The patriarchal outlook that people have is the main reason that women are not seen as equals who climb the ladders of the corporate sector with hard work and determination at par. To tackle this issue, the government brought out a one woman director mandate. Section 149 of the Companies Act, 2013, read along with the Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014, states that any company with a paid up capital of more than one hundred crore and an annual turnover of more than three hundred crore, must have at least one woman director on board.
The Government had stipulated that the deadline of appointing at least one woman director was one year from the date of enforcement of the Act. This was a step to address the underrepresentation of women in the corporate sector and a push to gender diversity. We’ll look into the history of this legislation and discuss why it was important to have such legislation in the first place. We’ll also discuss its effects and where the country stands with respect to the enforcement of this rule.
Table of Contents
History and Reasons
The one woman director rule was first brought about in extensive discussion in the Companies (Amendment) Bill, 2003, after it was proposed by Naresh Chandra Committee in 2002. This rule was resented by many people and did not come up for discussion for many years. It was brought up again in Companies Bill, 2011.
The one woman director mandate was brought up in discussions in India after various corporate governance proposals in India and abroad advocated for gender diversity on company boards. For example, Davies Report, in the United Kingdom supported gender diversity on board, citing various studies that had suggested that women helped to improve the overall performance of companies as they had a better decision making process. Also, the Higgs Report, submitted by British Department of Trade and Industry, suggested that gender diversity on board enhanced its effectiveness.
The discussions on women as board directors has not been limited to the west. In 2010, Community business, a non-profit organization, along with Standard Chartered Bank, brought out a report on women on boards in the corporate sector of the leading companies on Bombay Stock Exchange-100. The report suggested that India lagged far behind companies from the United Kingdom and the United States of America, as far as representation of women on board is concerned.
India hasn’t been the first country to introduce a scheme like this. Norway, in 2003, became the first country in the world to introduce quotas for women in company boards. It mandated that forty percent of board directors in Norway should be women. This had a good impact on Norway’s corporate governance model.
Studies have proved, time and again, that gender diversity on board and growth in firm performance are interrelated. In a study, it was identified that firms with at least one woman director on their board did better in terms of income growth as compared to firms with no female on their board. Also, firms with a market capital of more than $10 billion with a female on board had a twenty-six percent higher share price performance as compared to the rest of the companies.
When the law came into force in 2013, it faced opposition from many Indian companies. The crux of the argument made by these companies was that appointing a woman director by all the companies was not practical. They also argued that the appointment of a director should be based on qualifications and talent, instead of gender. The Federation on Indian Chambers of Commerce and Industry (FICCI) said that competency of an individual should be the basis of board make up and not gender.
Those in favour of the policy, notably well-known corporate governance experts, rebutted that there were important moral and societal justifications for coming up with this policy. Professor Balasubramanian argued that this policy should be accepted with a broader societal outlook, as this legislation aims at equality and inclusivity.
The government had brought out this policy keeping in mind the welfare of women. The then Corporate Affairs Minister, Sachin Pilot, said that there was low gender equality in the work field. He also said that women had done enough work to prove what they are capable of and that this policy was just the first of many more to come. He said that he believed companies perform better if they have a female at high managerial level. He had also supported the Bill when it was severely criticized for promoting tokenism.
Loopholes and Tokenism
The policy, even though brought out in hope of huge achievements, did not get the compliance it had aimed at. A good amount of companies did not meet the deadline of April 1, 2015 for appointing a woman director. SEBI had to apply penalties as high as $3.9 million for further non-compliance with deadlines. After this, even though a fair amount of companies had appointed the same, it was seen that many of these companies had appointed a female family member on the board. First among such was Reliance, who appointed the company’s head’s wife, Nita Ambani, as the first female director on its board. This example was followed by many companies. As of February 2020, many of the top 1000 listed companies had complied with the rule, but still the concern of non-inclusivity of women in corporate boards is legitimate.
Even though companies followed the policy, it was just in action and not in mind. This evidently shows that companies’ mindset today is non-welcoming when it comes to women. Would many companies comply if SEBI had not introduced penalties? Also, the appointment of family members just to show the adherence to law defeats the purpose of law. The policy was brought out to allow women, who deserve such positions and might actually help in bringing some growth in the corporate sector of India, to get what they deserve. This, however, was not the motive of many companies which complied with the law.
In a study conducted by Women on Corporate Boards (WCB) Mentorship Program, Institutional Investor Advisory Services (IiAS) and Prime Database Group, the women director representation went up from five percent in 2012 to thirteen percent in 2017. This increase in representation shows that companies, at least on the face of it, have complied with the scheme and have started appointing women to high managerial positions. However, this cannot be the only factor that decides the success of this policy, if we look at the ROCE, i.e., Return on Capital Employed, there has been an increase of five percent after complying with the one woman director mandate.
There have also been a number of cases which have been brought to the court where non-adherence to Article 149(1) was the issue. In the case of Nizam Deccan Sugars Ltd. v Registrar of Companies, before the National Company Law Tribunal, Nizam Deccan Sugars Limited failed to appoint a woman director to its board before the deadline, and had to face penalties of Rs. 1,25,000 in total. In another case, Shakti Bhog Foods Ltd., failed to appoint a new woman director within a span of three months after vacancy and as a result, proceedings were initiated against it by the Registrar of Companies.
As can be seen, not only has the government supported the policy, it also has had a good impact on companies’ overall performance. Judiciary has also shown support in upholding the policy and making sure that it is adhered to.
The policy has been effective on the surface, i.e., in increasing the representation of women in the corporate sector. However, it still needs some improvement as far as the implementation is concerned. Even though companies have appointed female directors on their boards, many leading firms have indulged in tokenism just to meet the requirements of the rule and save themselves from penalty. Government brought out this policy keeping in mind the underrepresentation of women in corporate firms and this policy has given quite good results; but there’s still a long way to go. The policy has support from the government and the judiciary and will definitely bore fruit one day.
- Lord Davies, “Improving the Gender Balance on British Boards” (2011).
- Sir Derek Higgs, “Review of the Role and Effectiveness of Non-Executive Directors” (2003).
- Aparna Banerjee and Shalini Mahtani, ‘Standard Chartered Bank: Women on Corporate Boards in India 2010 Report’ (2010).
- ‘Norway sets 40% female quota for boardrooms’, 2002, available at: https://www.theguardian.com/society/2002/aug/01/publicsectorcareers.genderissues (last visited on 4th Dec., 2020).
- ‘Gender Diversity and Corporate Performance’, 2012, available at: https://women.govt.nz/sites/public_files/Credit%20Suisse_gender_diversity_and_corporate_performance_0.pdf (last visited on 4th Dec., 2020).
- ‘Draft Guidelines for Corporate Gender Party Soon: Sachin Pilot’, 2013, available at: https://www.business-standard.com/article/news-ians/draft-guidelines-for–corporate–gender-party-soon-sachin-pilot-113081900489_1.html (last visited on 4th Dec., 2020).
- ‘Nita Ambani Becomes First Woman Director on Reliance Board’, 2014, available at: https://economictimes.indiatimes.com/nita-ambani-becomes-first-woman-director-on-reliance-board/articleshow/36765126.cms?from=mdr (last visited on 5th Dec., 2020).
- 2016 SCC OnLine NCLT 320.
BY UDDESHYA YADAV | LOVELY PROFESSIONAL UNIVERSITY