Companies-Act

This article is authored by Akash Krishnan, a law student from ICFAI Law School, Hyderabad. It discusses in detail the provisions regarding the appointment of women directors in both national and international legal regimes, the impact of having a woman director on the governance of the company and the punishment for not appointing a woman director on the board of the company.

This article has been published by Sneha Mahawar.

Introduction

Women have played a pivotal role in the growth and development of the country since time immemorial. From running the household to running the nation, they have done it all. The only thing that was lacking was the involvement of women in companies by giving them major positions like a position on the board of directors. This situation was addressed in the Companies Act, 2013. According to the provisions of this Act, every company has to mandatorily appoint a woman director and the failure to abide by this condition attracts penal provisions as well.

To understand the involvement and impact of women having managerial roles in companies on the corporate governance policies of the company, we first need to understand the meaning and scope of the term corporate governance.

Corporate governance

Corporate governance can be defined as a set of rules, practices or processes that are used to control and direct the functions of an organisation. The objective of corporate governance practice is to create a balance between the interests of the company and its stakeholders, i.e., the shareholders, management, customers, financers, the community at large, etc. Good corporate governance practices ensure that ethical business practices are being followed by an organisation. Corporate governance is measured on four parameters, i.e., accountability, transparency, fairness, and responsibility.

The responsibility to ensure good corporate governance practices is on the board of directors as they are the decision-making authority of any company. They are entrusted with the authority to decide upon all important aspects relating to the proper functioning, growth and development of the company. The role of independent directors is also important for corporate governance as they are in a better position to align the interests of the stakeholders to the company and take an unbiased stance regarding managerial decisions.

There are 4 essential parts of corporate governance. They are also referred to as the 4 Ps of corporate governance. These include:

Purpose

Includes the reason for which the organisation was formed, its objectives and plans in the long run.

People

Includes all the stakeholders, i.e., the shareholders, management, customers, financers, the community at large etc.

Process

Includes how the management and functions of the organisation are being conducted.

Performance

Includes the performance of the organisation and the impact it has on society.

Directors and board of directors of a company

Section 2(10) of the Companies Act defines the term board of directors as a collective body of the directors of the company. The term director has been defined under Section 2(34) of the Companies Act as a director appointed to the board of a company. By reading these two definitions it can be understood that the exact meaning or scope of either of these two terms have not been provided under the Companies Act.

Directors

Directors as an agent of the company

The relationship between a company and its directors was discussed in the case of Ferguson vs. Wilson (1866). Herein, it was held that since a company can act only through its directors, a principal-agent relationship is established between the company and its directors.

Directors as trustees of the company

In Ramaswamy Iyer vs. Brahmayya and Co. (1966), the Madras High Court held that directors of a company act as the trustees of the company and any default by the director in furtherance of his duties would attract the same liabilities as of that of a trustee.

Directors as organs/limbs of the company

In Gopal Khatian vs. State (1969), the Calcutta High Court went on to hold that the directors are the limbs and organs of a company and as a natural person is liable for the actions of his limbs and organs, a company will also be liable for the actions of its directors.

Board of directors

In Bath vs. Standard Land Co. Limited (1932), the bench held that the company is a body and the board of directors act as the brain of that body. In Daimler Co. Ltd. vs. Continental Tyre and Rubber Co. Limited (1916), it was held that the state of mind of the company directly depends on the state of mind of the board of directors.

Every company to have a board of directors

Section 149 of the Companies Act states that every public company should have at least 3 directors on its board and every private company should have at least 2 directors on its board. The maximum number of directors in a board cannot exceed 15 directors.

Independent directors

Section 149(4) of the Companies Act states that every listed public company should have at least one-third of its total number of directors as independent directors. The following qualifications have to be met for appointment as an independent director:

  1. The individual should not be a managing or a whole-time director of the company.
  2. The individual should not be a promoter of the company.
  3. Neither the individual nor the relatives of such an individual should have a pecuniary relationship/interest in the company.
  4. Neither the individual nor the relatives of such an individual should be or had been an employee of the company.
  5. The individual should be a person of integrity.
  6. The individual should have sufficient skill/expertise in the area of business of the company.

International legal regime on the involvement of women in managerial positions

Countries having reservations for women in top-level management

Norway

In 2002, the Government of Norway issued a direction to all the private listed companies stating that there should be at least 40% women representation on their board of directors. The deadline to achieve this target was set as 2005. However, after the deadline was crossed, the women representation in boards of private listed companies remained at 24%. This led to the introduction of legislation making the 40% threshold limit mandatory to all private listed companies and penal provisions were added in cases of non-compliance. The threshold limit of 40% was achieved in the country by 2009.

