CAM Comment: “The blog proposes targeted amendments in relation to the following: (i) outdated mechanism of rotational retirement under Section 152(6) of the Companies Act, 2013, and (ii) issue relating to the disqualification of the director for RPTs violations, specifically in line with the legal gap created by the decriminalisation of Section 188 of the Companies Act, 2013.”
In recent years, corporate governance in India has undergone significant transformation, with the emergence of two key areas: (i) the retirement of directors by rotation; and (ii) the disqualification of directors for related party transaction (“RPT”) violations.
The first issue, revolving around the outdated mechanism of rotational retirement, was intended to ensure periodic shareholder oversight. The second highlights a legal gap created by the decriminalisation of Section 188 of the Companies Act, 2013 (“Act”), which governs RPTs. While criminal liability was removed, the disqualification provision under Section 164(1)(g) remained unchanged, leading to ambiguity about its applicability.
Relevance of Rotational Retirement
Section 152(6)(a): Clarity on the directors whose appointment is subject to retirement by rotation
Section 152(6), applicable to public companies, provides that:
“(a) Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company shall—
(i) be persons whose period of office is liable to determination by retirement of directors by rotation; …..
(c) ….at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one third, shall retire from office.”
However, the following directors are not liable to retire by rotation.
- Independent directors;
- Small shareholders’ directors;[1] and
- Nominee directors of financial institutions if the governing statute provides for the same.[2]
While Section 152(6)(a) ensures periodic exit from office by creating a window for reappointment only with shareholder approval, it provides for at least one-third of the board members to remain on the board without being liable to retire and, if no term is prescribed for their appointment, this effectively provides for permanent directorship. Further, ambiguity remains on whether a MD / WTD –typically appointed for a fixed period of five years – must be liable to retire by rotation.
In most situations, directors retiring by rotation are proposed for re-appointment and are eventually appointed, which creates unwarranted technical compliances. Additionally, subjecting MD / WTD to retire by rotation also causes risk to business continuity, if such retirement precedes their original term cessation. In one such example, the board of directors of a listed company comprised of 7 independent directors and 1 MD, and as independent directors are not liable to retire by rotation, the MD used to retire by rotation year and get reappointed every year.
To address this issue, it becomes necessary to review SEBI’s recent consultation paper[3] that quietly signaled a major shift in corporate governance norms by acknowledging that the concept of “liable to retire by rotation” is outdated for listed companies. Instead, SEBI proposed a uniform and periodic approval requirement, which are as follows:
- Any director who has not been subject to shareholder approval since April 1, 2019, must be placed before shareholders for approval at the first general meeting post April 1, 2024.
- Going forward, all directorships must be subject to shareholder approval once every five years, effectively abolishing the concept of permanent or perpetual board seats.
Subsequently, SEBI addressed board permanency by introducing Regulation 17(1)(D) under the SEBI (Listing Obligations and Disclosure Requirements), 2015 (“Listing Regulations”). This amendment closed the loophole that allowed certain directors to remain on boards indefinitely without shareholder oversight, reinforcing SEBI’s stance that listed entities, governed by stricter norms, must ensure periodic and transparent shareholder validation of board composition, thereby aligning regulatory practice with the principles of good governance.
Proposed amendment to Section 152(6)
To ensure consistency in the perception of directors whose appointment is subject to retirement by rotation, the concept itself should be deleted under Section 152(6). Instead, a term of up to five years should be prescribed for all directors. Accordingly, Section 152(6) can be amended to read as follows:
“(6) All director appointment shall be for a term of up to five years and subject to shareholders’ approval.”
Disqualification of directors
Section 164 – Disqualification of director for violation of RPT to include Regulation 23 of Listing Regulations
In the evolving landscape of corporate governance, ensuring accountability without stifling efficiency is a delicate balance. An area under scrutiny is Section 164(1)(g), which deals with the disqualification of directors. Under this provision, a person shall not be eligible for appointment as a director of a company if convicted of the offence dealing with RPTs under Section 188 at any time during the preceding five years. This made sense when Section 188 carried criminal consequences.
