e s .

C a n c e ll a t i o n o r S u r r e n d e r or D e - a c t i v a t i o n a n d R e - a c t i v a t i o n of D I N :

R u l e 1 1 of t h e C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of D i r e c t o r s ) R u l e s , 2 0 1 4 l a y s down the

p ro c e d u r e for c a n c e l l a t i o n o r s u r r e n d e r or d e a c t i v a t i o n a n d re-activation of D I N as u n d e r :

(1) The Central G o v e rn m e n t or Regional Director ( N o r t h e rn Region), Naida or any officer

a u t h o r i s e d by the R e g i o n a l D i r e c t o r m a y , u p o n b e i n g s a t i s fi e d on v e r i fi c a t i o n of p a r t i c u l a r s or

d o c u m e n t a r y proof a tt a c h e d with the a p p l i c a t i o n received a l o n g with p r e s c r i b e d fee from a n y

p e r s o n , c a n c e l o r d e a c t i v a t e t h e D I N i n case -

(a) t h e D I N is fo u n d to be d u p l i c a t e d i n respect of the s a m e p e r s o n p ro v i d e d the data

related to both the D I N s s h a l l be m e r g e d with the v a l i d l y r e t a i n e d n u m b e r ;

(b) t h e D I N was o b t a i n e d i n a w r o n g f u l m a n n e r o r by fr a u d u l e n t m e a n s ;

H o w e v e r , before c a n c e l l a t i o n or d e a c t i v a t i o n of D I N p u r s u a n t to the c l a u s e ( b ) a b o v e ,

a n o p p o r t u n i t y of b e i n g h e a r d s h a l l be g i v e n to the c o n c e rn e d i n d i v i d u a l.

For this purpose

(i) t h e term " w r o n g f u l m a n n e r " m e a n s if the D I N is o b t a i n e d o n the s t r e n g t h of

d o c u m e n t s w h i c h are n o t l e g a l l y v a l i d o r i n c o m p l e t e d o c u m e n t s are f u rn i s h e d

or o n s u p p r e s s i o n of m a t e r i a l i n fo r m a t i o n o r on the b a s i s of w ro n g certification

or by m a k i n g m i s l e a d i n g o r false i n fo r m a t i o n o r by m i s r e p r e s e n t a t i o n .

(ii) t h e term " fr a u d u l e n t " m e a n s if the D I N is o b t a i n e d with a n i n t e n t to d e c e i v e

a n y o t h e r p e r s o n or a n y a u t h o r i t y i n c l u d i n g the C e n t r a l G o v e rn m e n t.

(c) of the death of t h e c o n c e rn e d i n d i v i d u a l ;

(d) t h e c o n c e rn e d i n d i v i d u a l h a s b e e n d e c l a r e d as a person of u n s o u n d m i n d by a

competent Court;

(e) if the c o n c e rn e d i n d i v i d u a l h a s b e e n a d j u d i c a t e d an i n s o l v e n t.

(f) o n a n a p p l i c a t i o n m a d e i n Form D I R - 5 by the D I N h o l d e r to s u r r e n d e r h i s o r h e r

DIN along with declaration that he has never been appointed as director in any

c o m p a n y a n d t h e s a i d D I N h a s n e v e r b e e n u s e d for fil i n g of a n y d o c u m e n t with a n y

a u t h o r i t y , t h e C e n t r a l G o v e rn m e n t m a y d e a c t i v a t e s u c h D I N .

However, before d e a c t i v a t i o n of a n y D I N i n the a b o v e case (f), the C e n t r a l G o v e rn m e n t

s h a l l verify e - r e c o r d s .

(2) T h e C e n t r a l G o v e rn m e n t or R e g i o n a l D i r e c t o r ( N o r t h e rn R e g i o n ) , o r a n y officer a u t h o r i s e d by

the C e n t r a l G o v e rn m e n t or R e g i o n a l Director ( N o r t h e rn R e g i o n ) s h a l l , d e a c t i v a t e the D i r e c t o r

I d e n t i fi c a t i o n N u m b e r ( D I N ) , of an i n d i v i d u a l who does not i n t i m a t e h i s p a r t i c u l a r s i n e-form

D I R - 3 - K Y C w i t h i n the s t i p u l a t e d t i m e i n a c c o r d a n c e w i t h R u l e 1 2 A .

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

(3) The de-activated DIN shall be re-activated o n l y after e-form DIR-3 is fi l e d a l o n g w i t h t h e fee

as prescribed u n d e r the Companies (Registration O ffi c e s a n d Fees) Rules, 2014.

I n t i m a t i o n of C h a n g e s i n P a r t i c u l a r s s p e c i fi e d i n D I N A p p l i c a t i o n :

Rule 12 of t h e Companies (Appointment and Q u a l i fi c a t i o n s of D i r e c t o r s ) Rules, 2014, provides for

t h e fo l l o w i n g p r o c e d u r e fo r i n t i m a t i o n of c h a n g e s in p a r t i c u l a r s s p e c i fi e d in t h e DIN application:

(1) I n t i m a t i o n of c h a n g e to C e n t r a l G o v e rn m e n t: Every i n d i v i d u a l w h o h a s b e e n a l l o tt e d a D I N

u n d e r these rules s h a ll , in the event of any change in his particulars as stated in Form

DIR-3, i n ti m a t e such c h a n g e ( s ) to t h e Central G o v e rn m e n t w i t h i n a period of thirty days of

such change(s) in Form DIR-6 i n t h e fo l l o w i n g manner, namely:

(i) The a p p l i c a n t s h a l l download Form D I R - 6 from the portal, fi l l i n the relevant changes,

verify t h e form and attach duly scanned copy of t h e p ro o f of t h e changed particulars

and s u b m i t e l e c t ro n i c a l l y ;

(ii) t h e form shall be d i g i t a l l y s i g n e d by a c h a r t e r e d accountant in practice or a c o m p a n y

s e c re t a r y i n p ra c t i c e or a cost a c c o u n t a n t i n practice;

(iii) the a p p l i c a n t s h a l l s u b m i t the Form DIR-6;

(2) A p p l i c a n t to be i n fo r m e d of c h a n g e i n the e l e c t r o n i c d a t a b a s e : T h e Central G o v e rn m e n t ,

upon being s a t i s fi e d , after v e r i fi c a t i o n of s u c h c h a n g e d p a r t i c u l a r s from the e n c l o s e d proofs,

shall incorporate the said changes and i n fo r m the applicant by way of a l e tt e r by post or

electronically or in any other mode c o n fi r m i n g the effect of such change in the electronic

database maintained by t h e Ministry.

(3) Intimation to c o n c e rn e d Registrar:The DIN c e ll of the Ministry shall also i n ti m a t e the

change(s) in the particulars of t h e director s u b m i tt e d to it in Form DIR-6 to the c o n c e rn e d

Registrar(s) u n d e r whose j u r i s d i c t i o n the registered office of t h e company(s) in which such

individual is a d i r e c t o r is s i t u a t e d .

(4) l n d i v i u a l to i n fo r m c h a n g e i n p a r t i c u l a r s to t h e c o m p a n y /i e s : T h e c o n c e rn e d individual

shall also i n t i m a t e the change(s) in h i s p a r t i c u l a r s to t h e c o m p a n y o r c o m p a n i e s i n w h i c h he

is a d i r e c t o r w i t h i n 1 5 days of s u c h c h a n g e .

In the decided c a s e of lmraj Ali Molla v. Union of India, W . P . Nos. 268 and 273 of 2 0 1 9 March 18,

2020, it was held that s i n c e DIN is allocated u n d e r section 154 and there is no provision in Act for

d e a c t i v a t i o n of D I N of a d i r e c t o r o n l y on g ro u n d of d i s q u a l i f i c a t i o n u n d e r section 1 6 4 ( 2 )( a ) or s e c t i o n

1 6 7 ( 1 )( a ) , action of RoC in deactivating DIN of petitioners on ground of s u c h violation of s e c t i o n

1 6 4 ( 2 )( a ) of a p a r t i c u l a r c o m p a n y c o u l d not confer a r i g h t o n R o C to d e a c t i v a t e s u c h DIN.

It was l a i d in Gaurang Balvantlal Shah v. Union of India, R/Special Civil Application Nos. 22435 of

2017 and Others, December 18, 2 0 1 8, that DIN of a director cannot be cancelled or deactivated

except under circumstances mentioned in rule 1 1 of C o m p a n i e s ( A p p o i n t m e n t of D i r e c t o r s ) Rules,

2014.

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

C 5 . RIGHT OF PERSONS OTHER THAN RETIRING DIRECTORS

TO STAND FOR DIRECTORSHIP [SECTION 160]

A person w h o is not a r e t i r i n g director is a l s o e l i g i b l e to s t a n d for d i r e c t o r s h i p . Section 1 6 0 of the Act

a n d R u l e 1 3 of the C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of Directors) R u l e s , 2 0 1 4 c o n t a i n

p ro v i s i o n s i n t h i s respect. T h e s e are d i s c u s s e d as u n d e r :

(i) R e q u i r e m e n t of Written N o t i c e :

(a) Person who a p p l i e s h i s c a n d i d a t u r e as a d i r e c t o r : A person o t h e r t h a n retiring

d i r e c t o r s h a l l be e l i g i b l e for a p p o i n t m e n t as a director i n a c o m p a n y at a n y g e n e r a l

m e e t i n g ( W h e t h e r in A G M o r E O G M ) , if h e has g i v e n a n o t i c e i n w r i t i n g u n d e r h i s h a n d

signifying h i s c a n d i d a t u r e as a director at l e a s t 1 4 days before the m e e t i n g at the

r e g i s t e r e d office of the c o m p a n y .

(b) M e m b e r who i n t e n d s to p r o p o s e o t h e r p e r s o n for d i r e c t o r s h i p : l n s t e a d of a b o v e

p e r s o n , s o m e o t h e r m e m b e r of the c o m p a n y w h o i n t e n d s to p ro p o s e s u c h o t h e r person

as a d i r e c t o r can a l s o g i v e a written notice at the registered office of the c o m p a n y

s i g n i f y i n g h i s i n t e n t i o n to p ro p o s e the o t h e r p e r s o n as a c a n d i d a t e fo r d i r e c t o r s h i p at

l eas t 1 4 days before the m e e t i n g .

(ii) R e q u i r e m e n t of D e p o s i t : The written notice n e e d s to be a c c o m p a n i e d with the d e p o s i t of

1 , 0 0 , 0 0 0 or s u ch h i g h e r a m o u n t a s m a y be p r e s c ri b e d .

Exceptions-The • Independent Director

requirement of deposit
• director recommended by the Nomination and Remuneration
shall not apply in
Committee, if any under section 1 7 8 ( 1 )
following cases of

appointment of • director recommended by the Board of Directors, where there is no

directors Nomination and Remuneration Committee.

(iii) A c t i o n by the c o m p a n y : T h e c o m p a n y s h a l l i n fo r m its m e m b e r s r e g a r d i n g the c a n d i d a t u r e

of a person fo r t h e office of d i r e c t o r i n a c c o r d a n c e with the m a n n e r p r e s c r i b e d i n R u l e 1 3 of

t h e C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of Directors) R u l e s , 2 0 1 4 . The s a m e is stated

below:

At l ea s t 7 days before the g e n e r a l m e e t i n g , the c o m p a n y s h a l l i n fo r m its m e m b e r s of s u c h

candidature-

(1) by s e r v i n g i n d i v i d u a l notices t h ro u g h e l e c t r o n i c m o d e to s u c h m e m b e r s who have

p ro v i d e d t h e i r e - m a i l a d d r e s s e s fo r c o m m u n i c a t i o n p u r p o s e s a n d i n writing to a l l o t h e r

members; and

(2) by p l a c i n g notice of s u c h c a n d i d a t u r e on its w e b s i t e , if a n y .

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

W h e n t h e r e is n o need to serve notices i n d i v i d u a ll y : It s h a l l not be necessary fo r the

c o m p a n y to serve i n d i v i d u a l notices if it advertises s u c h c a n d i d a t u r e , not less t h a n 7 days

b e fo r e the m e e t i n g :

(a) at least once in a v e rn a c u l a r n e w s p a p e r in the p r i n c i p a l v e rn a c u l a r l a n g u a g e of the

district in w h i c h the registered o ffi c e of the c o m p a n y is s i t u a t e d , a n d

(b) at least once in E n g l i s h l a n g u a g e in an E n g l i s h n e w s p a p e r c i r c u l a t i n g in that d i s t r i c t.

(iv) R e f u n d of D e p o s i t: The a m o u n t of d e p o s i t s h a l l be refunded to s u c h person or, as the case

may b e , to the m e m b e r , if the person proposed gets selected as a director or gets more t h a n

2 5 % of the total v a l i d votes cast e i t h e r on show of h a n d s or on p o l l.

Explanation - No d e p o s i t fees s h a l l be refunded to those c a n d i d a t e s who are not a p p o i n t e d

as directors or do not get more t h a n 25% of total v a l i d votes in fa v o u r of t h e i r a p p o i n t m e n t.

Note 1 : For the p u r p o s e s of Section 1 6 0 , the e x p r e s s i o n ' r e t i r i n g director' m e a n s a director

7.
retiring by ro t a t i o n

Note 2 : N o t a l l the directors are retiring directors. T h e r e fo r e , if an a d d i t i o n a l director or an

a l t e rn a t e director or a n o m i n e e director or a director a p p o i n t e d to fi l l a c a s u a l vacancy, is to

be a p p o i n t e d as a r e g u l a r director at the g e n e r a l m e e t i n g , the procedure prescribed by

Section 1 6 0 is r e q u i r e d to be fo l l o w e d . S i m i l a r l y , where a director retires by rotation b u t

instead of r e - a p p o i n t i n g h i m , a new person i n h i s place is proposed to be a p p o i n t e d ,

p ro v i s i o n s of S e c t i o n 1 6 0 are a tt r a c t e d .

C l a r i fi c a t i o n s

(1) A s per Notification No. G . S .R . 465(E), dated 5th June, 2 0 1 5 , in case of Nidhis,the amount

of deposit for the purpose of Section 1 6 0 ( 1 ) shall be "ten thousand rupees". In other words,

a person (not a retiring director) proposing his candidature as director in Nidhis or some other

m e m b e r proposing such person's candidature shall be required to deposit 1 0 , 0 0 0 along

with the written notice.

(2) The MCA vide General Circular No. 38/2014, dated 14th October, 2 0 1 4 , has clarified that

in case of Section 8 companies, their Board of Directors shall decide as to whether the

deposit of 1 , 0 0, 0 0 0 is to be forfeited or refunded if the person proposed as director fails to

secure more than 25% of the valid votes.

7
E x p l a n a t i o n to Section 1 5 2 ( 7 ) .

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

Exemptions

(1) In terms of Notifications No. 4 6 3 (E), dated 5June, 2 0 1 5 , as a m e n d e d by Notifications

No. 582 (E), dated 1 3 June, 2017, Section 160 shall not apply to:

(a) A Government company in which the entire paid up share capital is held by the

Central G o v e rn m e n t , or by any State G o v e rn m e n t or Governments or by the Central

G o v e rn m e n t and one or more State Governments;

(b) A subsidiary of a Government company, referred to in (a) above, in which the entire

paid up share capital is held by the G o v e rn m m e n t company.

(2) In terms of Notifications No. 464 (E), dated 5June, 2 0 1 5 as a m e n d e d by Notifications

No. 583 (E), dated 13 June, 2017, similar exemption from Section 1 6 0 is applicable to a

private company.

(3) In terms of Notifications No. 466 (E), dated 5" June, 2 0 1 5 as amended by Notifications

No. 584 (E), dated 13 June, 2017, similar exemption from Section 160 is also applicable to

Section 8 companies whose articles provide for election of directors by ballot.

Note: In all the three cases me n tioned above e x emption from the application of Section 160

is available only if the c o n c e rn e d com p any has not commi tt ed a default in filing its financial

statements under Section 1 3 7 or A n n u a l return under Section 92 with the Registrar.

O 6. APPOINTMENT OF DIRECTOR ELECTED BY SMALL

SHAREHOLDERS [SECTION 1 5 1 ]

A c c o r d i n g to S e c t i o n 1 5 1 of t h e Act, a listed c o m p a n y m a y have o n e d i r e c t o r elected by the s m a l l

s h a r e h o l d e r s . T h i s p ro v i s i o n e n a b l e s the s m a ll s h a re h o l d e r s to p l a c e t h e i r r e p r e s e n t a t i v e o n the

B o a r d of D i r e c t o r s of a l i s t e d c o m p a n y so t h a t t h e i r v o i c e is a l s o l i s t e n e d effectively.

The term " s m a ll s h a r e h o l d e r s " m e a n s a s h a r e h o l d e r h o l d i n g s h a r e s of n o m i n a l v a l u e of not more

t h a n 2 0 , 0 0 0 or s u c h o t h e r s u m as m a y be p r e s c r i b e d .

Manner of appointment of small shareholders' director and terms and conditions of such

appointment are prescribed by Rule 7 of the Companies (Appointment and Q u a l i fi c a t i o n s of

D i r e c t o r s ) R u l e s , 2 0 1 4 . T h e s e p ro v i s i o n s are d i s c u s s e d b e l o w :

(i) Strength of S m a ll Shareholders required for appointment of t h e i r Director:A listed

c o m p a n y m a y , u p o n n o t i c e of not l e s s t h a n :

(a) o n e t h o u s a n d s m a l l s h a r e h o l d e r s ; or
w h i c h e v e r i s lower

(b) 1 / 1 0 # of th e total n u m b e r of s u ch s h a r eh ol d e r s ,

have a s m a l l s h a r e h o l d e r s ' d i r e c t o r e l e c t e d by the s m a l l s h a r e h o l d e r s .

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

However, a listed company m a y opt to have a d i r e c t o r on suo moto representing small

s h a r e h o l d e r s a n d i n s u c h a case the p r o v i s i o n s g i v e n b e l o w i n P o i n t ( i i ) , s h a l l not a p p l y for

a p p o i n t m e n t of s u c h d i r e c t o r .

(ii) S e r v i n g of n o t i c e by s m a ll s h a r e h o l d e r s : T h e s m a l l s h a r e h o l d e r s i n t e n d i n g to p r o p o s e a

person a s a c a n d i d a t e fo r the post of s m a l l s h a r e h o l d e r s ' d i r e c t o r s h a l l g i v e a n o t i c e of t h e i r

i n t e n t i o n with the c o m p a n y at least fourteen days before the m e e t i n g u n d e r t h e i r s i g n a t u r e

s p e c i f y i n g the n a m e , a d d r e s s , s h a r e s h e l d a n d fo l i o n u m b e r of the p e r s o n w h o s e n a m e is

b e i n g p ro p o s e d fo r the post of d i r e c t o r a n d of the s m a l l s h a r e h o l d e r s who are p ro p o s i n g s u c h

p e r s o n for the office of d i r e c t o r .

H o w e v e r , if the person b e i n g proposed d o e s not h o l d a n y s h a r e s i n the c o m p a n y , the d e t a i l s

of s h a r e s h e l d a n d fo l i o n u m b e r need not be s p e c i fi e d i n the n o t i c e .

(iii) S t a t e m e n t to be a n n e x e d w i t h n o t i c e : T h e n o t i c e s h a l l be a c c o m p a n i e d by a s t a t e m e n t

signed by the person w h o s e name is b e i n g p r o p o s e d fo r the post of s m a ll s h a r e h o l d e r s '

director stating-

(a) h i s Director I d e n t i fi c a t i o n N u m b e r ( D I N ) ;

(b) that he is not d i s q u a l i fi e d to become a director u n d e r the Act; a n d

(c) h i s c o n s e n t to act as a director of the c o m p a n y .

(iv) S m a ll s h a r e h o l d e r s ' d i r e c t o r as i n d e p e n d e n t d i r e c t o r : S u c h d i r e c t o r s h a l l be c o n s i d e r e d

as a n i n d e p e n d e n t director. T h e r e fo r e , he s h o u l d m e e t the e l i g i b i l i t y criteria p e r t a i n i n g to

i n d e p e n d e n t d i r e c t o r as g i v e n u n d e r section 149(6) and should give a declaration of h i s

i n d e p e n d e n c e i n a c c o r d a n c e with s e c t i o n 1 4 9 ( 7 ) of the Act.

(v) Applicability of s e c t i o n 152: The appointment of s m a l l shareholders' director s h a l l be

s u b j e c t to the p ro v i s i o n s of s e c t i o n 1 5 2 except that-

(a) s u c h d i r e c t o r s h a l l not be l i a b l e to retire by ro t a t i o n ;

(b) such d i r e c t o r ' s t e n u r e as s m a l l s h a r e h o l d e r s ' d i r e c t o r s h a l l not exceed a period of

three consecutive years; a n d

(c) o n t h e e x p i r y of the t e n u r e , s u c h d i r e c t o r s h a l l n o t be e l i g i b l e for r e - a p p o i n t m e n t.

(vi) A p p l i c a b i l i t y of S e c t i o n 1 6 4 : A person s h a l l not be a p p o i n t e d as s m a l l s h a r e h o l d e r s ' d i r e c t o r

of a c o m p a n y , if h e is not e l i g i b l e fo r a p p o i n t m e n t in t e r m s of s e c t i o n 1 6 4 w h i c h s p e c i fi e s the

d i s q u a l i fi c a t i o n s fo r a p p o i n t m e n t as a d i r e c t o r .

(vii) V a c a t i o n of o ffi c e : A person a p p o i n t e d as s m a l l shareholders' director s h a ll vacate the office if -

(a) the director incurs any of the d i s q u a l i fi c a t i o n s s p e c i fi e d i n Section 1 6 4 ;

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

8;
(b) t h e office of t h e d i r e c t o r b e c o m e s v a c a n t i n p u r s u a n c e of S e c t i o n 167

( c) the director ceases to meet the criteria of i n d e p e n d e n c e as p r o v i d e d in Section 1 4 9 ( 6 ) .

(viii) M a x i m u m n u m b e r of d i r e c t o r s h i p s : N o p e r s o n s h a l l h o l d t h e p o s i t i o n of s m a l l s h a r e h o l d e r s '

d i r e c t o r i n m o r e t h a n two c o m p a n i e s at the s a m e t i m e .

H o w e v e r , t h e s e c o n d c o m p a n y i n w h i c h he h a s b e e n so a p p o i n t e d s h a l l n o t be i n a b u s i n e s s

w h i c h i s c o m p e t i n g o r is i n c o n f l i c t w i t h t h e b u s i n e s s of t h e fi r s t c o m p a n y .

(ix) Cooling period: A small shareholders' director s h a l l not be appointed in o r be associated

with such company in any other capacity, either directly or indirectly fo r a period of three

years from the d a t e o n w h i c h he c e a s e s to h o l d office as a s m a l l s h a r e h o l d e r s ' d i r e c t o r i n a

company.

G 7. APPOINTMENT OF ADDITIONAL DIRECTOR,

ALTERNATE DIRECTOR, A DIRECTOR TO FILL CASUAL

VACANCY AND N O M I N E E DIRECTOR [SECTION 1 6 1 ]

(A) A d d i t i o n a l Director [Section 1 6 1 ( 1 ) ] : A c c o r d i n g to t h e s e c t i o n :

(i) The a r t i c l e s of a c o m p a n y m a y c o n f e r on its Board of D i re c t o r s t h e p o w e r to a p p o i n t

a n y p e r s o n as a n a d d i t i o n a l d i r e c t o r at a n y t i m e .

(ii) A person, who fa i l s to get appointed as a director in a general meeting, cannot be

a p p o i n t e d a s an a d d i t i o n a l d i r e c t o r .

(iii) A d d i t i o n a l director s h a l l h o l d office u p to t h e date of t h e next a n n u a l g e n e r a l meeting

o r t h e l a s t d a t e on w h i c h t h e a n n u a l g e n e ra l m e e t i n g s h o u l d h a v e b e e n h e l d , w h i c h e v e r

is e a r l i e r .

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

g ra n t e d by t h e a r t i c l e s . T h e n o t a b l e p o i n t is t h a t it is not S e c t i o n 1 6 1 ( 1 ) b u t t h e articles

w h i c h c o n f e r s u c h power.

T h e p e r s o n to be appointed as a d d i t i o n a l director s h o u l d possess DIN and m u s t n o t be t h e

p e r s o n w h o fa i l e d to get a p p o i n t e d in a general meeting. T h i s b r i n g s to t h e force t h e power

of s h a re h o l d e r s i.e. any person discarded as director at a general meeting by the

shareholders cannot get appointed by the Board of Directors through back-door entry.

