Module 3

Module 3: Directors & Key Managerial Personnel

Contents
1. BOARD OF DIRECTORS & ITS COMPOSITION .................................................... 2
2. DIN (DIRECTOR IDENTIFICATION NUMBER) ...................................................... 5

Page 1 of 27
 Module 3

1. BOARD OF DIRECTORS & ITS COMPOSITION

1.1. Introduction

Hypothetical Situation

Five people incorporate a private company and subscribe to the Memorandum and
Articles of Association. Additionally, there are 50 shareholders, which include both
individual shareholders and institutions.

The Role of the Board of Directors

• A company is an artificial person and requires a group of individuals to represent

the shareholders and act on the company’s behalf.

• The Board of Directors constitutes the core decision-making body of the

company, responsible for key functions and decisions.

• The Board is accountable to regulators and stakeholders of the company.

• One of its key responsibilities is ensuring proper and timely reporting and
disclosures, making the Board pivotal in the company’s structure.

Definition of 'Board of Directors' and 'Director'

• Section 2(10) of the Companies Act, 2013 defines ‘Board of Directors’ as the
collective body of directors of the company.

• Section 2(34) defines a ‘Director’ as someone appointed to the board of a

company.

Legal Framework for Appointment and Qualification of Directors

• Chapter XI of the Companies Act deals with the appointment and qualification
of directors.

• Additional regulations govern the Board of Directors under both Company Law
and the SEBI framework. Some examples include:

o Companies (Appointment and Qualification of Directors) Rules, 2014

o Companies (Meeting of Board and its Powers) Rules, 2014

o SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Should Every Company Have a Board of Directors?

• Section 149 of the Companies Act, 2013 states that every company must have a
Board of Directors consisting only of individuals (not body corporates,
associations, or firms).

Page 2 of 27
 Module 3

• A new company cannot establish a Board of Directors after a few months or once
it gains traction and financial stability. The composition of the initial Board of
Directors must be defined at the time of incorporation.

First Directors of the Company

• As a common practice, the first subscribers of the Memorandum of Association

become the first directors of the company.

• Section 173(1) of the Companies Act mandates that every company must hold
its first meeting of the Board of Directors within 30 days of its incorporation.

1.2. Composition of Board of Directors

• Minimum Number of Directors:

o Public Companies: At least three directors (Section 149(1)).

o Private Companies: At least two directors.

o One Person Company: At least one director.

• Maximum Number of Directors:

o A company can appoint up to 15 directors without any specific

compliance.

o For appointing more than 15 directors, the company must pass a special
resolution in the general meeting.

o Section 8 companies (charitable companies) can appoint more than 15

directors without any special resolution.

Requirements for Directors

• Residency Requirement:

o At least one director must have stayed in India for not less than 182 days
in the previous financial year (Section 149(3)).

• Women Director Requirement:

o Certain classes of companies must have at least one woman director:

▪ All listed companies.

▪ Public companies with paid-up capital of ₹100 crores or more.

▪ Public companies with a turnover of ₹300 crores or more.

Page 3 of 27
 Module 3

Directorship Limits (Section 165)

• Maximum Number of Directorships:

o A person can hold directorships in up to 20 companies.

o However, a person cannot be a director of more than 10 public

companies.

o Private companies that are holding or subsidiary of a public company are

also included in this limit.

• Exceptions:

o Section 8 companies are not considered for the purpose of maximum

directorship.

o The members of a company can restrict these limits by passing a special

resolution.

• Penalty: Exceeding the statutory directorship limits is a punishable offence.

Summary

• The Board of Directors constitutes the nucleus of the company.

• The Board is responsible for the day-to-day functioning of the company and is
accountable to regulators and stakeholders.

• Every company must have a Board of Directors consisting only of individuals.

• The first Board of Directors meeting must be held within 30 days from the date
of incorporation.

• Public companies must have at least three directors, private companies at

least two, and One Person Companies at least one.

• A company can appoint up to 15 directors without special compliance.

