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Procedure for the Appointment of Alternate Director

Background  

  • An Alternate Director is appointed if a Director is absent for period of not less than three months from India. He acts in place of the Original Director and shall hold office for the period permissible for the Director in whose place he has been appointed. He has to vacate office as and when the Original Director in whose place he has been appointed returns to India. Also, if the term of office of the Original Director is determined before he so returns to India, any provision for the automatic re-appointment of retiring Directors in default of another appointment shall apply to the original, and not to the alternate director.
  • The Articles of Association of the Company should confer the power on Board to appoint Alternate Director and if the Articles do not provide for the same, the same needs to be altered.
  • The Board of Directors of a company may appoint alternate director if authorized by the Article of Association (AoA) of the company or resolution passed by the company in general meeting. The person proposed to be so appointed shall not hold any alternate directorship for any other Director in the company or hold directorship in the same company. (Section 161 (2) of the Companies Act, 2013) 

Sections/ Rules/Regulations  

  • Section 152, 153, 159, 161, 173, 184 of the Companies Act, 2013  
  • Regulation 25 (1), 30, 44, 46, 62E, 62N of SEBI (LODR), 2015  
  • Secretarial Standard-1  
  • Secretarial Standards-2   
  • Rule 8, Rule 9 of Companies (Appointment and Qualification of Directors) Rules, 2014  

Pre-requisites & Important Points  

  • To appoint alternate director the Board must be authorized by the AoA of the company or a resolution can also be passed by the company in a general meeting.
  • The person being appointed as an alternate director must not hold alternate directorship of any other director in the company. 
  • The appointed director must fulfil the eligibility criteria and must not be disqualified as per section 164 of the Companies Act, 2013. 
  • The person being appointed as an alternate director must not hold directorship in the same company. 
  • An alternate director to be appointed only if the director for whom he is acting as an alternate director is absent for not less than three months from India. 
  • No person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act
  • An alternate director shall vacate the office when the original director returns to India. 
  • An alternate director shall not hold the office for more than the permissible period for which the original director is appointed. 
  • If the term of the original director is determined before his return any provision of automatic re-appointment of retiring director in default shall be applicable only on the original director and not on the alternate director. 
  • A person appointing as alternate director must have an active Director Identification Number (DIN) and Digital Signature Certificate (DSC). 
  • If a person proposed to be appointed as a Director does not have a DIN, the same may be applied for in DIR-3 
  • With effect from April 1, 2024, the continuation of a director serving on the board of directors of a listed entity shall be subject to the approval by the shareholders in a general meeting at least once in every five years from the date of their appointment or reappointment, as the case may be. Also the continuation of the director serving on the board of directors of a listed entity as on March 31, 2024, without the approval of the shareholders for the last five years or more shall be subject to the approval of shareholders in the first general meeting to be held after March 31, 2024. This requirement is no applicable to WTD, MD, Manager, Independent Director, Retiring Director U/s 152(6) of Companies Act 2013 if the approval of the shareholders for the reappointment or continuation of the aforesaid directors or Manager is otherwise provided for by the provisions of these regulations or the Companies Act, 2013 and has been complied with. This requirement shall not be applicable to Director appointed by Court Order/Tribunal/Nominee Director of Govt of listed entity other than public sector company or nominee director of a financial regulator of listed entity or Director appointed by financial institution regulated by RBI or nominated by a Debenture Trustee registered with SEBI under subscription agreement for debentures issued by listed entity. (Regulation 17(1D) of SEBI(LODR) Regulations 2015) 
  • Any vacancy in the office of a director shall be filled by the listed entity at the earliest and in any case not later than three months from the date of such vacancy subject to such provisos as provided therein (Regulation 17(1E) of SEBI(LODR) Regulations 2015) 
  • No person who is or has been a director of a company which— 

(a)  has not filed financial statements or annual returns for any continuous period of three financial years; or 

(b)  has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so. 

Where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment. 

  • The directors of High Valued Debt Listed Entity (HVDLE) shall comply with the conditions with respect to the maximum number of directorships, including any alternate directorships held by them at any point of time. A person may act as a director in not more than seven listed entities. A person may serve as an independent director in not more than seven listed entities (Reg 62E of SEBI (LODR) 2015) 
  • No person shall be appointed as an alternate director for an independent director of HVDLE. (Reg 62N (1) of SEBI (LODR) 2015) 
  • The recommendation of the Nomination & Remuneration Committee (NRC) as per Section 178 of the Companies Act, 2013 is required for the appointment of an alternate director which shall be considered by the Board in case of *Listed companies and Public Companies having a paid-up share capital of Rs. 10 cr or more or turnover of Rs. 100 cr or more or aggregate o/s loans/debentures/deposits exceeding Rs. 50 cr, a meeting of Nomination and Remuneration Committee shall be held for identifying the persons who are qualified to become Directors as per the criteria laid down and recommend to the Board their appointment [Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014] 

Procedure:  

