Section 150: selecting independent directors and the data bank

Introduction

Section 150 deals with how an independent director is found and approved. Sub-section (1) allows selection from a data bank of persons eligible and willing to act as independent directors, maintained by a body, institute or association notified by the Central Government and published on its website. The selection is subject to section 149(6), which sets out who qualifies as an independent director.

Using the data bank does not shift responsibility. The proviso places the duty of due diligence before selecting a person on the company making the appointment. The appointment must be approved in general meeting under section 152(2), and the explanatory statement with the notice must justify the choice of the appointee.

Key takeaways

Identify a candidate

Sub-section (1) allows, but does not require, selection from the notified data bank. Whatever the source, the candidate must meet the independence criteria in section 149(6) and the qualifications and requirements under section 149.

The 2013 Gazette printed “sub-section (5) of section 149” in sub-section (1). The official Corrigenda of 1 January 2014 (item 8) corrected it to “sub-section (6)”, which is the text reproduced here.

• India Code — consolidated Companies Act, 2013, section 150
• eGazette — MCA notification S.O. 902(E), 26 March 2014 (commencement from 1 April 2014)
• eGazette — Corrigenda to the Companies Act, 2013, Gazette of India, Extraordinary, Part II s.1, No. 2, 1 January 2014

Carry out due diligence

Under the proviso, the company making the appointment is responsible for exercising due diligence before selecting a person from the data bank. Keep a record of the checks made on independence, qualifications and any other prescribed requirement.

Approve in general meeting

Sub-section (2) requires approval by the company in general meeting as provided in section 152(2). The explanatory statement annexed to the notice of that meeting must indicate the justification for choosing the appointee as an independent director.

Data bank and prescribed procedure

Sub-section (3) requires the data bank to create and maintain data of willing persons in accordance with rules. Sub-section (4) allows the Central Government to prescribe the manner and procedure of selecting independent directors. The Act leaves the detail to rules (“as may be prescribed”). Read the current rules made under this Chapter, as published by the Ministry of Corporate Affairs, for forms, fees and procedure before acting.

Practical preparation

Confirm the candidate meets section 149(6); record due diligence; draft the explanatory statement with the justification for the choice; place the appointment before the general meeting under section 152(2); check the current rules on the data bank and selection procedure.

Practical checklist

Glossary

Data bank

A database of persons eligible and willing to act as independent directors, kept by a body notified by the Central Government.

Explanatory statement

The statement annexed to the general meeting notice, which must justify the choice of the appointee.

Frequently asked questions