8
Section 1 6 7 of t h e Act s p e c i fi e s v a r i o u s g ro u n d s , w h i c h if attracted, s h a l l m a k e a director l i a b l e to vacate

h i s o ffic e.

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

F u r t h e r , a n a d d i t i o n a l d i r e c t o r is not a r e t i r i n g d i r e c t o r . T h e r e fo r e , h i s a p p o i n t m e n t as r e g u l a r

d i r e c t o r r e q u i r e s t h a t the p ro v i s i o n s of S e c t i o n 1 6 0 a re fo l l o w e d .

Term of office of a d d i t i o n a l d i r e c t o r : T h e term of a d d i t i o n a l d i r e c t o r is l i m i t e d to the h o l d i n g

of e n s u i n g A n n u a l G e n e r a l M e e t i n g ( A G M ) . Even if the A G M i s not h e l d on the last d u e d a t e ,

the term e n d s there i t s e l f a n d it c a n n o t be e x t e n d e d to a date w h e n the A G M , i n a c t u a l i t y ,

s h a l l be h e l d in future after its d u e d a t e .

(B) Alternate D i r e c t o r [ S e c t i o n 1 6 1 ( 2 )] : A c c o r d i n g to t h i s s e c t i o n :

(i) T h e B o ar d of Directors of a c o m p a n y m a y , if so a u t h o r i s e d by its a r t i c l e s or by a

r e s o l u t i o n passed by the c o m p a n y i n g e n e r a l m e e t i n g , a p p o i n t a p e r s o n , not b e i n g

a person h o l d i n g a n y a l t e rn a t e d i r e c t o r s h i p for a n y o t h e r d i r e c t o r i n the c o m p a n y or

h o l d i n g d i r e c t o r s h i p i n the s a m e c o m p a n y , to act as a n a l t e rn a t e director for a d i r e c t o r

d u r i n g h i s a b s e n c e fo r a p e r i o d of not l e s s than three m o n t h s from I n d i a .

(ii) No person shall be a p p o i n t e d as an a l t e rn a t e director fo r a n i n d e p e n d e n t director

u n l e s s he is q u a l i fi e d to be a p p o i n t e d as a n i n d e p e n d e n t d i r e c t o r u n d e r the p ro v i s i o n s

of t h i s Act.

(iii) An a l t e rn a t e d i r e c t o r s h a l l not h o l d office fo r a period l o n g e r t h a n t h a t p e r m i s s i b l e to

t h e o r i g i n a l d i r e c t o r i n w h o s e p l a c e he h a s b e e n a p p o i n t e d a n d s h a l l vacate the office

if a n d w h e n the o r i g i n a l d i r e c t o r returns to I n d i a .

(iv) If the term of office of the o r i g i n a l director is d e t e r m i n e d before he so r e t u rn s to I n d i a ,

a n y p ro v i s i o n fo r the a u t o m a t i c r e - a p p o i n t m e n t of r e t i r i n g directors i n d e fa u l t of a n o t h e r

a p p o i n t m e n t s h a l l a p p l y to the o r i g i n a l , a n d not to the a l t e rn a t e d i r e c t o r .

T h e po w e r to a p p o i n t a n a l t e rn a t e d i r e c t o r rests with t h e B o a r d of D i r e c t o r s . H o w e v e r , s u c h

power m u s t be conferred by the articles o r by a r e s o l u t i o n p a s s e d at the g e n e ra l m e e t i n g .

An a l t e rn a t e d i r e c t o r is a p p o i n t e d i n p l a c e of a r e g u l a r d i r e c t o r w h o h a s g o n e o u t of I n d i a .

T h e p e r i o d of a b s e n c e of s u c h o r i g i n a l d i r e c t o r from I n d i a m u s t be m i n i m u m t h r e e m o n t h s or

m o r e . A s h o r t a b s e n c e of l e s s t h a n three m o n t h s d o e s not e n t i tl e the Board to a p p o i n t an

a l t e rn a t e d i r e c t o r . S u c h p ro p o s e d a l t e rn a t e d i r e c t o r s h o u l d possess D I N .

A p e r s o n selected fo r a p p o i n t m e n t as a l t e rn a t e d i r e c t o r m u s t n o t be the o n e w h o is h o l d i n g

a n y a l t e rn a t e d i r e c t o r s h i p for a n y o t h er director i n the c o m p a n y . I n o t h e r w o r d s , a p e r s o n w h o

is a l r e a d y a n a l t e rn a t e d i r e c t o r i n the c o m p a n y c a n n o t h o l d a n o t h e r a l t e rn a t e d i r e c t o r s h i p i n

that c o m p a n y . F u r t h e r , the selected p e r s o n m u s t a l s o n o t be a d i r e c t o r i n the s a m e c o m p a n y .

T h u s , a p e r s o n a l r e a d y a d i r e c t o r c a n n o t at the s a m e t i m e be a n a l t e rn a t e d i r e c t o r i n the

s a m e c o m p a n y b u t a p e r s o n h o l d i n g d i r e c t o r s h i p i n a n y o t h e r c o m p a n y can be c o n s i d e r e d

fo r the a p p o i n t m e n t as a l t e rn a t e director. However, for c o n s i d e r i n g maximum n u m b e r of

d i r e c t o r s h i p s of a p e r s o n u n d e r S e c t i o n 1 6 5 , the a l t e rn a t e d i r e c t o r s h i p s h a l l a l s o be c o u n t e d .

T h u s , a fresh a l t e rn a t e d i r e c t o r s h i p s h o u l d be t a k e n u p by t h e p e r s o n c o n c e rn e d o n l y if h i s

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

holding of r e g u l a r as w e l l as a l t e rn a t e d i r e c t o r s h i p s d o e s n o t exceed the m a x i m u m limit.

F u r t h e r , he s h o u l d not be d i s q u a l i fi e d to h o l d t h e office of a d i r e c t o r .

E x a m p l e 1 0 : M r . D e v e n d r a K u m a r h a s b e e n a p p o i n t e d as a n a l t e rn a t e director in p l a c e of

M r . G a u r a v J a i n ( i . e . O r i g i n a l Director) i n U r b a n D e v e l o p m e n t Private L i m i t e d . Now, c o m p a n y

w a n t s to a p p o i n t M r . D e v e n d r a K u m a r as a n a l t e rn a t e director i n p l a c e of M s . S h a i l y J a i s w a l

( i . e . a n o t h e r o r i g i n a l director of the s a m e c o m p a n y ) .

H e r e , M r . D e v e n d r a c a n n o t be a p p o i n t e d as a n a l t e rn a t e d i r e c t o r of a n o t h e r o r i g i n a l d i r e c t o r

of the c o m p a n y .

I n c a s e , the o r i g i n a l d i r e c t o r is a n i n d e p e n d e n t d i r e c t o r a n d h e l e a v e s fo r a p l a c e o u t s i d e

I n d i a fo r three m o n t h s o r m o r e , the p e r s o n who is to be a p p o i n t e d i n h i s p l a c e as a l t e rn a t e

d i r e c t o r m u s t be q u a l i fi e d to be a p p o i n t e d as a n i n d e p e n d e n t d i r e c t o r . I n o t h e r w o r d s , the

status of i n d e p e n d e n c e as w e l l as o t h e r r e q u i s i t e s of a n i n d e p e n d e n t d i r e c t o r m u s t form part

of s u c h a l t e rn a t e d i r e c t o r who is selected fo r a p p o i n t m e n t i n the a b s e n c e of a n i n d e p e n d e n t

director.

A ' w o u l d be a l t e rn a t e d i r e c t or ' is not exempted from f u rn i s h i n g h i s c o n s e n t to act as d i r e c t o r .

T h e r e fo r e , he m u s t f u rn i s h h i s c o n s e n t i n D I R - 2 to the c o m p a n y on or before h i s a p p o i n t m e n t

a n d i n t u rn the c o m p a n y s h a l l fi l e h i s c o n s e n t with t h e R e g i s t ra r i n D I R - 1 2 .

Term of office of alternate d i r e c t o r : T h e term of office of a n a l t e rn a t e d i r e c t o r c o i n c i d e s

with the p e r m i s s i b l e term a p p l i c a b l e to the o r i g i n a l director in whose place he has been

a p p o i n t e d . T h u s , t h e term s h a l l not be l o n g e r t h a n the term w h i c h is p e r m i s s i b l e to t h e o r i g i n a l

d i r e c t o r ; a n d as s o o n as the o r i g i n a l d i r e c t o r ceases to be a director ( d e a t h i n c l u d e d ) the

a l t e rn a t e director fo l l o w s h i s s t ep s a n d is r e q u i r e d to vacate the office. F u r th e r , t h e a l t e rn a t e

d i r e c t o r s h a l l vacate the office i m m e d i a t e l y o n the return of o r i g i n a l d i r e c t o r to I n d i a .

It m a y h a p p e n that the term of o r g i n a l d i r e c t o r e x p i r e s w h i l e h e is s t i l l o u t s i d e I n d i a . I n s u c h

a c a s e , the p r o v i s i o n s r e l a t i n g to a u t o m a t i c d e e m e d r e - a p p o i n t m e n t as e n v i s a g e d i n S e c t i o n

1 5 2 ( 7 ) ( b ) s h a l l a p p l y to the o r i g i n a l director a n d not to the a l t e rn a t e d i r e c t o r a p p o i n t e d i n h i s

p l a c e . T h u s , the o r i g i n a l d i r e c t o r ( a n d n o t a l t e rn a t e director) s h a l l be d e e m e d a s r e - a p p o i n t e d

at the a d j o u rn e d A G M if the c o m p a n y d o e s not a p p o i n t a n o t h e r p e r s o n o n the e x p i r y of the

term of o r i g i n a l d i r e c t o r .

A p p o i n t m e n t of alternate d i r e c t o r by o r i g i n a l d i r e c t o r : The o r i g i n a l d i r e c t o r who is l e a v i n g

to a p l a c e o u t s i d e I n d i a c a n n o t a p p o i n t a n a l t e rn a t e d i r e c t o r i n h i s p l a c e . It is the B o a r d w h i c h

s h a l l m a k e the a p p o i n t m e n t b e c a u s e the a u t h o r i t y for s u c h a p p o i n t m e n t vests i n the B o a r d .

Following example w i l l make the situation clear:

E x a m p l e 1 1 : M r . Q , a Director of P Q R L i m i t e d p r o c e e d i n g on a l o n g fo r e i g n t o u r ( p e r i o d of

d u r a t i o n o u s i d e I n d i a e x c e e d e d three m o n t h s ) , a p p o i n t e d M r . Y as a n alternate director to act

fo r h i m d u r i n g h i s a b s e n c e . T h e a r t i c l e s of the c o m p a n y p ro v i d e for a p p o i n t m e n t of a l t e rn a t e

d i r e c t o r s . M r . Q c l a i m s that he h a s a r i g h t to a p p o i n t a l t e rn a t e d ir e c t o r .

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

As per section 1 6 1 ( 2 ) , the Board of Directors of a c o m p a n y m a y , if so a u t h o r i s e d by its articles

or by a r e s o l u t i o n passed by the c o m p a n y i n g e n e r a l m e e t i n g , a p p o i n t a p e r s o n , not b e i n g a

person h o l d i n g a n y a l t e rn a t e d i r e c t o r s h i p for a n y other director i n the c o m p a n y o r h o l d i n g

d i r e c t o r s h i p i n the s a m e c o m p a n y , to act as a n a l t e rn a t e director for a d i r e c t o r d u r i n g h i s

a b s e n c e for a p e r i o d of not less t h a n three m o n t h s from I n d i a . F ro m the a b o v e p r o v i s i o n it is

c l e a r that the authority to a p p o i n t a l t e rn a t e director h a s b e e n vested i n the Board of Directors

o n l y a n d that too s u b j e c t to e m p o w e r m e n t by the articles or by a r e s o l u t i o n p a s s e d by the

c o m p a n y in g e n e r a l m e e t i n g .

T h e r e fo r e , Q, in this case is not authorized to appoint an a l t e rn a t e director and the

a p p o i n t m e n t of M r . Y is not v a l i d .

(C) N o m i n e e D i r e c t o r [ S e c t i o n 1 6 1 ( 3 ) ] : A c c o r d i n g to t h i s s e c t i o n :

' S u b j e c t to the articles of a company, the Board may a p p o i n t any person as a director

n o m i n a t e d by a n y i n s t i t u t i o n i n p u r s u a n c e of the p r o v i s i o n s of a n y law fo r the t i m e b e i n g i n

force o r of a n y a g r e e m e n t or by the C e n t r a l G o v e rn m e n t o r the State G o v e rn m e n t by v i r t u e

of its s h a r e h o l d i n g i n a G o v e rn m e n t c o m p a n y . '

S i m p l y s t a t e d , a n o m i n e e d i r e c t o r is not l i k e a n y o t h e r d i r e c t o r . H e represents the b o d y w h i c h

m a k e s h i s n o m i n a t i o n fo r a p p o i n t m e n t as d i r e c t o r i n the c o m p a n y . W h e n e v e r a c o m p a n y

obtains fi n a n c i a l assistance from some fi n a n c i a l institution or bank, such instituation

i n v a r i a b l y n o m i n a t e s its r e p r e s e n t a t i v e for s a f e g u a r d i n g its interests t i l l t h e l o a n e d a m o u n t is

completely repaid. The nominee director is expected to ensure that the terms of loan

a g e e m e n t s are r e l i g i o u s l y c o m p l i e d with a l l the t i m e by the c o m p a n y c o n c e rn e d w h i c h h a s

been granted fi n a n c i a l assistance. The Board of Directors (subject to the articles) is

e m p o w e r e d to a p p o i n t a n o m i n e e d i r e c t o r a n d the s h a r e h o l d e r s c a n n o t interefere with s u c h

a p p o i n t m e n t. F u r t h e r , by virtue of its s h a r e h o l d i n g i n a G o v e rn m e n t c o m p a n y , t h e C e n t r a l

G o v e rn m e n t or the State G o v e rn m e n t may also nominate a person for a p p o i n t m e n t as

n o m i n e e d i r e c t o r a n d the Board s h a l l have to fo l l o w the s u i t w i t h o u t a n y h i n d e r a n c e on its

part.

(D) C a s u a l V a c a n c y [ S e c t i o n 1 6 1 ( 4 )] : A c c o r d i n g to t h i s s e c t i o n :

(i) if the office of a n y director a p p o i n t e d by the c o m p a n y i n g e n e r a l m e e t i n g is vacated

before h i s term of office e x p i r e s i n the n o r m a l c o u r s e , t h e r e s u l t i n g c a s u a l v a c a n c y

m a y , i n d e fa u l t of a n d subject to a n y r e g u l a t i o n s i n the a r t i c l e s of t h e c o m p a n y , b e fi l l e d

by the Board of Directors at a m e e t i n g of the Board which shall be s u b s e q u e n t l y

a p p r o v e d by m e m b e r s i n the i m m e d i a t e next g e n e r a l m e e t i n g .

(ii) Any p e r s o n so a p p o i n t e d s h a l l h o l d office o n l y u p to the date u p to w h i c h the d i r e c t o r

i n w h o s e p l a c e he is a p p o i n t e d w o u l d h a v e h e l d office if it h a d not b e e n v a c a t e d .

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

T h e a bo ve p ro v i s i o n s are d i s c u s s e d as u n d e r :

T h e term ' c a s u a l ' m e a n s a s u d d e n h a p p e n i n g i.e. s o m e t h i n g w h i c h h a p p e n e d by c h a n c e or

u n e x p e c t e d l y or u n fo re s e e n b u t not by efflux of t i m e . A c a s u a l v a c a n c y results w h e n the office

of a n y d i r e c t o r a p p o i n t e d i n the g e n e r a l m e e t i n g is vacated before the e x p i r y of h i s term in

the n o r m a l c o u r s e . T h i s is not the v a c a n c y created d u e to the r e t i r e m e n t of a d i r e c t o r . It is

created b e c a u s e of certain o t h e r factors t h a t are not l i n k e d with r e t i r e m e n t l i k e o c c u r r e n c e of

dea t h o r attraction of d i s q u a l i fi c a t i o n or t e n d e r i n g of r e s i g n a t i o n or r e m o v a l , etc. F u r t h e r , i n

t h i s c a s e , the term of the office of d i r e c t o r b e c a u s e of w h i c h the c a s u a l v a c a n c y is created

d o e s not get e x p i r e d i n t h e n o r m a l c o u r s e .

A v a c a n c y w h i c h was created d u e to t h e fact that the elected d i re c t o r d e c l i n e d to a s s u m e the

office after h i s a p p o i n t m e n t at g e n e r a l m e e t i n g c a n n o t be s a i d to r e s u l t i n a c a s u a l v a c a n c y .

I n s u c h a c a s e , w h e n t h er e w a s no a s s u m e of office by the d i r e c t o r , how c a n he vacate it.

T h u s , there a r i s e s no c a s u a l v a c a n c y .

Section 161 (4) does not require that articles should expressly empower the Board of

D i r e c t o r s fo r fi l l i n g a c a s u a l v a c a n c y . W h e n a c a s u a l vacancy occurs it s h a l l be fi l l e d by the

B oa r d at its m e e t i n g by p a s s i n g a r e s o l u t i o n a n d not o t h e r w i s e . T h e v a c a n c y so fi l l e d by the

B oa r d s h a l l be a p p ro v e d s u b s e q u e n t l y by m e m b e r s i n the i m m e d i a t e next g e n e r a l m e e t i n g .

It is to be n ot ed that where a r t i c l e s c o n t a i n a n y r e g u l a t i o n s as r e g a r d s fi l l i n g of c a s u a l v a c a n c y

they n e e d to be fo l l o w e d by the B o a r d ; b u t the s u b s e q u e n t a p p r o v a l of s u c h fil l i n g of v a c a n c y

by m e m b e r s i n the i m m e d i a t e next g e n e r a l m e e t i n g i s a m u s t.

As we have n o t i c e d , t h e c a s u a l v a c a n c y a r i s e s w h e n a n y d i r e c t o r a p p o i n t e d i n the g e n e r a l

meeting vacates his office before the e x p i r y of h i s t e r m . Thus, such a p p o i n t m e n t of the

d i r e c t o r w h o vacates h i s office m u s t have b e e n m a d e i n the g e n e r a l m e e t i n g a n d w h e n the

c a s u a l v a c a n c y is fil l e d by the Board a n d s u b s e q u e n t l y a p p ro v e d by t h e m e m b e r s i n the

i m m e d i a t e next g e n e r a l m e e t i n g , the m a tt e r e n d s t h e r e . S u b s e q u e n t l y , if the c a s u a l v a c a n c y

so fi l l e d is a g a i n vacated d u e to s o m e c a s u a l o c c u r e n c e , t h e n it c a n n o t be s a i d to be a c a s u a l

v a c a n c y b e c a u s e it a ro s e a g a i n s t a n a p p o i n t m e n t w h i c h was not m a d e in the g e n e r a l m e e t i n g .

S u c h type of v a c a n c y n e e d s to be fi l l e d by the Board by a p p o i n t i n g a n a d d i t i o n a l d i r e c t o r .

A d i r e c t o r a p p o i n t e d to fill a c a s u a l v a c a n c y is not a ' c a s u a l d i r e c t o r ' . H e enjoys a l l the powers

as w e l l as is r e q u i r e d to b e a r t h e r e s p o n s i b i l i t i e s of t h e d i r e c t o r i n w h o s e p l a c e he is a p p o i n t e d

e x c e p t that where the e a r l i e r d i r e c t o r was a n 'interested director', h i s ' i n t e r e s t ' c a n n o t be

a tt a c h e d to the new d i r e c t o r fil l i n g the c a s u a l v a c a n c y .

I n case a c o m p a n y h a s a p p o i n t e d a w o m a n d i r e c t o r b e c a u s e of statutory re q u i r e m e n t a n d a n

i n t e r m i t t e n t v a c a n c y is created i n the office of s u c h w o m a n d i r e c t o r , the Board s h a l l fil l s u c h

c a s u a l v a c a n c y at the e a r l i e s t b u t not l ate r t h a n immediate next Board meeting or three

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

9
m o n t h s from the date of c r e a t i o n of s u c h v a c a n c y , w h i c h e v e r is l a t e r . S i m i l a r is the case w i t h

a n i n d e p e n d e n t d i r e c t o r w h o s e i n t e r m i tt e n t v a c a n c y m u s t be fil l e d at the e a r l i e s t b u t not la t e r

t h a n i m m e d i a t e next Board m e e t i n g o r three m o n t h s from the date of occurrence of s u c h

v a c a n c y , wh i c h e v e r is l a t e r . " H o w e v e r , there is no s u ch u r g e n c y so far as fi l l i n g of a n y o th e r

c a s u a l v a c a n c y is c o n c e rn e d (i.e. not of a w o m a n d i r e c t o r o r of a n i n d e p e n d e n t director)

because if the B oar d of Directors feels t h a t the affairs of the c o m p a n y can be managed

w i t h o u t a p p o i n t i n g a n y b o d y , t h e n the B o a r d can p o s t p o n e s u c h a p p o i n t m e n t.

Term of office of a d i r e c t o r a p p o i n t e d to fill a c a s u a l v a c a n c y : T h e term of office of a

d i r e c t o r a p p o i n t e d to fil l a c a s u a l v a c a n c y c o n t i n u e s t i l l s u c h t i m e u p to w h i c h the term of the

d i r e c t o r b e c a u s e of w h o m the c a s u a l v a c a n c y was created w o u l d have c o n t i n u e d . T h u s , the

person fi l l i n g the c a s u a l v a c a n c y s h a l l h o l d office u p to t h e date u p to w h i c h the director i n

w h o s e p l a c e h e is a p p o i n t e d w o u l d h a v e c o n t i n u e d i n the office w h i c h in o t h e r words m e a n s

' u p to t h e u n e x p i r e d term of s u c h d i r e c t o r ' . The ' c o n t i n u a t i o n c l a u s e ' is a p p l i c a b l e b e c a u s e

of the P ro v i s o m e n t i o n e d u n d e r S e c ti o n 1 6 1 ( 4 ) ; b u t fo r the a p p l i c a t i o n of t h i s ' c o n t i n u a t i o n

c l a u s e ' the a p p o i n t m e n t m a d e by the Board n e e d s to be a p p r o v e d by the m e m b e r s i n the

i m m e d i a t e next g e n e r a l m e e t i n g .

C 8. APPOINTMENT OF DIRECTORS TO BE VOTED

INDIVIDUALLY [SECTION 1 6 2 ]

S e c t i o n 1 6 2 of the C o m p a n i e s Act p ro h i b i t s a p p o i n t m e n t of directors by p a s s i n g a s i n g l e r e s o l u t i o n .

E l e c t i n g more t h a n o n e p e r s o n as directors t h r o u g h a s i n g l e r e s o l u t i o n d e p r i v e s t h e s h a r e h o l d e r s

from e x e r c i s i n g t h e i r c h o i c e to reject a s p e c i fi c i n d i v i d u a l. I n s u c h a s i t u a t i o n , e i t h e r t h e y w i l l have

to vote a g a i n s t o r i n fa v o u r of a l l the p ro s p e c t i v e directors i . e . it s h a l l be d i ffi c u l t fo r t h e m to reject a

p a r t i c u l a r p e r s o n as d i r e c t o r u n l e s s t h e y reject s u c h r e s o l u t i o n in toto, t h u s not a p p o i n t i n g a l l the

p e r s o n s s p e c i fi e d i n that r e s o l u t i o n . T h a t is w h y , S e c t i o n 1 6 2 r e q u i r e s every i n d i v i d u a l p e r s o n to be

voted i n d i v i d u a ll y fo r a p p o i n t m e n t as d i r e c t o r . As stated i n the box b e l o w , if certain c o n d i t i o n s are

s a t i s fi e d t h i s p r o v i s i o n s h a l l n o t a p p l y to a G o v e rn m e n t c o m p a n y a n d its w h o l l y - o w n e d s u b s i d i a r y .

F u r t h e r , a private c o m p a n y is a l s o e x e m p t e d from t h i s p ro v i s i o n .