Spain

In 2007, the Spanish Government passed the Ley de Igualdad, i.e., the Gender Equality Act under which all public companies and all IBEX-35 quoted firms having more than 250 employees had to mandatorily ensure that there was at least 40% women representation on their board of directors within a period of eight years, i.e., by 2015. Meeting this threshold limit was mandatory for obtaining any form of Government Contracts.

Iceland

In 2010, the Iceland Government issued a notification that all publicly owned and public limited companies having more than 50 employees should ensure that there should be at least 40% representation of each sex, i.e., male and female on their board of directors.

Finland

The Finnish Corporate Governance Code that was enacted in 2008 mandated that every listed company in the country should have at least one male and one female director.  

Countries having proposed legislation for having reservations for women in top-level management

France

The French Government had released a Quota Bill in 2011 wherein all listed companies in the country were to mandatorily have at least 20% women representation within three years of the passing of the Bill and 40% women representation within the next three years. For non-listed companies, the Bill mandated at least 20% women representation within three years of the passing of the Bill and 40% women representation within the next six years. This Bill was recently passed by the lower house of the French Parliament in May 2021 with the aim of achieving the set quotas by 2030.

Netherlands

The Dutch Government has passed a Draft Bill in 2020 under which both public and private companies, irrespective of their status of listing, had to ensure that they have at least 30% women and male representation on their board of directors.

Countries that are following an alternative approach

The United States of America

The Securities and Exchange Board of the USA has not specified any quota or reservation limits for the inclusion of women in managerial positions. However, they have focused on the need for inclusion of women in the board of directors and have made it mandatory that every company should make disclosures regarding the process of nomination of the directors and the ideology/selection criterion being followed by the nomination committee for ensuring gender diversity in the board of directors.

Australia

The Australian Government had issued several Corporate Governance Recommendations on Diversity and guidelines to ensure Gender Balance Performance and Reporting. According to these recommendations and guidelines, every company in the county has to mandatorily disclose information regarding the number of women directors that are present on their board of directors and the steps taken by the company to ensure gender diversity.

Indian legal regime on the involvement of women in managerial positions

Appointment of a woman director

According to Section 149(1) of the Companies Act read with Rule 3 of the Companies Appointment and Qualification of Director) Rules 2014, the appointment of a woman director has been made mandatory for the following companies:

  1. Listed companies.
  2. A public company having a paid-up share capital of ₹100 crores or more or having a turnover of ₹300 crores or more.

When should the woman director be appointed

There are multiple scenarios and time limits that have been prescribed for the appointment of a woman director. These scenarios have been enumerated below:

ScenarioThe time limit for an appointment
If the company is a listed company6 months from the date of incorporation of the company
If it is a public company having a paid-up share capital of ₹100 crores or more or having a turnover of ₹300 crores or more6 months from the date of incorporation of the company
If the Company existed before the commencement of the Companies Act1 year from the date of commencement of the Companies Act 2013
Intermittent vacancy for the position of a woman directorWithin three months from the date of the vacancy or in the next board meeting, whichever is later.

Duties of a woman director

The duties of a woman director are similar to the general duties and responsibilities of the other directors that have been provided under Section 166 of the Companies Act. Some of the duties have been enumerated below:

  1. The director should act in accordance with the article of the company.
  2. The director should act in accordance with the best interests of the company and all the stakeholders.
  3. The director should take due care and perform their duties with diligence.
  4. The director should not try and gain any undue advantage due to their position in the company.
  5. The director is prohibited from assigning their office to any person.

If the director acts in contravention of any of these duties then the director can be punished with a fine of ₹1,00,000 (one lakh) which may extend to ₹5,00,000 (five lakh).

Penalty in case of non-appointment of a woman director within the specified time

It is pertinent to note that there is no specific provision that provides punishment for the non-appointment of a woman director. Therefore, the general penal provisions under the chapter will be applicable in this case.

Section 172 of the Companies Act states that both the company and every officer of the company can be punished with a fine of at least ₹50,000 (fifty thousand) which may extend to ₹5,00,000 (five lakhs) in case of any contravention of the provisions regarding appointment of directors.

In Soumag Electronics Limited vs. the Deputy Registrar of Companies (2016), the Madras High Court while dealing with a petition regarding the failure to appoint a woman director within the specified time limit held that the failure of the company to appoint a woman director attracts the penalty under Section 172 of the Companies Act and imposed a fine of ₹50,000 on the company and its officers.

Conclusion

The world today is shifting from the age-old patriarchal approach. The inclusion of women in top-level management, political roles, armed forces, etc is a bold statement in this regard. There are multiple dimensions that women will bring to the board. This includes aspects of emotional intelligence, a self-branding attitude, confidence, etc. The inclusion of women will not only pave the way for better corporate governance in the organisation but also promotes the ideology of gender diversity.

References


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