This article is written by Hritika Jannawar, pursuing Diploma in General Corporate Practice: Transactions, Governance and Disputes from Lawsikho.
Table of Contents
Introduction
The progressive laws to have female representation in Boardrooms has led to a drastic change in the involvement of female professionals. The immediate impact of the legislation resulted in the growth of female representation to 17% from 6% in the year 2014.
The objective behind making it mandatory to appoint a woman director on the Board is twofold: first, it aims to establish gender parity in top positions and to have a broader perspective in decision making. Corporations should not simply be units of capitalism but should also be mediums of economic and societal change. The government has female quotas enabling women employment but there are no such provisions made in the private sector, that too in top position. Women lack appropriate representation in the boards not because of the dearth of female professionals but due to the lack of the opportunity accorded to them due to the ‘big boys club’ politics that play out in the Boardroom. Hence, this legislation aims to open the doors for more women directorship. Enactment of the said legislation is just a battle won, the true war is in implementing the same.
The author in this article discusses the provisions mandating the appointment of woman directors both under the Companies Act, 2013 and SEBI (LODR) regulation, 2015, and further dives into the discussion at length as to how the prosecution is launched and what penalties are imposed for violation of the said provisions.
Provisions for appointment of women directors in Companies Act, 2013
The old companies Act of 1956 did not have any provisions to make it mandatory to appoint one women director to the Board but, the Companies Act of 2013 has one. Section 149 (1) of the Companies Act, 2013 and Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides that certain listed and unlisted companies are required to appoint at least one woman director on the Board.
Classes of Companies that are required to follow the aforementioned rules:
- All listed Companies.
- All public Companies –
- having paid up Share Capital 100 Crore or more, or
- having turnover of 300 Crore or more.
Even Private Companies can be mandated to appoint a women director. For instance, in cases where a private company is a subsidiary of a Public Company which is covered under Rule 3 of the Companies Rule, 2014, then the Private Company would be also liable to appoint one woman director for the compliance of provisions of the Act.
SEBI Regulations
The provisions in the Companies Act made a difference in diversifying the Board with an added member i.e. woman on the board but failed to make any difference in the opinion, as the Company’s top management found a loophole in the Act, and appointed their female relatives to the position, thus conforming with the regulatory framework but not the objective.
The membership of a Board is very crucial in the working of the Company as all the decisions of the company are made by the Board. The top management is always reluctant to open up the position to other people as it may cause changes in the dynamics of decision making power. To do away with this issue the SEBI regulation prescribed appointing an independent women director.
According to SEBI Regulation 17 (Listing Obligations and Disclosure Requirements) Regulations, 2015 on the Composition of Board of the listed entity has prescribed:
- The Board shall have at least one women director;
- The board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019;
- The board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020.
Note- the top Companies will be decided based on market capitalization as at the end of the immediate previous financial year.
Penalty for failure to appoint women directors
Chapter XI of the Companies Act, 2013 deals with the appointment and qualification of the directors:
Section 149 of the Act provides for the compulsory appointment of at least one woman director in the classes of companies provided thereunder. But if the said provisions are violated there is no specific punishment laid under Section 149.
Therefore Section 172 of the same chapter has to be referred to, which provides punishment for contraventions of any provision of this chapter, for which no specific punishment is provided therein. The provisions state that the Company and every officer of the Company who is in default shall be punishable with a fine which shall not be less than Rs. 50,000 and may extend to 5,00,000.
Prosecutions launched for failure to appoint women director
Although Section 149 of the Companies Act prescribes the appointment of the Woman director it does not provide a specific penalty for the violation of the said provision. In this Scenario, Section 172 comes into the picture along with Section 450 of the Companies Act, 2013.
Section 450 – If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation, or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption concerning any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.
Since the advent of the new Companies Act at first, the period given to appoint the woman director was of 6 months and then when the Board members appointed their female relatives to conform with the regulations, the SEBI in 2018 brought amendments in its LODR (Listing obligations and Disclosure Requirements) Regulations of 2015 making the appointment of independent woman director necessary to successfully fulfil the objective of such law.
Some Companies took this new progressive change in stride and appointed women directors but some were quite reluctant to comply with the said regulations and caused unnecessary delay stating that they didn’t have any female professionals to add to their quorum and they were still finding one.
