Gender Diversity on Board of Directors: A Study of Section 149(1) of the Companies Act, 2013 & Existing Practices and Challenges
Abstract
The Companies Act, 1956 went under an overall reform with the introduction of the Companies Act, 2013. The act in itself is a revolution as it proposed various new changes and paved the way for India to become a country where entrepreneurship is promoted. It eased out a few things and increased the liability in case of any default. Provisions related to high amount fines and imprisonment was introduced because in the preceding decade our country witnessed serious frauds and financial irregularities related to companies such as Satyam Computers and Kingfisher. Apart from the much-needed enactments, the Act also came up with the provision of mandatory appoint of women to the Board of Directors. This was done with the objective to promote gender diversity and representation of women into the legal field pertaining to corporate governance. It opens the avenues for women to decision making positions in a company and make them a part of something big and valuable. This research article deals with the provision laid down in the Section 149(1) of the Companies Act, 2013. It delves deeper into the need of such provision and the ways through which it is being exploited by the companies. Furthermore, this article with the help of some studies and research suggest that the provision needs necessary amendments in order to achieve the objectives of the legislation.
Introduction
From racial to caste-based discrimination, our country and the whole world have seen dark times in the past. The victims of such discrimination were marginalised to the extent that it took them centuries to rise again. It was so bad that we as a society had to assume the responsibility of undoing the past bad deeds of ours by various means and schemes. The constitution along with the people played a great role in eradication of caste discrimination and fuelled the growth and prosperity of the marginalised ones. The state came up with reservation and other various schemes to help those people and it still does. Such a step was taken with the introduction of The Companies Act, 2013 (hereinafter, referred to as Act) wherein, section 149(1) of the Act makes it mandatory for the companies to appoint one (1) woman director into the Board of Directors (hereinafter, referred to as Board). Furthermore, Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014 (hereinafter, referred to as Rules) makes the appointment of at least one (1) woman director mandatory for (i) every listed company; (ii) every other public company having – (a) paid-up share capital of one hundred crore rupees or more; or (b) turnover of three hundred crore rupees or more. Further plain reading of the rule reveals that such appointment is mandatory only for companies registered under the Act and not for the companies registered under the Companies Act, 1956 (hereinafter, referred to as Preceding Act).
Talking about the Preceding Act, it did not provide for such mandatory appointment and the Act can be considered as a great leap towards gender diversity and a little representation in the Board as the minimum required number is still very low i.e., one (1). It can be said that this inclusion in the Act was made after several European nations did the same otherwise, we already had a similar recommendation in 2002 from the then Naresh Chandra Committee. The recommendation did not gain much attention of the legislators until the European nations started to do the same. A woman in the Board is perhaps seen as a highly collaborative person who can foster healthy relationships and multitasking while bringing new perspectives to the table.[1]
Growing Need for Gender Diversity in the Board
The people do not tend to notice much but the legal framework pertaining to corporate sector is highly dominated by male. The systemic dominance of one male gender knowingly or unknowingly rules out the participation of women from the Board and other decision-making positions. This led to the emergence of demands for some representation of women in the Board around the world and India also followed. The Nordic nation Norway took the lead and became the first country in the world to make it mandatory for the private as well as the public sector companies to appoint at least 40% women directors out of the total strength of the Board. This legislation affected nearly 500 private and public sector companies, and the legislation also came up with dissolution of the company as a penalty for the companies that do not comply with it.[2]
Eventually, the rest of the Europe followed Norway on this path. The Kingdom of Spain came up with recommendation of 40% seats to be reserved for women in the Board of the companies. In 2007, in the UK there was a similar campaign named the Club Campaig[3]n wherein, the demands were to reserve 30% of Board seats for women. France in 2011 was the biggest European nation to legislate on this subject and came with 40% minimum mandatory women membership for the Board. Until now, India was not ready and with the introduction of the Act which repealed the Preceding Act, we also got a similar legislation but the minimum number of women to be inducted into the Board is one (1). It is very low compared to other major jurisdictions around the world and makes up only around 6.66% of the maximum number of directors that can be appointed as per the section 149 of the Act i.e., a maximum of fifteen directors. Although, the number of directors can be increased by passing a special resolution but the minimum number of women directors stays to be one (1). In such case, the representation percentage of women will go down further.
