DIRECTORS

Subject – Corporate & Information Technology Law

Semester VI, B. Com (Hons.)
Unit 10

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-A company, being an artificial person aims to achieve its objects as enshrined in the
objects clause of its Memorandum of Association & it has necessarily to depend upon
some agency, known as Board of directors.
-The Board of directors of a company is a group of directors, selected according to the
procedure prescribed in the Act and the Articles of Association of the company.
-Members of the Board of directors are known as directors
-Acting collectively as a Board of directors, they can exercise all the powers of the
company except those, which are prescribed by the Act to be specifically exercised by
the company in general meeting.
-The directors of a company are its eyes, ears, brain, hands, nerves and other essential
limbs, upon whose efficient functioning depends the success of the company.
-The directors formulate policies and establish organisational set up for implementing
those policies and to achieve the objectives as contained in the Memorandum, muster
resources for achieving the company objectives and control, guide, direct and manage
the affairs of the company.

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-The Companies Act, 2013 does not contain an exhaustive definition of the term “director”.
-Section 2 (34) of the Act prescribes that “director” means a director appointed to the
Board of a company.
-Section 2 (10) of the Companies Act, 2013 defines that “Board of Directors” or “Board”,
in relation to a company, means the collective body of the directors of the company.
-Under the Companies Act, 2013 only an individual can be appointed as a Director; a
corporate, association, firm or other body with artificial legal personality cannot be
appointed as a Director. (Section 149)
-Directors of a company are individuals that are elected as, or elected to act as,
representatives of the stockholders to establish corporate management related policies
and to make decisions on major company issues. The success of the company depends, to a
very large extent, upon the competence and integrity of its directors.
-Section 166 (6) of Companies Act, 2013, prohibits assignment of office of director to any
other person. Any assignment of office made by a director shall be void.

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 Minimum/Maximum Number of Directors in a Company-
Section 149(1) of the Companies Act, 2013 requires that every company
shall have a minimum number of:
-3 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.
-A company can appoint maximum 15 fifteen directors.
-A company may appoint more than fifteen directors after passing a
special resolution in general meeting and approval of Central Government
is not required.

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Number of directorships- Section 165
-Maximum number of directorships, including any alternate directorship a person can hold is
20.
-It has come with a rider that number of directorships in public companies/ private
companies that are either holding or subsidiary company of a public company shall be
limited to 10.
-Further the members of a company may restrict the abovementioned limit by passing a
special resolution.
-Any person holding office as director in more than 20 or 10 companies as the case may be
before the commencement of this Act shall, within a period of one year from such
commencement, have to choose companies where he wishes to continue/resign as director.
-There after he shall intimate about his choice to concerned companies as well as concerned
Registrar.
-Such person shall not act as director in more than the specified number of companies after
despatching the resignation or after the expiry of one year from the commencement of this
Act, whichever is earlier.
-If a person accepts an appointment as a director in contravention of above mentioned
provisions, he shall be punishable with fine which shall not be less than Rs. 5,000 but which
may extend to Rs. 25,000 for every day after the first day during which the contravention
continues

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EXECUTIVE & NON EXECUTIVE DIRECTORS
-A director so appointed may either be executive director or non-executive director.
-An Executive Director can be either a Whole-time Director of the company (i.e., one who
devotes his whole time of working hours to the company and has a significant personal interest
in the company as his source of income), or a Managing Director (i.e., one who is employed
by the company as such and has substantial powers of management over the affairs of the
company subject to the superintendence, direction and control of the Board).
-They are generally responsible for overseeing the administration, programs and strategic
plan of the organization.
-Other key duties include fund raising, marketing, and community out reach.
-In contrast, a non-executive Director is a Director who is neither a Whole-time Director nor
a Managing Director.
-A director to the Board may be appointed as • First Director • Resident Director • Women
Director • Independent Director • Alternate Director • Additional Director • Small
Shareholder Director • Nominee Director • Director by Casual Vacancy

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 EXECUTIVE DIRECTOR NON-EXECUTIVE DIRECTOR
Active & Routine Contribution - involved in the management of the company Expertise, Selective Contribution - is a member of the company's board,
as well as he/she is the full-time employee of the company. but he/she does not possess the management responsibilities

Main tasks are - Formulation and Implementation Consideration and Review

They are paid a monthly/timely remuneration Paid service fees or consultation charges
are the whole-time directors of the company who report to the company’s does not take part in the management and operation of the company
Chairman. They work for the company in a senior capacity, mainly but plays a crucial role in the formulation of policies and plans, and
associated with the policy concerns and functional areas of primary decision making of the company.
strategic importance.
They are elected to the board by the Nomination Committee or by the The appointment of Non-Executive Directors is based on their
company’s board itself. qualification such as depth of knowledge and breadth of experience
charged with executive responsibilities of managing the enterprise. appointed with the aim of bringing a certain degree of objectivity in the
organization’s decision
Ex: Whole time director, managing director, Ex: Independent Director

DIFFERENCE BETWEEN EXECUTIVE & NON EXECUTIVE DIRECTORS

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First Director
-Section 152 -provides for the appointment of first directors,
-where there is no provision made in Articles of Association of the company for
appointment of first directors then the subscribers to the memorandum who are individuals
shall be deemed to be the first directors of the company until the directors are duly
appointed.
-Directors specified in the memorandum and articles at the time of incorporation.
-If not specified then shall be selected by majority of memorandum subscribers or all the
subscribers are first directors.
-They are appointed till the company appoints subsequent directors.
-In the case of a One Person Company, an individual being a member shall be deemed to
be its first director until the director(s) are duly appointed by the member in accordance
with the provisions of Section 152.

