Section 149 Company to have Board of Directors – Companies Act 2013

Amended and updated notes on section 149 of Companies Act 2013. Detail discussion on provisions and rules related to company to have Board of Directors.

Chapter XI (Sections 149–172) of the Companies Act, 2013 (CA 2013) deals with the provisions related to appointment and qualifications of directors. Section 149 of CA 2013 provides for company to have Board of Directors.

Recently, we have discussed in detail section 148 (Central Government to specify audit of items of cost in respect of certain companies) of CA 2013. Today, we learn the provisions of section 149 of Companies Act 2013.

The provisions of section 149 are effective from 1-April-2014. You may refer Notification No. S.O. 902(E) issued dated 27-03-2014. In this article, you will learn detail of the provisions of section 149 of the Companies Act 2013 read with the Companies (Appointment and Qualification of Directors) Rules, 2014 as amended by the Companies (Amendment) Act, 2020.

Section 149 of CA 2013 corresponds to section 252 (Minimum Number of Directors), section 253 (Only Individuals to be Directors) and section 259 (Increase in Number of Directors to require Government sanction) of the Companies Act, 1956.

Name of Act	The Companies Act 2013
Enacted by	Parliament of India
Administered by	Ministry of Corporate Affairs (MCA)
Number of Chapters	29
Number of Sections	484 (470-43+57)
Number of Schedules	7
You are reading:
Chapter No.	XI
Chapter Name	Appointment and Qualifications of Directors
Section No.	149
Section Name	Company to have Board of Directors
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Table of Contents

Number of Individual Directors in a Company

As per section 149(1) of the CA 2013, every company shall have a Board of Directors (BOD) consisting of individuals as directors. That means only Individuals are eligible for becoming directors in a company.

Further, the provisions of sub-section (1) of section 149 also provides for the minimum and maximum number of directors required in case of different types of companies viz. Public, Private and OPC.

A) Minimum Directors [Section 149(1)(a)]:

A company must have at least the following minimum number of directors

In case of Public Company: 3 Directors;
In case of Private company: 2 Directors;
In case of One Person Company (OPC): 1 Director.

Thus, the concept of only one director in case on OPC has been newly introduced in the Companies Act, 2013.

B) Maximum Director [Section 149(1)(b)]:

A company may appoint a maximum of 15 directors. In accordance with the first proviso of section 149(1) of CA 2013, a company may also appoint more than fifteen directors after passing a special resolution. Thus, the approval of Central Government is not required for increasing the number of directors.

The maximum limit of directors in a company has been increased from 12 to 15 under CA 2013 in compare to old CA 1956. Under the old Companies Act, 1956, the private company was allowed to appoint any number of directors but now, under CA 2013, the maximum limit of directors has been applicable on every company.

Compulsory Appointment of Woman Directors on the Board

In compliance with the second proviso of section 149(1) of the Companies Act, 2013, the prescribed class of companies shall have at least one Woman Director. The Central Government (CG) has now prescribed such class or classes of companies in Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

Accordingly, the following class of companies shall appoint at least one Woman Director:

i) Every Listed Company;
ii) Every Other Public Company having –

a) paid–up share capital of ₹100 crore or more; or
b) turnover of ₹300 crore or more:

Note: The paid up share capital or turnover, as the case may be, as on the last date of latest audited financial statements shall be taken into account.

A) Last date to appoint Woman Director:

A company, which has been incorporated under the CA 2013 and is covered under provisions of second proviso to sub-section (1) of section 149 shall comply with such provisions within a period of six months from the date of its incorporation.

In other words, such prescribed class of companies must appoint at least 1 Woman Director within 6 months from the date of its incorporation under the Companies Act, 2013.

B) Filling Vacancy of Woman Directors:

According to second proviso to Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014, any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest. However, the filling of such vacancy of Woman Director shall not be later than:

i) Immediate next Board meeting; or
ii) 3 months from the date of such vacancy;
– whichever is later.

In other words, if there is any intermittent vacancy of a woman director then it shall be filled up with another woman director within 3 months from the date of such vacancy or not later than immediate next board meeting, whichever is later.

Requirement for Resident Director in a Company

As per Section 149(3) of the CA 2013, every company shall have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year.

Further, the Ministry of Corporate Affairs (MCA) has issued a clarification on applicability of requirement for resident director in the current calendar/ financial year vide General Circular No. 25/2014 dated 26-06-2014.

Accordingly, the newly incorporated companies between 01-04-2014 to 30-9-2014 should have a resident director either at the incorporation stage itself or within six months of their incorporation.

However, a company incorporated on and after 30th September, 2014 need to have the resident director from the date of incorporation itself.