However, the Companies (Amendment) Act, 2020, decriminalised Section 188, replacing the provision for the imposition of criminal liability with that for the imposition of monetary penalties on the company and defaulting officers. However, Section 164(1)(g), left untouched, still refers to conviction under Section 188, which is non-existent in the current legal framework. This creates a legal vacuum: If criminal conviction is not possible under Section 188, can a director still be disqualified under Section 164(1)(g)?
Recognising this, the CLC,[4] recommended amending this to provide that monetary penalties for non-compliance with Section 188 would attract disqualification under Section 164(1)(g). If incorporated, any director with monetary penalties imposed under Section 188 would be disqualified from holding office as a director.
Interestingly, the CLC has not addressed whether violations of the Listing Regulations – also governing RPTs – would attract disqualification under Section 164(1)(g). This omission leaves a grey area, especially for listed companies where SEBI’s RPT framework is different and plays a critical role.
Let us consider a director of a listed company entering into a RPT without complying with the substantive preconditions under Regulation 23 of Listing Regulations. Upon adjudication, the SEBI imposes a penalty on this director in accordance with the SEBI Act, 1992. Despite the imposition of monetary penalty, such a director would not attract disqualification under Section 164(1)(g).
Given that the Listing Regulations prescribes a stricter regulatory regime for RPTs entered into by a listed company, even the imposition of monetary penalties by SEBI, or a conviction under the provisions of the SEBI Act, 1992, should attract disqualification under Section 164(1)(g).
Section 164(1)(g) may accordingly be amended as:
“A person shall not be eligible for appointment as a director of a company, if —
penalties have been imposed upon them for violation of the provisions dealing with related party transactions under section 188 at any time during the last preceding five years, or penalties have been imposed upon him by SEBI, or he has been convicted under the provisions of the SEBI Act, 1992, for violation of the provisions dealing with related party transactions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, at any time during the last preceding five years”
Conclusion
The evolving corporate governance landscape in India reflects a shift towards greater transparency, accountability, and stakeholder empowerment. The traditional mechanism of retirement by rotation under Section 152(6), once a cornerstone of board oversight, has increasingly become a procedural formality that does not serve any useful purpose. SEBI’s proposal to replace this outdated model with a uniform five-year shareholder approval requirement marks a progressive step towards ensuring that all directors, regardless of classification, don’t have any guaranteed tenure and remain answerable to shareholders at regular intervals.
Simultaneously, with the decriminalisation of Section 188, the continued reference to “conviction” in Section 164(1)(g) is inappropriate and ineffective. The CLC’s recommendation to extend disqualification to directors penalised for RPT violations, whether under the Act or Listing Regulations, seeks to close this legislative gap and reinforce the principle that directors must be held accountable for lapses in fiduciary conduct, regardless of the forum of enforcement.
Together, these reforms signal a broader regulatory intent to dismantle legacy structures that enable indefinite board tenures and to ensure that directors who breach governance norms, face meaningful consequences. As these proposals take shape, companies must prepare for a governance regime that is not only more robust but also more reflective of stakeholder interests and market integrity.
The Act is like the Constitution of India for the corporate sector and such inadequate drafting leads to practical challenges. Many such amendments are awaiting Parliamentary approval. CLC report 2022 remains to be implemented.
[1] As per Rule 7 of the Companies (Appointment and Disqualification of Directors) Rules, 2014.
[2] K. Subramony v. Official Liquidator 2009 SCC OnLine Ker 52
[3] Consultation Paper on Strengthening Corporate Governance at Listed Entities by Empowering Shareholders – Amendments to the Listing Regulations, 2015 dated February 21, 2023.
[4] Company Law Committee Report dated March 21, 2022.