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Woman Director
-Second proviso to Section 149(1) read with Rule 3 of Companies (Appointment and Qualification
of Directors) Rules, 2014 following class of companies must have at least one Women Director:
(mandatory)
a) All Listed Companies Public companies with paid up capital of `100 crore or more or
b) with turnover of `300 crore or more
-For listed entities of SEBI - shall have at least one independent woman director
-appointment of woman director is applicable to the company within a period of six months from
the date of its incorporation.
-can be an executive director or a non-executive director.
-can hold the position of a director until the next Annual General Meeting from the date of
appointment. She is also entitled to seek reappointment at the general meeting.
-It is pertinent to note that the tenure of a woman director is liable to retirement by rotation
(Section 152(6)) similar to other types of directors.
-penalty for non–compliance of the appointment of woman director is - In case of non-
compliance, the erring company will be fined ₹10,000. If no amendments are made, there will
be a further fine of ₹10,000 per day till it continues – Sec 149 (1)
-(company or officer in default punishable with fine which shall not be less than Rs. 50,000
but which may extend to Rs. 5,00,000) – Sec 172

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Director elected by Small Shareholders [Section 151]
-every listed company may have one director elected by such small shareholders
-“Small shareholder” means a shareholder holding shares of nominal value of not more
than twenty thousand rupees or such other sum as may be prescribed.
-Here, the ‘nominal value’ of shares is relevant. It does not matter how much is the ‘paid up
value’ or ‘market value’ of shares. However, a small shareholder may be a holder of equity
shares or preference shares or both.
-For example: Mr. X holds 3000 equity shares of `10 each (`5 paid up) in ABC Ltd. However,
Mr. X cannot be considered as small shareholder since the nominal value of shares held by him
(i.e. `30,000) exceeds `20,000.

A listed company, may upon notice of not less than (a) 1000 small shareholders; or
(b) one-tenth of the total number of such shareholders, whichever is lower; have a
small shareholder’s director elected by the small shareholder. A ‘Small Shareholders’
Director’ may be elected voluntarily by any listed company.

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-A person shall not hold the office of small shareholders’ director in
more than two companies.
-If second company is in competitive business or is in conflict with
business of the first company, he shall not be appointed in second
company.
-He shall directly or indirectly not be appointed or associated in any
other capacity with the company either directly or indirectly for a
period of 3 years from the date of cessation as a small shareholder’s
director.

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Alternate Director
-Section 161(2) - empowers the Board, if so authorized by its articles or by a resolution
passed by the company in general meeting, to appoint a director (termed as ‘alternate
director) to act in the absence of an original director for a period of not less than three
months from India.
-Section 161(2) of the Act applies to public or private companies.
-The Board of Directors of a company must be authorised by its articles or by a resolution
passed by the company in a general meeting for appointment of the alternate director.
-The person in whose place the Alternate Director is being appointed should be absent for a
period of not less than 3 months from India.
-The person to be appointed as an Alternate Director shall be a person other than the
person holding any alternate directorship for any other Director in the company or
holding directorship in the same company.
-If it is proposed to appoint an Alternate Director to an Independent Director, it must be
ensured that the proposed appointee also satisfies the criteria of Independence.
-The right to appoint an alternate director vests in the Board. The original director has no
right to appoint an alternate director.
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-An alternate director shall not hold office for a period longer than that
permissible to the director in whose place he has been appointed.
-If the original director ceases to be a director by reason of death or vacation
of office under section 167, the alternate director shall immediately cease to
hold his office.
-The alternate director shall vacate his office when the original director in
whose place he has been appointed returns to India
-If the term of office of an original director expires before he returns back to
India, the provision for automatic reappointment of a director as envisaged
under section 152(7)(b) shall be applicable to the original director, and not
to the alternate director.

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Nominee director
-nominee director is an individual nominated by an institution, including banks and financial
institutions, on the board of companies where such institutions have some ‘interest’.
-The ‘interest’ can either be in form of financial assistance such as loans or investment into
shares. Such strategic investment may have a direct bearing on the profitability of a
nominator and therefore, the appointment of nominee director becomes essential to
facilitate monitoring of the operations and business of the investee company.
-The main purpose of appointment of such person(s) is to safeguard the interest of the
nominator, without conflicting with his/ her fiduciary duty as a director.
-Such a director has several roles and responsibilities, including adequate disclosure of
interest, reporting to the nominator and protection of the interest of the company in its
entirety.
-Under Companies Act, 2013, the appointment of a nominee director is made in
accordance with section 161(3): Subject to the articles of a company, the Board may appoint
any person as a director nominated by any institution in pursuance of the provisions of any
law for the time being in force or of any agreement or by the Central Government or the
State Government by virtue of its shareholding in a Government company.”

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-a nominee director is “nominated” by a nominator.
-The nominator has all the rights with respect to appointment, removals
and the terms and conditions of appointment to form a part of an
agreement entered into with the company by such investor or creditor
or other stakeholders.
-Acts as a ‘watchdog’
-Participation and decision making
-Maintains Confidentiality

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INDEPENDENT DIRECTORS
-The concept of Independent Directors emerged when the Cadbury Committee in 1992
was set up following the corporate scandals
-The focus was on appointment of independent directors as a part of the new practices for
better governance.
-ID function as an oversight body in monitoring the performance and raise red flags
whenever suspicion occurs.
-are expected to be more aware and question the company on relevant issues in their
position as trustees of stakeholders.
-Are critical for ensuring good corporate governance and it is necessary that the
functioning of the institution is critically analysed and proper safeguards are made to
ensure efficacy.
-An independent director means a director other than a managing director or a whole-
time director or a nominee director who does not have any material or pecuniary
relationship with the company/ directors.
-Basically an independent director is a non-executive director.