I n n u t s h e l l , p ro v i s i o n s of S e c t i o n 1 6 2 are as u n d e r :

(i) Two or m o r e d i r ec t or s of a c o m p a n y c a n n o t be elected as directors by a s i n g l e r e s o l u t i o n . I t

i m p l i e s that each person s h a ll be a p p o i n t e d as d i r e c t o r by a separate r e s o l u t i o n .

9
As p e r S e c o n d P ro v i s o to R u l e 3 of t h e C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of Directors) Rules,

2014.

10As p e r S e c o n d P r o vi s o to R u l e 4 ( 1 ) of th e C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a ti o n s of Directors) R u l e s,

2014.

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

(ii) As an exception, two or more persons can be appointed as d i r e c t o r s by a s i n g l e resolution

if a p r o p o s a l to move such a r e s ol u t i o n (i.e. a p p o i n ti n g two or more persons as directors by

a s i n g l e r e s o l u t i o n ) h a s fi r s t b e e n a g r e e d to at the g e n e r a l m e e t i n g w i t h o u t a n y vote b e i n g

cast a g a i n s t it.

Example12: A c o m p a n y h e l d its g e n e r a l m e e t i n g at its r e g i s t e r e d office with twenty m e m b e r s

p r e s e n t. At the meeting a proposal was moved to appoint t h re e persons as d i re c t o r s by a

single resolution. This proposal was agreed to by the seventeen shareholders w h o voted in

its f a v o u r b u t t h e re m a i n i n g t h r e e m e m b e r s d i d n o t vote at a l l. T h u s , no vote was cast a g a i n s t

the p ro p o s a l. In such a situation, the company can a p p o i n t three persons as directors by a

s i n g l e r e s o l u t i o n . S u c h s i n g l e r e s o l u t i o n s h a ll be p a s s e d by s i m p l e m a j o ri t y i . e . as a n o r d i n a r y

resolution.

(iii) A resolution moved in contravention of t h e p ro v i s i o n stated in point (ii) above shall be void,

w h e t h e r o r not o b j e c t i o n t h e r e t o was r a i s e d at t h e t i m e w h e n it was so m o v e d .

(iv) A m o t i o n for a p p ro v i n g a p e r s o n for a p p o i n t m e n t , o r fo r n o m i n a t i n g a p e r s o n for a p p o i n t m e n t

as a d i r e c t o r , shall be t r e a t e d as a m o t i o n fo r h i s a p p o i n t m e n t.

Exemptions

Non-applicability of Section 162 of the A c t of 201 3:

(1) Notifications No. GSR 463(E), dated 5th J u n e , 2 0 1 5 as amended by Notification No. GSR

582 (E), dated 1 3 - 0 6 - 2 0 1 7 states that Section 162 requiring appointment of each person as

director by a separate resolution, shall not apply to:

(a) A Government company in which the entire paid up share capital is held by the Central

G o v e rn m e n t , or by any State G o v e rn m e n t or G o v e rn m e n t s or by the Central

G o v e rn m e n t and one or more State G o v e rn m e n t s ;

(b) A subsidiary of a Government company, referred to in (a) a b o v e , in which the entire

paid up share capital is held by that G o v e rn m m e n t company.

However, above exemption is applicable only if such G o v e rn m e n t company has not committed

a default in filing its financial statements under Section 1 3 7 or A n n u a l Return under Section 92

with the Registrar.

(2) Similarly, Notifications No.and 464(E), dated 5th June, 2015 as amended by Notification

No. GSR 583 (E), dated 13-06-2017 exempts a private company from the application of

Section 162.However, this exemption is applicable only if such private company has not

committed a default in filing its financial statements under Section 1 3 7 or A n n u a l Return under

Section 92 with the Registrar.

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

C 9. OPTION TO ADOPT PRINCIPLE OF PROPORTIONAL

REPRESENTATION FOR APPOINTMENT OF

DIRECTORS [SECTION 1 6 3 ]

As a g e n e r a l ru l e , the d i r e c t o r s i n a c o m p a n y are a p p o i n t e d by s i m p l e m a j o r i t y . It i m p l i e s t h a t t h e

shareholders having voting rights j u s t equal to 51 percent can easily negate the choice of other

m i n o r i t y s h a r e h o l d e r s who have s u b s t a n t i a l voting r i g h t s as h i g h as u p to 49 p e r c e n t in the m a tt e r

of a p p o i n t m e n t of d i r e c t o r s . Thus, minority shareholders though having sizeable voting rights may

n o t fi n d it p o s s i b l e to a p p o i n t e v e n a s i n g l e d i r e c t o r of t h e i r own on t h e B o a r d of D i r e c t o r s . To c o u n t e r

t h i s k i n d of u n p l e a s a n t s i t u a t i o n w h i c h m a y create c o n fr o n t a t i o n i n a c o m p a n y a n d a d v e r s e l y affect

t h e m a n a g e r i a l e ffi c i e n c y . S e c t i o n 1 6 3 c h a l k s o u t a s y s t e m by w h i c h d i r e c t o r s m a y be a p p o i n t e d by

way of p r o p o r t i o n a l r e p r e s e n t a t i o n . T h e p ro v i s i o n s of S e c t i o n 1 6 3 are stated as u n d e r :

(i) Section 163 starts with the phrase 'Notwithstanding anything contained in this Act' which

implies that t h i s s e c t i o n h a s o v e r r i d i n g effect i. e . it o v e r r i d e s a l l o t h e r p ro v i s i o n s of the

C o m p a n i e s Act, 2 0 1 3 .

(ii) The articles of a c o m p a n y n e e d to c o n t a i n p r o v i s i o n s for t h e a p p o i n t m e n t of d i r e c t o r s by

p ro p o r t i o n a l representation. The procedure as contained in the articles must be capable

enough to enable the minority shareholders to have a p ro p o r t i o n a t e representation on the

B o a r d of D i r e c t o r s .

(iii) T h e a r t i c l e s n e e d to p r o v i d e fo r the a p p o i n t m e n t of not l e s s t h a n two-third (i . e . m i n i m u m

2/3 or more) of the total number of th e directors in accordance with the p ri n c i p l e of

proportional representation.

(iv) Such appointments to be made in accordance with the principle of p ro p o r t i o n a l

representation, may use fo ll o w i n g m e t h o d s of v o t i n g :

(a) V o t i n g a c c o r d i n g to the s i n g l e t r a n s f e r a b l e vote. I t m e a n s , a c a n d i d a t e g e t s e l e c t e d

if he s e c u r e s t h e r e q u i s i t e votes fixed as q u o t a ; o r

(b) V o t i n g a c c o r d i n g to a system of ' c u m u l a t i v e v o t i n g ' ; or

(c) O t h e r w i s e i . e . a d o p t i o n of a n y o t h e r t r a n s p a r e n t a n d effective m e t h o d of v o t i n g

if it e n s u r e s t h a t the Board shall have fair representation of t h e minority interest, in

c a s e m e t h o d s stated at ( a ) or ( b ) are n o t a d o p t e d .

(v) S u c h a p p o i n t m e n t s m a y be m a d e o n c e i n every 3 years.

(vi) C a s u a l v a c a n c i e s of s u c h directors s h a ll be fi ll e d as p r o v i d e d i n S e c t i o n 1 6 1 (4) i.e.

s u c h c a s u a l v a c a n c y s h a l l be fi l l e d as p e r t h e p r o v i s i o n s of t h e a r t i c l e s ; a n d if t h e r e is n o s u c h

p ro v i s i o n , t h e n the Board of D i r e c t o r s m a y fi l l t h e v a c a n c y t h ro u g h a b o a r d resolution. Later

o n , s u c h a p p o i n t m e n t m a y be r e g u l a r i z e d by t h e s h a r e h o l d e r s at t h e i m m e d i a t e l y h e l d g e n e ra l

meeting.

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

Exemptions

Non applicability of Section 163: Section 1 6 3 of the Act, shall not apply to:

(1) A Government company in which the entire paid up share capital is held by the Central

Government, or by any State Government or Governments or by the Central

Government and one or more State Governments;

(2) A subsidiary of a Government company, referred to in (1) above, in which the entire

paid up share capital is held by that Governmment company.

subject to the condition that such Government company has not committed a default in filing

its financial statements under Section 137 or Annual Return under Section 92 with the

Registrar.

[Notifications No. GSR 463(E), dated 5th June, 2 0 1 5 as amended by Notification No. GSR 582

(E), dated 1 3 - 0 6 - 2 0 1 7 ]

C 10. DISQUALIFICATIONS FOR APPOINTMENT OF

DIRECTOR [SECTION 164]

S e c t i o n 1 6 4 of the C o m p a n i e s Act, 2 0 1 3 c o n t a i n s d i s q u a l i fi c a ti o n s of a d i r e c t o r . A p e r s o n s h a ll not

be eligible for a p p o i n t m e n t a s a d i r e c t o r of a c o m p a n y if he suffers from a n y of the s p e c i fi e d

d i s q u a l i fi c a t i o n s . As s u c h , t h e law d o e s not specify a n y p r o f e s s i o n a l o r e d u c a t i o n a l q u a l i fi c a t i o n s of

a director o r r e q u i r e s h i m to h o l d r e q u i s i t e n u m b e r of q u a l i fi c a t i o n s h a r e s e x c e p t that as a g e n e r a l

r u l e , a n y p e r s o n d e s i r i n g to b e c o m e a d i r e c t o r s h o u l d be c o m p e t e n t to contract a n d s h o u l d have

b e e n a l l o tt e d a Director l d e n t fi c a t i o n N u m b e r ( D I N ) .

V a r i o u s d i s q u a l i fi c a t i o n s are m e n t i o n e d as u n d e r :

(i) S e c ti o n 1 6 4 ( 1 )states that a p e r s o n s h a l l not be a p p o i n t e d as a director if:

(a) h e is of u n s o u n d m i n d a n d s t a n d s so d e c l a r e d by a c o m p e t e n t c o u r t ;

(b) h e is a n u n d i s c h a r g e d i n s o l v e n t ;

(c) h e h a s a p p l i e d to be a d j u d i c a t e d as a n i n s o l v e n t a n d h i s a p p l i c a t i o n is p e n d i n g ;

(d) h e h a s b e e n convicted by a court of a n y offence, w h e t h e r i n v o l v i n g m o r a l t u r p i t u d e

o r o t h e r w i s e , a n d s e n t e n c e d to i m p r i s o n m e n t for not less t h a n 6 m o n t h s a n d a

p e r i o d of 5 years has not e l a p s e d from the date of expiry of the s e n t e n c e .

However, in case a person has been convicted of a n y offence and sentenced in

respect thereof to i m p r i s o n m e n t fo r a p e r i o d of 7 years or m o r e , h e s h a ll n o t be

e l i g i b l e to be a p p o i n t e d as a d i r e c t o r i n a n y c o m p a n y

(e) a n o r d e r d i s q u a l i f y i n g h i m fo r a p p o i n t m e n t as a d i r e c t o r h a s b e e n p a s s e d by a court

o r T r i b u n a l a n d t h e o r d e r is i n fo r c e ;

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

(f) he has not p a i d any c a ll s i n r e s p e c t of a n y s h a r e s of t h e c o m p a n y h e l d by h i m a n d 6

months have elapsed from the last day fi x e d fo r the payment of the c a l l. It is

i m m a t e r i a l w h e t h e r s u c h s h a r e s are h e l d i n d i v i d u a l l y by h i m or j o i n t l y w i t h o t h e r s ;

(g) he has been c o n v i c t e d of t h e offence of d e a l i n g with related party t r a n s a c t i o n s

u n d e r section 1 8 8 at a n y t i m e d u r i n g the last p r e c e d i n g 5years; or

(h) he has not c o m p l i e d w i t h s e c t i o n 1 5 2 (3) w h i c h r e q u i re s a d i r e c t o r to h a v e a D i r e c t o r

I d e n t i fi c a t i o n Number (DIN).

(i) he has not c o m p l i e d with t h e p r o v i s i o n s of S e c t i o n 1 6 5 ( 1 ) relating to holding of

s p e c i fi e d n u m b e r of d i r e c t o r s h i p s .

(ii) S u b - s e c t i o n ( 2 ) of S e c t i o n 1 6 4 p r e s c r i b e s d i s q u a l i fi c a t i o n s w h i c h get a tt a c h e d to a p e r s o n

if he is or has b e e n a d i r e c t o r of a c o m p a n y w h i c h has c o m m i tt e d d e fa u l t as under-

(a) h i s company has not fi l e d fi n a n c i a l s t a t e m e n t s o r a n n u a l r e t u rn s for a n y c o n t i n u o u s

p e r i o d of 3 fi n a n c i a l y e a r s ; or

(b) h i s company has f a i l e d to r ep ay the d e p o s i t s a c c e p t e d by it o r pay interest thereon

or to redeem any d e b e n t u r e s on the d u e date or pay interest d u e t h e r e o n or pay

any dividend declared and such failure to p a y or r e d e e m c o n t i n u e s fo r 1 y e a r o r

more.

In both the above cases of d e f a u l t , the director c o n c e rn e d shall not be eligible to be re­

a p p o i n t e d as a d i r e c t o r of s u c h d e fa u l t i n g c o m p a n y or a p p o i n t e d i n s o m e o t h e r c o m p a n y for

p e r i o d of 5 y e a r s from t h e d a t e on w h i c h t h e s a i d c o m p a n y h a s c o m m i tt e d d e f a u l t.

W h e r e a p e r s o n is a p p o i n t e d as a director i n a defaulted c o m p a n y : However, in case a

person is a p p o i n t e d as a d i r e c t o r of a c o m p a n y w h i c h h a s c o m m i tt e d d e f a u l t as per clause

(a) or clause (b) above, he s h a ll not i n c u r the d i s q u a l i fi c a t i o n fo r a period of six months

from t h e date of h i s a p p o i n t m e n t.

Exemptions

As per Notification No. GSR 463 (E), dated 5 June, 2 0 1 5 as amended by Notification No.

GSR 582 (E), dated 1 3 June, 2017, Section 164(2) is not applicable to a Government

company provided it has not committed a default in filing its financial statements under

Section 1 3 7 or Annual Return under Section 92 with the Registrar.

(iii) Additional q u a l i fi c a t i o n s by private company: According to Section 164 (3), a private

company (not being a subsidiary of a public company) is permitted to p ro v i d e for a d d i t i o n a l

d i s q u a l i fi c a t i o n s through its a r t i c l e s for a p p o i n t m e n t of a person as a director b e s i d e s those

s p e c i fi e d i n s u b - s e c t i o n s ( 1 ) a n d ( 2 ) of s e c t i o n 1 6 4 . [referpoints ( i ) a n d ( i i ) a b o v e ] . T h u s , it may

specify c e r t a i n q u a l i fi c a t i o n s l i k e a g r a d u a t e s h a l l o n l y be t h e d i r e c t o r or the prospective d i r e c t o r

s h o u l d h o l d c e r t a i n n u m b e r of q u a l i fi c a t i o n s h a r e s , etc.

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

Note: In terms of P ro v i s o to Section 1 6 4 ( 3 ) , the d i s q u a l i fi c a t i o n s referred to i n clauses ( d ) ,

(e) a n d (g) of sub-section ( 1 ) s h a l l continue to apply even if the a p p e a l or petition has been

fil e d a g a i n s t the order of conviction or d i s q u a l i fi c a t i o n .

(iv) D i s q u a l i fi c a t i o n as p r e s c r i b e d by S e c t i o n 2 1 7 ( 6 )( i i ) : Section 2 1 7 relates to a company

which is under investigation. In case any director of such a company has been convicted of an

offence u n d e r Section 2 1 7 , the director shall be deemed to have vacated his o ffi c e on and fr o m

the date on which he is so convicted. On such vacation of o ff i c e , he shall be d i s q u a l i fi e d fr o m

h o l d i n g an o ffi c e in any company.

In Manju Chamundeeswari v.Union of l n d i a , W . M P . N O S . 28025 & 28027 of 2 0 2 1 , it was laid that in

terms of r ul e 1 1 of Companies (Appointment and Q u a l i fi c a t i o n s of Directors) Rules, 2 0 1 4 neither

cancellation nor deactivation of D I N is provided fo r upon d i s q u a l i fi c a t i o n u n d e r section 1 6 4 ( 2 ) and such

deactivation would be contrary to section 1 6 4 ( 2 ) , read with section 1 6 7 ( 1 ) inasmuch as person

c o n c e rn e d would continue to be a director of defaulting company.

The H i g h Court of Kerala held in Zacharia Maramkandathil Mohan v.Union of India W . P (C) N o . 2 1 6 2 8

of 2020,June 1 6 , 2021 the fo l l o w i n g principles :

(i) S e ct i o n 164(2) disqualifying directors of companies fo r a period of 5 years on failure to s u b m i t

a n n u a l r e t u rn s / fi n a n c i a l statements fo r 3 consecutive years is not ultra vires Article 1 4 or A r t i cl e

1 9 ( 1 ) (g ) of Constitution .

( i i ) Section 164(2) which had come into fo r c e fr o m 1 - 1 - 2 0 1 4 would have p ro s p e c t i v e and not

r e t ro s p e c t i v e effect and defaults contemplated under section 164(2)(a) with regard to n o n - fi l i n g

of fi n a n c i a l statements or a n n u a l r e t u rn s fo r any continuous period of three fi n a n c i a l years to be

counted fr o m fi n a n c i a l year 2 0 1 4 - 1 5 only.

(iii) D i s q u a l i fi c a t i o n under section 1 6 4 ( 2 ) is of temporary nature, thus, rule 1 1 of Companies

(Appointment and Q u a l i fi c a t i o n s of Directors) Rules, 2 0 1 4 does not empower any authority to

cancel or deactivate D I N upon d i s q u a l i fi c a t i o n under section 1 6 4 ( 2 ) .

O 44. MAXIMUM N U M B E R OF DIRECTORSHIPS[SECTION 165]

Section 1 6 5 of the Act provides fo r the m a x i m u m permissible directorships that a person can h o l d .

The p ro v i s i o n s are as u n d e r :

(i ) Maximum number of directorships:According to Section 1 6 5 ( 1 ) , a person, after the

c o m m e n c e m e n t of the C o m p a n i e s Act, 2 0 1 3 , s h a ll not hold o ffi c e as d i r e c t o r , i n cl u d i n g any

a l t e rn a t e directorship, i n more than 20 c o m p a n i e s at the s a m e time.

Further, out of the above l i m i t of 20 c o m p a n i e s , the m a x i m u m n u m b e r of p u b l i c companies i n

which a person can be appointed as a director s h a ll not exceed 10 .

It may be noted that the l i m i t of p u b l i c c o m p a n i e s (i . e . 1 0 ) s h a l l i n c l u d e directorship i n private

c o m p a n i e s that are either h o l d i n g or s u b s i d i a r y company of a p u b l i c company.

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

However, the l i m i t of directorships of 20 c o m p a n i e s shall not i n c l u d e the directorship i n a dormant

c o m p a n y ; as also in a Section 8 c o m p a n y (refer Exemption mentioned in the box below).

Exemptions

Section 1 6 5 ( 1 ) [refer point no.(i) above] shall not apply to a Section 8 company subject to

the condition that such a company h a s not committed a default in filing its financial statements

under Section 1 3 7 or A n n u a l return under Section 92 with the Registrar. In other words, a

directorship in a Section 8 company shall not be counted for determining the maximum

permissible limit.

[Notification No. 4 6 6 (E), dated 5"June, 2 0 1 5 as amended by Notification No. 584 (E), dated

1 3 June, 2017].

(ii) L e s s e r n u m b e r of d i r e c t o r s h i p s t h a n maximum:The members of a c o m p a n y may, by

special resolution, specify any lesser n u m b e r of c o m p a n i e s in which a d i re c t o r of the

c o m p a n y m a y act a s d i r e c t o r s . [ S e c t i o n 1 6 5 ( 2 ) ]

(iii) P r e s c r i p t i o n of T r a n s i t i o n P e r i o d of O n e Y e a r : l m m e d i a t e l y before the commencement of the

C o m p a n i e s Act, 2 0 1 3 (i.e. before 0 1 - 0 4 - 2 0 1 4 ) , if a person was h o l d i n g office as director in more

c o m p a n i e s than the specified l i m i t s , he was required, within o n e year (i . e . by 3 1 - 0 3 - 2 0 1 5 ) to:

(a) c h o o s e not more t h a n the s p e c i f i e d l i m i t of c o m p a n i e s , i n w h i c h he w i s h e d to c o n ti n u e

to h o l d t h e office of d i r e c t o r ;

(b) r e s i g n h i s office as d i r e c t o r in the o t h e r r e m a i n i n g c o m p a n i e s ; a n d

(c) i n t i m a t e the c h o i c e m a d e by h i m to each of the c o m p a n i e s i n w h i c h h e was director

a n d to the j u r i s d i c t i o n a l R e g i s t r a r . [ S e c t i o n 1 6 5 ( 3 ) ]

Any r e s i g n a t i o n so m a d e was to b e c o m e effective i m m e d i a t e l y on the d i s p a t c h thereof to the

c o m p a n y c o n c e rn e d . [ S e c t i o n 1 6 5 ( 4 ) ]

After d i s p a t c h i n g the re s i g n a t i o n of h i s office a s d i re c t o r / n o n - e x e c u t i v e director or after the

c o m p l e t i o n of t h e t r a n s i t i o n p e r i o d of o n e year (i . e . after 3 1 - 0 3 - 2 0 1 5 ) , w h i c h e v e r was e a r l i e r ,

no s u c h person would act as d i r e c t o r i n more t h a n the s p e c i fi e d n u m b e r of c o m p a n i e s .

[Section 1 6 5 ( 5 ) ]

I n o t h e r w o r d s , after the c o m p l e t i o n of t r a n s i t i o n p e r i o d of o n e y e a r on 3 1 - 0 3 - 2 0 1 5 , n o person

is p e r m i tt e d to h o l d more d i r e c t o r s h i p s t h a n the m a x i m u m s p e c i fi e d .

(iv) Punishment for Contravention:According to Section 165(6), if a person accepts an

a p p o i n t m e n t as a d i r e c t o r i n c o n t r a v e n t i o n of S e c t i o n 1 6 5 ( 1 ) i.e. h o l d i n g d i r e c t o r s h i p of more

t h a n 2 0 c o m p a n i e s or m o r e t h a n 1 0 p u b l i c c o m p a n i e s (subject to the e x e m p t i o n s , if a n y ) , he

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

s h a l l be l i a b l e to a p e n a l t y of two t h o u s a n d r u p e e s for each d a y after the first d u r i n g w h i c h

s u c h v i o l a t i o n c o n t i n u e s , subject to a m a x i m u m of two l a k h r u p e e s .

G 12. I N D E P E N D E N T DIRECTORS

The l e g a l p ro v i s i o n s r e g a r d i n g i n d e p e n d e n t d i r e c t o r s are d i s c u s s e d b e l o w :

(a) N u m b e r of I n d e p e n d e n t D i r e c t o r s : F o l l o w i n g c o m p a n i e s are r e q u i r e d to a p p o i n t s p e c i fi e d

n u m b e r of i n d e p e n d e n t d i r e c t o r s :

(i) Listed C o m p a n i e s : E v e r y l i s t e d p u b l i c c o m p a n y s h a l l have at least o n e - t h i r d of the

total n u m b e r of d i r e c t or s as i n d e p e n d e n t d i re c t o r s . [Section 1 4 9 ( 4 )]

Note:Any fraction c o n t a i n e d i n s u c h 1 1 3 r d n u m b e r s h a l l be r o u n d e d off a s o n e .

(ii) O t h e r P u b l i c C o m p a n i e s : T h e C e n t r a l G o v e rn m e n t is e m p o w e r e d to p r e s c r i b e certain

m i n i m u m n u m b e r of i n d e p e n d e n t dir e c t o r s i n case of a n y c l a s s or c l a s s e s of p u b l i c

c o m p a n i e s . T a k i n g a step i n t h i s d i r e c t i o n , R u l e 4 ( 1 ) of t h e C o m p a n i e s ( A p p o i n t m e n t

a n d Q u a l i fi c a t i o n s of D i r e c t o r s ) R u l e s , 2 0 1 4 h a s b e e n framed w h i c h states that the

fo l l o w i n g class or classes of companies shall have at least two directors as

i n d e p e n d e n t directors:

(1 ) all such public companies which have p a i d u p s h a r e c a p i t a l of 1 0 crore

r u p e e s o r m o r e ; or

(2) a ll s u c h p u b l i c c o m p a n i e s w h i c h have t u rn o v e r of 1 0 0 crore r u p e e s o r m o r e ;

or

(3) a l l s u c h p u b l i c c o m p a n i e s w h i c h h a v e , i n the a g g r e g a t e , o u t s t a n d i n g l o a n s ,

d e b e n t u r e s a n d d e p o s i t s , e x c e e d i n g 50 crore r u p e e s .