Next Topics to Explore

• Appointment of Directors

• Director Identification Number (DIN)

• Types of Directors in a Company

• Rights, Duties, and Liabilities of Directors

Page 4 of 27
 Module 3

2. DIN (DIRECTOR IDENTIFICATION NUMBER)

2.1. DIN (Director Identification Number)

Introduction to Director Identification Number (DIN)

• Definition of DIN:

o DIN is a unique identification number assigned to an existing or

potential director of a company. It is similar to personal identifiers such
as Aadhar or PAN numbers and remains unique to the individual director.

• Purpose of DIN:

o DIN helps maintain a database of all directors of companies, ensuring

traceability of directors and their participation in various companies.

o It assists in preventing fraudulent or fly-by-night companies by tracking

the involvement of directors in multiple companies.

Mandatory Requirement

• Mandatory for Directors:

o It is mandatory for any person acting as a director to obtain a DIN under

the Companies Act, 2013.

o No person can be appointed or continue to act as a director without

holding a valid DIN.

Features of DIN

• Unique and Permanent:

o DIN is unique and consists of 8 digits.

o Once allotted, it remains valid for the lifetime of the director, unless it is
cancelled, surrendered, or deactivated.

• Single DIN for Each Director:

o A director can hold only one DIN. If a person holds multiple DINs, it
could lead to imprisonment for up to 6 months.

Application and Disclosure

• Application Process:

o A director must apply for a DIN to the Ministry of Corporate Affairs

(MCA), Government of India, along with the prescribed fee.

Page 5 of 27
 Module 3

• Disclosure Requirements:

o DIN is disclosed in various forms and returns filed by the company.

o It must also be disclosed at every place where information about the

directors is mandatory.

Summary

• DIN is a unique, 8-digit identification number for directors.

• It is mandatory for directors to hold a valid DIN while acting as directors of

companies.

• One DIN per person is allowed, and violations may result in imprisonment.

• DIN remains valid for life unless deactivated or cancelled.

• Application for DIN is made to the Ministry of Corporate Affairs along with the
prescribed fee.

3. KINDS OF DIRECTORS

3.1. Definition of Director

Introduction to Definitions Related to the Board of Directors

• Importance of Definitions:

o Understanding key definitions in the Companies Act is crucial for

interpreting the roles and responsibilities of the Board of Directors. These
terms will be referenced in future videos relating to the Board of Directors.

Definitions of Key Terms

1. Director

• Definition:

o As per Section 2(34) of the Companies Act, a Director is a person

appointed to the Board of a Company.

o The terms "Board of Company" and "Board" are used interchangeably.

2. Board of Directors

• Definition:

Page 6 of 27
 Module 3

o According to Section 2(10) of the Act, the Board of Directors refers to the
collective body of directors of a company.

3. Independent Director

• Definition:

o As defined in Section 2(47), an Independent Director is a director who is

not a Managing Director, Whole-time Director, or Nominee Director,
and, in the opinion of the Board, possesses integrity, relevant
experience, and expertise.

o Independent Directors should not hold any position or interest in the

company, directly or indirectly. They should neither be promoters nor key
managerial persons (KMPs), nor related to promoters, KMPs, or
employees within the organization.

o Independent Directors must also meet the qualifications prescribed by

the Central Government.

4. Managing Director

• Definition:

o Under Section 2(54), a Managing Director is a director who has been

entrusted with substantial powers regarding the affairs of the company,
which may be:

▪ By the Articles of Association, agreement with the company, or

resolution passed in a general meeting.

▪ By the Board of Directors.

o A Managing Director occupies a pivotal role, regardless of the title used,

and has substantial authority over company operations.

• Exclusions:

o Routine administrative powers (e.g., affixing the company seal, endorsing

cheques, signing certificates of share, etc.) are not included in the
substantial powers of management.

5. Whole-time Director

• Definition:

o As per Section 2(94), a Whole-time Director is one who is employed as a

full-time director in the company.

Page 7 of 27
 Module 3

Conclusion

• This video covered essential definitions in the context of the Companies Act,
including the terms Director, Board of Directors, Independent Director,
Managing Director, and Whole-time Director. These terms are vital for
understanding the structure and roles within a company’s governance.