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 APPOINTMENT OF DIRECTORS – Section 152
- every director shall be appointed by the company in general meeting, except if specific procedure is
enlisted in the Companies Act, 2013
- Director Identification Number is compulsory for appointment of director of a company.
- Every person proposed to be appointed as a director shall furnish his Director Identification Number and a
declaration that he is not disqualified to become a director under the Act.
- A person appointed as a director shall on or before the appointment give his consent to hold the office of
director in physical form DIR-2 i.e. Consent to act as a director of a company.
(https://www.mca.gov.in/MinistryV2/companyformsdownload.html)
- Company shall file Form DIR-12 (particulars of appointment of directors and KMP along with the form DIR-2
as an attachment within 30 days of the appointment of a director, necessary fee)
- Articles of the Company may provide the provisions relating to retirement of the all directors.
- If there is no provision in the articles, then 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 by rotation
and eligible to be reappointed at annual general meeting.
- At the annual general meeting of a public company one-third of such of the directors for the time being as
are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number
nearest to one-third, shall retire from office.
- The directors to retire by rotation at every annual general meeting shall be those who have been longest in
office since their last appointment
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- 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.
- If the vacancy of the retiring director is not so filled-up and the meeting has not expressly resolved not to fill the
vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if
that day is a national holiday, till the next succeeding day which is not a holiday, at the same time and place.
- If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also has not
expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at
the adjourned meeting, unless—
(i) a resolution for the re-appointment of such director has been put to the meeting and lost;
(ii) the retiring director has expressed his unwillingness to be so re-appointed;
(iii) he is not qualified or is disqualified for appointment;
(iv) a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of any
provisions of this Act; or
(v) section 162 i.e. appointment of directors to be voted individually is applicable to the case.

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 There will be no appointment without a DIN:
- No one shall be appointed as a director of a company unless he has been assigned a Director Identification
Number (DIN) in accordance with section 154, (3).
- Every individual nominated to be appointed as a director by the company, whether in a general meeting or
otherwise, must provide his Director Identification Number as well as a certification that he is not disqualified
to become a director under this Act.
Acceptance to serve as Director:
- A person designated as a director may not act as a director unless he consents to occupy the position. The
permission must be lodged with the Registrar in the required way within thirty days after he is appointed per
Section 152(5).
- When an independent director is appointed at a general meeting, an explanatory statement affixed to the
notice of the general meeting must include a declaration that, in the Board’s view, he meets the qualifications
stipulated in this Act for such an appointment.

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 Appointment of first directors
- Section 152(1) - provides for the appointment of the first directors of the companies.
- The first directors hold their offices from the date of formation of the companies.
- As per Section 152(1), the Articles of Association of Companies have provisions through which the companies
appoint the first directors.
- Where the articles do not provide such provisions, the companies consider the following persons as first directors:
a. One-Person Companies: Individuals being members.
b. In other circumstances: Individuals who subscribe to the Memorandum of Associations of companies.
c. The first directors hold their offices until the members appoint directors as per the provisions of Section 152.
d. Where, for any reason, for example, death, the first directors do not assume their offices, the subscribers of
the Memorandum (who will then be only members) have to convene meetings for the appointment of
directors.

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 Appointment of directors at general meetings
- Section 152(2) - the companies appoint directors in general meetings except where the Act provides
otherwise.
- However, in the case of public companies, shareholders appoint two-thirds of the total number of directors.
They appoint the remaining one-third of the members as per the Articles of Association in general meetings.
- Except if the Act allows otherwise, every director must be selected by the company in a general meeting,
according to section 152(2).
- Section 152 (6) - unless the articles allow for the retirement of all directors at each annual general meeting,
not less than two-thirds of a public company’s total number of directors must be present.
- These shall be individuals whose terms of office are subject to the rotational retirement of directors; and
- In the event of such a corporate (i.e., public company), the remaining directors shall be selected by the
company in a general meeting in the absence of, and subject to, any requirements in the articles of the
company.

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Appointment of Directors in casual vacancy- Section 161 (4)
-If any vacancy is caused by death or resignation of a director appointed by the
shareholders in General meeting, before expiry of his term, the Board of directors can
appoint a director to fill up such vacancy.
-If the office of any director appointed by the company in general meeting is vacated
before his term of office expires in the normal course, the resulting casual vacancy may, in
default of and subject to any regulations in the articles of the company, be filled by the
Board of Directors at a meeting of the Board which shall be subsequently approved by
members in the immediate next general meeting
-The appointed director shall hold office only up to the term of the director in whose
place he is appointed.

