Women Directors as Alternate Directors: Seeking Clarifications

A version of this article was posted on April 13, 2016 on the author’s LinkedIn page, and can be accessed here

Introduction

In the August of 2015, BASF India appointed Germany-based Andrea Frenzel as a non-executive director to comply with the law on having women directors on company boards.[1] On the same day it appointed N J Baliga, a male, as an alternate director to attend meetings in place of Frenzel.[2]

Proxy firm Shareholder’s empowerment Services (“SES”) has termed this action as not being compliant with the law as, “by appointing a male as an alternate director in place of woman director cannot in the farthest imagination be deemed as compliance with the law requiring at least one woman director.”[3] While SES has acknowledged that “...although the law does not clearly prohibit appointment of a male as Alternate to woman director”, it argues that “to comply with the spirit of law, an alternate director to a woman director shall be a woman only.”[4]

But is that so?

The ensuing debate has acquired the texture of suppression of women[5]. Many feel that such actions “...only render lip service to what is a cherished constitutional precept – substantive gender equality”.[6]

This article argues whether this substantive gender equality is to be achieved by coercing companies into appointing directors, they feel are not suitable to serve on their boards, and at the cost of the interests of the company. At the outset, the author seeks to clarify that the author is neither against women participation on boards, nor against the mandatory requirement to have a woman director on the board of directors.

Problem with the Legislative Provisions

Section 161(2) of the Companies Act, 2013 provides for the appointment of a person as an alternate director in the company, for any other director in the company during his absence for a period of not less than three months from India.[7]

A proviso to this section provides “that 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.”

Section 149(1) has a proviso that “such class or classes of companies as may be prescribed shall have at least one woman director.”[8]Further, the corresponding rules specify the type of companies to which this law applies to, i.e., listed companies (who are also bound by Clause 49 of the listing agreement), and public companies that have a minimum paid-up share capital of INR 100 crore or a minimum turnover of INR 300 crore. This requirement of having a female director on the board of a company is mandatory for such companies and the stock exchanges have been penalising listed companies for not complying with the said provision on a periodic basis.[9]

So, we have a statutory obligation towards having a woman director. We also have the provision of having alternate director(s) to any other director on the board during his absence from the country for more than three months. To ensure that companies do not appoint any independent director and appoint their own directors as alternate to those directors, the statute lays down an obligation to appoint only that person as an alternate to an independent director who is eligible to be appointed as an independent director.

But what about a situation when a women director, appointed as a result of following statutory obligation laid down under Section 149(1)? Can a male person be appointed as a director in place of the statutorily appointed woman director? Does this defeat the purpose of having a woman director mandatorily?

This is where the above stated situation comes into picture. The statute refers to various category of directors like Independent, Nominee, woman etc. As mentioned before, proviso to Section 161 prescribes that an Alternate to an Independent Director shall be one who qualifies to be an Independent Director by himself. Extending the same logic, many advocacy groups argue that although not specified it does indicate at least in spirit that an alternate to a woman director has to be a woman.[10]

But can such an obligation actually be read when none exists? And can companies be penalised for not following this obligation mandated by ‘in spirit’?

No obligation to appoint a female as an alternate to a woman director

My contention is that such an obligation cannot be read, because had this been the intent, no particular mention to the appointment of independent directors as alternate to independent directors would have been made, and the same would have been assumed under the “spirit of the law” argument being made for the other directors.

When a person is appointed an an alternate director to a regular director, the post that the person holds is that of “Mr./Ms. XYZ, alternate director to Director Mr./Ms. ABC”. Thus, as far as the satisfaction of the statute is concerned, a male alternate director appointed in place of a statutorily appointed woman director, will still satisfy the statutory requirement, as on the Board, an alternate director is in fact sitting for the statutorily appointed woman director, and is not appointed in place of her.

No Corporate Governance motive served

Also, the requirement does not serve the purpose of corporate governance as the appointment of independent directors do. The appointment of independent directors serves the purpose of moral anchors for the board to act in line, and they are able to serve this purpose by not being affliated with the company in any manner.[11] No such obligation exists on woman directors and, as such, their presence or absence on the board, cannot be said to further the interests in corporate governance. Let this statement not be interpreted to imply that the requirement of having a woman director should be done away with.

Not at all. What this statement implies is that in case of a normal situation, a situation where the company is not going to lengths to ensure that no women is sitting on the board, and where a woman director for genuine purposes is not in the country for bona fide reasons? A company is there to run a business and people appointed at the helm of the affairs, the Directors of the company, have to satisfy minimum requirement or else the directors so appointed will only be a surgical farce, if not even detrimental to the interests of the company. In fact, as per a report by the global firm Grant Thornton on Corporate Governance, published in 2015, only 47% of the top business leaders supported the introduction of quotas for female directors.[12]

In such a case, forcing a company to appoint an alternate woman director, for the mere purpose of satisfying the “spirit of the law” and not serving any needs of corporate governance, goes against the spirit of easing of doing business in the country and promoting an  entrepreneurial spirit in the country.