3.2. Kinds of Director

In previous videos, we covered the concept of the Board of Directors and key
definitions. Now, we explore the different types of directors within a company.

Executive vs Non-Executive Directors

• Executive Directors:

o Executive Directors can be either Whole-time Directors or Managing

Directors, responsible for overseeing administration, programs, strategic
planning, fundraising, marketing, and community outreach. They report
directly to the Board of Directors.

• Non-Executive Directors:

o Non-executive Directors are those who are neither Whole-time Directors

nor Managing Directors.

Specific Categories of Directors Under the Companies Act, 2013

1. First Directors

• Definition:

o According to Section 152 of the Companies Act, 2013, First Directors are
the individuals who are subscribers to the memorandum of the company,
and they serve as the first directors until the Board appoints new directors
at the next Annual General Meeting (AGM).

2. Resident Director

• Definition:

o As per Section 149(3), a Resident Director is a person who has stayed in

India for at least 182 days or more in the previous calendar year. This
requirement is proportionate for newly incorporated companies.

Page 8 of 27
 Module 3

3. Independent Director

• Definition:

o Section 149(6) defines an Independent Director as a director who is not

a Managing Director, Whole-time Director, or Nominee Director. More
details on Independent Directors will be covered in a separate video.

4. Small Shareholders Director

• Definition:

o A Small Shareholders Director represents the interests of minority

shareholders. A small shareholder holds shares of nominal value of not
more than ₹20,000, as defined under Section 151(3).

o Appointment Rules: Listed companies can appoint such a director on

notice from 1,000 or more small shareholders or one-tenth of the total
number of small shareholders, whichever is lower.

o Limitations: A Small Shareholders Director can hold the position in no

more than two companies, and the second company should not be in a
competing business.

5. Women Director

• Definition:

o Section 149(1)(a) mandates that companies with a paid-up capital of

₹100 crores or more or a turnover of ₹300 crores or more must appoint at
least one Women Director.

o Compliance Issue: Despite this mandate, companies have been slow to

comply, with some top companies not meeting the diversity initiative set
by SEBI (Securities & Exchange Board of India).

6. Additional Director

• Definition:

o An Additional Director is appointed by the Board of Directors as a

supplementary member, and the appointment is effective until the next
AGM or when it takes place, whichever is earlier.

o Section 161(1) outlines this appointment process.

Page 9 of 27
 Module 3

7. Alternate Director

• Definition:

o An Alternate Director is appointed to take the place of an original

director who is absent from India. This director can hold office for a
maximum of three months.

o Section 161(2) governs the appointment, which requires either an article

of association provision or a special resolution.

8. Nominee Director

• Definition:

o Section 161(3) allows for the appointment of a Nominee Director, who is

nominated by institutions or shareholders, such as public financial
institutions, banks, or governments.

o They are appointed to represent specific interests or stakeholders,

particularly in cases of oppression or mismanagement.

9. Shadow Director

• Definition:

o A Shadow Director is not formally appointed by the Board but acts as a

de-facto director. Section 2(59) defines a Shadow Director as a person
whose instructions the Board is accustomed to follow, even though they
do not have formal appointment.

o Shadow Directors are liable for director responsibilities, despite not being
officially appointed.

Broad Classification of Directors

• Executive Directors:

o They work full-time and are deeply involved in managing company affairs.
Their main income source is the directorship in the company.

o Examples: Whole-time Directors, Managing Directors.

• Non-Executive Directors:

o Non-executive Directors are those who are neither Whole-time Directors

nor Managing Directors, and they typically provide independent oversight
without being directly involved in company operations.

Page 10 of 27
 Module 3

4. INDEPENDENT DIRECTORS

Introduction to Independent Directors

• Major corporate scams like Enron and Worldcom triggered the concept of
corporate governance, emphasizing mechanisms of monitoring and
accountability to assure good management, benefiting shareholders and
stakeholders.

• In 1999, SEBI set up a committee under the chairmanship of Kumarmangalam

Birla, leading to the addition of 'Clause 49 of Corporate Governance,' introducing
the concept of Independent Directors. The Companies Act, 2013, gave the
concept a concrete shape and defined its parameters.