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-To fill up a casual vacancy prior authorization from Articles is not required just like
Alternate or Additional Director.
-In case Articles are silent regarding appointment of director to fill casual vacancy, board of
directors have inherent power to fill the resulting casual vacancy under section 161(4).
-Filling up of casual vacancy through resolution by Circulation (Section-175) is not allowed as
casual vacancy is compulsorily to be filled at the meeting of the Board of Directors of a
Public Company.
-As per the interpretation of the language of Section 161(4), vacancy in the office of a
Director, who was appointed by the Company in General meeting, can only be filled as
a Casual Vacancy under section 161(4).
-For example if an additional director appointed by Board vacated his office thereby
creating casual vacancy, such casual vacancy cannot be filled under section 161(4) of the
Companies Act 2013.
-Tenure of casual director: The person so appointed will be eligible to act as a casual
director till the remaining tenure of the director in whose place he was appointed by the
company.
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Retirement of Directors
-AOA of the company may give the provisions relating to the retirement of all directors.
-In case no guideline is provided in the AOA, at that point at the very least two-third of
the complete number of directors of a public company will be people whose period of
office will end by retirement on a rotational basis and such person is qualified to be
reappointed at the yearly general meeting.
-Further, independent directors will not be incorporated for the calculation of all
outnumber of directors.
-At the AGM of a public company, one-third of such of the directors for the time being as
are obligated to resign by rotation, or if their number is neither three nor a multiple of
three, at that point, the number closest to one-third, will resign from office.
-The directors to resign by rotation at each yearly general meeting will be the individuals
who have been longest in office since their last appointment.

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 Filling the vacancy of the Retiring Director
- At the AGM the company may fill the vacancy by re-appointing the resigning director or some other
individual thereto.
- In the event that the vacancy of the resigning director is not filled and the meeting has not explicitly settled not
to fill the vacancy, the meeting will stand dismissed till that day in the following week, at the same time and
place, or if that day is a national holiday, till the following succeeding day which isn’t a holiday, at the same
time and place.
- If in the postponed meeting, the vacancy of the resigning director isn’t filled and that meeting likewise has not
explicitly settled not to fill the opening, the resigning director will be qualified to be re-appointed at the
postponed meeting, except if-
­ a resolution for the re-appointment of such director has been put to the meeting and lost;
­ the resigning director has communicated his reluctance to be so re-appointed;
­ he isn’t qualified or is disqualified for appointment;
­ a resolution, regardless of whether special or ordinary, is required for his appointment or re-appointment under
the Act; or
­ Section 162 i.e., the appointment of directors to be voted individually is applicable in any case.

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 REMOVAL OF DIRECTOR
- A Company may, by ordinary resolution, remove a Director, not being a Director appointed by the Tribunal
under section 242, before the expiry of the period of his office after giving him a reasonable opportunity of
being heard. [Section 169(1)]
- An Independent Director re-appointed for second term shall be removed by the Company only by passing a
Special Resolution and after giving him a reasonable opportunity of being heard. [Section 169(1) First
Proviso]
- A special notice shall be required to remove a Director.
- A special notice required to be given to the Company shall be signed, either individually or collectively by such
number of members holding not less than one percent of total voting power or holding shares on which an
aggregate sum of not less than five lakh rupees has been paid up on the date of the notice. [Section 115
and Rule 23(1) of the Companies (Management and Administration) Rules, 2014]
- A vacancy created by the removal of a director may, if he had been appointed by the company in general
meeting or by the Board, be filled by the appointment of another director in his place at the meeting at which he
is removed, provided special notice of the intended appointment has been given.
- A director so appointed shall hold office till the date up to which his predecessor would have held office if he
had not been removed.
- The Director so removed shall not be re-appointed as a Director by the Board of Directors.

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 RESIGNATION OF DIRECTOR
- A director may resign from his office by giving a notice in writing to the Company and the Board shall
on receipt of such notice take note of the same and
- the Company shall intimate the Registrar and shall also place the fact of such resignation in the report
of directors laid in the immediately following General Meeting by the Company. [Section 168 of the
Companies Act, 2013]
- The resignation of a director shall take effect from the date on which the notice is received by the
company or the date, if any, specified by the director in the notice, whichever is later.
- The director who has resigned shall be liable even after his resignation for the offences which occurred
during his tenure.

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-The Board shall, on receipt of such notice within 30 days intimate the Registrar in Form DIR-
12 and also place the fact of such resignation in the Directors’ Report of subsequent
general meeting of the company and post the information on its website.
-The director shall also forward a copy of resignation along with detailed reasons for the
resignation to the Registrar in Form DIR-11 within 30 days from the date of resignation.
-If all the directors of a company resign from their office or vacate their office, the promoter
or in his absence the Central Government shall appoint the required number of directors to
hold office till the directors are appointed by the company in General Meeting.