Moving forward, Germany in 2015 came up with the same 40% quota for women in the Board like other European nations.[4] This change that followed after the first steps by Norway back in 2003 was not implement solely because others were doing it. Rather, it was based on empirical studies and evidences regarding capabilities of women when it comes to working in the corporate governance sector. One such study was done by the Peterson Institute for International Economics, wherein the data from 21,980 listed companies from 91 countries were collected. The study showed that on an average there was 15% rise in profitability of the companies that increased the percentage of women director to 30%.[5]Another such study was published in Harvard Business Review which suggested that women are better at 17 out of the 19 skills that give them an edge over other leaders.[6]A report from McKinsey published in the year 2010 stated that companies that have higher percentage of women population among the Board tends to outperform other companies by generating 47% more revenue 55% more EBIT in a financial year.[7]
Coming back to India, section 149 (1) of the Act and rule 3 of the Rules are the only legislations to provide mandatory entry to women into the leadership roles of corporate governance. Back in 2013, the Act faced backlashes wherein, the major contention was that to get entry into the Board, the person should be chosen based on his or her merit rather than providing reservation for such entry. Securities and Exchange Board of India (SEBI), the government body dealing in securities and exchanges of listed company and the then minister of Corporate Affairs, Mr. Sachin Pilot defended the new provision and highlighted that such a provision would enable companies to make efficient decisions with a larger viewpoint considering various gender related aspects in the working of a company.[8]
Challenges and Problems
It is evident that the provision regarding one (1) woman director under section 149(1) of the Act is a step towards equality and gender diversity in the Board. It can also be said that this step facilitates women participation in the corporate governance but the objective of the provision is even more complex. It creates a platform for women to take more than passive attitude and present their views and ideas in order to increase their participation in overall growth of the society. The objectives of the legislation are of a very pious nature but the actual effect of it is a bit different.
Currently, the companies registered under the Act have at least one or a small percentage of women on the Board. On comparison with other nations having similar legislation, it crosses all of our minds that whether the representation given to women under the Act is enough or not. Here comes the Critical Mass Theory (hereinafter, referred to as Theory) into the picture. While, the researches, journals and other studies suggest the need of women into the board, the Theory focuses on the number of women that should be on the Board.[9]Historically, various experiments have been conducted to study the influence of masses, especially that of the majority groups on the minority groups. The minority group is heavily under represented and their participation merely makes a difference. The inference is that when the majority agrees on something, their contentions and arguments are already backed by larger group against that of the minority group whose views, ideas, arguments are cornered because the majority does not want to talk about it. However, when you slowly increase the number of minority groups referred to as “tokens” under the Theory, their value based on their percentage share of the population increases and the majority group referred to as “dominants” takes the other group more and more seriously.
A study conducted by the Harvard Business School, wherein a group of 4 people were formed out of which 3 were pre decided and were asked to give same wrong answer to the questions asked from the group. The 4th person had no idea about the scenario and it showed that the decision taken by at least three people makes an impact.[10] The study revealed that a group of 3 people make up a critical mass under the Theory and such group possesses the capability of making an impact to the Board. Based on the study, it can be suggested that to achieve the objectives of the legislation efficiently, a critical mass of 3 women should be made appointed mandatorily to the Board under the Act.
The Act has some various other shortcomings as well. As it is already clear that the number mandatory women in the Board should be increased from one to at least, another challenge that persists and may continue to persist even after increasing the number is of nepotism. It is generally seen that for the sake of compliance, any woman family member of one of the directors is appointed as the woman director. This goes against the objectives of the Act because such women often have little or no knowledge about the roles and responsibilities of the director. Such appointments compromise with the objectives of the Act and the efficient working of the company. Such a case was seen at Reliance Industries, when Nita Ambani, wife of Mukesh Ambani was appointed as the woman director. Following this trend, other big companies like JK Tyres, Videocon, Godfrey Phillips, etc. did the same thing.[11]
There are specific deadlines for the companies to comply with the provision laid down in the section 149(1) of the Act. Many companies even failed to comply with the provision citing the reason that they were not able to find any competent person with proper knowledge and experience to be deemed fit for the position of woman director.[12]There is no specific provision under the Act that deals with scenarios when a company fails to comply with the rule of mandatory appoint of women director. In such cases Section 172[13] and Section 450[14]of the Act is generally referred for punishments for non-compliance. The section provides for the minimum fine of Rs. 50,000 that can go up to Rs. 5,00,000 to be levied on the company and the officers involved. Furthermore, to rule out the problem of appointment of the woman director from the family or the friends of the other Board member, SEBI came up with amendments to the Listings Obligations and Disclosure Requirements Regulations and made it mandatory for the companies to appoint Independent Director which is defined under section 2(47) of the Act.[15]The National Company Law Tribunal (NCLT) in the case of Teamasia Semiconductors (India) Ltd. and its Directors held that offences punishable under the Act can be compounded at any stage. This judgement makes it easy for the companies to do away with the mandatory provision under section 149(1) of the act and they can comply at any stage without any culpability. It can be said that the punishment for such non-compliance i.e., liquidation of the company would have been an ideal punishment as it is already there in Norway.