Definition of Independent Directors

• Who is an Independent Director?

o According to Section 149(6), an Independent Director is a director other

than:

▪ The Managing Director

▪ The Whole-time Director

▪ The Nominee Director

o An Independent Director falls under the category of non-executive

directors.

Requirements for Appointment of Independent Directors

• Should every company appoint Independent Directors?

o No. Section 149(4) specifies that certain companies must have a

specified number of Independent Directors, as per the following criteria:

▪ Every listed public company must have at least one-third of the

total number of directors as Independent Directors.

▪ Public companies with:

▪ Paid-up share capital of ₹10 crores or more;

▪ Turnover of ₹100 crores or more;

▪ Aggregate outstanding loans, debentures, and deposits

exceeding ₹50 crores.

Page 11 of 27
 Module 3

o Exemptions exist for certain unlisted public companies such as joint

ventures, wholly-owned subsidiaries, and dormant companies.

• Conditions for Appointment of Independent Directors:

o The person should:

▪ Be of integrity and have relevant expertise and experience.

▪ Not be or have been a promoter or related to the promoters or

directors.

▪ Not have any pecuniary relationship with the company (except for
remuneration).

▪ Not hold securities exceeding ₹50 lakh or 2% of the paid-up

capital.

▪ Not be indebted to the company or guarantee debt for any third

person.

▪ Not be a Key Managerial Personnel or employee in the previous

three years.

▪ Not be involved in firms with significant transactions with the

company.

▪ Not be a chief executive or director of an NGO receiving significant

funding from the company.

Qualifications for Independent Directors (2018 Amendment)

• According to the 2018 amendment to the Companies (Appointment and

Qualification of Directors) Rules, 2014:

o An Independent Director must have appropriate skills, experience, and

knowledge relevant to the company's business, in fields like finance, law,
management, sales, marketing, etc.

o An Independent Director must declare that they meet the criteria of

independence at the first board meeting after appointment and at the
start of each financial year. They must also declare any changes affecting
their status.

Role and Responsibilities of Independent Directors

• Independent Directors play a crucial role in corporate governance. Their roles

and responsibilities include:

o Maintaining Transparency: Ensuring clear and open communication.

Page 12 of 27
 Module 3

o Providing Impartial and Objective Judgment: Offering unbiased

perspectives in decision-making.

o Ensuring Accountability and Credibility: Holding the company

accountable for its actions.

o Acting as a Watchdog for Stakeholder Interests: Representing the

interests of all stakeholders.

o Guiding as Strategic Advisors: Providing counsel to the board.

o Upholding Ethical Standards: Promoting integrity and probity in

business practices.

• The full guide for Independent Directors can be found in Schedule IV of the
Companies Act, 2013.

• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, also

outline additional obligations for Independent Directors.

Liability of Independent Directors

• Section 149(12) defines the liability of Independent Directors. They can only be
held liable if:

o The acts of omission or commission occurred with their knowledge,

attributable through the Board process, and with their consent or
connivance, or due to lack of diligence on their part.

• In the case of Brij Gopal Daga & Ors. v. State of Kerala & Anr., the Court ruled
that vicarious criminal liability arises only if it is established that the person was
in charge of and responsible for the company’s business when the offence was
committed.

• The Supreme Court in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr.
clarified that liability arises from being responsible for the company’s business
at the time the offence occurred, not merely from holding the office.

Term of Independent Directors

• As per Section 149(10), an Independent Director can hold office for a term of five
consecutive years, with the possibility of reappointment for another five years.

• They cannot hold office for more than two consecutive terms of five years each.
After ceasing to be an Independent Director, they may be reappointed after a
three-year break.

• Their appointment requires approval by shareholders in the Annual General

Meeting or Extraordinary General Meeting.

Page 13 of 27
 Module 3

Remuneration of Independent Directors

• Section 149(9) specifies that Independent Directors cannot be entitled to stock

options, but they may receive:

o Sitting Fees: For attending board meetings.

o Reimbursement of Expenses: For participation in board meetings.

o Profit-Related Commission: Subject to approval by the members.

