General Circular No. 14/2014, No.
1/22/2013-CL-V, dated: 9th June,
2014
Clarifications
on Rules prescribed under the Companies Act,
2013 -Matters relating to appointment
and qualifications of
directors and Independent Directors – reg.
Government has
received representations from Industry Chambers, Professional Institutes and
other stakeholders seeking clarifications inter alia about appointment of
Independent Directors (IDs) under the relevant provisions
of the Companies Act, 2013 (Act) read with relevant rules with effect from 1st
April, 2014. The representations have been examined and clarifications on
the following points are hereby given:-
(i) Section 149(6)(c): “pecuniary
interest in certain transactions”:-
(a) This provision inter alia requires
that an ‘ID’ should have no ‘pecuniary relationship’ with the company
concerned or its holding/ subsidiary/ associate company and certain other
categories specified therein during the current and last two preceding
financial years. Clarifications have been sought whether a transaction entered
into by an ‘ID’ with the company concerned at par with any member of the general public and at the same price as is payable/paid
by such member of public would attract the bar of ‘pecuniary relationship’
under section 149(6)(c). The matter has been examined and it is hereby
clarified that in view of the provisions of Section 188 which take away
transactions in the ordinary course of business at
arm’s length price from the purview of related party transactions, an ‘ID’ will
not be said to have ‘pecuniary relationship’ under section 149(6)(c) in such
cases.
(b) Stakeholders have also sought
clarification whether receipt of remuneration, (in accordance with the
provisions of the Act) by an ‘ID’ from a company would be considered as having
pecuniary interest while considering his appointment in the holding
company, subsidiary company or associate company of such company.
The matter has
been examined in consultation with SEBI and it is clarified that ‘pecuniary
relationship’ provided in section 149(6)(c) of the Act does not include receipt
of remuneration, from one or more companies, 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 approved by the members, in accordance with the provisions of the
Act.
(ii) Section 149: Appointment of
‘IDs’:
Clarification
has been sought if ‘IDs’ appointed prior to April 1, 2014 may continue
and complete their remaining tenure, under the provisions of the Companies Act,
1956 or they should demit office and be re-appointed (should the company so
decide) in accordance with the provisions of the new Act.
The matter has
been examined in the light of the relevant provisions of the Act, particularly
section 149(5) and 149(10) 86 (11). Explanation to section 149(11) clearly
provides that any tenure of an ‘ID’ on the date of
commencement of the Act shall not be counted for his appointment/holding office
of director under the Act. In view of the transitional period of one year
provided under section 149(5), it is hereby clarified that it would be
necessary that if it is intended to appoint existing ‘IDs’ under the new Act,
such appointment shall be made expressly under section 149(10)/ (11) read with
Schedule IV of the Act within one year from 1st April, 2014, subject
to compliance with eligibility and other prescribed conditions.
(iii) Section
149(10)/(11) – Appointment of ‘IDs’ for less than 5 years:-
Clarification
has been sought as to whether it would be possible to appoint an individual as
an ID for a period less than five years.
It is clarified
that section 149(10) of the Act provides for a term of “upto five consecutive
years” for an ‘ID’. As such while appointment of an ‘ID’ for a term of less
than five years would be permissible, appointment for any term (whether for
five years or less) is to be treated as a one term under section 149(10) of the
Act. Further, under section 149(11) of the Act, no person can hold office of
‘ID’ for more than two consecutive terms’. Such a person shall have to demit
office after two consecutive terms even if the total number of years of his
appointment in such two consecutive terms is less than 10 years. In such a case
the person completing ‘consecutive terms of less than ten years’ shall be
eligible for appointment only after the expiry of the requisite cooling-off
period of three years.
(iv) Appointment of
‘IDs’ through letter of appointment:-
With reference
to Para IV(4) of Schedule IV of the Act (Code for IDs) which requires
appointment of ‘IDs’ to be formalized through a letter of appointment,
clarification has been sought if such requirement would also be applicable for
appointment of existing ‘ID s’?
The matter has
been examined. In view of the specific provisions of Schedule IV, appointment
of ‘IDs’ under the new Act would need to be formalized through a letter of
appointment.
This issues with
the approval of the competent authority.
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