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Sanya Chandela

Graduate, Guru Gobind Singh Indraprastha University CS, Institute of Company Secretaries of India

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ADDITIONAL DIRECTOR AND RELATED COMPLIANCES

ADDITIONAL DIRECTOR AND RELATED COMPLIANCES

Introduction

The general provision is that a director can be appointed in the Board of Directors of a company only by shareholders in a general meeting meaning thereby it is the prerogative of shareholders to decide who shall be serving on the Board of Directors. However, the Companies Act 2013 (hereinafter ‘the Act’) has authorized Board of Directors to appoint certain types of directors via board resolution without requiring shareholders’ approval. Additional directors are usually appointed by the Board of Directors in order to ensure that the requisite quorum is present in a board meeting when an urgent matter needs to be discussed.

Relevant Provision

Section 161(1) deals with the provision relating to appointment of additional director. The concerned provision states:

“The articles of a company may confer on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier”.

Applicability of maximum permissible limit and concept of rotation

As per section 149(1)(b), a company can have a maximum of 15 directors on the Board of Directors. Where a company decides to exceed the prescribed limit then the same can be done after passing a special resolution. An additional director is included within the maximum permissible limit of directors that can be appointed on the Board. Therefore, if a company has 15 directors on Board already and is proposing to introduce an additional director, then a special resolution shall be the pre-requisite. Further, as per section 152(6) a public company is required to have at least two-third of the total number of directors who shall be persons whose period of office is liable to determination by retirement of directors by rotation and these directors shall be appointed in general meeting. As far as the remaining one-third are concerned, the same shall be appointed in general meeting only. Now, the main question which requires our contemplation here is that whether additional directors will be included in the limit of rotational directors. The concept of rotation is applicable on directors who are appointed in general meeting, however, as mentioned above, an additional director is appointed by the Board vide board resolution. Therefore, additional directors will fall neither within the limit prescribed for rotational directors nor within the non-rotational directors. This can be better comprehended with an example: suppose a company has 14 directors including 2 additional directors. Now, for calculating the number of rotational and non-rotational directors out of total number of directors, these 2 additional directors shall be deducted from the limit of 14. Out of 12 directors, 8 shall be rotational (2/3*12) and 4 shall be non-rotational. The composition of the Board shall be 8 rotational directors, 4 non-rotational directors and 2 additional directors.

Pre-compliances for appointment of Additional Director

  • The Articles of Association (‘AOA’) of a company shall contain authorization to the Board of Directors as to appointment of additional Director.
  • The proposed appointee is required to have a valid Director Identification Number.
  • The proposed appointee shall not be the one whose appointment as a director was earlier rejected by the shareholders in a general meeting.
  • The proposed appointee should not be disqualified for appointment under section 164 of the Act.
  • The proposed appointee should be in compliance with respect to maximum limit of directorship as prescribed under section 165. His/her appointment as a director in other companies including the proposed appointment shall not exceed 20 companies simultaneously.

For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included and directorship in dormant company shall not be included.

  • The Board of Directors is required to obtain necessary declarations, which are required to be considered at the time of board meeting, from the proposed appointee including:
  • a consent in writing to act as a director in the concerned company in form DIR-2.
  • A declaration in form DIR-8 disclosing that he/she is not disqualified to act as a director.

Process for appointment of Additional Director and other compliances

Hold a Nomination and Remuneration Committee (NRC) Meeting: NRC will identify and recommend a person who is qualified to be appointed as additional director to the Board of Directors along with the details relating to remuneration.

Hold a Board Meeting: Board of Directors will deliberate on the appointment of the proposed appointee. Once Board of Directors is satisfied as to the qualification & skills of the proposed appointee, a board resolution is passed for the appointment by simple majority.

Post compliances with respect to appointment of Additional Director

File form DIR-12 to Registrar of Companies (‘ROC’): In terms of section 170, after appointing an additional director to the Board of Directors, a company is required to file a form DIR-12 intimating the fact of such appointment to ROC within a period of 30 days from the date of appointment.

Disclosure under Insider Trading Regulations: In case of a listed company, a disclosure is required to be obtained in terms of Regulation 7(1)(b) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 2015 from such director with respect to his holding of securities in the concerned company as on the date of appointment. Such disclosure is required to be obtained within a period of 7 days of his appointment.

Entry in Register of Directors and Key Managerial Personnel: In terms of section 170(1), the necessary entries for the appointment of an additional director are required to be made in the register of directors and key managerial personnel. This shall include the details of securities held by such director in the company or its holding, subsidiary, subsidiary of company’s holding company or associate companies.

Obtain other disclosures: A company shall obtain other disclosures required as per its policy including disclosure under MBP-1 with respect to his/her concern or interest in any company or companies or bodies corporate (including shareholding interest), firms or other association of individual in terms of section 184(1).

Tenure

An additional director holds office up to the date of the next Annual General Meeting (‘AGM’) and if no AGM is convened then in that case such tenure shall end on the last date on which the concerned meeting should have been convened. Further, on cessation of appointment of additional director, a return in form DIR 12 is required to be filed to ROC within 30 days. The appointment of such additional director can be regularized in the same AGM (on the commencement of which his/her tenure as additional director comes to an end) on the recommendation of the Board of Directors.

Current Scenario

Securities and Exchange Board of India (SEBI) has, in its consultation paper titled ‘Review of regulatory provisions related to Independent Directors’, addressed certain issues with respect to the extant provisions applicable on Independent Directors and suggested some viable proposals[1]. Among these one such issue was appointment of additional director in the independent capacity by the Board of Directors. SEBI while dealing with the concerned issue targeted the extant corporate practice of appointing a person as an additional independent director by the Board of Directors and thereafter getting the said appointment regularized in the forthcoming AGM. Shareholders are donned with the prerogative of appointing an Independent Director in the general meeting and this practice of appointing an additional director in the capacity of independent director by the Board of Directors is particularly questionable since the shareholders get to decide about regularizing the appointment of such additional director in independent capacity as Independent Director under section 149(6) only at the next AGM which could be held after 9-10 months after the date of appointment by the Board of Directors. This situation creates a huge gap between the two approvals and is impairing the interest of minority shareholders especially in the case where shareholders decide to refuse the appointment of such person as Independent Director in the AGM[2]. In order to curb this menace, SEBI has proposed direct appointment of Independent Directors by shareholders in a general meeting and thereby disallowing the Board of Directors to appoint any person as additional director in independent capacity.


[1] Consultation Paper on Review of Regulatory Provisions related to Independent Directors, SEBI, March 01, 2021, SEBI | Consultation Paper on Review of Regulatory Provisions related to Independent Directors

[2] Sanya Chandela, Strengthening the Statutory Regime for Independent Directors, TaxGuru, (June 26, 2021, 02:04 AM), https://taxguru.in/company-law/strenghthening-statutory-regime-independent-directors.html

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