R e q u i r e m e n t of h i g h e r n u m b e r : D u e to c o m p o s i t i o n of its a u d i t c o m m i tt e e , if a p u b l i c

c o m p a n y covered u n d e r the above r u l e , is r e q u i r e d to a p p o i n t a h i g h e r n u m b e r of i n d e p e n d e n t

d i r e c t o r s , s u c h h i g h e r n u m b e r of directors s h a l l be a p p l i c a b l e to it.

As p e r s e c t i o n 1 77 ( 2 ) of Act, the A u d i t C o m m i tt e e s h a l l c o n s i s t of a m i n i m u m of three directors

with i n d e p e n d e n t d i r e c t or s fo r m i n g a m a j o r i t y .

I n t e r m i tt e n t vacancy of an independent director: Any i n t e r m i tt e n t vacancy of an

independent director shall be fi l l e d - u p by the Board at the earliest but not later than

i m m e d i a t e next Board m e e t i n g o r three m o n t h s from the date of s u c h v a c a n c y , w h i c h e v e r

is l a t e r .

Duration of conditions after n o n - f u l fil m e n t of which no appointment required:A

c o m p a n y w h i c h was o b l i g a t e d to a p p o i n t i n d e p e n d e n t d i r e c t o r s , s h a l l not be r e q u i r e d to m a k e

s u c h a p p o i n t m e n t if it ceases to f u l fi l l a n y of the three c o n d i t i o n s r e l a t i n g to p a i d - u p s h a r e

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

c a p i t a l o r t u rn o v e r or o u t s t a n d i n g l o a n s , etc. [as l a i d down a b o v e i n R u l e 4 ( 1 )] for t h r e e

consecutive years. It s h a l l a g a i n be r e q u i r e d to a p p o i n t i n d e p e n d e n t d i r e c t o r s if it starts

m e e t i n g a n y of s u c h c o n d i t i o n s .

C l a i r i fi c a t i o n : E x p / a n a ti o n to R u l e 4 ( 1 ) c l a r i fi e s that the p a i d u p s h a r e c a p i t a l or t u rn o v e r or

o u t s t a n d i n g l o a n s , d e b e n t u r e s a n d d e p o s i t s , as the case m a y b e , as e x i s t i n g o n the last date

of latest a u d i t e d fi n a n c i a l s t a t e m e n t s s h a l l be t a k e n i n t o a c c o u n t.

E x e m p t e d c l a s s e s of u n l i s t e d p u b l i c c o m p a n i e s : A c c o r d i n g to R u l e 4 ( 2 ) , fo l l o w i n g c l a s s e s

of u n l i s t e d p u b l i c c o m p a n i e s s h a ll n o t be covered u n d e r s u b - r u l e ( 1 ) of R u l e 4 :

(a) a joint venture;

(b) a wholly owned subsidiary; and

(c) a d o r m a n t c o m p a n y as d e fi n e d u n d e r section 4 5 5 of the Act.

Independent Directors

Prescribed Classes of
Listed P u b l i c Companies
Companies

At least
Paid up Turnover: aggregate,
one third of
share 7100 outstanding
total or or
Capital 1 0 crores or loans, debentures
N u m b e r of
crores or more and deposits ? 50
directors
more crores or more

/
At l e a s t 2
I

If d u e to c o m p o s i t i o n of a u d i t c o m m i tt e e a n y h i g h e r n u m b e r of i n d e p e n d e n t directors are

r e q u i r e d , s u c h h i g h e r n u m b e r s h a l l be a p p l i c a b l e .

A p p o i n t m e n t of i n d e p e n d e n t directors not r e q u i r e d : If c o m p a n y ceases to fulfil a n y of the 3

conditions with respect to r e q u i r e m e n t of P a i d u p s h a r e c a p i t a l , T u rn o v e r or of aggregate

outstanding loans,debentures and deposits fo r 3 c o n s e c u t i v e y e a r s .

J o i n t v e n t u r e s , w h o l l y o w n e d s u b s i d i a r i e s a n d d o r m a n t c o m p a n i e s are not covered u n d e r

R u l e 4 ( 1 ) w h i c h m e n t i o n s a b o u t m a n d a t o r y a p p o i n t m e n t of i n d e p e n d e n t d i r e c t o r s .

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

(b) W h o c a n b e c o m e t h e I n d e p e n d e n t D i r e c t o r [ S e c t i o n 1 4 9 ( 6 )) : In relation to a company, an

i n d e p e n d e n t director means a director(other than a m a n a g i n g director or a whole-time director

11),
or a n o m i n e e d i re c t o r and who f u l fil l s the fo l l o w i n g criteria:

( 1 ) who, in the opinion of the Board, is a person of integrity and possesses relevant

e xp er t i s e a n d e x p e r i e n c e ;

Exemptions

As per Notification No. G.S.R. 463 (E) dated 5th June, 2 0 1 5 , in case of a Government

company, the word "Board' shall be substituted by the words "Ministry or Department of

the Central Govermment which is administratively in charge of the company, or, as the

12".
case may be, the State Government

(2) (A) who is or was not a promoter of the company or its h o l d i n g , subsidiary or

associate company;

(B) who is not related to p ro m o t e r s or directors in the company, its h o l d i n g ,

subsidiary or associate company;

(3) who has or had no p e c u n i a r y r e l a t i o n s h i p , other than remuneration as such director

or h a v i n g t r a n s a c t i o n not e x c e e d i n g 1 0 % of his total income or such a m o u n t as may

be prescribed,with the company, its h o l d i n g , subsidiary or associate company, or their

p ro m o t e r s , or directors, d u r i n g the 2 immediately preceding fi n a n c i a l years or during

the current fi n a n c i a l year;

C l a r ifi c a t i o n s i s s u e d by MCA

(i) As regards ' p e c u n i a r y interest in certain transactions', the MCA vide its General

Circular No. 1 4 / 2 0 1 4 , dated 09-06-2014 has c l a r i fi e d that in case a transaction entered

into by an i n d e p e n d e n t director with the company c o n c e rn e d is at par with any member

of the general public and at the same price as is payable/paid by such m e m b e r of

public, it w o u l d not attract the bar of ' p e c u n i a ry relationship' u n d e r Section

1 4 9 ( 6 )( c ) and therefore, an independent director w i ll not be said to have

'pecuniary relationship' under this Section, in such cases. This cl a r i fi c a t i o n has

been issued by the MCA considering the p ro v i s i o n s of Section 1 8 8 which take away

transactions in the ordinary course of business at arm's length price fr o m the purview

of related party transactions.

"As per Explanation to section 149(7), " N o m i n e e d i r e c t o r" means a director n o mi n a t e d by any fi n a n ci a l

institution in pursuance of the p ro v i s i o n s of any law fo r the time being in fo r c e , or of any agreement, or

appointed by any G o v e rn m e n t , or a n y other person to represent its interests.

As per amendment N o t i fi c a ti o n No. GSR 582 (E), dated 1 3 - 0 6 - 2 0 17 , the exceptions, m o d i fi c a t i o n s and

adaptations mentioned in N o t i fi c a t i o n No. G S R 463 (E), dated 0 5 - 0 6 - 2 0 1 5 are a p p l i c a b l e to s u c h G o v e rn m e n t

Company which has not c o m m i tt e d a default in fi l i n g its fi n a n c i a l statements under Section 137 or Annual

r e t u rn under Section 92 with the R e g i s t r a r.

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

(ii) Further, vide above-referred General Circular, it is a l s o c l a r i fi e d after c o n s u l t a t i o n

with SEBI that 'pecuniary relationship' does not include (a) r e c e i p t of r e m u n e r a t i o n

from one or more companies by way of fee p ro v i d e d under Section 197 (5);(b)

r e i m b u r s e m e n t of e x p e n s e s for p a r t i c i p a t i o n in the Board a n d other m e e t i n g s ; and (c)

profit r e l a t e d c o m m i s s i o n a p p r o v e d by t h e m e m b e r s , i n a c c o r d a n c e w i t h the p r o v i s i o n s

of t h e C o m p a n i e s Act, 2 0 1 3 .

Exemptions

A s per Notification No. 463 (E), dated 5th June, 2 0 1 5 as amended by Notification No.

582 (E), dated 1 3 - 0 6 - 2 0 1 7 , P o i n t No. (3) mentioned above [i.e. Section 149(6)(c)J shall

not apply in case of a Government company if it has not committed a default in filing

its financial statements under Section 1 3 7 or Annual return under Section 92 with the

Registrar.

(4) n o n e of w h o s e relatives-

(i) in the company, its holding, subsidiary or associate company during the

2 i m m e d i a t e l y p r e c e d i n g fi n a n c i a l years or d u r i n g t h e c u r r e n t fi n a n c i a l y e a r .

H o w e v e r , t h e r e l a t i v e m a y h o l d s e c u r i t y o r i n t e r e s t in the c o m p a n y of face v a l u e

not exceeding fifty lakh rupees or two per cent of the paid-up capital of the

company, its holding, s u b s i d i a r y or associate c o m p a n y or s u c h higher sum as

m a y be prescribed;

(ii) is i n d e b t e d to the company, its holding, subsidiary or a s s o c i a t e company or

their promoters, or directors, in excess of s u c h amount as prescribed under

Sub-rule 2 of R u l e 5 ( i. e . , Rs. 50 Lakhs) of t h e Companies (Appointment and

Q u a l i fi c a t i o n s of Directors) Rules, 2014 during the 2 immediately preceding

fi n a n c i a l y e a r s or d u r i n g t h e c u r r e n t fi n a n c i a l y e a r ;

(iii) has given a guarantee or p ro v i d e d any security in connection with the

indebtedness of any third person to the company, its holding, subsidiary or

associate company or their p ro m o t e r s , or d i r e c t o r s of s u c h holding company,

for s u c h amount as may be prescribed under Sub-rule 2 of Rule 5 (i . e, 50

Lakhs) of t h e C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of D i r e c t o r s ) Rules,

2014 during the 2 immediately preceding fi n a n c i a l years or d u r i n g the current

fi n a n c i a l y e a r ; or

(iv) has any other pecuniary transaction or relationship with the company, or

its s u b s i d i a r y , or its h o l d i n g or a s s o c i a t e c o m p a n y a m o u n t i n g to 2% or more of

its g ro s s t u rn o v e r or total i n c o m e s i n g l y or i n c o m b i n a t i o n w i t h t h e t r a n s a c t i o n s

referred to i n s u b - cl a u s e (i), (ii) or ( i i i ) ;

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

(5) w h o , n e i t h e r h i m s e l f n o r a n y of h i s relatives-

(A) h o l d s o r h a s h e l d the p o s i t i o n of a key m a n a g e r i a l p e r s o n n e l or is or h a s b e e n

employee of t h e c o m p a n y or its holding, s u b s i d i a r y or associate c o m p a n y in

a n y of t h e 3 fi n a n c i a l years i m m e d i a t e l y p r e c e d i n g t h e fi n a n c i a l y e a r i n w h i c h

h e is p ro p o s e d to be a p p o i n t e d ;

H o w e v e r , i n c a s e of a r e l a t i v e w h o i s a n e m p l o y e e , the restriction u n d e r t h i s

c l a u s e s h a ll not a p p l y fo r h i s e m p l o y m e n t d u r i n g p r e c e d i n g 3 fi n a n c i a l

years;

(B) is or h a s been an e m p l o y e e o r p r o p r i e t o r or a p a r t n e r , in any of the 3

f i n a n c i a l y e a r s i m m e d i a t e l y p r e c e d i n g the fi n a n c i a l y e a r i n w h i c h he i s p ro p o s e d

to be a p p o i n t e d , of-

(i) a fi r m of auditors or company secretaries in practice or cost

auditors of the company or its holding, subsidiary or associate

c o m p a n y ; or

(ii) a n y l e g a l o r a c o n s u l t i n g firm t h a t h a s or h a d a n y t r a n s a c t i o n with t h e

company, its holding, subsidiary or associate company amounting to

1 0 % or more of t h e g ro s s t u rn o v e r of s u c h fi r m ;

(C) h o l d s together with his relatives 2% or more of t h e total voting power of t h e

company; or

(D) is a C h i e f E x e c ut iv e o r d i r e c t o r , by w h a t e v e r n a m e c a l l e d , of a n y n o n - p r o f i t

o r g a n i s a t i o n that receives 25% or m o r e of its re c e i p t s from the c o m p a n y , any

of its promoters, directors or its holding, s u b s i d i a r y or a s s o c i a t e company or

that holds 2% o r more of t h e total v o t i n g power of t h e c o m p a n y ; or

(6) who possesses such o t h e r q u a l i fi c a t i o n s as are prescribed under Rule 5 of the

C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of D i r e c t o r s ) R u l e s , 2 0 1 4 i. e . :

(a) An independent director shall possess appropriate skills, experience and

k n o w l e d g e i n o n e o r m o r e fi e l d s of fi n a n c e , l a w , m a n a g e m e n t , s a l e s , m a r k e t i n g ,

administration, research, c o r p o r a t e g o v e rn a n c e , technical o p e r a t i o n s or o t h e r

d i s c i p l i n e s r e l a t e d to t h e c o m p a n y ' s b u s i n e s s .

(b) None of the relatives of an Independent director, fo r the purposes of sub­

clauses (ii) and ( i i i ) of c l a u s e ( d ) of s e c t i o n 149(6),-

(i) is i n d e b t e d to t h e c o m p a n y , its h o l d i n g , s u b s i d i a r y or a s s o c i a t e c o m p a n y

o r t h e i r p ro m o t e r s , or d i r e c t o r s ; o r

(ii) has given a guarantee or provided any security in connection with the

i n d e b t e d n e s s of a n y t h i r d p e r s o n to the c o m p a n y , its h o l d i n g , s u b s i d i a r y

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

o r a s s o c i a t e c o m p a n y o r t h e i r p ro m o t e r s , o r d ir e c t o r s of s u c h h o l d i n g

company,

for a n a m o u n t of fifty l a k h s r u p e e s , at a n y t i m e d u r i n g the two immediately

p r e c e d i n g fi n a n c i a l years o r d u r i n g t h e c u r r e n t fi n a n c i a l y e a r .

(c) D e c l a r a t i o n by I n d e p e n d e n t D i r e c t o r [ S e c t i o n 1 4 9 ( 7 )] : Every i n d e p e n d e n t d i r e c t o r s h a l l

g i v e a d e c l a r a t i o n that he m eet s t h e criteria of i n d e p e n d e n c e as p ro v i d e d i n S e c t i o n 1 4 9 ( 6 )

[refer P o i n t N o . ( b ) a b o v e ] i n t h e fo l l o w i n g m a n n e r :

(1) at the first m e e t i n g of the B o a r d i n w h i c h he p a r t i c i p a t e s as a d i r e c t o r ; a n d

(2) thereafter at t h e first m e e t i n g of t h e B o a r d i n every fi n a n c i a l y e a r ; or

(3) w h e n e v e r there is a n y c h a n g e i n the c i r c u m s t a n c e s w h i c h m a y affect h i s status as a n

independent director.

(d) C o d e for i n d e p e n d e n t d i r e c t o r s [ S e c t i o n 1 4 9 ( 8 )] : T h e c o m p a n y a n d i n d e p e n d e n t d i r e c t o r s

s h a l l a b i d e by the p ro v i s i o n s s p e c i fi e d i n S c h e d u l e IV to the C o m p a n i e s Act, 2 0 1 3 . As regards

i n d e p e n d e n t d i r e c t o r s , S c h e d u l e IV s p e c i fi e s g u i d e l i n e s fo r p r o f e s s i o n a l c o n d u c t , ro l e a n d

functions, duties, manner of a p p o i n t m e n t and re-appointment, resignation and removal,

p ro v i s i o n s r e g a r d i n g s e p a r a t e m e e t i n g s a n d e v a l u a t i o n m e c h a n i s m .

(e) Remuneration of Independent Directors [Section 1 4 9 ( 9 )] : Notwithstanding anything

c o n t a i n e d i n a n y o t h e r p ro v i s i o n of t h i s Act, b u t subject to t h e p ro v i s i o n s of s e c t i o n s 1 9 7 a n d

1 9 8 , a n i n d e p e n d e n t director s h a ll not be e n t i t l e d to a n y stock o p t i o n a n d m a y receive

r e m u n e r a t i o n by way of-

(1) fee p ro v i d e d u n d e r S e c t i o n 1 9 7 ( 5 ) ,

(2) r e i m b u r s e m e n t of e x p e n s e s for p a r t i c i p a t i o n i n the B o a r d a n d o t h e r m e e t i n g s a n d

(3) profit related c o m m i s s i o n as m a y be approved by the m e m b e r s .

E n t i l e d to: Not E n t i t l e d to:

Fee p ro v i d e d u n d e r section 1 9 7 ( 5 ) Any stock o p t i o n

R e i m b u r s e m e n t of e x p e n s e s for p a r t i c i p a t i o n i n :

(i) B o ar d M e e t i n g s

(ii) Other Meetings

Profit related commission as may be approved by the

members

N o t e : A c c o r d i n g to R u l e 4 of t h e C o m p a n i e s ( A p p o i n t m e n t a n d R e m u n e r a t i o n of M a n a g e r i a l

P e r s o n n e l ) R u l e s , 2 0 1 4 , s i tt i n g fee r e q u i r e d to be p a i d to an i n d e p e n d e n t d i r e c t o r s h a l l not

be l e s s t h a n the s i tt i n g fee w h i c h is p a y a b l e to o t h e r directors of the c o m p a n y .

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

P ro v i d e d t h a t if a c o m p a n y h a s n o profits o r its profits are i n a d e q u a t e , a n i n d e p e n d e n t d i r e c t o r

m a y receive r e m u n e r a t i o n , e x c l u s i v e of a n y fees p a y a b l e u n d e r s u b - s e c t i o n (5) of s e c t i o n

1 9 7 , i n a c c o r d a n c e with the p ro v i s i o n s of S c h e d u l e V .

(f) T e n u r e [ S e c t i o n 1 4 9 ( 1 0 ) & ( 1 1 )] : T h e s e p r o v i s i o n s are stated as u n d e r :

(i) (a) T e r m : S u b j e c t to the p r o v i s i o n s of s e c t i o n 1 5 2 ( A p p o i n t m e n t of D i r e c t o r s ) , a n

i n d e p e n d e n t d i r e c t o r s h a l l h o l d office fo r a term u p to 5 c o n s e c u t i v e years on

t h e Board of a c o m p a n y .

(b) Eligibility fo r R e - a p p o i n t m e n t: H e shall be eligible fo r re-appointment on

passing of a special resolution by the company and d i s cl o s u r e of such

a p p o i n t m e n t i n the B o a r d ' s report.

Note: According to First Proviso to Section 169 (1 ), an independent director re­

a p p o i n t e d fo r s e c o n d term u n d e r S e c t i o n 1 4 9 ( 1 0 ) s h a l l be r e m o v e d by the c o m p a n y

o n l y by p a s s i n g a s p e c i a l r e s o l u t i o n .

(ii) Li m i t on h o l d i n g of o ffi c e : An i n d e p e n d e n t d i r e c t o r s h a l l not h o l d office fo r more t h a n

2 consecutive terms.

C o o l i n g p e r i o d fo r a p p o i n t m e n t: H o w e v e r , h e s h a l l be e l i g i b l e fo r a p p o i n t m e n t after

t h e e x p i r a t i o n of 3 years of c e a s i n g to be a n i n d e p e n d e n t d i r e c t o r .

However, during the said period of 3 years he shall not be appointed in or be

a s s o c i a t e d with the c o m p a n y i n a n y o t h e r c a p a c i t y , e i t h e r d i r e c t l y or i n d i r e c t l y .

N o t e : It is c l a r i fi e d that fo r the p u r p o s e s of s u b - s e c t i o n s ( 1 0 ) a n d ( 1 1 ) of Section 1 4 9 ,

a n y t e n u r e of a n i n d e p e n d e n t d i r e c t o r on t h e date of c o m m e n c e m e n t of t h e C o m p a n i e s

Act, 2 0 1 3 s h a l l n o t be c o u n t e d as a term u n d e r those s u b - s e c t i o n s .

C l a r i fi c a t i o n i s s u e d by M C A

A p p o i n t m e n t of ' I n d e p e n d e n t Directors' fo r less than 5 years [Refer Section

149(10) and ( 1 1 )1 : - In terms of G e n e r a l Circular 14/2014, dated 09-06-2014, it is

c l a r i fi e d by MCA that section 1 4 9 ( 1 0 ) of the Act p r o v i d e s for a term of " u p t o five

c o n s e c u t i v e years" for an ' I n d e p e n d e n t Director'. As such w h i l e a p p o i n t m e n t of a n

'Independent Director' for a term of less than five years would be permissible,

a p p o i n t m e n t for a n y term ( w h e t h e r for five years o r l e s s ) is to be treated as a o n e term

u n d e r section 1 4 9 ( 1 0 ) of the Act.

F u r t h e r , u n d e r section 1 4 9 ( 1 1 ) of the Act, no person c a n h o l d office of ' I n d e p e n d e n t

Director' for more t h a n 'two consecutive t e r m s ' . S u c h a person s h a ll have to d e m i t

office after two c o n s e c u t i v e terms even if the total n u m b e r of years of h i s a p p o i n t m e n t

in such two c o n s e c u t i v e terms is less t h a n 10 years. In such a case the person

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

c o m p l e t i n g ' c o n s e c u t i v e terms of less t h a n ten years' s h a l l be e l i g i b l e for a p p o i n t m e n t

o n l y after the expiry of the r e q u i s i t e c o o l i n g - o f f period of three years.

(g) Li a b i l i t y [ S e c t i o n 1 4 9 ( 1 2 ) ] : As p e r s e c t i o n 1 4 9 ( 1 2 ) of Act, fo l l o w i n g p e r s o n s s h a l l be l i a b l e

fo r the fo ll o w i n g acts:

Parties Li a b l e F o r s a i d Acts

(i) a n i n d e p e n d e n t director • acts of o m i s s i o n or c o m m i s s i o n by a c o m p a n y

(ii) a n o n - e x e c u t i v e director not w h i c h had occurred with h i s k n o w l e d g e ,

being p ro m o t e r or key • a tt r i b u t a b l e t h ro u g h Board p ro c e s s e s

managerial personnel • with h i s c o n s e n t or c o n n i v a n c e , or

• where h e h a d not acted d i l i g e n t l y

(h) Retirement by rotation [Section 149(13)]: The p ro v i s i o n s of r e t i r e m e n t of directors by

ro t a t i o n covered u n d e r sub-sections (6) and ( 7 ) of section 1 5 2 shall n o t be a p p l i c a b l e to

13.
a p p o i n t m e n t of i n d e p e n d e n t d i r e c t o r s

(i) Independent D i r e c t o r is different from Nominee Director: A p p o i n t m e n t of a nominee

d i r e c t o r c a n n o t be t a k e n as a s u b s t i t u t e fo r a p p o i n t m e n t of an i n d e p e n d e n t d i r e c t o r . T h o u g h

a n o m i n e e d i r e c t o r is a l s o i n d e p e n d e n t of the o t h e r Board m e m b e r s b u t t h i s i n d e p e n d e n c e

d o e s n o t m a k e h i m a n i n d e p e n d e n t d i r e c t o r . H e i s a p p o i n t e d to s a f e g u a r d the i n t e r e s t of the

respective fi n a n c i a l i n s t i t u t i o n to w h i c h he b e l o n g s . H i s a p p o i n t m e n t t r i g g e r s from the fact

that h i s fi n a n c i a l i n s t i t u t i o n h a s g i v e n fi n a n c i a l a s s i s t a n c e to the c o m p a n y a n d h e r e m a i n s o n

the Board till the loan a m o u n t is repaid s a t i s fa c t o r i l y . N o m i n e e d i r e c t o r ' s a p p o i n t m e n t is

m a n d a t o r y o n l y if the fi n a n c i a l i n s t i t u t i o n so d e s i r e s b e c a u s e of the fi n a n c i a l a s s i s t a n c e g i v e n

by it to the c o m p a n y ; or a n y G o v e rn m e n t r e q u i r e s s u c h a p p o i n t m e n t to r e p r e s e n t its interest.

