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Chapter XI – Appointment and qualification of directors – section 149

Chapter XI – Appointment and qualification of directors


1)      2nd Proviso to section 149(1) – certain select companies to have women directors on their Board – these are (i) every listed company, and (ii) every other public company having paid up share capital of Rs.100 crores or more OR turnover of Rs.300 crores or more. In the first case the listed company should appoint woman director within one year from the commencement of the new act and in the second case, they have been given a three years leeway to comply with this section;

2)      The Rule 11.1 gives three years to a public company (other than listed company) “from the commencement of the 2nd proviso to section 149(1) of the Act” – i don’t understand the meaning of this phrase – “commencement of the 2nd proviso to section 149(1)” – does each of the provisos commence separately on different dates – i thought the entire section should commence at the same date, if at all the Ministry proposes the torturous process of separately intimating commencement of each sections of the Act, as it was done in the case of Competition Act, 2002;

3)      Women directors is made compulsory for all listed companies whereas even independent directors are not compulsory for all listed companies especially the small listed companies having paid up share capital upto Rs. 3 crores, for which the clause 49 is not made applicable so far;

4)      So the provisions of appointment of women directors on the Board is of far reaching consequence as the number of qualified women directors required by India Inc. Is going to be substantial;

5)      Section 149(3) is very important – it says that every company shall mandatorily have one director who is a resident Indian i.e. who has stayed in India for a period of not less than 182 days – this means that the companies cannot have a fully foreign Board – at least one director should be an Indian. All companies who are having fully foreign Board should take steps to induct at least one director on their Board;

6)      Section 149(4) goes contradictory to the existing listing agreement which gives exemption to the small listed companies from the provisions of clause 49 of the listing agreement thereof – it very clearly and equivocally says that every listed company shall have at least one-third of its total strength as independent directors. So SEBI needs to amend clause 49 to bring it in line with the companies act;

7)      Section 149(6) lays down stringent qualifications for being appointed as an independent director – person of integrity, relevant expertise, experience, not a promoter either now or in the past not only of the company, but also of its subsidiary or associate company, or not related to any of the promoters as above, no pecuniary relationship with any of these three classes of companies or whose relatives don’t have pecuniary relationship above a certain limit, or not a Key Managerial Personnel or an employee (even a peon!!) for the last three financial years or not a partner in any audit firm of CA, CS, CWA, legal consulting firm, or holds together with his relatives 2% or more of the voting power of the company or is a Chief executive of a NGO which receives 25% or more of its receipts from the company or its promoters, directors or holds 2% or more of the voting power of the company. Phew!!

8)      Section 149(7) states that every independent director shall at the first meeting at which he is appointed give a declaration that he qualifies in all the criteria that is given in section 149(6) excepting the part regarding person of integrity, expertise and experience which is required to be under an opinion of the Board;

9)      Section 149(8) – the company and its independent directors are required to abide by Schedule IV which is the Code of Conduct for Independent Directors;

10)   Section 149(9) – independent directors cannot be remunerated by way of stock options, but can receive fee, reimbursement of expenses, profit related commission as may be approved by the members – moot point here is that if the independent directors are going to be remunerated in any form by the company in which he is appointed as an independent director in whatever form the remuneration takes, then how can be retain his independence or how can he be called as an independent director;

11)   Section 149(10) & (11) – independent directors can be appointed for a maximum tenure of two consecutive period of 5 years each, but he can be re-appointed after a three year gap during which period he should not be associated in any form either with the company or its subsidiaries or its associate companies. Therefore technically speaking a young independent director can be appointed for 10 years, then take a 3 year sabbatical, come back for another 10 years and so on unless of course the law is changed further in this respect. I thought maximum tenure of 10 years is sufficient and after that “come-back” provisions after the 3 year gap, should have been avoided;

12)   Section 149(12) is very important and dangerous section for independent directors and also non executive directors – it is regarding liability for frauds committed by the company – the independent directors and NEDs can be held liable only if the fraud occurred with his knowledge, attributable through Board processes and with his consent or connivance or where he has not acted diligently – “attributable to Board processes” is not clear – ingredients of “knowledge, board processes and consent or connivance” should be present in the first instance or sheer lack of awareness on the second instance;

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Draft Company Law Rules 2013 – Chapter II – Incorporation


1) The procedure for incorporation is more or less the same. The Rules lays down detailed guidelines for the same.
2) Rule 2.5(3) – if the company has changed its activities which is not reflected in its name, then it shall change its name in line with its activities by following the procedures for change of name – But who will certify or verify that the company has changed its activities – it is not clear, what constitutes change of activities. Private limited companies are allowed to carry on business specified in other objects as well. So does this mean that they are henceforth not allowed to do “other objects” business – clarity required on this clause
3) Rule 2.27(1)(h) – why there is a requirement of bank draft evidencing payment of fee – it can be made by online in the MCA 21 system and only the SRN quoted in the form.
4) Rule 2.27(2) Proviso – this is for change of registered office from one state to another – what happens when there is no Company Secretary in the company seeking change of registered office – therefore a PCS should be allowed to certify that the list of creditors is correct etc.
5) Rule 2.32 – definition of “electronic transmission” could very well have been made in the Act itself especially as (iii) says “any other means of electronic communication”. Besides the definition itself is appearing at two places in the same Rule
6) Lastly the devil lies in the forms – there are total 32 forms in this chapter itself – whether all the forms are required to be certified by professionals will be the moot question.
7) Remembering all the rules, sub rules, clauses, sub clauses is going to be one heck of a job!!
8) Lastly I feel that recognition given to chartered accountant and cost accountant while incorporating companies is ill advised – at the point of repeating ourselves we will say – it is not their core competency.
These are my observations on the Chapter II.     

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