Companies Act Section 149 — Company to have Board of Directors
CHAPTER XI APPOINTMENT AND QUALIFICATIONS OF DIRECTORS
Commercial / Corporate
Summary
Sub-section (1) sets the basic size and composition rules for a company's Board of Directors. Every company must have a Board made up of individuals. The minimum number of directors is three for a public company, two for a private company, and one for a One Person Company. The maximum number of directors is fifteen. A company can appoint more than fifteen directors if it passes a special resolution. Also, certain classes of companies that may be prescribed by rules must have at least one woman director.
Sub-section (2) requires every company that existed before this Act came into force to comply with the requirements of sub-section (1) within one year from the date the Act commenced.
Sub-section (3) requires every company to have at least one director who stays in India for a total of not less than one hundred and eighty-two days during the financial year. For a newly incorporated company, this requirement applies proportionately at the end of the financial year in which it is incorporated.
Sub-section (4) requires every listed public company to have at least one-third of its total number of directors as independent directors. The Central Government may also prescribe the minimum number of independent directors for any class or classes of public companies. The explanation clarifies that if the one-third calculation results in a fraction, that fraction is rounded off to the next whole number.
Sub-section (5) requires every company that existed before this Act came into force to comply with the requirements of sub-section (4) within one year from the commencement of the Act or from the date of notification of the applicable rules, whichever is applicable.
Sub-section (6) defines who qualifies as an independent director. An independent director is a director who is not a managing director, a whole-time director, or a nominee director. Under clause (a), the Board must consider the person to be of integrity and to possess relevant expertise and experience. Under clause (b), the person must not be or have been a promoter of the company or its holding, subsidiary, or associate company, and must not be related to the promoters or directors of those companies. Under clause (c), the person must not have had a pecuniary relationship with the company or its related entities, other than remuneration as a director or transactions not exceeding ten per cent of the person's total income or such amount as may be prescribed, during the two preceding financial years or the current financial year. Under clause (d), none of the person's relatives may hold securities or interests in the company or its related entities during the two preceding financial years or the current financial year, except that a relative may hold securities or interests of a face value not exceeding fifty lakh rupees or two per cent of the paid-up capital, or such higher sum as may be prescribed. Also under clause (d), no relative may be indebted to the company or its related entities in excess of a prescribed amount, or have given a guarantee or security for a third person's indebtedness to those entities for a prescribed amount, or have any other pecuniary transaction with those entities amounting to two per cent or more of gross turnover or total income. Under clause (e), neither the person nor any relative may hold or have held a position of key managerial personnel or been an employee of the company or its related entities in the three financial years immediately preceding the proposed appointment, with a proviso that this restriction does not apply to a relative who is an employee during those three years. Also under clause (e), neither the person nor any relative may have been an employee, proprietor, or partner of a firm of auditors, company secretaries in practice, or cost auditors, or of a legal or consulting firm that had transactions with the company amounting to ten per cent or more of the firm's gross turnover, in the three preceding financial years. Neither the person nor any relative may hold two per cent or more of the total voting power of the company, and neither may be a Chief Executive or director of a nonprofit organisation that receives twenty-five per cent or more of its receipts from the company or its related entities or holds two per cent or more of the total voting power. Under clause (f), the person must possess such other qualifications as may be prescribed.
Sub-section (7) requires every independent director to give a declaration that he meets the criteria of independence as provided in sub-section (6). This declaration must be given at the first meeting of the Board in which he participates as a director, and thereafter at the first meeting of the Board in every financial year, or whenever there is any change in circumstances that may affect his status as an independent director. The explanation defines a nominee director as a director nominated by a financial institution under any law or agreement, or appointed by any Government or any other person to represent its interests.
Sub-section (8) requires the company and independent directors to abide by the provisions specified in Schedule IV.
Sub-section (9) states that, notwithstanding any other provision of this Act but subject to sections 197 and 198, an independent director is not entitled to any stock option. He may receive remuneration by way of fee as provided under sub-section (5) of section 197, reimbursement of expenses for participation in Board and other meetings, and profit-related commission as approved by the members. The proviso states that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 197, in accordance with the provisions of Schedule V.
Sub-section (10) states that, subject to the provisions of section 152, an independent director shall hold office for a term of up to five consecutive years on the Board of a company. He is eligible for reappointment upon the passing of a special resolution by the company and disclosure of such appointment in the Board's report.
Sub-section (11) states that, notwithstanding sub-section (10), no independent director shall hold office for more than
Official Text
(1) Every company shall have a Board of Directors consisting of individuals as directors and shall have—
(a) a minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company; and
(b) a maximum of fifteen directors:
Provided that a company may appoint more than fifteen directors after passing a special resolution:
Provided further that such class or classes of companies as may be prescribed, shall have at least one woman director.
(2) Every company existing on or before the date of commencement of this Act shall within one year from such commencement comply with the requirements of the provisions of sub-section (1). 1[
(3) Every company shall have at least one director who stays in India for a total period of not less than one hundred and eighty-two days during the financial year: Provided that in case of a newly incorporated company the requirement under this sub-section shall apply proportionately at the end of the financial year in which it is incorporated];
(4) Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.
Explanation.—For the purposes of this sub-section, any fraction contained in such one-third number shall be rounded off as one.
(5) Every company existing on or before the date of commencement of this Act shall, within one year from such commencement or from the date of notification of the rules in this regard as may be applicable, comply with the requirements of the provisions of sub-section (4).
(6) An independent director in relation to a company, means a director other than managing director or a whole-time director or a nominee director,—
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b)
(i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) who has or had no 1[pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed,] with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year; 2[
(d) none of whose relatives—
(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year: Provided that the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i),
(ii) or (iii);]
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed; 3[Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years.]
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of— (A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or (B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;
(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.
(7) Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6).
Explanation.—For the purposes of this section, “nominee director” means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests.
(8) The company and independent directors shall abide by the provisions specified in Schedule IV.
(9) Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of sections 197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members. 1[Provided that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 197, in accordance with the provisions of Schedule V.]
(10) Subject to the provisions of section 152, an independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report.
(11) Notwithstanding anything contained in sub-section (10), no independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director:
Provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.
Explanation.—For the purposes of sub-sections
(10) and (11), any tenure of an independent director on the date of commencement of this Act shall not be counted as a term under those sub-sections.
(12) Notwithstanding anything contained in this Act,—
(i) an independent director;
(ii) a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
(13) The provisions of sub-sections
(6) and
(7) of section 152 in respect of retirement of directors by rotation shall not be applicable to appointment of independent directors.