An independent director is appointed by the prescribed companies mandatorily. He is

appointed to p ro m o t e the c o n fi d e n c e of the investing bodies, particularly minority

s h a r e h o l d e r s . I n fact, the c o m p a n i e s i n w h i c h h i s a p p o i n t m e n t is c o m p u l s o r y are m u c h l a r g e r

than other companies and therefore, they must always be well managed so that the

c o n fi d e n c e of the s t a k e h o l d e r s i s n o t s h a k e n a n d t h e i r i n v e s t m e n t r e m a i n s i n safe h a n d s . T h e

a p p o i n t m e n t of i n d e p e n d e n t d i r e c t o r is a ro b u s t step in t h i s d i r e c t i o n . I n the m a tt e r of g o o d

corporate g o v e rn a n c e , the re g u l a t o r s fall b a c k u p o n h i m . T h e i n d e p e n d e n t director at all

t i m e s is r e q u i r e d to m a i n t a i n h i s i n d e p e n d e n c e a n d w h e r e c i r c u m s t a n c e s a r i s e w h i c h m a k e

h i m lose h i s i n d e p e n d e n c e , s u c h fact m u s t i m m e d i a t e l y be b ro u g h t to the k n o w l e d g e of the

B o a r d . T h e i n d e p e n d e n t directors are re q u i r e d to h o l d at l e a s t o n e m e e t i n g i n a fi n a n c i a l y e a r ,

w i t h o u t the a tt e n d a n c e of n o n - i n d e p e n d e n t d i r e c t o r s a n d m e m b e r s of m a n a g e m e n t.

13The p r o vi s i o n s of retirement of directors by ro t a t i o n covered under sub-sections (6) and (7) of Section 152

have been discussed later in t h e C h a p t e r.

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

Exemptions

In terms of Notification No.466(E) dated 5th June, 2 0 1 5 , as a m e n d e d by Notification No. G S R

584 (E), dated 13-06-2017 a Section 8 Company is exempted from the provisions of sub­

sections (4), (5), (6), (7), (8), (9), (10), (11), clause (i) of sub- section (12) and sub- section

(13) of Section 1 4 9 of the Act, only if such company has n o t committed a default in filing its

financial statements under Secion 137 and Annual Return under Section 92 with the

Registrar.

C 13. MANNER OF SELECTION OF INDEPENDENT

DIRECTORS AND MAINTENANCE OF DATA BANK OF

I N D E P E N D E N T DIRECTORS [SECTION 1 5 0 ]

S e c t i o n 1 5 0 of the Act a n d R u l e 6 of t h e C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of Directors)

Rules, 2 0 1 4 , contain p ro v i s i o n s r e g a r d i n g the m a n n e r of s e l e c t i o n of i n d e p e n d e n t d ir e c t o r s a n d

m a i n t e n a n c e of d a t a b a n k of i n d e p e n d e n t d i r e c t o r s . T h e s e p r o v i s i o n s are stated b e l o w :

(i) M a i n t e n e n a c e of Data B a n k of I n d e p e n d e n t D i r e c t o r s : A c c o r d i n g to section 1 5 0 ( 1 ), an

i n d e p e n d e n t director m a y be selected from a data b a n k c o n t a i n i n g n a m e s , a d d r e s s e s a n d

q u a l i fi c a t i o n s of p e r s o n s who are e l i g i b l e a n d w i l l i n g to act as i n d e p e n d e n t d i r e c t o r s , s u b j e c t

to the p ro v i s i o n s c o n t a i n e d i n s e c t i o n 1 4 9 ( 6 ) .

S u c h data b a n k s h a l l be m a i n t a i n e d by a n y b o d y , in s t it u t e or a s s o c i a t i o n , as m a y be n o t i fi e d

by the C e n t r a l G o v e rn m e n t as h a v i n g the expertise i n creation a n d m a i n t e n a n c e of s u c h data

b a n k a n d p u t on t h e i r w e b s i t e fo r the use by c o m p a n i e s a p p o i n t i n g s u c h d i r e c t o r s .

R u l e 6 of the C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of Directors) R u l e s , 2 0 1 4 lays down

p ro c e d u r e r e q u i r e d for a person w h o is e l i g i b l e a n d w i l l i n g to be a p p o i n t e d as a n i n d e p e n d e n t

director. Accordingly-

(1) A p p l y o n l i n e for i n c l u s i o n of n a m e i n the data b a n k : Every i n d i v i d u a l ­

(a) w h o h a s b e e n a p p o i n t e d as an i n d e p e n d e n t d i r e c t o r i n a c o m p a n y , o n the date

of commencement of the Companies (Appointment and Q u a l i fi c a t i o n s of

Directors) Fifth Amendment Rules, 2019, shall within a period of t h i r t e e n

m o n t h s from s u c h c o m m e n c e m e n t ; o r

(b) w h o i n t e n d s to get a p p o i n t e d as a n i n d e p e n d e n t d i r e c t o r i n a c o m p a n y after

s u c h c o m m e n c e m e n t , s h a l l before s u c h a p p o i n t m e n t ,

a p p l y o n l i n e to the i n s t i t u t e for i n c l u s i o n of h i s n a m e i n the data b a n k fo r a p e r i o d of

o n e y e a r or five years or fo r h i s l i f e - t i m e , a n d from t i m e to t i m e take steps as s p e c i fi e d

i n s u b - r u l e ( 2 ) , t i l l he c o n t i n u e s to h o l d the office of a n i n d e p e n d e n t director i n a n y

company:

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

Provided t h a t any i n d i v i d u a l , i n c l u d i n g an i n d i v i d u a l not h a v i n g D I N , may v o l u n t a r i l y

a p p l y to t h e i n s t i t u t e fo r i n c l u s i o n of h i s n a m e i n t h e d a t a b a n k .

(2) R e n e w a l of p e r i o d fo r i n c l u s i o n of h i s n a m e i n the data b a n k : Every individual

w h o s e n a m e h a s b e e n so i n c l u d e d i n the d a t a b a n k s h a l l fi l e a n a p p l i c a t i o n for r e n e w a l

fo r a f u r t h e r p e r i o d of o n e y e a r o r five y e a r s or fo r h i s l i f e - t i m e , w i t h i n a p e r i o d of t h i r t y

d a y s from the date of e x p i r y of t h e period upto w h i c h the n a m e of t h e i n d i v i d u a l was

a p p l i e d fo r i n c l u s i o n in the data b a n k , f a i l i n g w h i c h , the n a m e of s u c h individual shall

stand r e m o v e d from t h e d a t a b a n k of t h e i n s t i t u t e :

P r o v i d e d t h a t no a p p l i c a t i o n for r e n e w a l s h a l l be fi l e d by a n i n d i v i d u a l w h o h a s p a i d

l i f e - t i m e fees fo r i n c l u s i o n of h i s n a m e i n the d a t a b a n k .

(3) S u b m i s s i o n of d e c l a r a t i o n of c o m p l i a n c e to the B o a r d : Every i n d e p e n d e n t d i r e c t o r

s h a l l s u b m i t a d e c l a r a t i o n of c o m p l i a n c e of s u b - r u l e ( 1 ) a n d s u b - r u l e ( 2 ) to t h e Board,

e a c h t i m e he s u b m i t s t h e d e c l a r a t i o n required u n d e r s u b - s e c t i o n ( 7 ) of s e c t i o n 1 4 9 of

t h e Act.

(4) To pass an o n l i n e p r o fi c i e n c y self a s s e s s m e n t test: Every i n d i v i d u a l w h o s e n a m e

is so i n c l u d e d i n t h e data b a n k u n d e r s u b - r u l e ( 1 ) s h a l l p a s s a n o n l i n e p ro fi c i e n c y self­

a s s e s s m e n t test c o n d u c t e d by t h e i n s t i t u t e w i t h i n a p e r i o d two y e a r s from t h e d a t e of

inclusion of h i s name in the data bank, fa i l i n g which, his name shall stand removed

from the d a t a b a n k of t h e i n s t i t u t e :

Exemptions from online p r o fi c i e n c y self-assessment test: P ro v i d e d t h a t an

individual shall not be required to pass the online p r o fi c i e n c y s e l f - a s s e s s m e n t test

when he has s e r v e d fo r a t o t a l period of n o t less than t h r e e y e a r s as on the date of

i n c l u s i o n of h i s n a m e i n t h e d a t a b a n k , -

(A) as a d i r e c t o r or key m a n a g e r i a l p e r s o n n e l , as on t h e d a t e of i n c l u s i o n of h i s

n a m e i n t h e d a t a b a n k , i n o n e o r m o re of t h e fo ll o w i n g , n a m e l y : -

(a) listed p u b l i c c o m p a n y ; or

(b) unlisted public company having a paid-up share capital of rupees ten

crore or m o r e ; o r

(c) b o d y c o r p o r a t e l i s t e d on a n y r e c o g n i z e d stock e x c h a n g e or i n a c o u n t r y

which i s a m e m b e r State of t h e Financial Action T a s k Force on Money

Laundering and the r e g u l a t o r of t h e securities market in such member

State is a member of the I n t e rn a t i o n a l Organization of Securities

C o m m i s s i o n s ; or

(d) bodies corporate incorporated outside India having a paid-up share

c a p i t a l of U S $ 2 m i l l i o n o r m o r e ; o r

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

(e) statutory corporations set up under an Act of Parliament or any State

Legislature carrying on commercial activities; or

(B) in the pay scale of Director or equivalent or above in any Ministry or

Department, of the Central G o v e rn m e n t or a n y State G o v e rn m e n t , and having

experience in handling,-

(i) the m a tt e r s r e l a t i n g to c o m m e r c e , c o r p o r a t e a ff a i r s , fi n a n c e , i n d u s t r y or

public enterprises; or

(ii) the a ff a i r s related to G o v e rn m e n t companies o r statutory c o r p o ra t i o n s

set up under an Act of Parliament or any State Act and carrying on

commercial activities."

(C) i n t h e pay s c a l e of C h i e f G e n e r a l M a n a g e r or a b o ve in the Securities and

E x c h a n g e B o a r d or t h e R e s e r v e B a n k of I n d i a or t h e I n s u ra n c e Regulatory and

Development Authority of India or the Pension Fund Regulatory and

Development Authority and having experience in handling the m a tt e r s relating

to c o r p o r a t e l a w s or s e c u r i t i e s laws or e c o n o m i c laws :

Provided further t h a t for the p u r p o s e of c a l c u l a t i o n of t h e p e r i o d of t h r e e y e a r s

referred to in the first p ro v i s o , any period d u r i n g w h i c h a n i n d i v i d u a l was a c t i n g

as a director o r as a key managerial personnel in two or more companies or

bodies corporate o r statutory corporations at the same time shall be counted

only once.

" P r o v i d e d a l s o t h a t t h e fo ll o w i n g i n d i v i d u a l s , w h o are or h a v e b e e n , fo r at l e a s t

ten y e a r s : -

(A) a n a d v o c a t e of a c o u r t ; or

(B) in p r a c t i c e as a c h a r t e r e d accountant; or

(C) in p r a c t i c e as a cost a c c o u n t a n t ; or

(D) in practice as a company secretary, shall not be required to pass the

online p ro fi c i e n c y s e l f - a s s e s s m e n t t e s t. " .

(5) Restoration of names in the databank: Any individual whose name has been

removed from the data b a n k u n d e r s u b - r u l e (4 ) , m a y a p p l y fo r re s t o r a t i o n of h i s name

on payment of fees of one thousand rupees and the institute shall allow such

restoration s u b j e c t to t h e fo l l o w i n g c o n d i t i o n s , namely :-

(i) his name shall be shown in a separate restored category for a p e r i o d of

o n e year from t h e d a t e of r e s t o r a t i o n w i t h i n w h i c h , h e s h a l l be r e q u i r e d to p a s s

the online p ro fi c i e n c y self-assessment test and thereafter his name shall be

included in the databank, only, if he passes the said online p r o fi c i e n c y self­

a s s e s s m e n t test and in such case, the fees paid by him at the time of i n i t i a l

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

r e g i s t r a t i o n s h a l l c o n t i n u e to be v a l i d fo r t h e p e r i o d fo r w h i c h t h e s a m e was

initially paid; and

I n case he fa i l s to pass the o n l i n e p r o fi c i e n c y s e l f - a s s e s s m e n t test w i t h i n

o n e y e a r from t h e date of restoration, h i s n a m e s h a l l be r e m o v e d from t h e

data bank and he shall be required to apply afresh under sub-rule (1) for

i n c l u s i o n of h i s n a m e i n t h e d a t a b a n k .

E x p l a n a t i o n : F o r the p u r p o s e s of t h i s r u l e , -

(a) the expression "institute" means the 'Indian Institute of C o r p o r a t e Affairs

at M a n e s a r ' n o t i fi e d u n d e r s u b - s e c t i o n ( 1 ) of s e c t i o n 1 5 0 of t h e C o m p a n i e s

A c t , 2 0 1 3 a s t h e i n s t i t u t e fo r t h e c r e a t i o n a n d m a i n t e n a n c e of d a t a b a n k of

I n d e p e n d e n t Directors;

(b) an i n d i v i d u a l who has obtained a score of n o t l e s s t h a n fifty p e r c e n t. , in

aggregate in the o n l i n e p r o f i c i e n c y s e l f - a s s e s s m e n t test s h a l l be d e e m e d

to h a v e p a s s e d s u c h t e s t ;

(c) t h e r e s h a l l be n o l i m i t o n t h e n u m b e r of a tt e m p t s a n i n d i v i d u a l m a y t a k e fo r

p a s s i n g t h e o n l i n e p ro fi c i e n c y s e l f - a s s e s s m e n t t e s t .

(ii) D u e d i l i g e n c e to be e x e r c i s e d by the c o m p a n y : Further, the r e s p o n s i b i l i t y of e x e r c i s i n g

d u e d i l i g e n c e b e fo r e s e l e c t i n g a p e r s o n as an i n d e p e n d e n t d i r e c t o r from t h e d a t a b a n k , s h a l l

l i e with t h e c o m p a n y m a k i n g s u c h a p p o i n t m e n t [ P r o v i s o to S e c t i o n 1 5 0 ( 1 ) ] .

(iii) A p p r o v a l of A p p o i n t m e n t i n g e n e r a l m e e t i n g : T h e a p p o i n t m e n t of i n d e p e n d e n t d i r e c t o r

s h a l l be a p p ro v e d by t h e c o m p a n y i n g e n e r a l m e e t i n g as p ro v i d e d i n s e c t i o n 1 5 2 ( 2 ) a n d the

e x p l a n a t o r y s t a t e m e n t a n n e x e d to t h e n o t i c e of t h e g e n e r a l meeting c a l l e d to c o n s i d e r t h e

s a i d a p p o i n t m e n t s h a l l i n d i c a t e t h e j u s t i fi c a t i o n for c h o o s i n g t h e a p p o i n t e e for a p p o i n t m e n t as

i n d e p e n d e n t director. [Section 1 5 0 ( 2 ) ] .

(iv) Data b a n k to c o n t a i n l i s t of w ill i n g p e r s o n s w h o d e s i r e to act as I n d e p e n d e n t D i r e c t o r s :

T h e data b a n k s h a l l create a n d m a i n t a i n d a t a of p e r s o n s w i l l i n g to act as i n d e p e n d e n t d i r e c t o r

in accordance with R u l e 6 of t h e Companies (Appointment and Q u a l i fi c a t i o n s of D i r e c t o r s )

R u l e s , 2 0 1 4 . [Section 1 5 0 ( 3 ) ]

(v) M a n n e r & p r o c e d u r e of s e l e c t i o n s p e c i fi e d by C G : T h e C e n t r a l G o v e rn m e n t m a y p r e s c r i b e

t h e m a n n e r a n d p r o c e d u r e of s e l e c t i o n of i n d e p e n d e n t d i r e c t o r s w h o f u l fil l t h e q u a l i fi c a t i o n s

a n d r e q u i r e m e n t s s p e c i fi e d u n d e r s e c t i o n 1 4 9 [ S e c t i o n 1 5 0 ( 4 ) ]

Exemption

Notification No. 466(E) dated 5June, 2 0 1 5 as amended by Notification No. GSR 584 (E),

dated 1 3 - 0 6 - 2 0 1 7 has exempted a Section 8 company from the application of Section 1 5 0

of the Act, only if such company has not committed a default in filing its financial statements

under Section 1 3 7 or Annual Return under Section 92 with the Registrar.

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

C 14. DUTIES OF DIRECTORS

Directors a p p o i n t e d i n a c o m p a n y have v a r i o u s d u t i e s to p e r fo r m . The fo r e m o s t d u t y of t h e d i r e c t o r s

i s to act h o n e s t l y a n d d i l i g e n t l y a n d i n the best interest of the c o m p a n y so that the objective of w e a l t h

m a x i m i z a t i o n is a c h i e v e d for the s t a k e h o l d e r s . I n no case a n y b u s i n e s s o p p o r t u n i t y w h i c h falls w i t h i n

t h e a m b i t of the c o m p a n y be e x p l o i t e d by the d i r e c t o r s for t h e i r own b e n e fi t s .

A. D u t i e s as p e r S e c t i o n 1 6 6 : D u t i e s of d i r e c t o r s , more p a r t i c u l a r l y statutory d u t i e s , h a v e been

p r e s c r i b e d for the first t i m e i n t h e Statute. Section 1 6 6 s p e c i fi e s the fo l l o w i n g d u t i e s w h i c h are

r e q u i r e d to be a c c o m p l i s h e d by a d i r e c t o r :

(i) H e s h a l l act i n a c c o r d a n c e with t h e a r t i c l e s of the c o m p a n y , s u b j e c t to the p ro v i s i o n s of

the the C o m p a n i e s Act, 2 0 1 3 .

(ii) H e s h a l l act i n g o o d fa i t h in o r d e r to p ro m o t e the objects of the c o m p a n y fo r t h e b e n e fi t of

its members as a whole. Further, he shall act in the best interests of the company, its

e m p l o y e e s , the s h a r e h o l d e r s , the c o m m u n i t y a n d fo r the p ro t e c t i o n of e n v i ro n m e n t.

(iii) H e s h a l l exercise h i s d u t i e s with d u e a n d r e a s o n a b l e c a r e , s k i l l a n d d i l i g e n c e a n d s h a l l

exercise i n d e p e n d e n t j u d g m e n t.

(iv) H e s h a l l not i n v o l v e i n a s i t u a t i o n i n w h i c h h e m a y h a v e a direct or i n d i r e c t interest that

c o n f l i c t s , o r p o s s i b l y m a y c o n fl i c t , with the i n t e r e s t of the c o m p a n y .

(v) H e s h a l l n o t a c h i e v e a n y u n d u e g a i n or a d v a n t a g e e i t h e r to h i m s e l f o r to h i s r e l a t i v e s ,

p a r t n e r s , or a s s o c i a t e s . I n case s u c h d i r e c t o r is fo u n d g u i l t y of m a k i n g a n y u n d u e g a i n , he

s h a l l be li a b l e to pay a n a m o u n t e q u a l to that g a i n to the c o m p a n y .

(vi) H e s h a ll not a s s i g n h i s office a n d if a n y a s s i g n m e n t is so m a d e , it s h a l l be v o i d .

T h e a s s i g n m e n t of office h a s been m a d e i n v a l i d b e c a u s e of the fact that t h e s h a r e h o l d e r s

have e l e c t e d a p a r t i c u l a r person as d i r e c t o r for the m a n a g e m e n t of t h e i r c o m p a n y . If s u c h

person a s s i g n s h i s office to s o m e o t h e r p e r s o n , the s h a r e h o l d e r s m a y not h a v e faith i n the

o t h e r p e r s o n ; a n d t h e r e fo r e , a person w h o d o e s not c o m m a n d the faith of the s h a r e h o l d e r s

c a n n o t be g i v e n the r e s p o n s i b i l i t y to m a n a g e the c o m p a n y . I n o t h e r w o r d s , it is r e q u i r e d of

the o r i g i n a l d i r e c t o r to carry o u t h i s d u t i e s of d i r e c t o r s h i p o n h i s own w i t h o u t a s s i g n i n g t h e m

to s o m e o t h e r p e r s o n . D e l e g a t i o n of d u t i e s to o t h e r staff m e m b e r s , w h e r e v e r p e r m i tt e d , is n o t

a k i n to a s s i g n m e n t of o ffi c e .

P u n i s h m e n t for not a c c o m p l i s h i n g statutory d u t i e s : l f a n y d i r e c t o r of the c o m p a n y c o n t r a v e n e s

t h e p ro v i s i o n s of S e c t i o n 1 6 6 , s u c h d i r e c t o r s h a ll be p u n i s h a b l e with fi n e w h i c h s h a l l not be l e s s t h a n

7 1 , 0 0 , 0 0 0 b u t w hi ch m a y extend to 5, 0 0, 0 0 0 .

14
B. Some Other D u t i e s :They are d e s c r i b e d as u n d e r :

(i) To file v a r i o u s d o c u m e n t s : It is the d u t y of the d i r e c t o r s to fi l e v a r i o u s d o c u m e n t s r e q u i r e d

14 T h i s list of d u t i e s is not e xh a u s ti v e.

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

to be fi l e d w i t h t h e R e g i s t r a r w i t h i n t h e s p e c i fi e d t i m e l i m i t s . S i m i l a r l y , w h e r e v e r r e q u i r e d , t h e

r e q u i s i t e d o c u m e n t s m u s t a l s o be fi l e d with o t h e r statutory b o d i e s .

15
(ii) To c o n v e n e G e n e r a l M e e t i n g s : As a n d w h e n r e q u i r e d , A n n u a l G e n e r a l M e e t i n g ( A G M }

16
a n d e x t r a o r d i n a r y g e n e r a l m e e t i n g s ( EG M s ) n e e d to be c o n v e n e d by t h e d i r e c t o r s .

(iii) To attend B o a r d M e e t i n g s : B o a r d m e e t i n g s is the p l a t fo r m w h e r e c o l l e c t i v e d e c i s i o n s are

t a k e n fo r m a n a g i n g t h e c o m p a n y p ro fi t a b l y . It is s t a t u t o r i l y r e q u i r e d of a c o m p a n y to hold at

17
l e a s t fo u r b o a r d m e e t i n g s every year and the gap between two board meetings m u s t not

exceed 1 2 0 days. H o w e v e r , a c o m p a n y m a y , as p e r t h e e x i g e n c i e s , h o l d m o r e m e e t i n g s t h a n

s t a t u t o r i l y r e q u i r e d a n d every d i r e c t o r is d u t y - b o u n d to a tt e n d t h e m . A d i r e c t o r , t h o u g h , may

n o t a tt e n d a l l t h e Board m e e t i n g s h e l d i n a y e a r b u t i n c a s e h e r e m a i n s a b s e n t from a l l s u c h

meetings held within a period of tw el ve months either with or without seeking leave of

18.
absence, he s h a l l be d e e m e d to h a v e v a c a t e d h i s o ffi c e

19:
(iv) To disclose interest In the ordinary course, it is required of a director that h i s interest s h o u ld not

clash with the interests of the company i.e. he should not get himself benefitted from a transaction,

the profit of which belongs to the company. If it happens and a director gets interested in a transaction

b e l o n g i n g to the company, it h i s duty to disclose such interest at the very first Board meeting he

attends after becoming interested in the transaction. Thereafter, such interest should be disc losed

in the first board meeting held in every fi n a n ci a l year. In case th ere is any change in the disclosure

already made by the director, such change needs to be b ro u g h t in the knowledge of other directors

in the first board meeting which he attends after occurring of such change. A detailed disclosure of

interest and p u n i s h m e n t for non -disclosure is discussed at the appropriate place.

(v) To approve the a n n u a l financial statements?9:Before s e e ki n g a u d i t o r' s report, the annual

fi n a n c i a l statements i. e . balance sheet, statement of profit a n d loss, cash flow statement, etc.

i n c l u d i n g c o n s o l i d a t e d fi n a n c i a l statem ents, if a n y , are required to be approved by the directors.

21
(vi) To approve a n d attach Board R e p o r t : A report by t h e B o a r d of D i r e c t o r s c o n t a i n g r e q u i s i t e

particulars on the affairs of the company including Directors' Responsibility Statement is

r e q u i r e d to be a tt a c h e d w i t h the fi n a n c i a l s t a t e m e n t s a ft e r its a p p ro v a l.

