Updated Index of Company Law Posts


Download Index of Company Law Posts as updated on March 31, 2017

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Designation and Category of Directors


When an applicant files a form for incorporation of a company, we need to select the designation and category of first directors in incorporation Form 32 (popularly called Spice) or wherever company appoints a director. There are four different categories of directors. We will discuss confusion regarding these categories of directors.

There are three different set of selection required in these forms –

  1. Designation of director
    1. Director (simple director)
    2. Managing Director
    3. Whole time Director
    4. Nominee Director
    5. Alternate Director
    6. Additional Director
    7. Director appointed in casual vacancy

      {Please note, last three designations are possible only in existing companies, not at the time of incorporation}

  2. Category
    1. Promoter
    2. Professional
    3. Independent
    4. Nominee (This option as a category not available for existing companies in Form DIR – 12, which I find strange. This forces the company to select not so properly correct option all the time – professional director.)
    5. Small shareholders’ director (in existing companies)
  3. Chairman
  4. Executive Director or Non – Executive Director

Interesting rules

There are interesting rules relating these combos –

  • A person cannot be an Executive director and non–executive director same time.
  • Managing Director and whole time director may be an Executive director as per the form, however, they always should be Executive Director. Any other director drawing salary ideally should be executive director.
  • A Nominee Director by designation may belong to the category of a promoter, professional or nominee director but no independent director.
  • Nominee director as the designation is a different thing from the Nominee director as the category but to select the category of Nominee Director the designation must be Nominee Director.
  • A Nominee Director may be an executive director as well.
  • A Professional Director need not be an executive director.
  • In case of existing companies, director designated as nominee directors should ideally be categorized as no so correct option – professional director. MCA should make a correction in Form DIR – 12 and align it with Form INC-32 (SPICe) in this matter.

Small Shareholder’s Director

According to Section 151 read with rule 7, as discussed earlier herein details, a listed company, may upon notice of not less than one thousand small shareholders or one-tenth of the total number of such shareholders, whichever is lower, have a small shareholders’ director elected by the small shareholders. [Sub – Rule (1) of Rule 7]

Professional Director

This term “professional director” or “professional” does not define in the Companies Act, 2013.

However, Proviso to subsection (4) of Section 197 of the Companies Act, 2013 has reference to professional services by a director. Section 200 has reference to the professional qualification in relation to managerial remuneration.

The dictionary defines word “professional” as a person competent or skilled in a particular activity. Accordingly, a person having some competence or skill relating to a particular activity to contribute decision making of the board may be appointed under the category of the professional director. A doctor may be a professional director in a hospital company.

Nominee Director

According to Section 149(6) of the Companies Act, 2013, an independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director.

According to the explanation to Section 149, “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.

Accordingly, a nominee nominated by promoter group to represent its interests may be nominee director by designation but it shall promoter director as the appropriate category.

In case of nominee director as designation, the name of company or institution nominating such director is required in the forms.

Promoter Director

The Companies Act, 2013 does not define promoter director but define promoter.

According to Section 2(69), promoter” means a person—

(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;

Unless a person is a promoter as per this definition or representing a promoter, it may not be called as promoter director. A promoter director should be a member of promoter group or nominated to the board by promoters to represent them.

I faced an interesting question – whether an applicant signing application for incorporation or an application for name reservation is a promoter? A mere applicant representing all subscribers for incorporation need not be a promoter unless he has a control over affairs of the company. While signing application, applicant just representing all subscribers/first shareholders of the company.

Independent Director

Section 149(6) of the Companies Act, 2013 defines Independent Directors. This definition earlier discussed here and here needs no further discussion. Just to have quick look, an independent director in relation to a company, means a director other than a 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 pecuniary relationship 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;

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two percent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(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;

(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 percent or more of the gross turnover of such firm;

(iii) holds together with his relatives two percent or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non-profit organization that receives twenty-five percent or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two percent or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

Selection of correct category is important for the long-term interest of the company and concerned director as an individual.

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ICSI National Convention 2017


I love ICSI National Conventions for knowledge, networking and new places. This was the turn of Southern India regional office of the Institute of Company Secretaries of India to host this yearly event. ICSI National Convention 2017 was held in Kazhakoottam (कष़ऽक्कूट्टम), a suburb of state capital Thiruvananthapuram. This time about 1200 attained the National Convention which is claimed to be the second highest turnaround for ICSI National Convention. This high turnaround certainly puts pressure on organizers but attendance in technical sessions was reduced to less than 50% of total delegates, thanks to Kerala and Kerala Tourism. Kerala Tourism is one of most proactive state tourism department/company in India.