Independent Directors in a Company

A) Criteria and Qualifications of Independent Director:

According to section 149(6) of CA 2013, an independent director in relation to a company, means a director who fulfills the following criteria:

1) Experienced Person: The Independent Director must be a person of integrity and possesses relevant expertise and experience in the opinion of the Board.

2) Not a Promoter: A person who is or was a promoter of the company or its holding, subsidiary or associate company shall not become Independent Director. Additionally, the Independent Director shall not be related to promoters or directors in the company, its holding, subsidiary or associate company.

3) Relationship: The Person 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;

4) Relative Relationship: 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 2% or more of its gross turnover or total income or ₹50 lakh or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year.

5) Key Managerial Personal or Employee: 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 nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or

6) Other Qualifications: who possesses such other qualifications as may be prescribed.

Such other qualification has now been prescribed in Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014. Accordingly, an independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.

However, you should note that a Managing Director (MD) or a Whole-time Director (WD) or a Nominee Director (ND) shall not be an Independent Director of a Company.

Nominee Director means:

a) a director nominated by any financial institution in pursuance of:
- – the provisions of any law for the time being in force, or
- – any agreement; or
b) a director appointed by any Government, or any other person to represent its interests.

B) Declaration by Independent Director:

In compliance with the provisions of section 149(7) of CA 2013, every independent director shall give a declaration that he meets the criteria of independence:

i) at the first meeting of the Board in which he participates as a director; and
ii) thereafter at the first meeting of the Board in every financial year; or
iii) whenever there is any change in the circumstances which may affect his status as an independent director.

The criteria of independence of director has been provided in sub-section (6) of section 149 and the same has been discussed in point A above.

C) Minimum Number of Independent Director:

According to the provisions of section 149(4) of CA 2013, every listed public company shall have at least one-third of the total number of directors as independent directors. As per the explanation given under section 149(4) of CA 2013, any fraction contained in such one-third number shall be rounded off as one.

However, the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies. In Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the CG has prescribed that the following class or classes of Public Companies shall have at least two directors as independent directors:

i) Paid up Share Capital: The Public Companies having paid up share capital of ₹10 crores or more; or
ii) Turnover: The Public Companies having turnover of ₹100 crores or more; or
iii) Loans: The Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹50 crores.

Note: The paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account.

Where a company ceases to fulfil any of three conditions laid down above for 3 consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions.

D) Higher Number of Independent Director:

A company belonging to any class of companies for which a higher number of independent directors has been specified in the law for the time being in force shall comply with the requirements specified in such law.

In case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it.

Therefore, please refer the provisions of section 177(2) of the Companies Act, 2013 for more details. According to that section the Audit Committee shall consist of a minimum of three directors with independent directors forming a majority.

E) Filling Vacancy of Independent Directors:

Second proviso of Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 states that any intermittent vacancy of an independent director shall be filled up by the Board at the earliest but not later than immediate next Board meeting or 3 months from the date of such vacancy, whichever is later.

Thus, the vacancy of independent director shall be filled up within the same time and manner as we have already discussed in the case of vacancy of Woman Directors provided in Rule 3.

F) Retirement by Rotation of Independent Directors:

As per section 149(13) of CA 2013, the provisions of sub-sections (6) and (7) of section 152 in respect of retirement of directors by rotation shall not be applicable to appointment of independent directors.

G) Code for independent directors:

In accordance with the provisions of section 149(8) of Companies Act, 2013, the company and independent directors shall abide by the provisions specified in Schedule IV of the CA 2013.

H) Remuneration of Independent Director:

As per section 149(9) of CA 2013, an independent director shall not be entitled to any stock option and may receive remuneration by way of:

i) Fee provided under section 197(5);
ii) Reimbursement of expenses for participation in the Board and other meetings; and
iii) profit related Commission as may be approved by the members.

Note that the above remuneration shall be notwithstanding anything contained in any other provision of the Companies Act, 2013 but subject to the provisions of sections 197 (Remuneration in case of inadequacy of profits) and 198 (Calculation of profits).

Note that w.e.f. 18-March-2021, if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under section 197(5), in accordance with the provisions of Schedule V.

I) Tenure of Independent Director:

According to section 149(10) of the Companies Act, 2013, an independent director shall hold office for a term up to 5 consecutive years on the Board of a company. Thereafter, he/she shall be eligible for reappointment as an independent director only after passing a Special Resolution (SR in GM) by the company and such appointment shall be disclosed in the Board’s report.

Accordingly, the appointment of independent director for a term of less than 5 years is permissible. But, you should note that any appointment for any term whether for five years or less is to be treated as a one term under section 149(10) of the CA 2013.

Further, section 149(11) of the CA 2013 provides that Independent director shall not hold office for more than 2 consecutive terms. And we know that the two consecutive terms may be less than 10 years. In other words, the independent director shall have to leave office after 2 consecutive terms even if the total number of years of his appointment in such two consecutive terms is less than 10 years.