22:
(vii) To a p p o i n t first Auditors I t i s t h e d u t y of d i r e c t o r s to a p p o i n t first a u d i t o r s of t h e c o m p a n y .

15 Refer S e c ti o n 9 6 .

16 Refer S e c t i o n 10 0 .

17 Refer S e c ti o n 1 7 3 ( 1 ) . A c o m p a n y , if s p e ci fi c a l l y e x e m p t e d , m a y h ol d l e s s e r n u m b e r of B o a r d M e e t i n g s in

a year.

18 Refer S e c ti o n 1 6 7 ( 1 ) ( b ).

19 Refer S e c t i o n 1 8 4 .

20 Refer S e c t i o n 1 3 4 .

21 Refer S e c t i o n 1 3 4 .

22 Refer S e c t i o n 1 3 9 .

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

C 45. VACATION OF O F F I C E OF DIRECTOR [SECTION 1 6 7 ]

Section 1 6 7 of the Act c o n t a i n s p r o v i s i o n s d e t a i l i n g o u t as to w h e n the office of a d i r e c t o r s h a l l

b e c o m e v a c a n t. As soon a s , a n y s u c h e v e n t o c c u r s , the d i r e c t o r is r e q u i r e d to d e m i t t h e office of

d i r e c t o r of t h e c o m p a n y . T h e s e p r o v i s i o n s are g i v e n as u n d e r :

(i) G r o u n d s fo r v a c a t i o n : A c c o r d i n g to S e c t i o n 1 6 7 ( 1 ) , t h e office of a d i r e c t o r s h a l l b e c o m e

vacant in case:

(a) h e i n c u r s a n y of the d i s q u a l i fi c a t i o n s s p e c i fi e d i n s e c t i o n 1 6 4 ;

However, if h e i n c u r s d i s q u a l i fi c a t i o n u n d e r s e c t i o n 1 6 4 ( 2 ) , the office of the director

shall b e c o m e v a c a n t i n a l l the c o m p a n i e s , except the c o m p a n y w h i c h is i n d e f a u l t

u n d e r that s u b - s e c t i o n ;

(b) h e a b s e n t s h i m s e l f from a ll the m e e t i n g s of the Board of Directors h e l d d u r i n g a

p e r i o d of 1 2 m o n t h s with or w i t h o u t s e e k i n g le a v e of a b s e n c e of the B o a r d ;

(c) h e acts i n c o n t r a v e n t i o n o f t h e p r o v i s i o n s of section 1 8 4 r e l a t i n g to e n t e r i n g into

contracts o r a r r a n g e m e n t s i n w h i c h h e is d i r e c t l y or i n d i r e c t l y i n t e r e s t e d ;

(d) h e fa i l s to d i s c l o s e h i s interest in a n y contract or a r r a n g e m e n t i n w h i c h he is d i r e c t l y

o r i n d i r e c t l y i n t e r e s t e d , i n c o n t r a v e n t i o n of t h e p ro v i s i o n s of s e c t i o n 1 8 4 ;

(e) h e b e c o m e s d i s q u a l i fi e d by a n o r d e r of a court o r the T r i b u n a l ;

(f) he is convicted by a court of a n y o ff e n c e , whether involving m o ra l turpitude or

o t h e r w i s e a n d s e n t e n c e d to i m p r i s o n m e n t for 6 m o n t h s or m o r e .

E x c e p t i o n : T h e office s h a l l not be vacated by the d i r e c t o r i n case of orders referred

to in c l a u s e s (e) a n d (f)-

(i) for thirty d a y s from the date of c o n v i c t i o n or o r d e r of d i s q u a l i fi c a t i o n ;

(ii) w h e r e a n a p p e a l or petition is preferred w i t h i n thirty days as a fo r e s a i d a g a i n s t

t h e c o n v i c t i o n r e s u l t i n g i n s e n t e n c e o r o r d e r , u n t i l expiry of s e v e n days from the

date on w h i c h s u c h a p p e a l or p e t i t i o n is d i s p o s e d of; o r

(iii) where a n y further a p p e a l or p e t i t i o n is preferred a g a i n s t o r d e r or s e n t e n c e

w i t h i n s ev e n d a y s , u n t i l s u c h further a p p e a l o r p e t i t i o n is d i s p o s e d of;

(g) h e is r e m o v e d i n p u r s u a n c e of the p r o v i s i o n s of the C o m p a n i e s Act, 2 0 1 3 l i k e

w h e n he is r e q u i re d to vacate office fo r d i s q u a l i fi c a t i o n i n c u r r e d u n d e r S e c t i o n 2 1 7 (6)

(ii) i.e. c o n v i c t i o n for c o m m i tt i n g a n offence u n d e r S e c t i o n 2 1 7 ;

(h) h e , h a v i n g b e e n a p p o i n t e d a d i r e c t o r by v i r t u e of h i s h o l d i n g a n y office or o t h e r

e m p l o y m e n t i n the h o l d i n g , s u b s i d i a r y o r a s s o c i a t e c o m p a n y , ceases to h o l d s u c h

office or o t he r e m p l o y m e n t in that c o m p a n y .

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

P r o v i s i o n of a d d i t i o n a l g r o u n d for v a c a t i o n by a private c o m p a n y : A c c o r d i n g to S e c t i o n

1 6 7 ( 4 ) , a private c o m p a n y m a y provide a n y o t h e r g r o u n d for the v a c a t i o n of the office of a

d i r e c t o r i n a d d i t i o n to t h os e s p e c i fi e d a b o v e , t h ro u g h its a r t i c l e s .

(ii) P u n i s h m e n t: S e c t i o n 167(2) prescribes punishment in case of c o n t ra v e n t i o n of section

1 6 7 ( 1 ) . T h u s , if a p e r s o n f u n c t i o n s as a director even w h e n h e knows that the office of d i r e c t o r

h e l d by h i m has b e c o m e v a c a n t o n a c c o u n t of a n y of the d i s q u a l i fi c a t i o n s s p e c i fi e d i n S e c t i o n

1 6 7 ( 1 ) , he s h a l l be p u ni sh ab l e with fi n e of ? 1 , 0 0 , 0 0 0 e x t e n d a b l e to ? 5 , 0 0, 0 0 0.

(iii) All t h e Directors v a c a t i n g the o f fi c e : S e c t i o n 1 6 7 ( 3 ) m e n t i o n s a b o u t the e v e n t u a l i t y w h e n

a l l the d i r e c t o r s of a c o m p a n y vacate t h e i r offices u n d e r a n y of the d i s q u a l i fi c a t i o n s s p e c i fi e d

i n S e c ti o n 1 6 7 ( 1 ) . I n t h a t c a s e , the p ro m o t e r o r , i n h i s a b s e n c e , the C e n t r a l G o v e rn m e n t s h a l l

a p p o i n t the r e q u i r e d n u m b e r of d i r ec t or s w h o s h a l l h o l d office t i l l the directors are a p p o i n t e d

by the c o m p a n y i n the g e n e r a l m e e t i n g .

C 16. RESIGNATION OF DIRECTOR [SECTION 168]

P r o vi s o n s r e g a r d i n g r e s i g n a t i o n of d i r e c t or s have b e e n i n c l u d e d i n the C o m p a n i e s Act, 2 0 1 3 fo r the

first time. Section 168 read with Rule 15 and Rule 16 of the Companies (Appointment and

Q u a l i fi c a t i o n s of D i r e c t o r s ) R u l e s , 2 0 1 4 d e a l s with r e s i g n a t i o n of a d i r e c t o r as u n d e r :

Board takes note on receipt of notice

A A

I I

Fact of such resignation is given in the report of directors

placed in the immediately following general meeting

Director forward copy of resignation with reasons to

Registrar i n 30 days from date of resignation in Form D I R -

11 with fees.

S i g n i n g a n d F i l i n g of Form D I R - 1 1 i n case of a F o r e i g n D i r e c t o r : l n case a c o m p a n y h a s a l r e a d y

fi l e d Form D I R - 1 2 with the R e g i s t r a r , a fo r e i g n director of s u c h c o m p a n y r e s i g n i n g from h i s office

may authorise in writing a practising chartered accountant or cost accountant in practice or

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

c o m p a n y secretary i n practice or a n y o t h e r r e s i d e n t d i r e c t o r of the c o m p a n y to s i g n Form D I R - 1 1

a n d fi l e the s a m e on h i s b e h a l f i n t i m a t i n g the r e a s o n s fo r the r e s i g n a t i o n .

C l a r i fi c a t i o n : M C A v i d e G e n e r a l C i r c u l a r N o . 3 / 1 5 , d a t e d 3rd M a r c h , 2 0 1 5 h a s c l a r i fi e d t h a t in the

e v e n t of d e a c t i v a t i o n of D i g i t a l S i g n a t u r e Certificate ( D S C ) fo ll o w i n g en masse r e s i g n a t i o n of a l l the

directors of a c o m p a n y before a p p o i n t m e n t of new d i r e c t o r s i n t h e i r p l a c e s , where Form DIR-12

c a n n o t be fi l e d by a c o m p a n y d u e to l a c k of an a u t h o r i z e d s i g n a t o r y d i r e c t o r , the Registrars of

C o m p a n i e s w i t h i n t h e i r respective j u r i s d i c t i o n s are a u t h o r i z e d , o n request from the s t a k e h o l d e r s ,

a n d after d u e e x a m i n a t i o n , to a l l o w a n y o n e of the r e s i g n e d d i r e c t o r w h o was a n a u t h o r i z e d s i g n a t o r y

d i r e c t o r fo r t h e p u r p o s e of fi l i n g D I R - 1 2 o n l y a l o n g with a d d i t i o n a l fees, as a p p l i c a b l e a n d s u b j e c t to

c o m p l i a n c e of o t h e r p r o v i s i o n s of C o m p a n i e s Act, 2 0 1 3 .

Effective date of r e s i g n a t i o n : T h e r e s i g n a t i o n of a d i r e c t o r s h a l l take effect:

(i ) from the date on w h i c h the notice is received by the c o m p a n y , }

OR

(ii) the d a t e , if a n y , s p e c i fi e d by the director i n the n o t i c e ,

Li a b i l i t y : T h e d i r e c t o r w h o has so r e s i g n e d s h a l l be l i a b l e even after h i s r e s i g n a t i o n for t h e offences

w h i c h occurred d u r i n g h i s t e n u r e .

All t h e D i r e c t o r s t e n d e r i n g r e s i g n a t i o n : I n case a l l the directors of a c o m p a n y r e s i g n from t h e i r

offices, o r vacate t h e i r offices u n d e r section 1 6 7 , the p r o m o t e r or, in h i s a b s e n c e , the C e n t r a l

G o v e rn m e n t s h a l l a p p o i n t the r e q u i r e d n u m b e r of directors w h o s h a l l h o l d office t i l l t h e directors

are a p p o i n t e d by the c o m p a n y i n g e n e r a l m e e t i n g .

G 17. REMOVAL OF DIRECTORS [SECTION 169]

A d i r e c t o r of a c o m p a n y m a y be removed before c o m p l e t i o n of h i s term as d i r e c t o r . R e m o v a l of

directors is d i s c u s s e d h e r e u n d e r the fo l l o w i n g h e a d s :

Removal of directors by

I I

the shareholders
the Tribunal (Sec. 242)
(sec. 1 6 9 )

I I I

By ordinary on application made

By special resolution
resolution under section 241

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

I. R e m o v a l of D i r e c t o r by the S h a r e h o l d e r s : Section 1 6 9 of t h e Act c o n t a i n s p r o v i s i o n s for

r e m o v a l of directors by the s h a r e h o l d e r s . T h e way s h a r e h o l d e r s are e m p o w e r e d to a p p o i n t a d i r e c t o r ,

i n the s a m e way they can a l s o r e m o v e a d i r e c t o r . T h e p r o c e d u r e of r e m o v a l m a y be i n the fo l l o w i n g

manner:

23
(i) R e q u i r e m e n t of O r d i n a r y R e s o l u t i o n : A c o m p a n y m a y , by o r d i n a r y r e s o l u t i o n , remove a

d i r e c t o r before the e x p i r y of the p e r i o d of h i s office except the fo ll o w i n g :

(a) w h e n a d i r e c t o r is a p p o i n t e d by the T r i b u n a l u n d e r Section 2 4 2 .

2(b) when as per Section 163, two-thirds or m o r e of the total n u m b e r of directors are

a p p o i n t e d a c c o r d i n g to the p r i n c i p l e of p r o p o r t i o n a l r e p r e s e n t a t i o n , t h e n s u c h directors

c a n n o t be r e m o v e d .

F o r e x a m p l e , if a c o m p a n y h a s e i g h t d i r e c t o r s , of w h i c h s i x were a p p o i n t e d a c c o r d i n g

to the p r i n c i p l e of p ro p o r t i o n a l r e p r e s e n t a t i o n . I n s u c h a c a s e , o n l y two directors w h i c h

were not a p p o i n t e d fo l l o w i n g the system of p ro p o r t i o n a l r e p re s e n t a t i o n , c a n o n l y be

r e m o v e d by the s h a r e h o l d e r s .

(ii) R e q u i r e m e n t of S p e c i a l Resolution in case of removal of r e - a p p o i n t e d independent

d i r e c t o r : A n i n d e p e n d e n t d i r e c t o r r e - a p p o i n t e d for s e c o n d term u n d e r S e c t i o n 1 4 9 ( 1 0 ) s h a ll

be removed by the c o m p a n y o n l y by p a s s i n g a s p e c i a l r e s o l u t i o n .

N o t e : U n d e r both the c l a u s e s ( i ) a n d ( i i ) a b o v e , the d i r e c t o r to be r e m o v e d s h a l l be g i v e n a

r e a s o n a b l e o p p o r t u n i t y of b e i n g h e ar d before h i s removal.

25
(iii) S p e c i a l Notice :A s p e c i a l n o t i c e as p e r Section 1 1 5 s h a l l be r e q u i r e d for p ro p o s i n g a n y

r e s o l u t i o n to remove a d i r ec t o r .

S p e c i a l n o t i c e u n d e r S e c t i o n 1 1 5 i s r e q u i r e d to be s i g n e d b y :

(i) m e m b e r s h o l d i n g n o t less t h a n 1 % of total v o t i n g power; o r

(ii) members holding shares on which at least Rs. 5,00,000 has been paid in the

aggregate.

Such n o t i c e s h a l l be s e n t by the m e m b e r s not e a r l i e r t h a n 3 m o n t h s b u t at l e a s t 1 4 days

before the m e e t i n g at w h i c h the r e s o l u t i o n is d e s i r e d to be m o v e d .

26
(iv) A c t i o n by the c o m p a n y : O n r e c e i p t of the s p e c i a l notice of a r e s o l u t i o n to remove a d i r e c t o r ,

the c o m p a n y s h a l l forthwith s e n d a copy thereof to t h e d i r e c t o r c o n c e rn e d , a n d the d i r e c t o r ,

2As p e r S e c ti o n 1 6 9 ( 1 ) .

As p e r S e c o n d Proviso to S e ct i o n 1 6 9 ( 1 ) .

·As p e r S e c ti o n 1 6 9 ( 2 ).

28As p e r S e c ti o n 1 6 9
.(3).

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

w h e t h e r or not he is a m e m b e r of the c o m p a n y , s h a l l be e n t i t l e d to be heard on the r e s o l u t i o n

at the m e e t i n g .

(v) Representation by the director:ln case the director c o n c e rn e d makes a written

representation to the company and requests that it s h o u l d be n o t i fi e d to members, the

c o m p a n y s h a l l , if the t i m e p e r m i t s it to d o s o , -

(a) state t h e fact of t h e r e p r e s e n t a t i o n h a v i n g been m a d e by the d i r e c t o r in a n y n o t i c e

of the r e s o l u t i o n g i v e n to m e m b e r s of the c o m p a n y ; a n d

(b) s e n d t h e r e p r e s e n t a t i o n to every m e m b e r of t h e c o m p a n y to w h o m notice of the

m e e t i n g is s e n t ( w h e t h e r before or after receipt of the r e p r e s e n t a t i o n by the c o m p a n y ) .

I n c a s e , the r e p r e s e n t a t i o n is not s e n t as a fo r e s a i d d u e to i n s u f fi c i e n t t i m e or for the

c o m p a n y ' s d e fa u l t , the d i r e c t o r m a y w i t h o u t p r e j u d i c e to h i s r i g h t to be h e a r d o r a l l y

r e q u i r e that the re p r e s e n t a t i o n s h a l l be read o u t at the m e e t i n g .

27:
R e p r e s e n t a t i o n of d i r e c t o r need not be sent It is p r o v i d e d that r e p r e s e n t a t i o n n e e d n o t

be s e n t o u t a n d read o u t at the m e e t i n g if, on the a p p l i c a t i o n e i t h e r of the c o m p a n y o r of a n y

o t h e r a g g r i e v e d p e r s o n , the T r i b u n a l is s a t i s fi e d t h a t the r i g h t s of r e p r e s e n t a t i o n are b e i n g

a b u s e d to s e c u r e n e e d l e s s p u b li c i t y for d e fa m a t o r y m a tt e r .

F u r t h e r , the T r i b u n a l m a y o r d e r the d i r e c t o r c o n c e rn e d ( n o t w i t h s t a n d i n g that h e is not a party

to it) to make payment in w h o l e or i n part of the costs incurred by the c o m p a n y on the

a p p l i c a t i o n so m a d e to the T r i b u n a l.

28
(vi) F i lli n g of vacancy :The vacancy resulting from the a fo r e s a i d removal if he had been

appointed by the company in general meeting o r by the Board, may be fil l e d in by the

a p p o i n t m e n t of a n o t h e r d i r e c t o r at the same meeting at w h i c h the director is removed,

p ro v i d e d s p e c i a l n o t i c e of the p r o p o s e d a p p o i n t m e n t h a s b e e n g i v e n .

29:
N o n - F ill i n g of vacancy If t h e v a c a n c y is not fi l l e d i n t h e s a m e m e e t i n g as a b o v e , t h e n it

m a y be fi l l e d as a c a s u a l v a c a n c y p ro v i d e d that the d i r e c t o r who was so removed from office

s h a l l not be r e a p p o i n t e d as a d i r ec t o r .

(vii) P e r i o d of h o l d i n g of office by new director:A director so a p p oi n t e d sh al l h o l d office for

the r e m a i n i n g p e r i o d for w h i c h the d i r e c t o r w h o has b e e n r e m o v e d w o u l d h a v e h e l d office if

h e h a d not b e e n r e m o v e d .

2'As p e r Proviso to S e c t i o n 1 6 9 ( 4 ) .

28As p e r S e c ti o n 1 6 9 ( 5 ) .

29As p e r S e c ti o n 1 6 9
.(5).

3As p e r S e c t i o n 1 6 9 ( 7 ) .

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

31:
(viii) P a y m e n t of c o m p e n s a t i o n A person so removed as d i r e c t o r s h a l l not be deprived of h i s

r i g h t s to c o m p e n s a t i o n or d a m a g e s p a y a b l e to him in r e s p e c t of t h e premature termination of

the directorship, or terms of his appointment as director or of a n y appointment terminating

with that as a director.The re s t r i c t i o n s imposed by Section 202 are also to be kept under

consideration while making p a y m e n t of c o m p e n s a t i o n fo r l o s s of office of d i r e c t o r s h i p .

32
(ix) No restriction imposed by Section 169 :Nothing in Section 169 shall be taken as

d e r o g a t i n g from a n y p o w e r to r e m o v e a d i r e c t o r u n d e r a n y o t h e r p r o v i s i o n s of t h e C o m p a n i e s

Act, 2013.

In other words, Section 169 does not impose any restriction on any other power available

u n d e r s o m e o t h e r p ro v i s i o n s of t h e C o m p a n i e s Act, 2 0 1 3 which allows r e m o v a l of a d i r e c t o r .

I I. R e m o v a l of D i r e c t o r by the T r i b u n a l : A c c o r d i n g to S e c t i o n 2 4 2 , a d i r e c t o r m a y be r e m o v e d

by the Tribunal where an application has been made to it under Section 241 fo r prevention of

oppression and m i s m a n a g e m e n t in the c o m p a n y . The T r i b u n a l is a l s o e m p o w e r e d to t e r m i n a t e , set

aside or modify any agreement between the company and any of its directors on such terms and

conditions which i n the o p i n i o n of T r i b u n a l are j u s t a n d equitable.

A c c o r d i n g to Section 243, a d i r e c t o r so r e m o v e d as p e r t h e o r d e r of T r i b u n a l s h a l l n o t be e n t i t l e d to

c l a i m a n y c o m p e n s a t i o n for l o s s of h i s o f fi c e . F u r t h e r , he s h a l l not be offered a p p o i n t m e n t as d i r e c t o r

for a p e r i o d of five years from t h e d a t e of t h e o r d e r w i t h o u t fi r s t s e e k i n g t h e l e a v e of t h e T r i b u n a l.

G 48. REGISTER OF DIRECTORS AND KEY MANAGERIAL

PERSONNEL AND THEIR SHAREHOLDING [SECTION 170]

A company is re q u i r e d to maintain a r e g i s t e r of d i r e c t o r s and key managerial personnel and their

shareholding u n d e r Section 1 7 0 of t h e A c t. T h e s e p ro v i s i o n s are as u n d e r :

Every c o m p a n y s h a l l keep at its registered office a register c o n t a i n i n g the prescribed p a r t i c u l a r s of

its directors and key managerial p e r s o n n e l. T h e prescribed particulars shall include details of

securities held by each of t h e m in the company o r its holding, subsidiary, s u b s i d i a r y of its holding

companies or associate companies. In this respect Rule 1 7 of t h e Companies (Appointment and

Q u a l i fi c a t i o n s of Directors) Rules, 2014 ,is r e l e v a n t. It prescribes the fo l l o w i n g p a r t i c u l a r s to be

i n c l u d e d i n the R e g i s t e r :

(a) Director I d e n t i fi c a t i o n N u m b e r ( o p t i o n a l fo r key m a n a g e r i a l personnel);

·'As p e r S e c t i on 1 6 9 ( 8 ) ( a ) .

3As p e r S e c ti o n 1 6 9 ( 8 ) ( b ).

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

(b) p r e s e n t n a m e a n d s u rn a m e in full;

(c) a n y fo r m e r n a m e o r s u rn a m e in f u l l ;

(d) fa t h e r ' s n a m e , mother's name and s p o u s e ' s n a m e ( i f m a r r i e d ) a n d s u rn a m e s i n f u l l ;

( e) d a t e of b i r t h ;

(f) residential address (present as well as permanent);

(g) n a t i o n a l i t y ( i n c l u d i n g t h e n a t i o n a l i t y of o r i g i n , if d i ff e r e n t ) ;

(h) occupation;

(i) d a t e of t h e b o a r d resolution i n w h i c h t h e a p p o i n t m e n t was made;

(j) d a t e of a p p o i n t m e n t a n d re a p p o i n t m e n t i n t h e c o m p a n y ;

(k) d a t e of c e s s a t i o n of office a n d r e a s o n s t h e r e fo r ;

(I) o ffi c e of director or key managerial personnel held or relinquished in any other body

corporate;

(m) membership number of the Institute of Company Secretaries of India in case of Company

Secretary, if a p p l i c a b l e ; and

(n) P e r m a n e n t A c c o u n t N u m b e r ( m a n d a t o r y fo r key m a n a g e r i a l personnel if not h a v i n g DIN);

I n a d d i t i o n to the above d e t a i l s , the company shall also include in the Register the d e t a i l s of

securities held by t h e m in the company, its holding company, subsidiaries, subsidiaries of the

company's holding company and associate c o m p a n i e s relating to:

(a) the n u m b e r , description and n o m i n a l v a l u e of s e c u r i t i e s ;

(b) t h e d a t e of a c q u i s i t i o n a n d the price o r other c o n s i d e r a t i o n paid;

(c) d a t e of d i s p o s a l a n d price and other consideration received;

(d) cumulative balance and n u m b e r of s e c u r i t i e s h e l d after e a c h t r a n s a c t i o n ;

(e) m o d e of a c q u i s i t i o n of s e c u r i t i e s ;

(f) m o d e of h ol di n g - p h y s i c al or i n d e m a t e r i a l i z e d fo r m ; and

(g) w h e th e r securities have been pledged or any encumbrance has been created on the

securities.