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 Appointment by the Board of Directors
(i) Additional Directors
- A company’s articles may grant its Board of Directors the authority to designate any person as an extra director
at any time. A person who is not elected as a director at a general meeting, on the other hand, cannot be elected.
- As a result, without an authority granted by the Articles, the Board cannot select new directors. The section applies
to all enterprises, whether public or private.
(ii) Filling up the Casual Vacancy
- In the event of any corporation, including a private company, Section 161(4), as modified by the Amendment Act,
2017, authorizes the Board to fill casual vacancies. A casual vacancy is one that occurs for reasons other than
retirement or the end of an appointment’s term limit.
- Thus, if the office of any director appointed by the company in a general meeting is vacated before his term of
office expires in the normal course, the resulting casual vacancy may be filled by the Board of Directors at a
meeting of the Board, subject to any regulations in the articles of the company.
(iii) Alternate Directors
- The Board of Directors of a company may designate an alternate director to act for a director during his
departure from India for a term of not less than three months if so, authorized by its articles or by a resolution
passed by the company in a general meeting. A person holding an alternate directorship for another director in
the firm, on the other hand, shall not be chosen. Again, an existing director of the business cannot be chosen as an
alternate director for another director of the same firm.
- No one may serve as an alternate director for an independent director unless he is eligible to serve as an
independent director under the requirements of this Act.
- An alternate director is not the original director’s agency.
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Remuneration
-Collins Dictionary defines the term ‘remuneration’ as the money that is paid to a person in return for the
work that he or she has done.
-The term owes its origin to the Latin term ‘remuneratus’ which means ‘to reward’. It is a return that an
employee receives for his or her contribution to the organisation or company.
-It relates to needs, motivation, and rewards. Put simply, it is the financial compensation that a person
working in an organisation or a company is offered in return for his or her service.
-Remuneration often gains importance as it concerns the outflow of money from the company, analysing net
profits, and gaining approval from its stakeholders and the board of directors.
-The term “remuneration” is defined under Section 2(78) of the Companies Act, 2013. It defines the term
as money or its eThe term ‘managerial remuneration’ is nowhere defined in the Companies Act, 2013. It is
used as a term that connotes the remuneration that is paid to managerial personnel. It is a very significant
topic under corporate governance, which ensures fair pay to key managerial personnel and other
directors.
-The central legislation pertaining to company matters, i.e., the Companies Act, 2013 entails provisions
concerning managerial remuneration. It is embodied under Section 197 of the 2013 Act.
-Managerial Remuneration can be defined as the benefits and remuneration given to the top management
of the company, like the CEO, managing director, board of directors, whole-time director, its manager, etc.
in respect of any financial year.
-The computation of managerial remuneration that is to be given is decided according to the provisions of
Section 198 of the Act of 2013. quivalent provided or given to a person in return for the services
provided by him.
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- The first clause of the Section lays down the maximum remuneration payable by a public company.
- Section 197(1) states that for a financial year, the total managerial remuneration that is paid by a public
company to the managerial personnel and other directors, including the managing director, whole-time
director, and its director, shall not be more than 11 percent of the net profits of the company.
- This net profit is calculated as prescribed under Section 198 of the Act of 2013. Also, this remuneration is not
deducted from the gross profits.
- The proviso clause of Section 197(1) states that a company may exceed the limit of 11 percent and authorise
the payment of remuneration exceeding 11 percent in a general meeting. However, it is important to note that
the company must do so in compliance with Schedule V.
- The proviso further states that the remuneration paid to any one managing director, whole-time managing
director, or manager shall not exceed 5 % of the net profits of the company. Also, if there is more than one
such director, then the exceeding limit for remuneration to all such directors and managers must not exceed
10% when taken together.
- In the case of remuneration that is paid to directors who are neither the managing directors nor the whole-
time directors, the remuneration shall not exceed 1% of the net profits of the company, if there is a managing
or whole-time director or manager. In any other case, it shall not exceed 3 percent.
- In cases where there is any default in payment of dues by the company to any bank or other financial
institution, prior approval is necessary before obtaining such approval for payment of remuneration in the
general meeting.

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- Section 197(3) provides for the course of action that is to be taken in the event a company suffers losses,
makes no profit, or makes an inadequate profit.
- It states that in the above cases of loss or no profits, the company shall not pay to its directors, including any
managing or whole-time director or manager or any other non-executive director, any remuneration that is
exclusive of any fees that are payable to the director under Section 197(5), and this shall be done in compliance
with the provisions of Schedule V.
- Section 197(4) states that the remuneration that is to be paid to the directors of a company, shall be
computed in a manner that complies with Section 197.
- Also, this should be done either by the company’s articles of association, by a resolution, or by a special resolution
if there exists a provision requiring the same in the AOA of the company.
- Also, the remuneration given to the director determined through the aforesaid procedure is inclusive of any other
services rendered by him in any other capacity as well.

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-Section 197(5) states that a director can also be paid remuneration by way of fees for
attending board or committee meetings, based on the decisions taken by the board.
-The proviso of the sub-section states that the aforesaid fees shall not exceed the prescribed
amount. It also states that the fees for different classes of companies and fees for
independent directors may be as prescribed.
-Section 197(6) of the Act of 2013 provides for the way by which a director or a manager
may be paid remuneration. The director or manager can either be paid monthly or at a
specified percentage of the net profits of the company, or a combination of both, as the
case may be.

06/03/24 RUCHI BHARDA JAIN 33

Refund of remuneration in certain circumstances
-Section 197 (9) & (10) were substituted by the Companies (Amendment) Act, 2017.
-The first subsection states that if a director draws or receives any amount of remuneration that
exceeds the prescribed limit, without approval, he shall refund the sums to the company within
two years or as directed by the company.
-Sub-section (10) states that the company is not allowed to waive the sum that is refundable
unless the same is approved in a special resolution within two years from the date such sum
becomes refundable.
-The proviso of this sub-section further states that such a waiver by the company can only be
done with the prior approval of a concerned bank or any other financial institution, non-
convertible debenture holders, other secured creditors, etc. if there is any default in payment
of dues on the part of the company from such institutions.

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Recovery of managerial remuneration
-Section 199 of the Act of 2013 provides for the recovery of managerial remuneration from
any managing director, whole-time director, manager, or Chief Executive Officer in case the
remuneration is not paid in accordance with Section 197, if there is any non-compliance with
the requirements mentioned in the Act of 2013, or if it is found to be in excess of what is
shown or restated in the financial statements.
-This also includes stock options.

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Criteria for consideration of remuneration
The company’s financial and operating performance in the last three preceding financial
years.
The company’s relationship between performance and remuneration that is being
rendered.
Does there exist any difference in the remuneration policy of the directors and other
employees, and if so, the rationale behind the same?
The securities held by the directors, along with the options and details of the shares
pledged at the end of the preceding final year.
The proportionality of remuneration among the directors and the directors of the
board, along with other employees.

