Company Law: Board of Directors

Board of Directors

• Board of Directors comprises the collective body of company directors, according to Section 2(10).

Need for Board of Directors

• Required because a company is an artificial entity lacking its own body or mind.
• A large number of shareholders, especially in listed companies, necessitate a board.
• They are required by Section 149.

Directors as Agents and Trustees

• Directors act as agents and bind the company in transactions with their principal.
• Directors are also trustees, responsible for the company’s properties, money, and trade secrets.

Section 149 - Company's Board of Directors

• A company's BOD must consist of individuals.
• Requires a minimum number of directors: 3 for public, 2 for private, and 1 for One Person Company (OPC).
• Allows a maximum of 15 directors, exceeding this requires a special resolution (SR).
• These rules are not applicable to government companies and Section 8 companies.
• Articles of Association (AOA) may set a lower limit for the maximum number of directors.
• Certain companies are required to have at least one woman director.

Rule 3 - Appointment and Qualification of Directors Rules, 2014

• The rule for women directors applies to listed companies and any other public company.
• Any other public company must have paid-up share capital (PUSC) of ₹100 crore or more OR turnover of ₹300 crore or more.
• PUSC and turnover are determined by the last date of the latest audited financial statements.
• Intermittent vacancies must be filled within 3 months or by the next Board of Directors (BOD) meeting, whichever is later.
• Newly incorporated companies must comply within 6 months.
• Death of a Woman Director occurred on March 17th, 2022, and the next BOD meeting is on June 25th, 2022. The company must fill the vacancy by June 25th.
• There is no requirement for a woman director to be independent.
• Resident Director must stay in India for at least 182 days during the Financial Year (FY).
• Newly incorporated companies must ensure proportionate stays according to incorporation date.

Independent Directors

• Independent Director rules are note applicable to private companies
• Listed public companies must have at least 1/3rd of the total directors as independent. Fractions are rounded to the nearest whole number.
• Unlisted public companies must have the number of independent directors as prescribed, with a minimum of 2.

Rule 4 - Appointment and Qualification of Directors Rules, 2014

• The following unlisted public companies must have at least 2 Independent Directors (ID).
• Paid-up Share Capital (PUSC) is ₹10 crore or more.
• Turnover is ₹100 crore or more.
• Outstanding Loans, Debentures, and Deposits exceed ₹50 crore. No independent directors are needed if it is exactly ₹50 crore.
• PUSC, turnover, and outstanding loans, debentures, and deposits are based on the last date of the latest audited financial statements.
• These provisions do not apply to Joint Ventures, Wholly Owned Subsidiaries (WoS), and Dormant companies under Section 455.

Section 149 vs 177

• If a higher number of Independent Directors (ID) is required due to the composition of the Audit Committee (Section 177).
• The higher number of IDs is applicable under this section.
• An unlisted public company has a PUSC of ₹100 crore with an Audit Committee of 7 directors. 4 directors must be IDs per Section 177, so the minimum number of IDs shall be 4 (and not 2) per Sec 149.
• Intermittent vacancies must be filled within 3 months or by the next BOD meeting, whichever is later.
• A company isn’t required to appoint an ID if it ceases to fulfill conditions for 3 consecutive years relating to PUSC, Turnover, and Outstanding Loans.

Definition of Listed Company

• A listed company is one with any of its securities listed on a Recognized Stock Exchange (RSE), as per Section 2(52).
• Public companies (equity not listed) with securities issued on private placement basis per SEBI regulations, are NOT considered a listed company.
• Non-convertible debentures and non-convertible redeemable preference shares are not considered a listed company.
• Private companies with listed non-convertible debt securities on private placement basis on a RSE are not considered a listed company.

Who Can Become an Independent Director?