Filing of R e t u rn in Form D I R - 1 2 with the Registrar:Section 170(2) read with Rule 18 of the

Companies (Appointment and Q u a l i fi c a t i o n s of D i r e c t o r s ) Rules, 2014 requires a c o m p a n y to fi l e a

r e t u rn in Form DIR-12 in r e s p e c t of its d i r e c t o r s and the key m a n a g e r i a l personnel after p a y i n g the

p r e s c r i b e d fee as u n d e r :

(a) within 30 d a y s from t h e a p p o i n t m e n t ; and

(b) within 30 d a y s of a n y c h a n g e t a k i n g place.

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

Exemption

Section 1 7 0 of the Companies Act, 2 0 1 3 shall not apply to a Government company in which

the entire share capital is held by the Central Government, or by any State G o v e rnm e n t or

Governments or by the Central Government or by one or more State G o v e rnm e n t subject to

the condition that such Government company has not committed a default in filing its financial

statements under Section 137 or Annual return under Section 92 with the registrar.

[Notification N o . G . S. R . 463(E), dated 5June, 2 0 1 5 as amended by Notification No. GSR

582 (E), dated 1 3 - 0 6 - 2 0 1 7 ].

C 19. M E M B E R S' RIGHT TO INSPECT [SECTION 1 7 1 ]

The m e m b e r s of t h e c o m p a n y have a r i g h t to i n s p e c t the r e g i s t e r of directors a n d key m a n a g e r i a l

p e r s o n n e l u n d e r S e c ti o n 1 7 1 of the Act. A c c o r d i n g l y :

(i) T i m i n g fo r i n s p e c t i o n : T h e register of directors a n d key m a n a g e r i a l p e r s o n n e l s h a l l be kept

o p e n fo r i n s p e c t i o n d u r i n g b u s i n e s s h o u r s . T h e m e m b e r s s h a l l have the r i g h t to take extracts

therefrom a n d c o p i e s t h e r e o f o n r e q u e s t a n d the s a m e w i l l be provided to t h e m w i t h i n 30 days

free of cost. [Refer S e c t i o n 1 7 1 ( 1 )( a ) ]

(ii) O p e n for i n s p e c t i o n : T h e register s h a l l a l s o be kept o p e n for i n s p e c t i o n at every a n n u a l

g e n e r a l m e e t i n g of the c o m p a n y a n d s h a l l be m a d e a c c e s s i b l e to a n y p e r s o n a tt e n d i n g the

m e e t i n g . [Refer S e c t i o n 1 7 1 ( 1 )( b ) ]

(iii) R e g i s t r a r to o r d e r i n case of r e f u s a l : l f a n y i n s p e c t i o n d u r i n g b u s i n e s s h o u r s is r e f u s e d , or

if a n y copy r e q u i r e d as a b o v e is not s e n t w i t h i n thirty days from the date of receipt of s u c h

r e q u e s t , the r e gi s t r ar s h a l l on a n a p p l i c a t i o n m a d e to h i m o r d e r i m m e d i a t e i n s p e c t i o n a n d

s u p p l y of c o p i e s . [Refer S e c ti o n 1 7 1 ( 2 ) ]

Exemptions

Section 1 7 1 shall not apply to a Government company in which the entire share capital is

held by the Central Government, or by any State Government or Governments or by the

Central Government or by one or more State Government subject to the condition that such

Government company has not committed a default in filing its financial statements under

Section 1 3 7 or Annual return under Section 92 with the registrar. [Notification No. G. S. R.

463(E), dated 5June, 2 0 1 5 as amended by Notification No. GSR 582 (E), dated 1 3 - 0 6 ­

2017].

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

C 20. P U N I S H M E N T [SECTION 1 7 2 ]

S e c t i o n 1 7 2 of the Act provides that if a c o m p a n y c o n t r a v e n e s a n y of the p r o v i s i o n s of C h a t e r XI

c o n t a i n g S e c t i o n s 1 4 9 to 1 7 1 a n d for w h i c h no s p e c i fi c p e n a l t y or p u n i s h m e n t is p ro v i d e d t h e r e i n ,

t h e c o m p a n y a n d every officer of the c o m p a n y w h o is i n d e f a u l t s h a l l be l i a b l e to a p e n a l t y of fifty

t h o u s a n d r u p e e s , a n d i n case of c o n t i n u i n g f a i l u r e , with a f u r t h e r p e n a l t y of five h u n d r e d r u p e e s for

e a c h d a y d u r i n g w h i c h s u c h f a i l u r e c o n t i n u e s , s u b j e c t to a m a x i m u m of three l a k h r u p e e s i n case of

a c o m p a n y a n d o n e l a k h r u p e e s i n case of a n offic e r w h o is i n d e fa u l t.

I n the d e c i d e d case of Ja/power Corporation Ltd. v. Registrar of Companies, it was h e l d that w h e r e

t h e r e was d e l a y i n a p p o i n t i n g w o m a n d i r e c t o r a n d a p p l i c a t i o n was fi l e d fo r c o m p o u n d i n g of offence,

s a m e was to be p e r m i tt e d fo r c o m p a n y a n d a l l its d i r e c t o r s , t h o u g h a p p l i c a t i o n for c o m p o u n d i n g was

fi l e d by c o m p a n y a n d two of its directors on p a y m e n t of p e n a l t y by each of d i r e c t o r s .

This was d e c i d e d i n as per S e c ti o n 1 4 9 , read with s e c t i o n 1 7 2 a n d section 4 4 1 , of the C o m p a n i e s

Act, 2 0 1 3 a n d r u l e 3 of the C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n of D i r e c t o r s ) R u l e s , 2 0 1 4 . In

t h e g i v e n c a s e , A p p l i c a n t c o m p a n y a p p o i n t e d w o m a n director after a d e l a y of 1 8 0 d a y s . R O C filed

complaint before EO . As belated appointment did not c a u s e any prejudice to any creditors of

c o m p a n y or p u b l i c at l a r g e , t h e r e fo r e , a p p l i c a t i o n was filed by c o m p a n y a n d two of its directors for

c o m p o u n d i n g of offence.

Here it was h e l d that s i n c e offence was c o m m i tt e d by c o m p a n y a n d a l l its 4 d i r e c t o r s , so c o m p o s i t i o n

of offence was to be p e r m i tt e d fo r c o m p a n y a n d a ll 4 d i r e c t o r s , t h o u g h a p p l i c a t i o n fo r c o m p o u n d i n g

was fi l e d by c o m p a n y a n d two of its di r e c t or s . All directors here h a d to pay fi n e a n d R O C s h o u l d

b r i n g i s s u e of c o m p o u n d i n g of offence to n o t i c e of S p e c i a l J u d g e for E c o n o m i c Offence .

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

TEST YOUR KNOWLEDGE

Multiple Choice Questions

1. Mr. Q, a Director of PQR Limited, is proceeding on a foreign tour covering entire Europe for four

months. He proposes to appoint Mr. Y as an alternate Director to act on his behalf during his

absence. The Articles of Association of PQR Limited provide for the appointment of alternate

Directors. Mr. Q claims that he has a right to appoint alternate Director of his choice. Which of the

following options is applicable in the given situation:

(a) Claim made by Mr. Q to appoint Mr. Y as alternate Director is valid as the Articles of

Association of PQR Limited provide for such appointment.

(b) Claim made by Mr. Q to appoint Mr. Y as alternate Director is not valid as the authority to

appoint alternate Director has been vested in the Board of Directors only and that too

subject to empowerment by the Articles of Association.

(c) Mr. Y cannot be appointed as an alternate Director in place of Mr. Q since Mr. Q is

proceeding on a foreign tour covering entire Europe for four months only which is less than

the required absence of minimum six months.

(d) Mr. Y cannot be appointed as an alternate Director in place of Mr. Q since Mr. Q is

proceeding on a foreign tour covering entire Europe for four months which is more than

the required absence of maximum three months.

2. In compliance with the Companies Act, 2013, at least one woman director shall be on the

Board of the prescribed class or classes of companies. Ms. Riya is keen to seek the office of

woman director in a company. Which of the following companies is mandatorily required to

appoint a woman director where Ms. Riya can hold such office:

(a) PQR Limited, an unlisted company, whose paid-up share capital is not exceeding 150

crore rupees as per the last date of latest audited financial statements is mandatorily

required to appoint a woman director.

(b) ABC Limited, a listed company, whose turnover is 250 crore rupees as per the last date of

latest audited financial statements is mandatorily required to appoint a woman director.

(c) XYZ Limited, an unlisted company, whose turnover is not more than 300 crore rupees

as per the last date of latest audited financial statements is mandatorily required to

appoint a woman director.

(d) BCZ Limited, an unlisted company whose paid-up share capital is not exceeding 100

crore and turnover is less than 300 crore rupees as per the last date of latest

audited financial statements is mandatorily required to appoint a woman director.

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

3. Kutumb Agro Limited (KAL), a newly incorporated company, has not mentioned the

n a m e s of the first Directors in its Articles of A s s o c i a t i o n . There are eight subscribers to

the M e m o ra n d u m o f Association including Parivaar Agro Private Limited. From the

following four options, c h o o s e the one which indicates as to who s h a ll b e d e e m e d to b e

the first Directors of KAL when nothing is m e n ti o n e d in the Articles?

(a) A ll the eight subscribers to the Memorandum of Association of KAL shall be

d e e m e d to be the first Directors.

(b) Except Parivaar Agro Private Limited, all other subscribers to the Memorandum of

A s s o c i a ti o n of KAL s h a ll b e d e e m e d to b e the first Directors.

(c) The shareholders shall appoint the first Directors in the G e n e r a l Meeting o f KAL.

(d) O u t of the eight subscribers to the Memorandum of Association, the first Directors

being three individuals s h a ll be n o m i n a t e d by Sriniwas, the Chartered a c c o u n t a n t

who h a s signed the Memorandum as witness a n d they s h a ll be d e e m e d to be the

first Directors of KAL.

4. The t u rn o v e r of XYZ C o m p o n e n t s Limited as on the last date of latest audited financial

statements is 4 0 0 crore rupees. A n intermittent v a c a n c y of a w o m a n Director arose on

June 1 5 , 2 0 2 1 due to the resignation of Ms. Swati. The immediate Board Meeting after

the resignation of Ms. Swati was held on O c t o b e r 1 0 , 2 0 2 1 . From the following options,

c h o o s e the o n e which indicates the date by which the vacancy of the w o m a n Director

m u s t be filled by XYZ C o m p o n e n t s Limited.

(a) July 1 4 , 2 0 2 1

(b) August 1 4 , 2 0 2 1

(c) September 14, 2 0 2 1

(d) October 1 0 , 2 0 2 1

5. Mr. Nagarjuna, one of the directors o f M G T Mechanics Limited, due to his own business

interests, decided to resign as director a n d accordingly, s e n t his resignation letter dated

1 2 J u n e , 2 0 2 1 to the c o m p a n y stating that he intends to resign w . e . f. 1 5 June, 2 0 2 1 .

Since n o communication in relation to his resignation was received from M G T M e c h a n i c s

Limited, he sent an e-mail on 17 June, 2021 enquiring about the receipt of his

resignation letter by the company b u t there was no response. However, M G T M e c h a n i c s

Limited received his resignation letter on 1 8 June, 2021. O u t o f the following four

options, c h o o s e the one which indicates the correct date from which his resignation will

b e effective:

(a) 1 2 J u n e, 2 0 2 1

(b) 1 5 June, 2 0 2 1

(c) 1 7 June, 2 0 2 1

(d) 1 8 June, 2 0 2 1

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

6. Mr. Z is p ro p o s e d to be appointed as the Director in RLP Mechanics Limited. It is

noteworthy t h a t Mr. Z already holds directorship in one dormant company, two Section 8

companies, eight public limited c o m p a n i e s a n d nine private limited c o m p a n i e s . However,

out of nine private limited c o m p a n i e s , two are subsidiaries of public limited c o m p a n i e s .

In the given circumstances, is it possible for Mr. Z to a c c e p t a n o t h e r directorship in R L P

Mechanics Limited without attracting any invalidity:

(a) It is n o t possible for Mr. Z to a c c e p t a n o t h e r directorship in R L P M e c h a n i c s Limited

since he is already holding directorships in twenty c o m p a n i e s .

(b) It is n o t possible for Mr. Z to a c c e p t a n o t h e r directorship in RLP M e c h a n i c s Limited

since he is already holding directorships in eight public limited companies a n d two

such private limited c o m p a n i e s which are subsidiaries o f public limited companies.

(c) It is possible for Mr. Z to a c c e p t a n o t h e r directorship in RLP Mechanics Limited

since Section 8 c o m p a n i e s a n d dormant c o m p a n i e s are excluded while calculating

the limit o f twenty c o m p a n i e s .

(d) It is possible for Mr. Z to a c c e p t a n o t h e r directorship in RLP Mechanics Limited

since there is n o limit on holding any n u m b e r of directorships.

Descriptive Questions

1. The Articles of Association of Rajasthan Toys Private Limited provide that the maximum

n u m b e r of Directors in the company shall not exceed 10. Presently, the company has 8

directors. Its Board of Directors desires to increase the n u m b e r of directors from 8 to 16.

Advise whether under the provisions of the Companies Act, 2 0 1 3 , the Board can do s o ?

2. A D J Limited has 1 0 directors on its Board. Two of the directors have retired by rotation at an

A n n u a l General Meeting. The place of retiring directors is not so filled up and the meeting

has also not expressly resolved 'not to fill the vacancy'. Since the A G M could not complete

its business, it is adjourned till the same day in the next week, a t the same time and place.

A t this adjourned meeting also the place of retiring directors could not be filled up, and the

meeting has also not expressly resolved 'not to fill the vacancy'.

Referring to the provisions of the Companies Act, 2 0 1 3 , decide:

(i) Whether in such a situation the retiring directors shall be deemed to have been re­

appointed a t the adjourned meeting?

(ii) What will be your answer in case at the adjourned meeting, the resolutions for re­

appointment of these directors were lost?

(iii) Whether such directors can continue in case the directors do not call the A n n u a l

General Meeting?

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

3. Pince Ltd. desires to appoint an additional director on i

ts Board of directors. The Articles of the

company confer upon the Board to exercise the power to appoint such a director. As such M i
s

appointed as an additionaldirector. hn the li

ght ofthe provisions ofthe Companies Act, 2013, examine

(i) Whether M can continue as director if the annual general meeting of the company is

not held within the stipulated period and is adjourned to a later d a t e ?

(ii) Can the power of appointing additional director be exercised at the Annual General

Meeting by the members?

(iii) A s the Company Secretary of the company what checks would you make after M is

appointed as an additional director?

4. The Board of Directors of XYZ Ltd. filled up a casual vacancy caused by the death of Mr. P

by appointing Mr. C as a director on 3April, 2 0 1 9 which was subsequently approved by the

members in the immediate next general meeting. Unfortunately Mr. C expired on 1 5 May,

2 0 1 9 after working a b o u t 40 days as a director. The Board n o w wishes to fill up the casual

vacancy by appointing Mrs. C in the forthcoming meeting of the Board. Advise the Board in

this regard keeping in view the provisions of the Companies Act, 2 0 1 3 .

5. Mr. John is a director of MNC Ltd., which had accepted deposits from public. The financial

position of MNC Ltd. took a southward turn and became bad to worse and ultimately, it failed

to repay the deposits which fell due for payment on 10April, 2 0 1 8 and such repayment has

not been made till 5 May, 2 0 1 9 . Another company JKL Ltd. wants to appoint the said Mr.

John as its director at its a n n u a l general meeting to be held on 6May, 2 0 1 9 . You are required

to state with reference to the pro v isions of the Companies Act, 2 0 1 3 whether Mr. John c an

be appointed as a director of JKL Ltd.

6. XYZ Li mited is an unlisted pub li c company having a paid-up share c apital of twenty crore

rupees as on 3 1 s t March, 2 0 1 9 and a tu rn over of one hundred fifty c rore rupees during the

year ended 3 1 s t March, 2 0 1 9 . The total number of directors is thirteen.

Referring to the pro v isions of the Companies Act, 2 0 1 3 answer the fo llowing :

(i) State the minimum number of independent directors that the company should a p point.

(ii) How many independent directors are to be appointed i

n case XYZ Limited i
s a listed

company?

7. Bright Motors (P) Li mited at the A n n u a l G eneral Meeting (AGM) held on 30.09.2016 appointed

Mr. Anmol as a Non -Ex ecutive D irector on the Board of the company for a period of three

years. On 2October, 2 0 1 7 , Mr. A n m o l suffered a severe heart failure and expired. The Board

of Directors of the company on 1 6 October, 2017 a ppointed Mr.Prateek to fill the casual

vacancy so created. The appointment of Mr. Prateek was made for a term of three years

by the Board. Subsequently at the A G M held on 2 9 - 0 9 - 2 0 1 8 , Mr. Prateek's appointment was

not p ro posed or app rov ed as the Board was of the view that it is not required. But the CFO

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

of the company is of the opinion that the Board of Directors have contravened the provisions

of the Companies Act, 2 0 1 3 in respect of non-approval of the appointment of Mr.Prateek and

his office tenure.Decide.

8. Mr. Dhruv is a Director of L T Limited and XT Limited respectively. L T Limited did not file its

financial statements for the year ended 3 1 s March, 2 0 1 6 , 2 0 1 7 & 2 0 1 8 respectively with the

Registrar of Companies (ROG) as mandated under the Companies Act, 2 0 1 3 . L T Limited

also did not pay interest on loans taken from a Public Financial Institution from 1s'April, 2017

and also failed to repay matured deposits taken from public on due dates from 1 s April,

2 0 1 7 onwards.

Answer the legality of the following i

n the light of the relevant provision of the Companies

Act, 2013.

(i) Whether Mr.Dhruv is disqualified under Companies Act, 2 0 1 3 and if so, whether he

can continue as a Director in L T Limited? Further can he also seek reappointment

when he retires by rotation at the AGM of XT Limited scheduled to be held in

September,2019?

(ii) Mr. Dhruv i

s proposed to be appointed as an Additional Director of MN Limited in

June 2019. ls he eligible to be appointed as an Additional Director i

n MN Limited?

Decide.

9. You are the CFO and in-charge of legal compliances of large multi-national company in India.

The Board of Directors of the Company comprises of directors who are Indian as well as

Foreign Nationals. Mr. "X", who is a Director (Business Development) on the Board is very

often on business tour abroad. He approached you and wants to know from you the regulatory

provisions of the Companies Act, 2 0 1 3 relating to appointment of Alternate Directors. Analyse

the following situations and advise suitably. Mr. X referring to the provisions of the Companies

Act, 2 0 1 3 .

(a) To h o w many directors can a person be appointed as an alternate director and h o w

many votes does he have in one Board Meeting.

(b) ln case ofprivate company, where an alternate director is appointed i

n place ofa non­

s indefinite,
executive director whose term i then, what will be the tenure of such

alternate director, provide the original director does not return to India for a longer

period say 3-4 years?

(c) Can an Executive Director/Whole Time Director/Managing Director appoint alternate

directors?

10. Mr. 'R' holds directorship in 10 Public Companies and 11 Private Companies as on

31.05.2019. One of the above Private Company is a dormant Company. Apart from the

dormant Company, on 3 0 . 0 6 . 2 0 1 9 a Private Company (in which Mr. R is holding directorship)

has become a subsidiary of a Public Company.

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

In the light of the provisions of the Companies Act, 2 0 1 3 examine and decide:

(i) The validity of holding directorship of Mr. 'R' with reference to n u m b e r of directorship

as on 3 1 . 0 5 . 2 0 1 9 and as on 3 0 . 0 6 . 2 0 1 9 .

(ii) Whether a Company h a s p o w e r to specify any lesser n u m b e r of Companies in which

a director of the Company may act as a director?

ANSWERS

A n s w e r to M u l t i p l e C h o i c e Q u e s t i o n s

1. b 2. b 3. b 4. d 5. d

6. b

A n s w e r to D e s c r i p t i v e Q u e s t i o n s

1. U n d e r Section 1 4 9 ( 1 ) of t h e C o m p a n i e s Act, 2 0 1 3 every c o m p a n y s h a l l h a v e a B o a r d of

Di r ec t or s consisting of individuals as directors and shall have a minimum number of 3

directors i n the case of a p u b l i c c o m p a n y , 2 directors i n the case of a private c o m p a n y , a n d

o n e d i r e c t o r i n the case of a O n e P e r s o n C o m p a n y . T h e m a x i m u m n u m b e r of directors s h a ll

be 1 5 .

T h e F i r s t P r o v i s o to S e c t i o n 1 4 9 ( 1 ) states that a c o m p a n y m a y a p p o i n t more t h a n 1 5 directors

after p a s s i n g a s p e c i a l r e s o l u t i o n .

F ro m the p ro v i s i o n s of s e c t i o n 1 4 9 ( 1 ) as a b o v e , t h o u g h the m i n i m u m n u m b e r of d i re c t o r s

m a y vary d e p e n d i n g o n w h e t h e r the c o m p a n y i s a p u b l i c , private o r a o n e person c o m p a n y ,

the m a x i m u m n u m b e r of directors is s a m e fo r a l l types of c o m p a n i e s i.e. 1 5 directors.

I n the g i v e n case s i n c e the n u m b e r of d i r e c t o r s is p ro p o s e d to be i n c r e a s e d from 8 to 1 6 , the

c o m p a n y w i l l be r e q u i r e d to c o m p l y with the fo ll o w i n g p ro v i s i o n s :

(i) Al t er its Articles of Association as p e r the p r o v i s i o n s of S e c t i o n 1 4 of the Act by p a s s i n g

a s p e c i a l r e s o l u t i o n , so as to i n c r e a s e the n u m b e r of directors i n the Articles from 10

to 1 6 ;

(ii) Also take a p p ro v a l fo r i n c r e a s i n g the m a x i m u m n u m b e r of directors from 8 to 1 6 by

m e a n s of a s p e c i a l r e s o l u t i o n p a s s e d by the m e m b e r s at a d u l y c o n v e n e d g e n e r a l

meeting.

2. R e t i r i n g d i r e c t o r - W h e n to be d e e m e d d i r e c t o r ?

In accordance with the provision of the Companies Act, 2013, as contained in section

1 5 2 ( 7 )( a ) w h i c h p ro v i d e s t h a t if at the a n n u a l g e n e r a l m e e t i n g at w h i c h a d i r e c t o r retires a n d

the v a c a n c y is n o t so fi l l e d u p a n d the meeting h a s not e x p r e s s l y r e s o l v e d not to fi l l the

v a c a n c y , t h e m e e t i n g s h a l l stand a d j o u rn e d to s a m e d a y i n t h e next w e e k , at the s a m e t i m e

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

and p l a c e , o r if t h a t d a y is a n a t i o n a l h o l i d a y , t i l l the next s u c c e e d i n g d a y w h i c h is not a

h o l i d a y , at the s a m e t i m e a n d p l a c e .

Section 1 5 2 ( 7 )( b ) f u r t h e r p r o v i d e s t h a t if at the a d j o u rn e d meeting a l s o , the p l a c e of the

r e t i r i n g d i r e c t o r is not fi l l e d u p a n d that m e e t i n g a l s o h a s not e x p r e s s l y resolved n o t to fill the

v a c a n c y , the r e t i r i n g d i r e c t o r s h a l l be d e e m e d to h a v e b e e n r e - a p p o i n t e d at the a d j o u rn e d

m e e t i n g , u n l e s s at the a d j o u rn e d m e e t i n g o r at the p r e v i o u s m e e t i n g a r e s o l u t i o n fo r the re­

a p p o i n t m e n t of s u c h d i r e c t o r was p u t a n d l o s t o r h e h a s g i v e n a n o t i c e i n w r i t i n g a d d r e s s e d

to the c o m p a n y o r the Board of Directors e x p r e s s i n g h i s d e s i r e not to be re-elected o r h e is

d i s q u a l i fi e d .

T h e r e fo r e , i n the g i v e n c i r c u m s t a n c e s a n s w e r s to the a s k e d q u e s t i o n s s h a l l be a s u n d e r :

(i) I n the first c a s e , a p p l y i n g t h e ab o v e p ro v i s i o n s , the retiring d ir e c t o r s s h a l l be d e e m e d

to have b e e n r e - a p p o i n t e d .

