[Opinion] Consequences of Failure to Meet Requirement of Minimum No. of Independent Directors on the Board
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- Last Updated on 25 October, 2024
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Prof R Balakrishnan – [2024] 167 taxmann.com 626 (Article)
1. Background of this case
As per the provisions of section 149(4) of the Companies Act 2013, all listed public companies are required to maintain at least one-third of their board as independent directors and Rule 4(1) of the Companies (Appointment of Directors) Rules 2014 mandates that public companies with substantial paid-up capital or turnover must have at least two independent directors. A company known as M/s. Dalas Biotech Limited, having its registered office at in Bhiwadi the state of Rajasthan, failed to adhere to these requirements by not filling up the vacancies created by the resignation of independent directors within the stipulated timeframe by the provisions of the Companies Act 2013. The non-compliance persisted over two distinct periods i.e. the first one was from 23rd February 2018, to 14th March 2021, and the second one was from 30th June 30 to 5th January 2023. However the company rectified the non-compliance, by appointing new independent directors well beyond the prescribed time by the Companies Act 2013 without adhering the required deadlines for filling up the vacancies. Consequently, the Adjudicating Officer, Jaipur of Rajasthan imposed a penalty of Rs. 8,00,000 on the company and its whole-time director after following the adjudication proceedings. One would be interested in going through this case so that the compliance involved along with the procedure is understood along with the consequences and the rationale behind levying the penalty by the regulators.
2. Provisions relating to this case under the Companies Act 2013.
The relevant provisions pertaining to this case is that of section 149 of the Companies Act 2013, read with the relevant rules framed thereunder and the extracts of the relevant provisions are as given below.
| Companies Act 2013 Chapter X1 – Appointment and qualifications of Directors Section 149 – Company to have Board of Directors |
|
| Section | Provision |
| 149 (4) | Every listed public company shall have at least one-third of the total number of Directors as independent Directors and the Central Government may prescribe the minimum number of independent Directors in case of any class or classes of public companies. |
| Companies (Appointment and qualification of Directors) Rules, 2014 Rule 4 – Number of Independent directors |
|
| Rule | Provision |
| Rule 4 (1) | the Public Companies having paid up share capital of ten crore rupees or more; or the public companies having turnover of one hundred crore rupees or more; or the public companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees shall have at least two directors as independent directors. |
| Proviso | Provided that any intermittent vacancy of an independent director shall be filled up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later. |
| Companies Act 2013 Chapter X1 – Appointment and qualifications of Directors Section 172 – Punishment |
|
| Section | Provision |
| Penal section for non-compliance/default if any | |
| 172 | If a company is in default in complying with any of the provisions of this chapter (i.e. Chapter XI) and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default. |
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