Companies Act Section 149

Companies Act Section 149- Company to Have Board of Directors

Section 149 of the Companies Act, 2013 establishes the fundamental requirement that every company must have a duly constituted Board of Directors. The Board is a group of individuals responsible for managing the affairs of the company, ensuring regulatory compliance, and safeguarding the interests of shareholders and stakeholders. This section prescribes the minimum and maximum number of directors, mandatory requirements such as resident directors, independent directors, and women directors, and lays down the eligibility, qualifications, and disqualifications for independent directors.

1. Requirement to Constitute a Board of Directors

As per Section 149(1), every company is required to appoint a Board of Directors composed of individuals only. The law lays down specific requirements based on the type of company:

Public Companies: Minimum of 3 directors.

Private Companies: Minimum of 2 directors.

One Person Companies (OPC): Minimum of 1 director.

The maximum number of directors a company can appoint is fifteen (15). However, companies are allowed to appoint more than 15 directors if they pass a special resolution at a general meeting of shareholders.

2. Mandatory Appointment of Women Director

The law mandates that certain prescribed classes of companies (such as large public companies meeting specific criteria) must have at least one woman director on their Board.

3. Timeline for Compliance by Existing Companies

Companies already in existence at the commencement of the Act were given a period of one year from the date of commencement to comply with the provisions related to Board constitution under this section.

4. Requirement to Appoint a Resident Director

Every company must ensure that at least one director stays in India for a cumulative period of not less than 182 days during a financial year.
For companies incorporated during the year, this requirement is applied proportionately for the year of incorporation.

5. Appointment of Independent Directors in Listed Companies

Every listed public company must appoint at least one-third of the total number of its directors as independent directors.
Additionally, the Central Government has the power to prescribe minimum numbers of independent directors for certain other classes of public companies.

Explanation on One-Third Rule

In case the calculation for one-third results in a fraction, the fraction should be rounded up to the nearest whole number.

6. Compliance Timeline for Existing Companies

Companies that existed before the commencement of the Act were given one year to comply with the requirement to appoint independent directors. If any rules were notified later for certain classes of companies, such companies would need to comply within one year from the date of notification of such rules.

7. Definition and Criteria for Independent Directors

The term independent director is defined under Section 149(6). An independent director is someone who is:

Not a managing director, whole-time director, or nominee director.

Possesses integrity, relevant expertise, and experience in the opinion of the Board.

In addition, the independent director:

(a) Relationship with Promoters/Directors

Must not be or have been a promoter of the company, or its holding, subsidiary, or associate company.

Must not be related to any promoters or directors of the company or its group companies.

(b) Pecuniary Relationships and Financial Dealings

Should not have had any pecuniary relationship with the company, its holding, subsidiary, or associate companies, or their promoters/directors, in the two preceding financial years or the current year, apart from receiving director’s remuneration and minor transactions below 10% of total income.

(c) Relatives’ Financial Interests

Relatives of the independent director should not:

Hold securities exceeding a face value of ?50 lakh or 2% of paid-up capital, whichever is lower.

Be indebted to the company or its group beyond prescribed limits.

Provide guarantees for loans taken by the company or its group beyond prescribed limits.

Engage in pecuniary transactions amounting to 2% or more of the gross turnover.

(d) Employment or Professional Relationship

Neither the independent director nor their relatives should have been:

Key managerial personnel or employees of the company or group in the last 3 years.

Partners or proprietors of firms providing auditing, company secretarial, cost audit, legal, or consulting services to the company or group in the last 3 years, if such services exceed 10% of firm’s turnover.

Significant shareholders holding 2% or more of voting power.

Officers of non-profit organisations receiving 25% or more of funding from the company or group.

(e) Other Prescribed Qualifications

The Central Government may prescribe additional qualifications for independent directors from time to time.

8. Declaration of Independence by Directors

Every independent director is required to provide a declaration at the:

First Board meeting in which they participate.

First Board meeting of every financial year.

Any time there is a change in circumstances affecting independence.

This declaration confirms that the director meets all independence criteria under Section 149(6).

9. Definition of Nominee Director

A nominee director refers to a director nominated by:

A financial institution under any law or agreement.

The Government or any other person to protect their interests.

10. Compliance with Schedule IV (Code of Conduct)

Both companies and independent directors must comply with the duties and guidelines laid down in Schedule IV of the Act, which covers:

Role and responsibilities.

Manner of appointment.

Professional conduct.

Evaluation mechanism.

Code of conduct.

11. Restrictions on Remuneration of Independent Directors

Independent directors are not entitled to stock options but can receive:

Sitting fees under Section 197(5).

Reimbursement of expenses for Board meetings.

Profit-linked commission as approved by shareholders.

If the company has no profits or inadequate profits, independent directors can receive remuneration in line with Schedule V, excluding sitting fees.

12. Term and Reappointment

Independent directors can hold office for up to five consecutive years. They are eligible for reappointment for another term of five years if approved by special resolution, with disclosure in the Board’s report.

Cooling-Off Period

After two consecutive terms, the independent director must step down for at least three years before being eligible for reappointment.

During this three-year cooling-off period, the person cannot hold any other position (such as consultant, advisor, or employee) in the company or its group.

Explanation on Pre-Act Tenure

Any term served before the commencement of the Companies Act, 2013 does not count toward these limits.

13. Limited Liability of Independent Directors and Non-Executive Directors

Independent directors and non-executive directors (not being promoters or KMP) are held liable only for acts:

That occurred with their knowledge, through Board processes.

In cases where they consented to or connived with the act.

Where they failed to act diligently.

14. Exemption from Rotation

The provisions on retirement by rotation under Section 152(6) and (7) do not apply to independent directors.