Conclusion

• We have discussed the role, composition, appointment, remuneration, and

liability of Independent Directors, covering their significance in corporate
governance and the legal framework governing their functions under the
Companies Act, 2013.

5. APPOINTMENT OF DIRECTORS

We have previously discussed the key definitions, kinds of directors, and their roles in
corporate management. In this section, we explore their appointment and
qualifications as per the Companies Act, 2013.

General Provisions for Appointment of Directors

Section 162: Rule for Single Resolution

• A single resolution cannot appoint two or more directors simultaneously.

• Exceptions: Private companies, Specified IFSC public companies, government

companies, or subsidiaries of government companies.

Key Requirements for Appointment

1. Directors are generally appointed at a general meeting.

2. Submission of Director Identification Number (DIN) is mandatory.

3. Declaration confirming they are not disqualified under the Act.

4. Submission of Form DIR-2 (consent to act as a director) before appointment.

5. Filing of Form DIR-12 with details of the appointment within 30 days.

Page 14 of 27
 Module 3

o Filing must include the necessary fee per Companies (Registration Office
and Fees) Rules, 2014.

Retirement by Rotation

• Applicable to Public Companies:

o Two-thirds of directors must retire by rotation unless specified otherwise

in the Articles of Association.

o Directors who have been in office the longest retire first.

o Retiring directors are eligible for reappointment unless:

▪ They express unwillingness.

▪ They are disqualified.

• Independent Directors are excluded from the calculation of total directors.

Candidature for Directorship

• New candidates must give written notice of their intention to stand for election.

• The company must notify members about the candidature at least 7 days before
the meeting.

Penalties for Non-Compliance

• Any contravention in the appointment process or failure to provide a DIN is a

punishable offence.

Appointment of Specific Types of Directors

1. First Directors

• As per Articles of Association: Named individuals act as First Directors.

• If not named: Subscribers to the Memorandum of Association are deemed First

Directors.

• In a One Person Company, the sole member is the First Director until another is
appointed.

2. Independent Directors

• Selection Criteria:

o Balance of skills, experience, and knowledge.

o Approval required in a shareholder meeting.

Page 15 of 27
 Module 3

o Candidates can be selected from the Independent Directors Databank

(managed by the IICA).

• Appointment Process:

o Notice of meeting must include an explanatory statement confirming

compliance with the Act.

o Appointment formalized via a letter specifying terms, remuneration, and

ethics.

o Terms and conditions must be published on the company’s website.

• Tenure:

o Up to 5 years; reappointment is based on performance and requires a

special resolution.

o A director can serve only two consecutive terms and is eligible for
reappointment after a 3-year gap.

Appointment by the Board of Directors

1. Additional Directors

• Appointed by the Board under powers conferred by the Articles of Association.

• Tenure: Until the next AGM or the date the AGM should have been held.

• Conditions:

o Total directors, including Additional Directors, must not exceed the limit
in the Articles.

o Individuals previously rejected in a general meeting cannot be

reappointed.

2. Alternate Directors

• Appointed in place of a director who is absent from India for 3+ months.

• Appointment requires:

o A resolution in a general meeting.

o Authorization in the Articles of Association.

• Tenure: Matches the substituted director's term and ends upon their return.

3. Nominee Directors

Page 16 of 27
 Module 3

• Represent the interests of specific stakeholders, as authorized by law,

agreements, or government shareholding.

• Appointed through a Board resolution at a general meeting.

4. Casual Vacancy

• Occurs due to death or resignation of a director.

• Appointment by the Board is valid until the end of the original director's term.

• Requires prior notice to members (published 7 days before the general meeting).

Appointment of Directors by Shareholders

Directors Elected by Small Shareholders

• Listed companies can have a director elected by small shareholders under Rule
7 of the Companies (Appointment and Qualification of Directors) Rules, 2014.

• Proportional Representation:

o Appointments follow systems like single transferable vote or

cumulative voting.

o Elections occur every 3 years.

