Section 149(4) of the Companies Act 2013 plays an important role in the definition of corporate governance for India. It states that a listed public company shall have one-third of its total directors, or two-thirds of its total directors in case the number is less than three, as independent directors. This would have the purpose and effect of infusing fresh openness, accountability, and rationality within the bodies of the corporations. In this context, the understanding and importance of Section 149(4) form an added layer of obligation to the companies in pursuing compliance with legal standards and investor confidence.
Important Provisions of Section 149(4) of the Companies Act 2013
Compulsory Appointment of Independent Directors:
Every listed public company must have at least one-third of the total number of directors as independent directors. This ensures that decisions are taken with impartial judgment to safeguard the interests of shareholders and other stakeholders.
Rounding off Fractions:
The part further states that any fraction that results from the one-third computation must be rounded up to the nearest integer. For example, if a board has seven members, then one-third is about 2.33; thus, the firm must have three independent directors.
Power of Central Government:
The Central Government can provide for the minimum number of independent directors prescribed for specific categories of public companies. This will provide the ultimate flexibility and adaptability on governance standards across various sectors and sizes of companies.
Also, Get to Know the Key provisions of Section 149 of Companies Act 2013
Further Relevant Considerations:
In Respect of Unlisted Public Companies
Section 149(4) explicitly applies only to listed public companies, while the Companies (Appointment and Qualification of Directors) Rules, 2014 apply similar directives to some unlisted public companies, though as specified in Rule 4, unlisted public companies within the class of those that have a paid-up share capital of ₹10 crore or more or whose turnover is ₹100 crore or more or outstanding loans, debentures, and deposits exceeding ₹50 crore, must also have at least two independent directors.
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Definition and Qualifications of Independent Directors
149(6) states that the status of independence for a director is defined with three conditions:
A director should not be a promoter or relative to any of the promoters.
He should not have any material pecuniary relation with the company and
He should have such other expertise or experience of this nature that would make the service useful to the board (149(6)).
Thus, an independent director may perform his role without any conflict of interest.
Also, Get to know What is the Role of Directors in Corporate Governance
Code for Independent Directors:
Schedule IV to the Companies Act, 2013, stipulates a code for independent directors enshrining their role, duties, and professional conduct. Only abiding by such a code ensures the soundness and effectiveness of these independent directors.
Know How Appointment of Directors is done according to Companies Law?
Conclusion:
Section 149(4) mandates the provision of independent directors to further the cause of transparency and accountability within the company. Independent directors promote ethical decision-making while providing a check on management, protecting the interests of minority shareholders, and strengthening investor confidence.
In short, Section 149(4) of the Companies Act, 2013 is critical for invigorating corporate governance frameworks in India because it ensures that listed public companies constitute independent directors on their boards, thus facilitating an independent oversight and accountability culture.
Do check out What are Schedule 2, Schedule 3 & Schedule 7 of the Companies Act 2013
FAQs on Section 149(4) of the Companies Act 2013
Q1. What does Section 149(4) of the Companies Act, 2013 provide?
It deals with providing a provision to require that every listed public company shall have at least one-third of its total directors shall be independent directors for independent supervision and strengthening corporate governance.
Q2. How is the number of independent directors determined?
Calculate one-third of the number of directors. If the result is a fraction, round up to the nearest whole number. For example, if a board has seven directors, one-third is 2.33, so three independent directors should be elected.
Q3. Who is an independent director for purposes of this section?
An independent director is defined as a director who neither is or has been associated with the promoters of the company nor holds any material pecuniary relationship with the company, possesses independent judgment, and has relevant expertise and experience so that he can contribute to the independent oversight of the company without any conflict of interest.
Q4. Does it extend to unlisted public companies?
On the other hand, section 149(4) deals with listed public companies, but some unlisted public companies also come under that category on specific grounds-being paid-up share capital of ₹10 crore or more, a turnover of ₹100 crore or more, or outstanding loans, debentures, and deposits of ₹50 crore or more. So even they are forced to have at least two independent directors.
Q5. What are the repercussions if the requirements of Section 149(4) are not complied with?
Non-compliance can attract a cost in the form of penalties on the company and its officers, such as fines and possible legal actions. Compliance with this provision is vital for the preservation of investor confidence and efficient governance of a corporation.