• A director other than a Managing Director (MD), Whole-Time Director (WTD), or nominee director must fulfill all criteria.
• They must have integrity and relevant expertise and experience in the opinion of the Board or Ministry of Corporate Affairs.
• They must not be a promoter of CASH (company, associate, subsidiary, holding). Directors of CASH are permissible.
• They must not be related to the promoter or director of CASH.
• They must have no pecuniary relationship with CASH or their Promoters/Directors (P/D) during the last 2 financial years and the current year.
• This rule does not apply to government companies as per Sections 92 and 137.
• Remuneration as a director is not considered a pecuniary relationship.
• A transaction is not a pecuniary relationship if it does not exceed 10% of total income or is transacted at arm's length in the Ordinary Course of Business (OCOB).
• None of the director's relatives can hold any security or interest in CASH during the last 2 FY + CY.
• Relatives can hold face value not exceeding ₹50 lakhs or PUSC up to 2% of CASH.
• Cannot be indebted to CASH or P/D in excess of the prescribed amount (₹50 lakhs) for 2 FY + CY.
• Cannot give a guarantee or provide security for indebtedness of any third person to CASH or P/D of such holding company for ₹50 lakhs for 2 FY + CY.
• Any other pecuniary relationship with CASH must be less than 2% of its Gross turnover or Total income in aggregate.
• Neither the director nor their relative can be a Key Management Personnel (KMP) or employee of CASH in the last 3 financial years.
• An exception is that a relative can be an employee in the past 3 years.
• An employee, proprietor, or partner in current year plus last 3 FY is disallowed.
• The director cannot be from a firm of auditors, CS in practice, or cost auditors of CASH.
• A legal/consulting firm cannot have a transaction with CASH equal to or greater than 10% of gross turnover.
• The director or their relative cannot hold 2% or more of the voting power of the company (not CASH).
• Being the CEO/Director of an NPO meeting certain criteria is disallowed.
• Criteria include receiving 25% or more of receipts from CASH or P/D or holding voting power of 2% or more of the company.
• The director must possess qualifications prescribed, such as skills, experience, and knowledge in finance, law, or management, as per Rule 5.
• An individual can be appointed as an ID in a subsidiary company. There is no such restriction.

Formal Declaration as an Independent Director

• An ID is required to declare they meet the criteria of independence.
• Declaration must be made at the first BOD Meeting the ID participates in.
• Must declare in First BOD Meeting of every FY.
• Must declare when any change in circumstance affects their status as an ID.
• An ID must abide by the provisions of Schedule IV.
• Independent Directors are not entitled to stock options but may receive Remuneration.
• Fees under Section 197(5) are allowed.
• Reimbursement of expenses for participation in meetings.
• Profit-related commissions, as approved by members, are allowed.
• In cases of no or inadequate profits, IDs may receive remuneration, excluding fees under Section 197(5), per Schedule V.

Term of Independent Director

• Term of ID is up to 5 consecutive years, shorter terms are permissible.
• Reappointment is subject to passing a special resolution (SR) and disclosure in the Board of Directors (BOD) report.
• IDs cannot hold office for more than 2 consecutive terms.
• There is a cooling period of 3 years, during which they shall not be associated with the company in any capacity, directly or indirectly.
• Independent Directors (ID) and Non-Executive Directors (NED) who are not Key Management Personnel (KMP) or promoters are liable only for acts of omission or commission.
• Omission or commission are only liable if they occurred with their knowledge
• Omission or commission are only liable if they are attributable to the board process
• Omission or commission are only liable if they are occurred with his consent or where he has not acted diligently.
• Sections 152 (6) and (7) do not apply to Independent Directors.

Selection and Databank of Independent Directors

• IDs can be selected from a databank containing details of eligible and willing candidates, including name, address, educational and professional qualifications, as per Section 150.
• The Central Government (CG) can notify bodies or institutions with expertise in creating and maintaining such databanks like the Indian Institute of Corporate Affairs.
• The responsibility for exercising due diligence lies with the company.
• Appointment of an ID must be approved in a general meeting (GM), with an explanatory statement annexed to the notice of the GM including justification.

Rule 6 - Appointment and Qualification of Directors Rules, 2014

• Online application to IICA for inclusion in the databank must be made within 13 months of commencement if:
• The person is an existing ID, needs to renew to continue as an ID in any company.
• The person is an aspiring ID and intends to get appointed.
• Individuals without a Director Identification Number (DIN) can also apply.
• Specify the period requested in the application.
• Choices are 1 year, 5 years, or a lifetime.
• Renewal application required within 30 days of expiry, otherwise name is removed, this does not apply if the lifetime option is chosen.
• IDs must declare compliance with this rule and with Section 149 (7).
• Individuals must pass an Online Proficiency Self-Assessment Test (OPSAT) within 2 years of inclusion, the name is removed if they are unsuccessful.
• Has no limit on number of attempts.
• Requires a score of 50% to pass the test.
• The test is not applicable for individuals who have served for 3 or more years as a director or KMP in listed companies, unlisted public companies with a paid-up share capital (PUSC) of ₹10 crore or more, companies listed in RSE, companies incorporated outside India with PUSC of $2 million or more, and statutory corporations.