Proportional Representation in Corporate Governance

Proportional Representation is a system designed to ensure fair representation of

minority shareholders in the management of a company. It enables the appointment of
directors in a way that reflects the proportion of shareholding in the company. This
system is primarily intended to protect the rights of minority shareholders, ensuring
they have a voice in key corporate decisions and representation on the board.

Mechanisms for Proportional Representation

1. Single Transferable Vote (STV)

o Definition: A voting system where shareholders rank candidates in order

of preference.

o Process:

▪ Each shareholder's votes are proportionate to their shareholding.

Page 17 of 27
 Module 3

▪ If a candidate receives more votes than required for election, the

surplus votes are transferred to the next preference.

▪ This process continues until all positions are filled.

o Benefits:

▪ Ensures that even minority shareholders can have their preferred

candidates elected.

▪ Prevents dominance by majority shareholders.

2. Cumulative Voting

o Definition: A system where each shareholder can cast multiple votes

equal to the number of shares they hold, multiplied by the number of
directors to be elected.

o Process:

▪ Shareholders can allocate all their votes to a single candidate or

distribute them among several candidates.

▪ This enables minority shareholders to pool their votes and elect a

candidate of their choice.

o Example:

▪ If a shareholder owns 100 shares and three directors are to be

elected, they have 300 votes.

▪ The shareholder may allocate all 300 votes to one candidate or

divide them among multiple candidates.

o Benefits:

▪ Facilitates the election of directors who represent minority

interests.

▪ Enhances inclusivity and diversity in board composition.

Legal Framework in India

• Companies Act, 2013 (Section 163):

o Proportional representation can be adopted by companies for appointing

directors if stated in the Articles of Association.

Page 18 of 27
 Module 3

o Allows for the use of cumulative voting or a single transferable vote

system for director appointments.

o Particularly relevant for companies with diverse shareholder bases where

minority interests require protection.

Advantages of Proportional Representation

1. Minority Protection:

o Provides a mechanism for minority shareholders to have a say in the

board's composition.

o Reduces the risk of decisions being dominated by majority shareholders.

2. Enhanced Corporate Governance:

o Encourages diverse perspectives in board discussions and decisions.

o Promotes accountability and reduces conflicts of interest.

3. Equitable Representation:

o Reflects the proportion of ownership in the decision-making process.

o Ensures that all shareholders, regardless of their shareholding size, have

an opportunity to influence corporate governance.

Challenges of Proportional Representation

1. Complexity:

o Systems like single transferable vote can be complex to administer.

o May require additional time and resources for implementation.

2. Potential Deadlocks:

o Diverse representation may lead to disagreements and slower decision-

making.

3. Majority Resistance:

o Majority shareholders may oppose such systems as they reduce their

control over board composition.

Conclusion

Page 19 of 27
 Module 3

Proportional representation mechanisms such as the single transferable vote and

cumulative voting are essential tools for ensuring balanced corporate governance and
protecting minority shareholders' rights. While their implementation can be complex,
they foster inclusivity, transparency, and equitable representation, contributing to a
more robust and democratic corporate structure.

Appointment by the Tribunal

Role of NCLT (National Company Law Tribunal)

• Under Sections 241–244, the Tribunal may appoint directors to address cases of
oppression or mismanagement.

• Tribunal-appointed directors may or may not be members of the company.

• Example: The ouster of Mr. Cyrus Mistry from the Tata Group highlighted this
provision.

The Tata Case: Cyrus Mistry’s Ouster and Role of the NCLT

Background and Facts

• The Tata Group: One of India’s largest conglomerates, consisting of over 100
operating companies across sectors. The holding company, Tata Sons, is a
privately held entity.

• Cyrus Mistry: Appointed as the Chairman of Tata Sons in 2012, succeeding

Ratan Tata. Mistry belonged to the Shapoorji Pallonji Group, a major shareholder
in Tata Sons with an 18.37% stake.

• Ouster: In October 2016, Cyrus Mistry was removed as Chairman of Tata Sons in
a boardroom decision, citing loss of confidence. Subsequently, he was removed
as a director of Tata Sons and its operating companies.