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A BOARD BELOW THE QUORUM


After the list of disqualified directors made public by Government of India, Many companies facing “no director on board” or “board below the quorum” situations. In last post here, we discussed the first situation. Now, we will discuss the second one.

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No Director in Company!! #APPOINT!!


“Disqualified directors are not directors in any Company”, this is fact under Section 164 and 167. In another word, A Company with all directors disqualified under Section 164 and 167 has no director at all. Such companies need new a set of directors immediately. The Companies Act, 2013 presume two situations where a company may be without Directors. We will discuss these two situations here.

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Unease of Name Approval


Before being launched a pilot project on 26th January 2016, central registration of companies was under consideration since long. However, The Central Government under the able leadership of Prime Minister Narendra Modi launched it silently and suddenly as a pilot project for the setting of Central Registry for Companies in India. Presently, central registry looks after only two functions: (a) Name Approval and (b) Company Incorporation.

Central Registry aims to serve a single window for compliances, reduce the requirement of personal visits and therefore corruption, and to upgrade the position of India in ease of doing business index. It was also told that central registry shall reduce workforce requirement in registration function and free it for enforcement function.

However, opponents saw this attempt to reduce decentralisation; increase touts activities in corruption, increase cost, reduce chances to explain a name directly to the relevant officer, and overburdened staff at the central registration office. Unfortunately, in last 22 months of implementation of this pilot project, most apprehensions of opponents seem to be true.

In earlier decentralised regime, practising company secretaries files an application with the MCA21 system, which automatically directed to the jurisdictional registrar of companies. Their system assigns it to a particular officer as per their own algorithm. The officer supposes to do a search from the names of existing companies, the name reserved for companies to be incorporated soon, and registered trademarks. When name pass this name was available for further consideration like under the Companies Act, 1956 or the Companies Act, 2013 and the Emblem and Names (Prevention of Improper Use) Act, 1950. Wherever a doubt or need explanation required, the applicant was available for discussion. Here comes the alleged corruption, which was claimed to be minimal by most company secretaries practising with jurisdictional Registrar of Companies.

Now, the Centralised Registry process name available application filed with the MCA21 system. The workflow is still same at registrar office sans chance of an official visit by the applicant. Interesting things come here. It blames that present system stopped only official interaction but not hidden one. Such hidden interaction, if really happen, have increased the hidden cost of corruption. Additionally, applicant sitting in another city may not have a chance of such unofficial interaction. They are now forced to hire touts in Delhi NCR. The cost of hiring a tout in Delhi is now an additional burden to the cost of corruption if it still exists.

The cost of touts and corruption is usually a well-accepted business norm in most countries. This is usually not a problem for business houses. Their prime concern is speed and ease of doing business.

Allegedly, the most applications filed before central registry face at least one resubmission. Most company secretaries off the record claim a pattern in the selection of ground of rejection. Mostly similarity with a registered trademark or renowned trademark, or name an existing company raised if not a technical ground. Recently there was a strange claim from few applicants. There is an alleged pattern of approving a name lower in rank among option applied by the applicants. Interestingly, officials do not raise all their objections at once, which may be possible due to oversight at the first time or maybe a sinister way to hold the application for the second resubmission. This second-time objection creates panic at end of applicant and most of the time seen as an invite to an unofficial meeting.

Unfortunately, these complainants do not the official complaint against such practices and silently welcome corruption and therefore harms governments attempt to reduce corruption from its system.

What I see is lack of opportunity for official interaction between applicant and the central registry is a problem. The present system has only one way of official interaction between central registry and applicant. I suggest, an option of official online chat between designated officer at central registry and applicant. This may facilitate both central registry and applicant to explain their viewpoints to each other.

P.S. Reader may give their suggestion in comment box which will not be published without their wishes.

REGISTERED VALUERS


Registered Valuers is a new concept in Indian corporate law introduced by the Companies Act, 2013. Earlier for various purposes like wealth tax assessment, we had different valuers.  Chapter XVII, Section 247 of the Companies Act, 2013 make law for registered valuers. Years earlier, we have discussed section 247 here. Now, section 247 comes into force along with a removal of difficulty order, a delegation of powers, its rules, in October 2017.

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Nodal Officer


Originally, neither the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 nor the Companies Act, 2013 have any mention of Nodal Officer except Form IEPF – 5. The Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Second Amendment Rules, 2017 first time bring this term in main rules.

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