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 Fixation of payable remuneration limit by Central government or company
- Section 200 of the Act of 2013, provides that in the event a company suffers a loss or makes inadequate or
no profits, the central government or the company may fix the remuneration limit for the time being, in
accordance with the limit specified in the Act.
- while fixing such a limit, the government or the company has to keep in mind certain parameters, namely;
­ Company’s financial position;
­ Remuneration or commission drawn from the company by that individual in any other capacity;
­ Remuneration or commission drawn by that individual from any other company;
­ Qualifications and professional qualities of the individual; and
­ Other parameters as may be prescribed.

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 Qualification For Appointment of Directors
The Act has a dedicated provision which is Section 162 that underlines the reasons for which a person may not
be appointed as a director. There is no such provision regarding the qualification under the Act. However,
requirements can be listed as below:
­ The person must have completed the age of eighteen or above.
­ Nationality can be that of Indian or otherwise.
­ The person should have his own Digital Signature Certificate (DSC) through which Director’s Identification
Number (DIN) shall be obtained.
­ The person has to furnish a written declaration expressing his consent to act in the position of Director and he
is not a person who falls under the category of disqualified members.
­ There is no academic qualification that needs to be held by the person who is desirous of obtaining the
directorship of a company.

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 Disqualifications for Appointment of Director (Section 164)
A person shall not be eligible for appointment as a director of a company, if —
(a) he is of unsound mind and stands so declared by a competent court;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and
sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not
elapsed from the date of expiry of the sentence:
Provided that if a person has been convicted of any offence and sentenced in respect thereof to
imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in
any company;
(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the
order is in force;
(f) he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly
with others, and six months have elapsed from the last day fixed for the payment of the call;
(g) he has been convicted of the offence dealing with related party transactions under section 188 at any
time during the last preceding five years; or
(h) he has not complied with section 152 (3) – allotment of DIN

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Disqualifications for Appointment of Director
- No person who is or has been a director of a company which—
(a) has not filed financial statements or annual returns for any continuous period of three
financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any
debentures on the due date or pay interest due thereon or pay any dividend declared and
such failure to pay or redeem continues for one year or more,
shall be eligible to be re-appointed as a director of that company or appointed in other
company for a period of five years from the date on which the said company fails to do so.
-A private company may by its articles provide for any disqualifications for appointment as a
director

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INDEPENDENT DIRECTORS
-The concept of Independent Directors emerged when the Cadbury Committee in 1992 was
set up following several corporate scandals
-The focus was on appointment of independent directors as a part of the new practices for
better governance.
-ID function as an oversight body in monitoring the performance and raise red flags whenever
suspicion occurs.
-are expected to be more aware and question the company on relevant issues in their position
as trustees of stakeholders.
-Are critical for ensuring good corporate governance and it is necessary that the functioning
of the institution is critically analysed and proper safeguards are made to ensure efficacy.

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 DEFINITION OF INDEPENDENT DIRECTOR (Section 149(6) )
- 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 other than remuneration as such director or having transaction
not exceeding 10% 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.
(d) none of whose relatives have or had pecuniary relationship
(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:
Exception - Provided that the relative may hold security or interest in the company of face value not
exceeding 50 lakh rupees or 2 % of the paid-up capital of the company, its holding, subsidiary or associate
company or such higher sum as may be prescribed;

06/03/24 RUCHI BHARDA JAIN 42

(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 2% 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);

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DEFINITION OF INDEPENDENT DIRECTOR (Section 149(6) ) contd…….
(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 per cent. or more of the gross turnover of such firm;
(iii) holds together with his relatives 2 % 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 organisation that
receives 25 % 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.
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NUMBER OF INDEPENDENT DIRECTORS
-Section 149(4) provides that 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
-Rule 4 of Companies (Appointment and Qualification of Directors) rules 2014, provides that
the following class or classes of companies shall have at least two directors as independent
directors –
(i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and
deposits, exceeding fifty crore rupees.

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PROCEDURE FOR APPOINTMENT OF INDEPENDENT DIRECTOR
-Individual having an Active Director Identification Number. [Section 152(3)]
-A person shall not be eligible for appointment as an Independent Director of a Company,
if he is disqualified from being appointed as a Director in the Company as per Section
164.
-The Company and Independent Directors shall abide by the provisions specified in Schedule
IV
-The total number of directorship of Independent Director shall not exceed the maximum
limit as provided under section 165(1)
-Company may select Independent Director from the databank maintained by any
association, body, institute or association, as may be notified by Central
Government. [Section 150]
-Shareholder’s approval by passing special resolution ratifying the appointment of any
independent director in a listed entity [As per SEBI (Listing Obligation and Disclosure
Requirment) Regulation 2015]
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 -Furnish the shareholders with the following information [As per SEBI (Listing Obligation and
Disclosure Requirement) Regulation 2015]
a. Director’s brief resume along with the details on his/her nature of expertise
b. Relationships between directors inter-se
c. Information on the listed entities where such person holds the directorship and the
membership of Board Committees along with listed entities from where he/she has
resigned in the past 03 years
d. Shareholding of non-executive directors including the one as beneficial owner in the listed
entity
e. In case of independent directors, the skills and capabilities required for the role and the
manner in which the proposed person meets such requirements.