In the year 2017, Shri P.P. Chaudhary, the then Minister of State for Law and Justice/Corporate affairs in a written reply to a question in Lok Sabha submitted that – ROC has launched prosecutions against 202 public unlisted Companies for non- Compliance with the provision of Section 149 (1) of the Act. Furthermore, 54 Companies listed on NSE and 88 Companies listed on BSE also were fined for non-compliance with LODR regulations mandating to appoint a woman director.
In the year 2019, NSE has penalized about 250 Companies for not conforming with the LODR regulation of 2015, the violations include many factors out of which non-appointment of woman directors is also prevalent.
By SEBI’s Circular dated Jan 22, 2020 Failure to Comply with LODR regulations of 2015 and not appointing a woman director for two consecutive quarters would lead to the suspension of the trading of Shares of listed entities.
As under the Companies Act, all the listed Companies are mandated to appoint a woman director, the action against these Companies can also be taken by ROC u/s 149 of the Act.
In Re: Icomm Tele Ltd, the ROC, Hyderabad, while scrutinizing the records of the Company found that they have not appointed a woman director on their Board thus violating Section 149(1) of the Companies Act read with Rule 3 of the Companies (Appointment and Qualification of the Directors ) Rules, 2014. The ROC sent a show-cause notice, but the Company failed to reply and hence the ROC initiated a Criminal Complaint against the Directors and the Company under Section 450 of the Companies Act, 2013.
The main question raised in the said case was whether NCLT can compound the offences under the Act when no fine or punishment is prescribed specifically under Section 149 and secondly, whether the Company law board can compound the offence either before the institution of the criminal proceedings or after the institution of the criminal proceedings. Both of these issues were resolved and it was held that NCLT has jurisdiction and power to compound such aforementioned offences, as well as the compounding, which can be done at any stage of the criminal proceedings.
Compounding under section 441 of the Companies Act, 2013 is the process of voluntarily admitting the contravention, pleading guilty, and seeking redressal; all of this to avoid lengthy litigation.
Conclusion
In India, the top 500 Companies have 17% women directors out of which 71% are independent directors. Addressing the issue of gender diversity at Board levels will bring balanced decision making, which will ultimately contribute to the growth of the Company as well as the Society. As of 11th January 2021, 4,920 women IDs were registered in the IICAs database, which is nearly 18% of the overall IDs registered to date. A few IT companies like Infosys and Tata Consultancy Services have surpassed the SEBI mandate and have appointed two-woman directors setting up a staunch example for Companies who are still adamant about not losing their old ways and opening the doors for woman directorship.
However, the question that still lingers is, how effective is this legislation? Won’t a single female voice be lost in the majority of the male-dominated Boardroom? The minimum mandate should have been at least 1/3rd of the total Board strength which would equalize the playing field. But as seen from the number of earlier prosecutions of the Companies for not appointing a woman director it could be deduced those meeting parameters of 1/3rd is quite difficult. ROC and the stock exchanges have not shied away to prosecute Companies’ levy fines etc. in the past as it is evident the societal implications the said legislation intends are not one to be taken lightly. After all this India still has to come a long way to have gender parity in the Boardrooms when compared globally as of 2019 France has 44.3% percentage of women Directorship Sweden has 39.6%, Netherlands 34%, The United Stated 26.1%, and India 15.9%
References
- Circular No.: SEBI/HO/CFD/CMD/CIR/P/2020/12, available at https://www.sebi.gov.in/legal/circulars/jan-2020/non-compliance-with-certain-provisions-of-the-sebi-listing-obligations-and-disclosure-requirements-regulations-2015-and-the-standard-operating-procedure-for-suspension-and-revocation-of-trading-of-_45752.html
- Prinyanka Kakodkar, 142 listed Companies fined for not employing women directors on their board, available at https://timesofindia.indiatimes.com/business/india-business/142-listed-companies-fined-for-not-employing-women-directors-on-the-board/articleshow/62269768.cms
- Narsin Sultana, NSE penalises 250 Companies for no-compliance of listing, disclosure norms, available at https://www.livemint.com/market/stock-market-news/nse-penalises-250-companies-for-non-compliance-of-listing-disclosure-norms-1557919835325.html
- Ministry of Corporate Affairs, Monthly Newsletter Volume-37 December- 2020, available at http://reports.mca.gov.in/Ministry/pdf/NewsDecember_15012021.pdf last seen on 28/11/2021
- Adv. Madhavi Lakhotia, Woman Director & Independent Director under Company Law Regime, TaxGuru, available at https://taxguru.in/company-law/woman-director-independent-director-company-law-regime.html
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