Qualifying Experience

• Holding a pay scale of Director or equivalent or above in any Ministry or Department of CG/SG with experience in handling matters of commerce, finance, industry, affairs related to government companies and statutory corporations set up by an Act of Parliament or any State Act.
• Holding a pay scale of Chief General Manager or above in SEBI, RBI, IRDA, PFRDA with experience in handling matters related to corporate/securities/economic laws.
• Advocates, Chartered Accountants, Cost Accountants, and Company Secretaries in practice for at least 10 years are not required to pass the OPSAT.

Restoration of Name

• Individuals whose names have been removed for not clearing the Online Proficiency Self-Assessment Test (OPSAT) within 2 years can apply for restoration by paying ₹1,000.
• The IICA will allow restoration if the name is shown in a separate restored category for 1 year, within which the person must pass the OPSAT.
• If the OPSAT is passed, the name will be included, and the fees paid at initial registration will continue to be valid for the period initially paid for.
• If the OPSAT is not passed within 1 year from the date of restoration, the name will be removed, and a fresh application will be necessary.

Section 151 - Small Shareholders

• A Listed Company MAY have 1 director elected by Small Shareholders (SSH).
• Small Shareholders are individuals with nominal value shares of ₹20,000 or less.
• The process may be initiated Suo motu or by Notice of Intention by SSH.
• The notice must be endorsed by not less than the lower of 1,000 SSH or 1/10th of total SSH.
• The Time limit is that Notice of intention must be given at least 14 days before the meeting.
• The notice must include the name, address, and number of shares held, if any, with the folio number, if any, of the proposed SSH, as well as the name, address, number of shares held, and folio number of all SHs proposing such appointment.
• The proposed SSH must state their DIN, confirm they are not disqualified under Section 164, and give consent to act as director.
• Small shareholder directors are considered IDs if eligible under Section 149(6) and give declarations under Section 149(7).
• They are not liable to retire by rotation.
• Tenure is 3 consecutive years and not eligible for reappointment.
• Cooling off period is 3 years.
• The position becomes vacant if disqualified under Section 164, due to vacation as per Section 167, or not meeting Section 149(6) criteria.
• Individuals can't hold the position of SSH in more than 2 companies at the same time.
• The second company cannot be in competing or conflicting business.

First Directors

• These are appointed as per provisions of the AOA, subscribers to the Memorandum of Association (MOA) are deemed to be the appointee until a director is duly appointed as specified in the Act, and for OPC, the individual member is deemed.
• Companies must elect every director in a general meeting unless otherwise specified.
• No person can be appointed as a director without a Director Identification Number (DIN); minors cannot obtain a DIN.
• Those appointed under Section 161 must furnish Declarations and DIN to show they are qualified before their tenure.
• The company must file consent with ROC within 30 days in Form DIR-12 + Fees.
• In case of a person who is a national of a country that shares a land border with India, necessary security clearance from MHA must be attached along with such consent.
• A proviso states that for Section 8 companies, which are non-profit organizations, these requirements aren't needed.
• For appointment of IDs of all companies, the explanatory statement must include how the conditions for the appointment are met.

Retirement by Rotation (RBR)

• Public companies must have at least 2/3 of the total number of directors subject to retirement by rotation (RBR) at every annual general meeting (AGM).
• This applies unless the AOA specifically provides for RBR of all directors.
• The GM determines both the period of office and the appointment.
• Out of the 2/3 directors, 1/3 will retire by rotation.
• If the fraction is not a multiple of 3, then the nearest number to 1/3 will be used.
• Those who have been in office longest since their last appointment retire.
• If directors became directors on the same day, the order is determined by lottery.
• The company may fill up the vacancy in office as per sub-section (7).
• Those NOT included in the total number of directors are independent directors, nominee director through law or agreement with government and alternate directors
• Those included in the total number of directors are nominee appointed by institutions and director appointed by BOD u/s 161
• Only those directors who are appointed in GM can retire in GM
• Directors appointed by BOD u/s 161(4) shall be considered non-rotational as they are appointed by BOD (irrespective of whether subsequently approved in GM).
• MD and KMP are R/NR depending on the rules.
• However, all directors including the above mentioned are added to total number of directors
• On retirement of a director, the company has to reappoint, appoint someone new or not fill the vacancy. If the meeting is adjourned (with no resolution), then directors are deemed to be reappointed automatically

Adjournment of Meetings

• If a vacancy isn’t filled in the AGM that has not resolved to not fill, the meeting is adjourned to the next week, same time and place.
• If there is a national holiday, the meeting is adjourned to the next succeeding day which is not a holiday.
• If vacancy is not filled, not resolved, then retiring directors are deemed reappointed via automatic reappointment.
• This automatic reappointment is an exception and won't occur if there is Disqualification as per 164, Expressing Unwillingness in Writing as per 164, or a Special Resolution Required as per this Act.