Legal Questions Raised

1. Oppression and Mismanagement:

o Was the removal of Cyrus Mistry an act of oppression under Section 241
of the Companies Act, 2013?

Page 20 of 27
 Module 3

o Did the Tata Sons board and majority shareholders abuse their powers to
marginalize minority shareholders (Shapoorji Pallonji Group)?

2. Corporate Governance:

o Did Tata Sons adhere to principles of corporate governance and fiduciary

duties during Mistry’s removal?

o Were board decisions made transparently and in accordance with the

Articles of Association?

3. Validity of Articles of Association:

o Were certain clauses in the Articles of Association of Tata Sons,

particularly regarding the Tata Trusts' rights, oppressive to minority
shareholders?

o Could the NCLT intervene in the internal management of a private

company?

4. Jurisdiction of NCLT:

o Could the NCLT appoint directors to address the alleged mismanagement

or oppression within Tata Sons?

Legal Proceedings

• NCLT Ruling (July 2018):

o The NCLT dismissed the petition filed by the Mistry Group, holding that:

▪ The removal of Cyrus Mistry was within the powers of the board
and not an act of oppression or mismanagement.

▪ Tata Sons was managed in accordance with its Articles of

Association.

▪ No evidence of prejudice against the minority shareholders

(Shapoorji Pallonji Group) was found.

▪ The Tribunal declined to interfere in the internal management of a

private company.

• NCLAT Ruling (December 2019):

o The National Company Law Appellate Tribunal (NCLAT) overturned the

NCLT's decision, holding that:

▪ The removal of Cyrus Mistry was illegal and oppressive.

Page 21 of 27
 Module 3

▪ Mistry should be reinstated as the Executive Chairman of Tata

Sons.

▪ The conversion of Tata Sons from a public to a private company

was unlawful.

• Supreme Court Ruling (March 2021):

o The Supreme Court of India set aside the NCLAT’s decision, ruling in favor
of Tata Sons. Key findings included:

▪ The removal of Cyrus Mistry was lawful and within the board’s
rights.

▪ No evidence of oppression or mismanagement was found.

▪ The Articles of Association were binding and valid, and the board's
actions were consistent with them.

▪ Minority shareholders could not claim veto rights over majority

decisions unless explicitly provided in the Articles of Association.

Implications and Role of NCLT

1. Oppression and Mismanagement Claims:

o The case illustrated the scope of Sections 241–244, where claims of

oppression and mismanagement are evaluated based on the Articles of
Association and corporate governance norms.

2. Tribunal-Appointed Directors:

o While the NCLT did not appoint directors in this case, the legal provisions
under Sections 241–244 empower the Tribunal to do so in instances of
proven mismanagement or oppression to restore governance.

3. Corporate Governance and Minority Rights:

o The case underscored the need for a balance between majority rule and
minority protection, emphasizing adherence to corporate governance
norms.

4. Judicial Review:

o The multi-tiered review by the NCLT, NCLAT, and the Supreme Court
demonstrated the checks and balances within India's corporate legal
framework.

Conclusion

Page 22 of 27
 Module 3

The Tata-Mistry case remains a landmark in Indian corporate law, highlighting the
complexities of boardroom politics, minority shareholder rights, and the role of judicial
bodies like the NCLT in resolving corporate disputes. While the NCLT’s powers were not
directly exercised to appoint directors in this case, it reinforced the Tribunal's authority
under Sections 241–244 to intervene in cases of oppression or mismanagement when
justified.

Summary

Appointments of directors can be categorized under three broad heads:

1. Appointment at General Meetings: E.g., First Directors, Independent Directors,

Directors elected by Small Shareholders.

2. Appointment by the Board: Additional, Alternate, Nominee Directors, and those

filling casual vacancies.

3. Appointment by the Tribunal: Directors appointed under NCLT orders in cases

of oppression or mismanagement.

With this, we conclude the discussion on the appointment and qualification of

directors.

6. DISQUALIFICATION OF DIRECTORS

Disqualification of Directors: A Comprehensive Overview

This discussion delves into the disqualification of directors under the Companies Act,
2013, focusing on key considerations for appointing directors, grounds for
disqualification, and the procedural aspects involved.