However, such independent director shall again be eligible for appointment after the expiration of 3 years of ceasing to become an independent director. Note that an independent director shall not, during the requisite cooling-off period of 3 years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

J) Liability of Independent Director:

Notwithstanding anything contained in the Companies Act, 2013:

(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.

Did you know? The concept of Women Director, Resident Director and Independent Director has been newly introduced under the CA 2013. There was no provision for this under the old Companies Act, 1956.

Section 149 of Companies Act 2013: Company to have Board of Directors

Section 149 shall come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014.

(1) Every company shall have a Board of Directors consisting of individuals as directors and shall have—

(a) a minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company; and
(b) a maximum of fifteen directors:

Provided that a company may appoint more than fifteen directors after passing a special resolution:

Provided further that such class or classes of companies as may be prescribed, shall have at least one woman director.

(2) Every company existing on or before the date of commencement of this Act shall within one year from such commencement comply with the requirements of the provisions of sub-section (1).

(3) Every company shall have at least one director who stays in India for a total period of not less than one hundred and eighty-two days during the financial year:

Provided that in case of a newly incorporated company the requirement under this sub-section shall apply proportionately at the end of the financial year in which it is incorporated.

(4) Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

Explanation: For the purposes of this sub-section, any fraction contained in such one-third number shall be rounded off as one.

(5) Every company existing on or before the date of commencement of this Act shall, within one year from such commencement or from the date of notification of the rules in this regard as may be applicable, comply with the requirements of the provisions of sub-section (4).

(6) An independent director in relation to a company, means a director other than 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 ten per cent. of his total income or such amount as may be prescribed, with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;
(d) none of whose relatives—
- (i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year:
  
  Provided that the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;
- (ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;
- (iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or
- (iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii);
(e) who, neither himself nor any of his relatives—
- (i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;
  
  Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years.
- (ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—
  - (A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
  - (B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;
- (iii) holds together with his relatives two per cent. or more of the total voting power of the company; or
- (iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.

(7) Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6).

Explanation: For the purposes of this section, “nominee director” means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests.

(8) The company and independent directors shall abide by the provisions specified in Schedule IV.

(9) Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of sections 197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

Provided that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 197, in accordance with the provisions of Schedule V.

[Proviso of sub-section (9) of section 149 was newly inserted w.e.f. 18-03-2021 by the Companies (Amendment) Act, 2020 vide Notification No. S.O. 1255(E) dated 18.03.2021.]

(10) Subject to the provisions of section 152, an independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.

(11) Notwithstanding anything contained in sub-section (10), no independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director:

Provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Explanation: For the purposes of sub-sections (10) and (11), any tenure of an independent director on the date of commencement of this Act shall not be counted as a term under those sub-sections.

(12) Notwithstanding anything contained in this Act, —

(i) an independent director;
(ii) a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

(13) The provisions of sub-sections (6) and (7) of section 152 in respect of retirement of directors by rotation shall not be applicable to appointment of independent directors.

Exception/ Modification/ Adaptation:

1) In case of Government company, section 149(1)(b) and first proviso to subsection (1) of section 149 shall not apply. – Notification No. G.S.R. 463(E) dated 5th June, 2015.

2) In case of Government company, in section 149, in sub-section (6), in clause (a), for the word “Board”, the words “Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government” shall be substituted. – Notification No. G.S.R. 463(E) dated 5th June, 2015.

3) In case of Government company, clause (c) of sub-section (6) of section 149 shall not apply. – Notification No. G.S.R. 463(E) dated 5th June, 2015.

4) In case of Section 8 (Non-profit) Companies, Sub-sections (4), (5), (6), (7), (8), (9), (10), (11), clause (i) of sub-section (12) and sub-section (13) of section 149 shall not apply. – Notification No. G.S.R. 466(E) dated 5th June, 2015.

5) In case of a Specified IFSC public company, second proviso to subsection (1) of section 149 shall not apply. –Notification No. G.S.R. 08(E) dated 4th January, 2017.

6) In sub-section (3) of setion 149, the following proviso shall be inserted, namely: –
“Provided that this sub-section shall apply to a Specified IFSC public company in respect of financial years other than the first financial year from the date of its incorporation.”. –Notification No. G.S.R. 08(E) dated 4th January, 2017.

7) In case of a Specified IFSC public company, sub- sections (4) to (11), clause (i) of subsection
(12) and sub-section (13) of section 149 shall not apply. –Notification No. G.S.R. 08(E) dated 4th January, 2017.

8) In sub-section (3) of section 149, the following proviso shall be inserted, namely: –
“Provided that this sub-section shall apply to the Specified IFSC private company in respect of financial years other than the first financial year from the date of its incorporation.”. –Notification No. G.S.R. 09(E) dated 4th January, 2017