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Process of appointment of Independent Directors:
1. Obtain Written Consent and Declaration from the Proposed Independent Director -
The Proposed Independent Director has to submit Form DIR-2 (Consent to act as a
Director) and Form DIR-8 (Intimation by Director about his disqualification) to the
Company. Such person shall also give a declaration that he fulfils the conditions for
appointment as an Independent Director
2. Obtain Form MBP-1 from the Proposed Independent Director - Company shall obtain a
disclosure of interest in Form MBP-1 from the person who is proposed to be appointed
as an Independent Director
3. Obtaining DIN and Digital Signature Certificate [Section 153] - If the person does not
have Digital Signature, he shall obtain Digital Signature from Certifying Authority in
India. The Application for DIN is required to be countersigned by a Director of the
Company and a copy of resolution approving the proposal of appointment is also to be
submitted by the person in Form DIR-3 with MCA with his ID Proof & Address proof, duly
digitally signed by him and a director of the company in which the appointee is intended
to be appointed as director.
06/03/24 RUCHI BHARDA JAIN 48
4. Meeting of Nomination and Remuneration Committee - Where a Company is required
to constitute a Nomination and Remuneration Committee under section 178, shall receive a
recommendation from the committee for the appointment of Independent Director by the
Board of Directors of the Company

5. Convene a Meeting of Board of Directors - Hold a meeting of Board of Directors of the

Company and pass the necessary Board Resolution
­ to consider the appointment of Independent Director,
­ to decide the term of his office which shall be not more than 5 years,
­ to take note of the disclosure of interest received from the Independent Director,
­ to issue Letter of Appointment to the person appointed as an Independent Director,
­ to authorize the Director or Company Secretary to sign and file requisite form and return with ROC

06/03/24 RUCHI BHARDA JAIN 49

6. Filing of Form DIR-12 with the ROC
-Return of Appointment of Directorship (Form DIR-12) is required to be filed with
Registrar within 30 days of appointment with copy of Board Resolution along with
Consent to Act as Director and Declaration about his disqualifications.
-In case of Companies other than OPC and Small Company, the return is also to be
certified by a Company Secretary/Chartered Accountant/Cost Accountant.
-Following documents will be required as an attachment with Form DIR-12:
Certified True Copy of the Board Resolution passed
DIR-2 Consent to Act as Director
DIR-8 Declaration by Director
Declaration of Independence under section 149(7)
Details of interest in other entities in form MBP-1
Letter of Appointment

06/03/24 RUCHI BHARDA JAIN 50

 7. Convene General Meeting
8. File Form MGT-14 with ROC - File Form MGT-14 with the ROC within 30 days of
passing Special Resolution in General Meeting along with fee along with Explanatory
Statement.

9. Making Necessary entries in Register of Directors - Company should make necessary

entries in the Register of Director and Key Managerial Personals and registers of contract
and arrangements

10. Regularize the appointment of Additional Independent Director at Annual General

Meeting

11. File Form DIR-12 with ROC - After the General Meeting, a Return of Appointment of
Directorship (Form DIR-12) is required to be filed with Registrar within 30 days of
appointment with copy of Ordinary Resolution.
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12. Undertake Directors and Officers insurance - The top 1000 listed entities are obligated to undertake Directors
and Officers insurance (D and O insurance) for all their independent directors of requisite quantum and which may
arise from decisions and actions while serving their duty. Protects company, management & employees. Not
mandatory in India.

13. File Necessary Amendment Application under following Acts

Goods and Services Act
Shops & Establishment Act
Factories Act
Foreign Exchange Management Act
Inter-State Migrant workmen Act
Private Security Agency Act
EPF
ESI
Other Labour Laws
Industry Specific Laws

06/03/24 RUCHI BHARDA JAIN 52

DECLARATION BY AN INDEPENDENT DIRECTOR- Section 149 (7)
-every independent director shall give a declaration that he meets the criteria of
independence when:
-(a) he attends the first meeting of the Board as a director;
-(b) thereafter at the first meeting of the Board in every financial year and
-(c) whenever there is any change in the circumstances which may affect his status as an
independent director.
-Additionally for listed entities SEBI along with the above an additional mention shall be made
in the declaration stating that he is not aware of any circumstance or situation, which exists
or may be reasonably anticipated, that could impair or impact his ability to discharge his
duties with an objective independent judgment and without any external influence.

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CODE FOR INDEPENDENT DIRECTORS –
-Section 149 (8) of the Act prescribes that the company and independent directors shall
abide by the provisions specified in Schedule IV regarding code for independent directors.
-It is a guide to professional conduct for independent directors.
-Adherence to these standards by independent directors and fulfilment of their
responsibilities in a professional and faithful manner will promote confidence of the
investment community, particularly minority shareholders, regulators and companies in the
institution of independent directors.

06/03/24 RUCHI BHARDA JAIN 54

Guidelines of professional conduct of an Independent Director: (Schedule IV, Companies Act 2013)
An independent director shall:
(1) uphold ethical standards of integrity and probity;
(2) act objectively and constructively while exercising his duties;
(3) exercise his responsibilities in a bona fide manner in the interest of the company;
(4) devote sufficient time and attention to his professional obligations for informed and balanced decision
making;
(5) not allow any extraneous considerations that will vitiate his exercise of objective independent judgment in
the paramount interest of the company as a whole, while concurring in or dissenting from the collective
judgment of the Board in its decision making;
(6) not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining
direct or indirect personal advantage or advantage for any associated person;
(7) refrain from any action that would lead to loss of his independence;
(8) where circumstances arise which make an independent director lose his independence, the independent
director must immediately inform the Board accordingly;
(9) assist the company in implementing the best corporate governance practices.
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Role and functions of independent directors: (Schedule IV, Companies Act 2013)
(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of
strategy, performance, risk management, resources, key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and management;
(3) scrutinize the performance of management in meeting agreed goals and objectives and monitor the
reporting of performance;
(4) satisfy themselves on the integrity of financial information and that financial controls and the systems of
risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior
management and have a prime role in appointing and where necessary recommend removal of executive
directors, key managerial personnel and senior management;
(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between
management and shareholder’s interest.