Introduction

Appointment of Directors

• Companies must consider various factors before appointing a director to ensure

compliance with legal requirements.

• The rise of shell companies—entities without active business operations or

significant assets—has drawn attention to the legitimacy of directors.

Page 23 of 27
 Module 3

• In 2017, the Ministry of Corporate Affairs cracked down on directors of shell

companies that had not filed returns for three or more years.

• The Registrar of Companies (RoC) began publishing lists of disqualified directors

under Section 164(2)(a) of the Companies Act, 2013.

Provisions for Disqualification (Section 164 of the Companies Act, 2013)

Grounds for Disqualification (Section 164(1))

A director may be disqualified for any of the following reasons:

1. Unsound Mind:

o Declared by a competent court.

2. Insolvency:

o Being declared insolvent by the court.

3. Criminal Conviction:

o Conviction for an offense involving moral turpitude.

o Sentenced to imprisonment for six months or more (eligible for

directorship only after five years post-sentence).

o Sentenced to imprisonment for seven years or more (lifetime

disqualification).

4. Court Order:

o Disqualified by a court order for specific reasons.

5. Unpaid Calls on Shares:

o Failure to pay calls on shares within six months of the due date.

6. Related Party Transaction Conviction:

o Convicted for violations related to related party transactions in the last

five years.

Related party transactions are financial or business dealings between a company and
its related parties, such as:

o Directors of the company.

o Relatives of directors.
o Key managerial personnel (KMP).

Page 24 of 27
 Module 3

o Firms or companies in which directors or KMPs have significant influence

or control.

7. Lack of DIN (Director Identification Number):

o Not having a valid DIN results in absolute disqualification.

Disqualification Due to Company Default (Section 164(2))

1. Failure to File Financial Statements or Annual Returns:

o Continuous non-filing for three years disqualifies the director.

2. Failure to Repay Obligations:

o Non-repayment of deposits, interest, redemption of debentures, or

payment of dividends for one year or more leads to disqualification.

o This provision, initially applicable only to public companies, now applies

to both public and private companies under the Companies Act, 2013.

Additional Disqualifications

• Private Companies:

o Articles of Association (AoA) may specify additional grounds for

disqualification beyond those mentioned in the Act.

Remedies Against Disqualification

Appeal to NCLT (National Company Law Tribunal):

• A disqualified director has the right to challenge the disqualification by appealing

to the NCLT.

• During the pendency of the appeal, the company must not disqualify the director
until the Tribunal issues its final order.

Procedural Aspects

Rule 14 of Companies (Appointment and Qualification of Directors) Rules, 2014:

• Provides a procedural framework for handling disqualification cases.

• Includes detailed steps and requirements for compliance and dispute

resolution.

Page 25 of 27
 Module 3

Impact of Shell Companies

• Shell companies are often used for illegitimate purposes, such as benami
transactions or tax avoidance.

• The Ministry of Corporate Affairs’ crackdown in 2017 demonstrated a strict

regulatory stance, targeting directors associated with such companies.

• This regulatory action emphasized the importance of filing returns and ensuring
transparency in company operations.

Summary of Key Points

1. Conditions for Disqualification:

o Includes unsound mind, insolvency, criminal convictions, unpaid calls on

shares, lack of DIN, and company defaults.

2. Effects of Disqualification:

o Disqualified individuals are restricted from serving as directors in any

company.

o The disqualification applies uniformly to both public and private

companies.

3. Remedies Against Disqualification:

o Directors can challenge their disqualification by appealing to the NCLT.

4. Regulatory Measures:

o Heightened oversight and actions following the crackdown on shell

companies in 2017.

Conclusion

The disqualification of directors is a critical regulatory mechanism under the

Companies Act, 2013. It ensures transparency, accountability, and good governance in
corporate affairs. By understanding the grounds for disqualification, procedural
aspects, and remedies, companies and directors can remain compliant and minimize
risks associated with non-compliance.

This concludes the discussion on Disqualification of Directors.

Page 26 of 27
 Module 3

7. POSITION OF DIRECTORS

Page 27 of 27