Appointment of IDs exempted by MCA for certain unlisted public companies by CS Dipanjali Nagpal Associate at Vinod Kothari & Company


The MCA notified the Companies (Appointment and Qualification of Directors) Amendment Rules, 2017[1] (‘Amendment Rules, 2017’) w.e.f July 5, 2017 exempting certain unlisted public companies from the requirement of appointing independent directors. Additionally, MCA has amended Form DIR-5 in relation to cancellation or surrender or deactivation of DIN.

Amendment in line with recommendation of Company Law Committee Report, 2016 (CLC)

Para 11.1 of CLC Report provided that in case of joint venture, wholly owned subsidiaries and dormant companies, there does not appear to be sufficient justifiable ground to prescribe for independent directors who were primarily there to protect the interest of the dispersed minority shareholders.

Section 149(4) of the Act, 2013 read with Rule 4(1) of the Amendment Rules, 2017prescribes the appointment of independent directors in various classes of companies as given below:-

4(1). Number of independent directors -The following class or classes of companies shall have at least two directors as independent directors:-

  1. the Public Companies having paid up share capital of ten crore rupees or more; or;
  2. the Public Companies having turnover of one hundred crore rupees or more; or
  3. the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

Provided that 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:

Provided that 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.”

Accordingly, Rule 4(2) inserted by the Amendment Rules, 2017 exempts the following categories of unlisted public companies, which are covered in Rule 4(1) above, namely:-

  1. a joint venture;
  2. a wholly owned subsidiary; and
  3. a dormant company[2] defined under Section 455 of the Act.

Regulation 24 (1) of Listing Regulations v/s Rule 4 (2) (b)

Regulation24(1) of the Listing Regulations mandates a holding company having its specified securities listed to appoint one of its independent directors on the board of unlisted material subsidiary in India. If such subsidiary happens to be a wholly owned subsidiary falling under Rule 4 (2) above, still one independent director shall be required to be appointed to ensure compliance of Listing Regulation by the listed holding company. Alternatively, a similar amendment should be incorporated in Regulation 24 (1) as well excluding wholly owned subsidiaries.

Changes in DIR-5

E-Form DIR-5 was last updated on June 21, 2017. Thereafter, the said e-Form has been amendment by Amendment Rules, 2017. The information required to be filled and fields of e-Form remain the same. There is simply an insertion of a note to the effect that DIN being retained will replace all the other DlNs for which surrender application is filed by the user.

Conclusion

The Amendment Rules, 2017 is a welcome step as this implements one of the recommendation of CLC Report. The amendment is not restrictive in nature and such companies may appoint independent directors for their professional/technical knowledge.Where the constitution of certain committees prescribed under the statute requires the presence of independent directors, in case of companies covered under Rule 4(2) of the Amendment Rules, 2017 such requirement shall not be applicable.

[1] Companies (Appointment and Qualification of Directors) Amendment Rules, 2017

[2] Dormant company here means:

Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

Explanation - For the purposes of this section -

(i) “inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years;

(ii) “significant accounting transaction” means any transaction other than

(a) payment of fees by a company to the Registrar; 

(b) payments made by it to fulfill the requirements of this Act or any other law;

(c) allotment of shares to fulfill the requirements of this Act; and

(d) payments for maintenance of its office and records.

Author's Details:

CS Dipanjali Nagpal

Associate, Vinod Kothari & Company

Corporate Law Services Group

corplaw@vinodkothari.com


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