The Companies (Appointment and Qualification of Directors) Rules 1 came into effect in 2014 when they were officially published in The Gazette of India. For the purpose of providing consistent context, the rules lay down specific definitions of basic and essential terms like an act, annexure, digital signatures, Director Identification Numbers, electronic records and registries, fees, forms and e-forms, regional directors and sections. Most of these definitions have been based on past Acts such as the Companies Act, 2 the Informational Technology Act 3 or other Ministry of Corporate Affairs codified rules.
Before attempting to understand the 2018 Second Amendment rules specifically, it is necessary to understand the provision of the 2014 Rules with respect to independent directors itself. As per the original Rules, the following are the codifications regarding independent directors –
1. Number of Independent Directors – As per Rule 4 of the Companies (Appointment and Qualification of Directors), Rules Public companies having a paid-up capital of ten crores or more, or having a turnover of 100 crores or more, or having outstanding debt exceeding fifty crore rupees are required to have at least two of its directors as independent directors. Further rules regarding the qualification of the independent directors have also been elucidated.
2. Qualifications of the Independent Director – As per Rule 5 of the same document, independent directors are expected to hold appropriate qualifications and experience in the field of business directing or other relevant fields such as management, marketing, finance or law. These skills lend to his or her technical capabilities and make them more suitable for holding the position of a director.
3. Databank of Persons offering to be Independent Directors – As per Rule 6 of the document, bodies or associations that have government authorization are to maintain a databank of individuals who have offered to take up the role of independent directors and shall also place the said databank on the Ministry of Corporate Affairs website or any other relevant Central Government approved website. The databank shall contain a variety of information notably the Director Identification Number (DIN) of the individual, personal details, income tax PAN, permanent address and history of any legal cases.
Having developed an understanding of the provisions regarding independent directors in the 2014 Rules, it is now necessary to understand the 2018 Second Amendment Rules. The provisions of the amendment are as follows – 4
Rule 5 of the 2014 Rules shall be numbered as sub-rule (1) and after it, a new sub-rule shall be inserted which states that:
no family members or relatives of an independent director –
1. will be indebted to the company or its subsidiaries, stakeholders, promoters or directors; or
2. would have given any guarantee or promised security in connection with the indebtedness of any third person to the firm or its subsidiaries, management or stakeholders of such holding company, for an amount of fifty lakh rupees at any time during the two immediately preceding financial years or the current financial year. 5
Furthermore, with respect to Rule 16 in the Principal Rules 6, the word “shall” will be replaced with the word “may”.
1. Companies (Appointment and Qualification of Directors) Rules, 2014.
2. The Companies Act,2013 – Act No.18 of 2013
3. Information Technology Act, 2000 – Act 20 of 2000
4. The numbering of the provisions in this article is not to be confused with the clause numbers of the official Amendment Rules.
5. As per the Companies (Appointment and Qualification of Directors) Second Amendment Rules, 2018 – 7th May, The Gazette of India – mca.gov.in
6. The Principal Rules refer to the Companies (Appointment and Qualification of Directors) Rules published in the Gazette of India Extraordinary, Part II, Section 3, Sub-section (i) vide notification number G.S.R. 259(E), dated the 31st March 2014