Which compliance is immediate: Independent Directors or Resident Directors

A mix-up has arisen with respect to compliance with Section 149 (3). Section 149 (3) imposes a requirement on every company that the board shall have a resident director i.e. a person who has been in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.

Section 149 (4) provides for appointment of independent directors by listed companies and such other public companies as may be prescribed by the Central Government.

Section 149 (5) provides a relief in terms of time that may be taken by companies for complying with the provisions of Section 149 (4) i.e. appointment of independent directors. The confusion probably arises from the provisions of Section 149 (5) that relate to “every company existing on or before the date of commencement of the Act”.

Most books and other professionals have reported the relaxation of time as mentioned above, as being applicable to Section 149(3) i.e. appointment of resident director. It is important to note that the Gazette Notification provides for a time period for compliance with the independent director provision and not the resident director provision as is being commonly reported.

As per the above interpretation, foreign companies that hitherto had an entirely foreign board should have appointed the resident director as of April 1, 2014 and if not done, should do so immediately.

Additionally, Section 2 (47) of the Act, provides that an “independent director” means an independent director referred to in sub-section (5) of section 149. However, the definition of independent director and the qualifications of an independent director are in fact provided in sub-section (6) of section 149 and not sub-section (5).

If one reads the rest of Section 149 i.e. sub-section (6) onwards upto sub-section (13) of Section 149 (and sub-section (5) as per the Gazette Notification), all provisions seem to be in relation to independent directors. Hence, the relaxation of 1 year should also apply to prescribed class of public companies that are now required to appoint an independent director instead of every company as is mentioned therein. Sub-sections (1) to (4) of Section 149 deal generally with the composition of the board of directors of every company.

The Chapter 11 rules, provide a time frame of 6 months for the compliance relating to appointment of women directors. Interestingly, no time frame for compliance with appointment of resident director is provided in either the Act or the Rules. There is in fact, no mention of resident directors in the rules. Can one arrive at the interpretation that the correct reference in sub section (5) is to be sub-section (4), where time is being provided to prescribed public companies to comply with the onerous provisions of appointing independent directors?

It can be argued, that the reporting in books is a misprint and on that basis people are continuing to interpret the relaxation as applicable to resident directors. To add to the above, the seemingly incorrect cross-reference in the definition of independent director calls to question the intent of the legislators and whether the intentions of the legislators are captured in the Act accurately,.

Having regard to all of these circumstances, a corrigendum to set this situation right immediately, given the gravity of the provisions of Section 149 (3), (4) and (5) is necessary.

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