To be director democratically – post 9th February 2018

The Companies Amendment Act, 2017 read with notification dated 9^th February 2018 amended law related to the right of a person to be appointed as director of a company under Section 160 of the Companies Act, 2013. Section 160, in its original form, as applicable from 1^st April 2014 until 8^th February 2018. Section 160 is well ignored but the strong pillar of corporate governance and democracy. We shall discuss amended section 160 here along with its limitations and challenges present before it.

Retiring Director

According to Explanation to Section 152, which is also applicable to Section 160, “retiring director” means a director retiring by rotation.

According to Section 152, Not less than two-thirds of the total number of directors of a public company shall be persons whose period of office is liable to determination by retirement of directors by rotation. At every subsequent annual general meeting, one-third of such of the directors are liable to retire by rotation. At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other person thereto.

A detail discussion on retiring director is available here.

Eligibility for other persons

A person who is not a retiring shall be eligible for appointment to the office of a director at any general meeting.  This eligibility for appointment is eligibility for his candidature for such appointment.

Candidature

The candidature may be announced in any of these two manners:

Signifying Candidature

The candidate shall not less than fourteen days before the annual general meeting, left at the registered office of the company, a notice in writing under his hand signifying his candidature as a director.

Proposing Candidature

Any member intending to propose a candidate as a director has not less than fourteen days before the annual general meeting, left at the registered office of the company, a notice in writing under his hand signifying the intention of such member to propose a candidate for that office.

Deposit

The notice for signifying a candidature or intention to propose a candidate for the office of director shall be left at the registered office along with the deposit of one lakh rupees or such higher amount as may be prescribed.

In case of Nidhi company, the amount of the deposit shall be ten thousand rupees only [Notification G.S.R. 465(E) dated 5th June 2015].

Refund of deposit

Such deposit shall be refunded to such candidate or, as the case may be, to the member proposing such candidate, if the candidate proposed gets elected as a director or gets more than twenty-five percent of total valid votes cast either on the show of hands or on the poll on such resolution.

Exception for deposit

This is long-standing demand from corporate houses. A proviso to subsection (1) of Section 160 is inserted with effect from 9^th February 2018.

The requirements of deposit of amount shall not apply in case of appointment of:

• an independent director; or
• a director recommended by the Nomination and Remuneration Committee, if any, constituted under sub-section (1) of section 178; or
• a director recommended by the Board of Directors of the Company, in the case of a company not required to constitute Nomination and Remuneration Committee.

In case of committee/board approved the candidate, the requirement of such deposit was just procedural. This requirement results in some useless debit and credit entries in banks of these companies.

In case of independent directors, why would an independent director declare his candidature? Where any other member proposes his candidature, will he remain independent in notional terms? Though most of these independent directors approved and recommended by Nomination and Remuneration Committee or the Board.

So, the requirement of such deposits is there only to deter candidates who are without the blessing of the committee/board.

Information of candidature

The company shall inform its members of the candidature of a person for the office of director in such manner as may be prescribed.

Rule 13 of the Companies (Appointment and Qualification of Directors) Rules 2014 laid down the procedure.

The company shall, at least seven days before the general meeting, inform its members of the candidature of a person for the office of a director or the intention of a member to propose such person as a candidate for that office-

(1) by serving individual notices, on the members through electronic mode to such members who have provided their email addresses to the company for communication purposes, and in writing to all other members; and

(2) by placing a notice of such candidature or intention on the website of the company, if any.

It shall not be necessary for the company to serve individual notices upon the members as aforesaid, if the company advertises such candidature or intention, not less than seven days before the meeting at least once in a:

• vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and circulating in that district, and
• in the English language in an English newspaper circulating in that district.

Exemption from Section 160

Section 160 is not applicable to:

1. Private limited companies. [Exemption Notification G.S.R. 464(E) dated 5th June 2015];
2. Section 8 companies whose articles provide for the election of directors by ballot. [Exemption Notification G.S.R. 466(E) dated 5th June 2015];
3. 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 Exemption [Notification G.S.R. 463(E) dated 5th June 2015];
4. A subsidiary of a Government company, in which the entire paid up share capital is held by that 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 [Notification G.S.R. 463(E) dated 5th June 2015];

Optional application of Section 160

Specified IFSC public company as per the Articles framed by the company [Notification G.S.R. 08(E) dated 5th January 2017]

Practical Challenges

The requirement of newly introduced Rule 9(3)(a)(iiia) of the Companies (Incorporation) Rules, 2014 as amended (discussed here) have far-reaching implications for the implementation of Section 160 of the Companies Act, 2013. Section 160 confers a right to a person, including a person who does not have the support of a majority on the Board, to propose his candidature. There is no question of formal resolution to appoint him as director of the Board of directors. However, sub-clause (iiia) of clause (a) of sub-rule (3) of rule 9 mandate a board resolution proposing his appointment in an existing company, where a candidate does not have a Director Identification Number. The combined reading of Section 160, 152 and Rule 9(3)(a)(iiia) do not match this well-established principle of corporate governance and democracy.