(ii) I n the s e c o n d c a s e , w h e r e the r e s o l u t i o n s for the r e a p p o i n t m e n t of the r e t i r i n g directors

were l o s t , the r e t i r i n g d i r e c t or s s h a l l not be d e e m e d to have b e e n r e - a p p o i n t e d .

(i i i ) S e c ti o n 1 5 2 ( 6 ) ( c ) states t h a t 1 / 3 of the r o t a tio n a l directors s h a l l retire at every A G M .

Accordingly, the directors w i l l retire as s o o n as the A G M is held on its d u e d a t e .

F u r t h e r , as per S e c t i o n 96 ( d e a l i n g with A n n u a l General M e e t i n g ) , every c o m p a n y

o t h e r t h a n a O n e P e r s o n C o m p a n y is r e q u i r e d to h o l d a n A n n u a l G e n e ra l M e e t i n g i n

each year . Hence, it is necessary fo r the company to hold the AGM, where the

di re c t or s l i a b l e to retire by rotation s h a l l r e t i r e . I n case A G M is not h e l d t i l l the l a s t date

o n w h i c h it s h o u l d h a v e b e e n h e l d , t h e term of retiring directors e n d s on t h i s last date

a n d it can not be e x t e n d e d t i l l the new date w h e n t h e A G M s h a l l be h e l d . As the c a l l i n g

of t h e A G M is the d u t y a n d r e s p o n s i b i l i t y of the d i r e c t o r s , they by o m i tt i n g to c a l l the

AGM o n its d u e date c a n n o t take a d v a n t a g e of t h e i r own f a u l t a n d by that m e a n s

c a n n o t e x t e n d t h e i r own c o n t i n u a n c e i n the office fo r a n y p e r i o d of t h e i r c h o i c e a n d as

l o n g as the h o l d i n g of the next A G M d o e s not take p l a c e .

3. S e c ti o n 1 6 1 ( 1 ) of the C o m p a n i e s Act, 2 0 1 3 p ro v i d e s t h a t the a r t i c l e s of a s s o c i a t i o n of a

c o m p a n y m a y confer o n its Board of Directors the power to a p p o i n t a n y p e r s o n , o t h e r t h a n a

p e r s o n who fa i l s to get a p p o i n t e d a s a d i r e c t o r at the g e n e r a l meeting, as a n additional

d i r e c t o r at a n y t i m e a n d s u c h d i r e c t o r w i l l h o l d office upto the date of the next a n n u a l g e n e r a l

meeting o r the last date on w h i c h such annual general meeting should have been held,

w h i c h e v e r is e a r l i e r .

(i) M c a n n o t c o n t i n u e as director t i l l the a d j o u rn e d a n n u a l g e n e r a l m e e t i n g , s i n c e h e c a n

h o l d t h e office of d i r e c t o r s h i p o n l y u p to t h e date of the next a n n u a l g e n e r a l m e e t i n g

o r the last date on w h i c h the a n n u a l g e n e r a l m e e t i n g s h o u l d h a v e b e e n h e l d , w h i c h e v e r

is e a r l i e r . S u c h a n a d d i t i o n a l d i r e c t o r s h a l l vacate h i s office latest o n the date on w h i c h

t h e a n n u a l g e n e r a l m e e t i n g s h o u l d have b e e n h e l d u n d e r S e c t i o n 96 of the C o m p a n i e s

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

Act, 2 0 1 3 . H e c a n n o t c o n t i n u e i n t h e office on the g ro u n d that the m e e t i n g was not

h e l d o r it c o u l d not be c a l l e d w i t h i n the t i m e p r e s c r i b e d .

(ii) T h e p o w e r to a p p o i n t a d d i t i o n a l d i r e c t o r s vests with the B o a r d of D ir e c t o r s a n d not

with the members of the company. The only condition is that t h e Board must be

conferred s u c h power by the a r t i c l e s of the c o m p a n y .

(iii) As a C o m p a n y Secretary, I w o u l d p u t the fo l l o w i n g c h e c k s i n p l a c e i n respect of M ' s

a p p o i n t m e n t as a n a d d i t i o n a l d i r e c t o r :

(a) H e m u s t have g o t the Directors I d e n t i fi c a t i o n N u m b e r ( D I N ) .

(b) H e m u s t f u rn i s h the D I N a n d a d e c l a r a t i o n that he is not d i s q u a l i fi e d to b e c o m e

a d i r e c t o r u n d e r the C o m p a n i e s Act, 2 0 1 3 .

(c) H e m u s t g i v e h i s written c o n s e n t i n Form D I R - 2 o n or before h i s a p p o i n t m e n t

as d i r e c t o r a n d s u c h c o n s e n t s t a n d s fi l e d with the R e g i s t r a r w i t h i n 30 days of

h i s a p p o i n t m e n t.

(d) H i s a p p o i n t m e n t is m a d e by the B o a r d of D i r e c t o r s .

(e) H i s n a m e is e n t e r e d i n the statutory records as r e q u i r e d u n d e r t h e C o m p a n i e s

Act, 2 0 1 3 .

4. S e c ti o n 1 6 1 ( 4 ) of t h e C o m p a n i e s Act, 2 0 1 3 p ro v i d e s t h a t if t h e office of a n y d i r e c t o r a p p o i n t e d

by the c o m p a n y i n g e n e r a l m e e t i n g is vacated before h i s term of office e x p i r e s i n the n o r m a l

c o u r s e , the r e s u l t i n g c a s u a l v a c a n c y m a y , i n d e f a u l t of a n d subject to a n y r e g u l a t i o n s i n the

a r t i c l e s of the c o m p a n y , be fi l l e d by the B o a r d of Directors at a m e e t i n g of the Board w h i c h

s h a l l be s u b s e q u e n t l y a p p ro v e d by m e m b e r s i n the i m m e d i a t e next g e n e r a l m e e t i n g .

F u r t h e r , a n y person so a p p o i n t e d s h a l l h o l d office o n l y u p to the date u p to w h i c h t h e director

i n w h o s e p l a c e he is a p p o i n t e d w o u l d have h e l d office if it h a d not b e e n v a c a t e d .

I n view of the above p ro v i s i o n s , i n the g i v e n c a s e , t h e a p p o i n t m e n t of M r . C i n p l a c e of the

d e c e a s e d d i r e c t o r M r . P was i n o r d e r . I n n o r m a l c o u r s e , M r . C c o u l d h a v e h e l d h i s office a s

d i r e c t o r u p to the date to w h i c h M r . P w o u l d have h e l d the s a m e .

However, M r . C expired on 1 5 M a y , 2 0 1 8 a n d a g a i n a v a c a n c y h a s a ri s e n i n the office of

d i r e c t o r o w i n g to deat h of M r . C w h o was a p p o i n t e d by the board a n d a p p ro v e d by m e m b e r s

to fi l l u p the c a s u a l v a c a n c y r e s u l t i n g from P ' s d e m i s e . V a c a n c y a r i s i n g on the Bo a r d d u e to

v a c a t i o n of office by the director a p p o i n t e d to fi l l a c a s u a l v a c a n c y i n the first p l a c e , d o e s not

create a n o t h e r c a s u a l v a c a n c y as s e c t i o n 161 (4) c l e a r l y m e n t i o n s that s u c h v a c a n c y is

created by the vacation of office by any director a p p o i n t e d by the company in g e n e ra l

m e e t i n g . H e n c e , the Board c a n n o t fi l l the v a c a n c y a r i s i n g from the d e a t h of M r . C w h o was

a p p o i n t e d to fi l l a c a s u a l v a c a n c y .

T h e Board m a y h o w e v e r a p p o i n t M r s . C as an a d d i t i o n a l d i r e c t o r u n d e r section 1 6 1 ( 1 ) of the

C o m p a n i e s Act, 2 0 1 3 p r o v i d e d the a r t i c l e s of a s s o c i a t i o n a u t h o r i s e t h e B o a r d to d o s o , in

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

w h i c h case M r s . C w i l l h o l d the office u p to t h e date of the next a n n u a l g e n e r a l m e e t i n g or

the last date o n w h i c h the a n n u a l g e n e r a l meeting should have been h e l d , w h i c h e v e r is

earlier.

5. S e c t i o n 1 6 4 (2) ( b ) of the C o m p a n i e s Act, 2 0 1 3 states that w h e r e a person i s o r h a s been a

d i r e c t o r of a c o m p a n y w h i c h h a s f a i l e d to repay its d e p o s i t on d u e date a n d s u c h fa i l u r e

c o n t i n u e s for o n e y e a r or m o r e , t h e n s u c h p e r s o n s h a l l not be e l i g i b l e to be a p p o i n t e d as a

d i r e c t o r of a n y o t h e r c o m p a n y for a p e r i o d of five years from the date on w h i c h s u c h c o m p a n y ,

i n w h i c h he is a d i r e c t o r , fa i l e d to repay its d e p o s i t s .

I n the i n s t a n t c a s e , M N C Lt d . , h a s fa i l e d to r e p a y its d e p o s i t o n d u e d a t e s a n d the d e fa u l t

c o n t i n u e s for more t h a n o n e year . H e n c e , M r . J o h n w i l l not be e l i g i b l e to be a p p o i n t e d as a

d i r e c t o r of J K L Lt d .

6. (i) A c c o r d i n g to R u l e 4 ( 1 ) of the C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of D i r e c t o r s )

R u l e s , 2 0 1 4 , the fo ll o w i n g c l a s s or c l a s s e s of c o m p a n i e s s h a l l have at l e a s t 2 directors

as i n d e p e n d e n t directors:

(1) t h e P u b l i c C o m p a n i e s h a v i n g p a i d u p s h a r e c a p i t a l of 1 0 crore r u p e e s or m o r e ;

or

(2) t h e P u b l i c C o m p a n i e s h a v i n g t u rn o v e r of 1 0 0 crore r u p e e s o r m o r e ; o r

(3) the P u b l i c C o m p a n i e s which have, i n aggregate, outstanding l o a n s , debentures

a n d d e p o s i t s , e x c e e d i n g 50 crore r u p e e s .

In the present case, XYZ Li m i t e d is a n unlisted public company having a paid-up

c a p i t a l of ? 20 crore as on 3 1 s t M a r c h , 2 0 1 9 a n d a t u r n o v e r of 1 5 0 crore d u ri n g the

year e n d e d 3 1 s t M a r c h , 2 0 1 9 . A c c o r d i n g l y , as p e r stated R u l e s it m u s t have at l e a s t 2

di re c t or s as i n d e p e n d e n t d i r e c t o r s .

(ii) A c c o r d i n g to Section 1 4 9 ( 4 ) of the C o m p a n i e s Act, 2 0 1 3 , every l i s t e d p u b l i c c o m p a n y

s h a l l have at l e as t o n e - t h i r d of the total n u m b e r of directors as i n d e p e n d e n t d i r e c t o r s .

T h e E x p l a n a t i o n to S e c t i o n 1 4 9 ( 4 ) s p e c i fi e s that a n y fraction c o n t a i n e d i n s u c h o n e ­

t h i r d n u m b e r s s h a l l be r o u n d e d off as o n e .

I n the p r e s e n t c a s e , XYZ L i m i t e d is a l i s t e d c o m p a n y a n d the total n u m b e r of d ir e c t o r s

is 1 3 . H e n c e , i n t h i s c a s e , XYZ L i m i t e d m u s t have a t l e a s t 5 directors ( 1 /3 of 1 3 is 4 . 3 3

r o u n d e d as 5) as i n d e p e n d e n t d i r e c t o r s .

E x p l a n a t i o n to R u l e 4 of the C o m p a n i e s ( A p p o i n t m e n t a n d Q u a l i fi c a t i o n s of Directors)

R u l e s , 2 0 1 4 c l a r i fi e s t h a t for the p u r p o s e of t h i s R u l e the paid u p s h a re c a p i t a l or

t u rn o v e r or o u t s t a n d i n g loans, debentures and deposits, as the case may be, as

existing on the l a s t date of latest a u d i t e d fi n a n c i a l statements s h a l l be t a k e n into

a c c o u n t.

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

In th e present case, it is m e n ti o n e d th a t paid u p c a p i t al of XYZ Li m i t e d is 20 crore as

on 3 1 s M a r ch , 2 0 1 9 and turnover is ? 1 5 0 crore d u ri n g the year ended 3 1 s M a r ch ,

2 0 1 9 . It is, t h e r e fo r e , assumed that 3 1 s t March, 2 0 1 9 is the last date of latest audited

fi n a n c i a l statements.

7. According to s e c ti o n 1 6 1 ( 4 ) of the C o m p a n i e s Act, 2 0 1 3 , if the o ff i c e of any director appointed

by the company in general meeting is vacated b e fo r e his term of o ffi c e expires in the normal

course, the resulting casual vacancy may, in default of and subject to any regulations in the

articles of the company, be fi l l e d by the Board of Directors at a meeting of the Board which

shall be subsequently a p p ro v e d by members in the i m m e d i a t e next general meeting.

P ro v i d e d that any person so appointed shall hold o ffi c e only up to the date up to which the

director in whose place he is appointed would have held o f fi c e if it had not been vacated.

In the given question, the casual vacancy caused d u e to death of Mr. Anmol (who was

appointed by the company in AGM held on 3 0 . 9 . 2 0 1 6 , fo r a period of 3 years) is fil l e d by

the Board of Directors by a p p o i n t i n g Mr. Prateek fo r a period of three years. However, the

appointment of Mr. Prateek fo r a period of three years is in c o n t ra v e n t i o n of above stated

p ro v i s i o n s as he can hold o ffi c e only u p to the date u p to which Mr. Anmol would have held

o ffi c e if it had not been vacated.

Further, as per the provisions of the Act, the appointment of Mr. Prateek o u g h t to be approved

by members in the immediate next general meeting. However, the appointment of Mr.

Prateek was not even p ro p o s e d or a p p ro v e d in the AGM held on 2 9 . 9 . 2 0 1 8 . Hence, the

appointment of Mr. Prateek is in contravention of the provisions of the Companies Act,

2 0 1 3 . T h e r e fo r e , the o p i n i o n of CFO is c o r r e c t.

8. According to section 1 6 4 ( 2 ) of the C o m p a n i e s Act, 2 0 1 3 , no person who is or has been a

director of a company which has not fil e d fi n a n c i a l statements or a n n u a l r e t u rn s fo r any

c o n t i n u o u s period of three fi n a n c i a l years; or 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 d i v i d e n d d e cl a r e d and such fa i l u re to pay or redeem continues fo r one

year or more, s h a l l be e l i g i b l e to be re-appointed as a director of that company or appointed

in other company fo r a period of fi v e years fr o m the date on which the said company fa i l s

to do so.

P ro v i d e d that where a person is appointed as a director of a company which is in default of

clause (a) or c l a u s e ( b ) , he s h a l l not i n c u r the d i s q u a l i fi c a t i o n fo r a period of six months

fr o m the date of his a p p o i n t m e n t.

Also, according to section 1 6 7 ( 1 )( a ) , the o ffi c e of a director s h a l l become vacant in case he

incurs any of the d i s q u a l i fi c a t i o n s s p e c i fi e d in s e c t i o n 1 6 4 ;

P ro v i d e d that where he incurs d i s q u a l i fi c a ti o n u n d e r sub-section (2) of s e c ti o n 1 6 4 , the

o ffi c e of the director shall become vacant in all the c o m p a n i e s , other than the company which

is in default u n d e r that sub-section.

© The Institute of Chartered Accountants of India

 C O R P O R A T E A N D E C O N O M I C LAWS

T h u s , i n the l i g h t of the s a i d p r o v i s i o n s of the Act a n d the facts of the q u e s t i o n :

(i) Y e s , M r . D h r u v is d i s q u a l i fi e d u n d e r the C o m p a n i e s Act, 2 0 1 3 , as LT L i m i t e d d i d not

fi l e fi n a n c i a l statements fo r a p e r i o d of three y e a r s . A l s o , the LT L i m i t e d h a s d e f a u l t e d

i n the r e p a y m e n t of m a t u r e d d e p o s i t s t ak e n from p u bl i c s i n c e 1 A p ri l , 2 0 1 7 (i . e . the

d e f a u l t h a s c o n t i n u e d fo r more t h a n o n e y e a r ) .

Mr. D h r u v c a n c o n t i n u e as a d i r e c t o r i n LT Li m i t e d as p ro v i s o to s e c t i o n 1 6 7 ( 1 )( a )

p ro v i d e s t h a t w h e r e the director i n c u r s d i s q u a l i fi c a t i o n u n d e r section 1 6 4 ( 2 ) , the office

of the d i r e c t o r s h a l l b e c o m e v a c a n t i n a l l the c o m p a n i e s , o t h e r t h a n the c o m p a n y w h i c h

is i n d e fa u l t. W h e r e a s he h a s to vacate the office of d i r e c t o r i n XT Li m i t e d .

Mr. Dhruv c a n n o t be reappointed (in the A G M to be held in S e p t e m b e r 2 0 1 9 ) as

d i r e c t o r i n XT L i m i t e d .

(ii) M r . D h r u v c a n n o t be a p p o i n t e d as a n A d d i t i o n a l D i r e c t o r ( i n t h e A G M to be h e l d in

J u n e 2 0 1 9 ) of M N Li m i t e d b e c a u s e as p e r section 164(2), he is not e l i g i b l e to be

a p p o i n t e d i n o t h e r c o m p a n y fo r a p e r i o d of five y e a r s from the date of s u c h d e f a u l t.

9. (a) A c c o r d i n g to S e c t i o n 1 6 1 (2) of t h e C o m p a n i e s Act, 2 0 1 3 , the Board of Directors of a

c o m p a n y m a y , if so a u t h o r i z e d by its articles or by a r e s o l u t i o n p a s s e d by the c o m p a n y

in g e n e ra l meeting, appoint a person, not being a person holding any a l t e rn a t e

d i r e c t o r s h i p fo r a n y o t h er d i r e c t o r i n t h e c o m p a n y o r h o l d i n g d i r e c t o r s h i p i n the s a m e

c o m p a n y , to act as an a l t e rn a t e d i r e c t o r fo r a d i r e c t o r d u r i n g h i s a b s e n c e for a p e r i o d

of not less t h a n three m o n t h s from I n d i a .

According to section 165, no person shall hold office as a director, including any

a l t e rn a t e d i r e c t o r s h i p , i n more t h a n twenty c o m p a n i e s at the s a m e t i m e . However,

t h e m a x i m u m n u m b e r of p u b l i c c o m p a n i e s i n w h i c h a p e r s o n c a n be a p p o i n t e d as a

d i r e c t o r s h a l l not exceed t e n .

H e n c e , i n the i n s t a n t c a s e , a p e r s o n can be a p p o i n t e d as an a l t e rn a t e d i r e c t o r fo r o n l y

o n e d i r e c t o r i n the s a m e c o m p a n y b u t m a x i m u m twenty different c o m p a n i e s .

An a l t e rn a t e d i r e c t o r w i l l h a v e o n l y o n e vote as he can h o l d a l t e rn a t e d i r e c t o r s h i p for

o n e d i r e c t o r o n l y i n the s a m e c o m p a n y .

(b) A c c o r d i n g to s e c o n d p r o v i s o to section 1 6 1 (2), a n a l t e rn a t e d i r e c t o r s h a l l not h o l d

office fo r a period l o n g e r t h a n t h a t p e r m i s s i b l e to the director i n w h o s e p l a c e h e h a s

b e e n a p p o i n t e d a n d s h a l l vacate the office if a n d w h e n the d i r e c t o r i n w h o s e p l a c e h e

h a s b e e n a p p o i n t e d r e t u rn s to I n d i a .

T h i r d p ro v i s o says that if the term of office of the o r i g i n a l director is d e t e r m i n e d before

he so r e t u rn s to India, any provision fo r the automatic re-appointment of r e t i r i n g

di re c t or s i n d e f a u l t of a n o t h e r a p p o i n t m e n t s h a l l a p p l y to the o r i g i n a l , a n d n o t to the

a l t e rn a t e d i r e c t o r .

© The Institute of Chartered Accountants of India

 A P P O I N T M E N T A N D Q U A LI F I C A T I O N S O F D I R E C T O R S

H e n c e , i n the i n s t a n t c a s e , the a l t e rn a t e d i r e c t o r s h a l l h o l d office t i l l the t i m e o r i g i n a l

d i r e c t o r r e t u rn s to I n d i a , even if the p e r i o d is as l o n g as 3-4 y e a r s .

(c) As p e r section 1 6 1 ( 2 ) , the B o a r d of Directors of a c o m p a n y m a y , if so a u t h o r i z e d by

its a r ti c l e s or by a r e s o l u t i o n p a s s e d by the c o m p a n y i n g e n e r a l m e e t i n g , a p p o i n t a

p e r s o n , not b e i n g a p e r s o n h o l d i n g a n y a l t e rn a t e d i r e c t o r s h i p for a n y o t h e r d i r e c t o r i n

t h e c o m p a n y or h o l d i n g directorship in the s a m e c o m p a n y , to act as a n a l t e rn a t e

d i r e c t o r for a d i r e c t o r d u r i n g h i s a b s e n c e for a period of not less t h a n three m o n t h s

from I n d i a .

F ro m t h e above p r o v i s i o n , it is c l e a r that an alternate d i r e c t o r can be a p p o i n t e d fo r a n y

d i r e c t o r . H e n c e , a n a l t e rn a t e director can be a p p o i n t e d for E x e c u t i v e d ir e c t o r / W h o l e

T i m e D i r e c t o r s / M a n a g i n g D i r e c t o r however, not by t h e m b u t by the Board of D i r e c t o r s .

10. (i) A c c o r d i n g to Section 1 6 5 of the C o m p a n i e s Act, 2 0 1 3 , no p e r s o n s h a l l h o l d office as

a d i r e c t o r , i n c l u d i n g any a l t e rn a t e d i r e c t o r s h i p , i n more t h a n twenty c o m p a n i e s at the

s a m e t i m e . W h e r e a s that the m a x i m u m n u m b e r of p u b l i c c o m p a n i e s i n w h i c h a p e r s o n

can be a p p o i n t e d as a d i r e c t o r s h a l l not exceed t e n .

F o r r e c k o n i n g t h e l i m i t of p u b l i c c o m p a n i e s i n w h i c h a p e r s o n can be a p p o i n t e d as

director, directorship in private companies that are either holding or subsidiary

c o m p a n y of a p u b l i c c o m p a n y s h a l l be i n c l u d e d .

For reckoning the l i m i t of d i r e c t o r s h i p s of twenty c o m p a n i e s , the directorship in a

d o r m a n t c o m p a n y s h a l l not be i n c l u d e d .

I n the i n s t a n t c a s e , h o l d i n g of d i r e c t o r s h i p of M r . R a s on 3 1 . 0 5 . 2 0 1 9 is v a l i d a s h e is

h o l d i n g d i r e c t o r s h i p i n 1 0 p u b l i c c o m p a n i e s a n d in 1 1 private c o m p a n i e s o u t of w h i c h

one c o m p a n y is d o r m a n t c o m p a n y . So, maximum directorship he is holding in 20

companies.

H o l d i n g of d i r e c t o r s h i p of M r . R a s on 3 0 . 0 6 . 2 0 1 9 is not v a l i d , as on 3 0 . 0 6 . 2 0 1 9 a

private c o m p a n y ( i n w h i c h M r . R is h o l d i n g d i r e c t o r s h i p ) h a s b e c o m e a s u b s i d i a r y of

a p u b l i c c o m p a n y . A c c o r d i n g l y , it m e a n s that this private c o m p a n y s h a l l d e e m e d to

be i n c l u d e d i n the l i m i t of p u b l i c c o m p a n i e s a n d t h e r e b y i n c r e a s i n g the n u m b e r of

p u b l i c c o m p a n i e s i n w h i c h he is h o l d i n g d i r e c t o r s h i p to 1 1 a n d m a k i n g it in v a l i d .

(ii) A c c o r d i n g to s e c t i o n 1 6 5 ( 2 ) , S u b j e c t to the p ro v i s i o n s of s u b - s e c t i o n ( 1 ) , the m e m b e r s

of a c o m p a n y m a y , by s p e c i a l r e s o l u t i o n , specify a n y l e s s e r n u m b e r of c o m p a n i e s i n

w h i c h a d i r e c t o r of the c o m p a n y m a y act as d i r e c t o r s .

© The Institute of Chartered Accountants of India

 NOTES

© The Institute of Chartered Accountants of India