Why an amendment is not required

The legislative intent in the present instance does not carry forward to the above stated proposition. Where the legislature has gone to lengths to ensure that in case of independent directors, any alternative director to be appointed should also qualify to be appointed as an independent director under the act. The same intention does not carry forward to women directors presently.

The legislative intent with regards to this conspicuous absence of reference in the relevant section is echoed by the industry and practitioners, as the Report of the Companies Law Committee[13] fails to mention the same while suggesting an amendment in Section 161. The Company Law Committee has recommended in its report that-

“11.9 The Committee recommended that there should be a prohibition in the Act for appointing a director of a company as an alternate director in the same company.

11.10 The Committee was of the view that this right should be available to the Boards of private companies as well.”

The Central Government has laid it’s views on the matter in consonance with the committee when in the Companies(Amendment) Bill, 2016 presented in the Lok Sabha, the following amendment is suggested-

“Section 49. In section 161 of the principal Act,—

 (i) in sub-section (2), after the words "alternate directorship for any other director in the company", the words "or holding directorship in the same company" shall be inserted;

(ii) in sub-section (4),— (a) the words "In the case of a public company," shall be omitted; (b) after the words "meeting of the Board", the words "which shall be subsequently approved by members in the immediate next general meeting" shall be inserted.”

So, the legislative intent, if there was any, to carry the “spirit of law”[14] argument to other directors[15] is nowhere to be seen.

Amendment or Clarification of Legislative Intent

What the legislature needs is an amendment that may clarify the situation for all the stakeholders. Clarifying whether the requirement attached to the appointment of an alternate director to an independent director is to be carried forward to every other director appointed under a statutory obligation, for the same should not be interpreted as such or otherwise under some farcical and imaginary, if not arbitrary, “spirit of the law.”

Therefore, the possible amendment can be in the form a proviso to Section 161-

“Provided that no male shall be appointed as an alternate director for a woman director appointed under Section 149.”

In the absence of such an amended proviso to Section 161, the Section has to be read in a manner that does not prohibit the appointment of a male alternate director to a woman director mandatorily appointed under Section 149. This will remain the case until Ministry of Corporate Affairs comes out with a Notification in this regard.

Conclusion

To conclude, many may argue whether this debate is even required. I argue the same. But what the many proponents are arguing for is the “spirit of the law” argument and how the same can be followed blindly to include ‘women directors’ in the same fray as that of ‘independent directors’. Anything other than this proposition is being treated as pure blasphemy. I am not against this. What I am against is the blind assumption that the same is the requirement by law. It is not. By any principle of statutory interpretation, it is not. What I have suggested above is a manner in which this dilemma can be rectified. Either come out with an amendment, or a change in the corresponding rules, if the intent is to carry the “spirit of the law” argument and treat ‘women directors’ like ‘independent directors’. Or if the intent is not such, clarify the same in the form of a notification. Till the same is not done, the problems such as the very real one described at the beginning of this write up, will continue occurring and baffling lawyers and companies likewise.

[1] Infra note 7.

[2] N. Sundaresha Subramanian, At BASF a woman alternative turns heads, raises eyebrows,http://www.business-standard.com/article/companies/at-basf-a-woman-alternative-turns-heads-raises-eyebrows-115081801319_1.html.

[3]Shareholder’s Empowerment Services, BASF 4 (August 2015), available at http://www.moneycontrol.com/news_html_files/news_attachment/2015/BASF%20India%20Ltd_SES%20Proxy%20Advisory%20Report_AGM_20%20August%202015.pdf.

[4] Id. at 5.

[5] Harini Subramini, Women Directors: only in letter and not in spirit, HerStory (Nov. 28, 2015), http://her.yourstory.com/women-directors-companies-act-2013-1128.

[6] Id.

[7] 169. (2) The Board of Directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint a person, not being a person holding any alternate directorship for any other director in the company, to act as an alternate director for a director during his absence for a period of not less than three months from India:

Provided that 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:

Provided further that an alternate director shall not hold office for a period longer than that permissible to the director in whose place he has been appointed and shall vacate the office if and when the director in whose place he has been appointed returns to India.

[8] 149. (1) Every company shall have a Board of Directors consisting of individuals as directors and shall have—

(a) a minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company; and

(b) a maximum of fifteen directors:

Provided that a company may appoint more than fifteen directors after passing a special resolution:

Provided further that such class or classes of companies as may be prescribed, shall have at least one woman director.

[9] Supra note 2.

[10] Supra note 3.

[11] See Companies Act, 2013, Section 149(6).

[12] Grant Thornton, Global Governance Report 11(August 2015).

[13] Companies Law Committee, Report of the Companies Law Committee (February 2016).

[14] Refer Text corresponding to supra note 11.

[15] Id.