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Duties of independent directors: (Schedule IV, Companies Act 2013)
(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the
company;
(2) seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate
professional advice and opinion of outside experts at the expense of the company;
(3) strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;
(4) participate constructively and actively in the committees of the Board in which they are chairpersons or members;
(5) strive to attend the general meetings of the company;
(6) where they have concerns about the running of the company or a proposed action, ensure that these are addressed
by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of
the Board meeting;
(7) keep themselves well informed about the company and the external environment in which it operates;
(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
(9) pay sufficient attention and ensure that adequate deliberations are held before approving related party
transactions and assure themselves that the same are in the interest of the company;
(10) ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the
interests of a person who uses such mechanism are not prejudicially affected on account of such use;
(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct
or ethics policy;
(12) acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
(13) not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion
plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required
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by law. RUCHI BHARDA JAIN 57
Resignation or removal: (Schedule IV, Companies Act 2013)
-An independent director who resigns or is removed from the Board of the company shall be
replaced by a new independent director within a period of not more than one hundred and
eighty (180) days from the date of such resignation or removal, as the case may be.
Evaluation mechanism:
(1) The performance evaluation of independent directors shall be done by the entire Board
of Directors, excluding the director being evaluated.
(2) On the basis of the report of performance evaluation, it shall be determined whether to
extend or discontinue the term of appointment of the independent director.

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Separate meetings:
(1) The independent directors of the company shall hold at least one meeting in a year,
without the attendance of non-independent directors and members of management;
(2) All the independent directors of the company shall strive to be present at such meeting;
(3) The meeting shall:
(a) review the performance of non-independent directors and the Board as a whole;
(b) review the performance of the Chairperson of the company, taking into account the
views of executive directors and non-executive directors;
(c) assess the quality, quantity and timeliness of flow of information between the
company management and the Board that is necessary for the Board to effectively
and reasonably perform their duties.

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REMUNERATION OF INDEPENDENT DIRECTOR (Section 149(9) )
-an independent director shall not be entitled to any stock option and may receive
remuneration by way of fee provided under of section 197(5), reimbursement of
expenses for participation in the Board and other meetings and profit related commission
as may be approved by the members.

Section 197 (5) - A director may receive remuneration by way of fee for attending meetings of the
Board or Committee thereof or for any other purpose whatsoever as may be decided by the
Board:
Provided that the amount of such fees shall not exceed the amount as may be prescribed:
Provided further that different fees for different classes of companies and fees in
respect of independent director may be such as may be prescribed

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TENURE OF INDEPENDENT DIRECTOR
-Section 149(10) an independent director shall hold office for a term up to five (5) 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.
-Section 149(11) states that without contravening the section 149(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.
-Proviso to Section 149(11) 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.

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 LIABILITY OF INDEPENDENT DIRECTOR - Section 149(12)
-provides that, 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.

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Imp points to note in relation to Independent Directors:
-Every ID who intends to get appointed as an independent director in a company shall before such appointment,
apply online for inclusion of his name in the data bank for a period of one year or five years or for his life-
time
-Every individual whose name is so included in the data bank shall pass an online proficiency self-assessment
test conducted by the institute within a period of one year from the date of inclusion of his name in the data
bank, failing which, his name shall stand removed from the databank
an individual who has obtained a score of not less than sixty percent. in aggregate in the online proficiency self-
assessment test shall be deemed to have passed such test;
there shall be no limit on the number of attempts an individual may take for passing the online proficiency self-
assessment test.
-IICA in compliance with Rule 6(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014
will conduct the Online Proficiency Self-Assessment through the Independent Director’s Databank platform.
-The Online Proficiency Self-Assessment will be conducted upon a robust, scalable, and secure proctor based
assessment platform that would issue an e-certificate upon successful completion of the test.
-The online test could be attempted by the Independent Directors at their own convenience from their office or
residence and will not require them to visit any test centre or institute for the same.

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Exemption from Test -
-include key managerial employees or directors who have served for at least three years on the
board of entities – listed companies, unlisted companies with INR 100 million or more paid-up
capital, non-resident companies with US$2 million paid-up capital, or a commercial entity set up
under a central or state law
-Practicing advocates or an advocate of a Court for 10 years
-Practicing chartered accountants
-Practicing cost accountants
-Practicing company secretaries
-senior bureaucrats within select ministries in the central government and regulatory bodies since
they meet the three years of corporate governance criteria

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 Amendment In Provisions related to Independent Director under companies Act, 2013
amended vide recent MCA Notification dated: 19th August, 2021 by which it notified
Companies (Appointment and Qualification of Directors) Amendment Rules, 2021. These
Rules came into effect from 20th August 2021: (wef 01/01/2022) - Every individual whose
name is so included in the data bank under sub-rule (1) shall pass an online proficiency self-
assessment test conducted by the institute within a period of [Two years from] the date of
inclusion of his name in the data bank, failing which, his name shall stand removed from the
databank of the institute

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THANK YOU
Ruchi Bharda Jain

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