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Impact of Section 149 (1) Proviso on Role of Women Directors

By Mayank Goyal July 26, 2016


"We need women at all levels, including the top, to change the dynamic, reshape the conversation, to make sure women's voices are heard and heeded, not overlooked and ignored."

—Sheryl Sandberg

 

The second Proviso of Section 149 (1) of Companies Act, 2013 makes it mandatory for companies, meeting a certain threshold, to appoint at least one woman director in their Boards (along with Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014). This provision has been provided in the amended act so as to incentivize the involvement of women in the top brass of the corporate world and give a better chance to women to show their prowess at such a level.

This provision has both its merits and demerits as the vagueness of this provision has left it open ended creating the possibility of exploiting it in many ways. However, the idea in itself is a significant step towards women empowerment in corporate world where women are constantly undermined and overshadowed by their male counterparts, despite having the required skills and expertise to succeed.

One of the biggest issues is that the women appointed as director is usually wife, daughter, niece or a friend of the promoter and this undermines their role to that of just playing a second fiddle/puppet to them. They do what they are told to do and don’t get any authority to make decisions on their own regarding the company. They are just placed there to comply with the existing rules and to listen to the promoter and do what he says. This is a blatant disregard of the intention behind this provision and amounts to exploitation of the loopholes in the law. This should be curbed down by bringing in a much stringent law to ensure that this provision is not limited to just appointment of a female director, but also lays down either the qualifications required (like in case of independent director) or other safeguards against such practice.

 

Pros

By specifying a small number and not a substantial percentage of women directors required in the board, the Act has cleared away from the situation in Norway. A 40 percent quota for women was established in Norway in 2003 that resulted in increasing the number of women directors but decrease in the company’s performance as the Norwegian firms then appointed many women as members of the board, who were less experienced, in order to just meet the legal mandate.

By keeping the number down to one and giving sufficient time to adhere to it, this provision enables companies to search for the best candidate for the position and not to go forward with just any women who is eligible to be appointed. This will, in turn, give women greater opportunity to showcase their skills and expertise in the field where they are seriously under-represented and undermined.

This will also allow them to gather sufficient market experience that is bound to help them grow and take on bigger challenges in future. Further, it is not just India where this has been implemented but there are similar provisions in law in countries like Norway, France, Italy, Spain, and Belgium, for women empowerment. Such laws will give an opportunity to women to be part of the top management of a company, like Aarthi Subramanian of TCS, Meera Shankar and Nirupama Rao at ITC, Kalpana Morparia of Hindustan Unilever. Infosys has gone as far as appointing women (all three of them) as independent directors on the board.

 

A 2007 Catalyst Bottom Line Report shows that a higher number of women board director’s in company results in higher financial performance. Reports have also pointed that the companies having three or more women directors tend to give a stronger-than-average performance. Such other studies signal out the positive impacts on the company due to appointment of women directors.

 

Cons

However, this rule has it owns demerits, like that the promoter appoint their wife, daughter, niece or a friend as the women director to fill the spot and meet the mandate. This makes a mockery of the provision that was introduced to increase participation and representation of women in top brass management of the company. Since there is no mention that which type of director has to be appointed, the section is pretty vague and leaves room for a lot of exploitation by the promoter/majority owner of the company. Such exploitation of the vagueness of the section enables promoters/directors to circumvent that provision.

Many of the top companies have clearly exploited this rule to appoint a women director from their family, just to meet the requirements of section 149, like Shallu Jindal (wife of Naveen Jindal) at JSPL, Nita Ambani (wife of Mukesh Ambani) at RIL, etc. Even if they are qualified enough, the fact remains that they are in their current position (Board of the company) only due to the fact that they are a family member of the owner. This as a whole undermines their power as a director and diminishes their role.

This is majorly due to the fact that majority of the Indian companies are family run businesses and therefore the promoter/owner do not wish to lose control over the board by bringing in an external person into the board. Further, by appointing a person whom they can control, the promoter/owner has the opportunity of further increasing his control over the board (higher percentage in voting). As a result, they have an added incentive to appoint someone from their family or a friend. However, this is against the basic intention of bringing in such a legislation in place.

There is one more argument against this provision that it forces companies to appoint non-deserving people to be appointed as director over the deserving male candidates. However, this argument is redundant as the company can incorporate that “deserving” candidate into the board by increasing the number of board members, either just by appointing him or by passing a special resolution for the same.

 

Conclusion

The provision of appointment of woman director is a stepping stone towards upliftment of women in the corporate world and also towards their involvement in corporate governance. They are seriously undermined in this field and therefore have to be provided some support in the form of such provisions to be able to gain the recognition. However, the current legislation is very vague and, as a result, leaves room for a lot of exploitation of law that doesn’t result in achieving the desired result. As a result, there is a need for reforming the laws in place to ensure that the companies do abide by these laws in their true sense and that the purpose behind them is achieved.

 

SOURCES:

  1. Section 149-Company to have Board of Directors, Ministry of Corporate Affairs, government of India, available at: http://www.mca.gov.in/SearchableActs/Section149.htm (last accessed on 18 July, 2016)
  2. Appointment of Woman Director, Legal Services India, 27 Oct 2014, available at: http://www.legalservicesindia.com/article/article/appointment-of-woman-director-1717-1.html (last accessed on 18 July, 2016)
  3. Companies with More Women Board Directors Experience Higher Financial Performance, According to Latest Catalyst Bottom Line Report, Catalyst, available at: http://www.catalyst.org/media/companies-more-women-board-directors-experience-higher-financial-performance-according-latest (last accessed on 18 July, 2016)
  4. The Bottom Line: Corporate Performance and Women's Representation On Boards, Catalyst, available at: http://www.catalyst.org/knowledge/bottom-line-corporate-performance-and-womens-representation-boards (last accessed on 18 July, 2016)
  5. The Companies Act, 2013, available at: http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf (last accessed on 18 July, 2016)
  6. TCS appoints Aarthi Subramanian as executive director, Shilpa Phadnis, The Times of India BUSINESS,12 Mar 2015, available at: http://timesofindia.indiatimes.com/business/india-business/TCS-appoints-Aarthi-Subramanian-as-executive-director/articleshow/46545152.cms (last accessed on 18 July, 2016)
  7. Backgrounder Appointment Appointment and Qualifications of Directors Directors, ICSI, available at: https://www.icsi.edu/portals/0/APPOINTMENT%20AND%20QUALIFICATIONS.pdf (last accessed on 18 July, 2016)
  8. Companies (Appointment and Qualification of Directors) Rules, 2014, available at: http://perry4law.org/clii/wp-content/uploads/2014/03/Companies-Appointment-and-Qualification-of-Directors-Rules-2014.pdf (last accessed on 18 July, 2016)
  9. Picture Credits: http://www.hindustantimes.com/business/over-1-500-companies-fined-for-not-appointing-woman-directors/story-ewknsLgTJ74jPrAvMAvRxH.html

 

- Mayank Goyal (Jindal Global Law School, 4th Year)

Tags: Company Law , Section Section 149 (1) Proviso , Companies Act 2013 , Rule 3 of Companies (Appointment and Qualification of Directors) Rules , women empowerment in the corporate world , women directors , woman director , Norway , stepping stone towards upliftment of women , 2014 , 2003


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