  • Provisions of AOA to be checked for authorization for appointment of alternate director. If the Articles do not provide for the same, they need to be altered
  • Consent Letter (Form DIR-2), DIR-8(Intimation by Director of his disqualification) and Form MBP-1(Disclosure of Interest from Director) to be taken from the proposed appointee.
  • Appointee to have a valid DIN and DSC. In case he does not have a DIN, an application to be made to MCA in Form DIR-3 for Allotment of DIN.
  • Meeting of Nomination and Remuneration Committee: In case of Listed companies and Public Companies having a paid-up share capital of Rs. 10 cr or more or turnover of Rs. 100 cr or more or aggregate o/s loans/debentures/deposits exceeding Rs. 50 cr, a meeting of Nomination and Remuneration Committee shall be held for identifying the persons who are qualified to become Alternate Directors as per the criteria laid down and recommend to the Board their appointment.
  • After considering the recommendations of NRC (in case of Listed and prescribed public companies) a Meeting of Board of Directors to be convened for considering the proposal of appointment of Alternate Director.
  • Board Meeting to be convened as per Section 173 and Secretarial Standard-1:
    • Notice of the Board Meeting shall be issued to all Directors at their registered addresses by post or hand delivery or by electronic means at least 7 days before the date of the board meeting, with provision for shorter notice in case of urgent business.  
    • The notice shall include Agenda, Notes to Agenda, and Draft Resolution.  
    • The Board at its meeting shall pass resolutions for appointment of Alternate Director, and to take note of disclosure of interest (Form MBP-1) and Form DIR-8 received from the proposed appointee alternate director.  
    • Listed companies shall disclose the outcome of the Board Meeting to the Stock Exchange within 30 minutes of Board meeting/ within 12 hours of Board Meeting/ 3 hours as applicable* [Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015] and also on website of the Company within 2 working days from the date of passing of resolution for the appointment. [Regulation 46 (3) of LODR 2015]. The listed entity may provide the exact link to the webpage of each of the recognized stock exchanges where such information has already been made available by the listed entity.  

*If the Board meeting is concluded after normal trading hours but more than 3 hours before the beginning of the normal trading hours the outcome to be disclosed within 3 hours from the closure of the board meeting.  

    • Draft Minutes shall be prepared and circulated within 15 days from the conclusion of the Board Meeting and be signed as provided in the Act and SS.

 

Post-Appointment Requirements  

  • Form DIR-12 (Return of Appointment of Director) shall be filed with the Registrar within 30 days of appointment of Alternate Director accompanied by:  
    • Certified True Copy of the Board Resolution passed.  
    • Form DIR-8 Declaration by Director.  
    • Letter of Appointment.  
  • For companies other than OPC and Small Company, the return must be certified by a Company Secretary/Chartered Accountant/Cost Accountant.  
  • The appointed director shall disclose holdings of company securities as on the date of appointment within seven days as per Regulation 7 of SEBI (Prohibition of Insider Trading) Regulations, 2015. 
  • Necessary entries shall be made in the Register of Director and Key Managerial Personnel under Form MBP-4. 
  • Required amendments shall be filed under applicable laws.  

Latest Amendment  

  • As per Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 (dated June 1, 2022)  
    • Form DIR-2 and Form DIR-3 now include a declaration regarding security clearance from the Ministry of Home Affairs, Government of India.  
    • In case the person seeking appointment is a national of a country which shares land border with India,  (China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, Afghanistan), necessary security clearance from the Ministry of Home Affairs, Government of India shall also be attached with the application for DIN and along with the consent letter of Director.  Clearance can be obtained at E-Sahaj Sewa Portal, launched by MCA.  
  • Pursuant to Companies (Appointment and Qualification of Directors) Amendment Rules, 2023 (dated January 20, 2023):   
    • Form DIR-2 need not be separately attached to Form DIR-12 but certified within Form DIR-12 itself by the director.  
    • Form DIR-8 now requires information about personal disqualifications under Section 164(1) along with company-related disqualifications under Section 164(2).  
    • Companies shall file Form DIR-9 with the Registrar of Company within 30 days of receipt of DIR-8.  
    • Form DIR-12 includes additional purposes for appointment due to disqualification of existing directors or appointment by liquidator/Interim Resolution Professional/Resolution Professional, requiring SRN (Service Request Number) of INC-28 and NCLT order if applicable.  

Penalties & Punishments   

As per Companies Act, 2013:  

  • Section 159: If any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156, such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupees for each day after the first during which such default continues  
  • Section 172: If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default 

As per SEBI(LODR) Regulations, 2015:

  • Regulation 46 – Non-compliance  with  norms  pertaining  to  functional website-Advisory/warning letter  per  instance  of non-compliance per item₹10,000 per instance for   every   additional advisory/warning letter   exceeding   the four advisory/ warning letters  in  a  financial year 
  • General penalty for Regulation 30(6)/17 (1D)/(1E)/62N/62E: 

Listed entity/any other person who contravenes any provision of the regulations shall be liable for one or more of the following penalties/actions as deemed fit by the regulator : a) action as per Securities Law, b) fine, c) suspension of trading, d)freezing of promoter/promoter group holding of designated securities, as may be applicable, in coordination with depositories, e) any other action specified by Board 

As per Regulation 7(1) of SEBI (Prohibition of Insider Trading) Regulations, 2015:

  • Sec 15A of SEBI Act:

If any person, who is required under this Act or any rules or regulations made thereunder,—

(a)  to furnish any document, return or report to the Board, fails to furnish the same or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents, he shall be liable to a penalty which shall not be less than one lakh rupees but  which  may  extend  to  one  lakh  rupees  for  each  day  during  which  such failure continues subject to a maximum of one crore rupees;  

(b)  to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified  therefor  in  the  regulations or  who  furnishes  or  files  false,  incorrect  or incomplete information, return, report, books or other documents, he shall be liable to penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees;  

(c)  to maintain books of account or records, fails to maintain the same, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees

Note: SEBI related provisions are applicable to Listed entities only.

Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article. 

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