AGM Extensions

• If any default is made in holding the AGM, the Tribunal can order a convened AGM by any member of the company.

Section 153

• An individual intending to be appointed as director needs to apply for DIN / other ID number as may be prescribed
• Application to the CG with Manner and fees as prescribed electronically in DIR-3 format
• LLP Act requires DPIN

Rule 9

• DIR-3 has to be filed by person willing to be appointed as a director
• Requires certified images of residence proof, identity proof and certificate of CEO/CFO or full time MD, CS and Directors
• IN-32 must be filed if a company is being incorporated to get new DIN
• Only a max of 3 directors at once

Section 154

• CG shall allow DIN within 1 month of receipt of application
• Communicate the decision + DIN within 1 month of receipt of application by Letter
• In case of defects, the authority will intimate the applicant to rectify any incompleteness in the application or via email

Online Proficiency Self Assessment Test OPSAT - Exemptions

• Individuals with a pay scale as a Director or CG/SG in any ministry with experience may also be exempt
• This includes the areas of commerce, finance, industry or public affairs
• Individuals wwith CA, CS and Cost accountants of above 10 years are exempt
• OPSAT amendment requires individuals to have experience in areas relating to government, state affairs, and organizations and corporations

Section 150

• ID may be selected from a databank of name,, address, educationaland professional qualifications
• The Central government has notified the IICA to notify body, institution or asscoaition having expertise

Companies Act Sections - Section 155 to 159 and rule 6 of Companies Rules

• Any DIN applicant must apply online, within13 months
• Rule 6 states how to apply if appointee needs to be removed as ID due to the fact that they can't find a company

Other points

• Online intimation of changes of particular details of Directors takes place in Form DIR-3
• Any change or verification has to take place within 30 days

Who cannot apply for direction

• A person is not eligible or fit to apply if himself, or any member , intends to propose himself as a director
• Any notice must be sent in writing 14 days before meeting
• The appointed candidate can deposit 1 Lakh.

Who informs and is in control

• With at least 7 days notice,
• Companies must place notices on website and public domain
• The person or individual must inform BOD within 15 days

Section 160 - Modifications

• Deposit is 10,000 instead of the usual 1 Lakh
• BOD of Sec 8 companies can refund monie if it involves <= 25% votes of the company

Section 161 points include

• Appointment of Additional, alternate and nominee directors
• articles of association give the power to BOD in all these cases
• This director can be any person other than who fails to get appointed as director in GM
• Tenure is applicable to next AGM or End if they are appointed by circulation
• Appointees must be authorized or resolved be GM to act for more than 3 months,
• Can't hold anything outside the organisation, or director to be appointed to the alternate position

Appointment of Directors to be Voted Individually

• A motion for the appointment of >= 2 directors is not accepted against the vote
• 1 has to cast a vote that its not in contravention of what has been issued
• What if there is not objection - doesn't matter

Concept Check

• Proportional Representation for Appt of Directors can happen in AOA

A person shall not be eligible for appointment if

• Declared of unsound mind
• Undischarged insolvent.
• Has a pending conviction

However

• If defaults can be made at any time and any new default with a new name is provided

Section 165 is N/A to section 8 companies

No person can hold office of the alternate position is >=20 organisations

• Max is more than 10
• The member companies can specify the no of specified companies a director can

Directors must

• Obey the law
• Act in good faith
• Exercise all actions with care

Not attempt

• To not achieve undue gains or advantages through their official roles

Consequences

• Fine 1 to 5 Lakhs

Directors office shall be vacated if

• Absent from Board Meeeting
• Acts in contravention of sec 184

Consequences

• Unless vacation is there, must let it be. A company can remove director by 0+ Giving OOBH in this

Section 169 details

• if re-appointee can be removed only by passing 0 + notice
• a director cannot be appointed if Tribunal is satisfied