Therefore, it can be said that the Act had pious objectives to bring about a valuable change into the society in the terms of gender diversity and equal participation of women in the sector of corporate governance as well but the corporations found the loopholes and now, they are exploiting it. Even if a company appoints a competent women director, then the number requirement is so low that it won’t fulfil the outcomes of the Theory and again it will defeat the purpose of the Act. So, it can be said that both the legislation and the corporate should take a collaborative approach and stop exploiting the provision for the sake of compliance.
Conclusion
India is very unique country; we have businesses led by female CEOs such as Chanda Kochhar (Former CEO, ICICI Bank) and many others that the people have witnessed on TV shows like Shark Tank India. It is a common sight for us but not for many so called developed western nations. Surprisingly, there is another side to this situation wherein competent women do not get equal representation in the Board and there is a need to solve this problem. A diverse workplace offers competitive environment and growth to the company. Further, it opens up avenues for talent acquisition and employment. Such approach not just benefits the company but the society as a whole. It leads to innovation and collaboration making the country prosper on economic terms.
[1] Rani Sahoo, D., 2021. View of Corporate Governance and Role of Women Directors under The Companies Act, 2013. [online] Archives.palarch.nl. Available at: <https://www.archives.palarch.nl/index.php/jae/article/view/8807/8205> [Accessed 12th July, 2025].
[2] Afra Afsharipour, The One-Woman Director Mandate: History and Trajectory, Corporate Governance in India: Change and Continuity, Pages 85-105, November 2016, <https://doi.org/10.1093/acprof:oso/9780199469321.003.0005> [Accessed on: 12th July, 2025]
[3] Ibid
[4] A Kamalnaath and Y Peddada, Women in Boardrooms: Formulating A Legal Regime for Corporate India, Journal on Governance, Vol. 1 No. 6, 2012
[5] M Noland; T Moran and B Kotschwar, Is Gender Diversity Profitable? Evidence from a Global Survey, Peterson Institute for International Economics, February 2016, <https://www.piie.com/publications/working-papers/gender-diversity-profitable-evidence-global-survey> [Accessed on: 13th July, 2025]
[6] J Zenger and J Folkman, Women Score Higher Than Men in Most Leadership Skills, Harvard Business Review, June 2019, <https://hbr.org/2019/06/research-women-score-higher-than-men-in-most-leadership-skills> [Accessed on: 18th July, 2025]
[7] McKinsey & Company, Women at the top of corporations: Making it happen, October 2010, <https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/women-at-the-top-of-corporations-making-it-happen> [Accessed on: 18th July, 2025]
[8] A. Gupta, Draft guidelines for corporate gender party soon: Sachin Pilot; Business Standard, August 19th, 2013<https://www.business-standard.com/article/news-ians/draft-guidelines-for-corporate-gender-party-soon-sachin-pilot-113081900489_1.html> [Accessed on: 19th July, 2025]
[9] Mariateresa Torchia, Andrea Calabro and Morten Huse, Women Directors on Corporate Boards: From Tokenism to Critical Mass, Journal of Business Ethics, August 2011, Vol. 102, No. 2 (August 2011), pp. 299-317
[10] W. Kramer, V. and M. Konrad, A., 2006. How Many Women Do Boards Need? [Online] Harvard Business Review. Available at: <https://hbr.org/2006/12/how-many-women-do-boards-need> [Accessed on 19th July, 2025]
[11] Nimitha Aboobaker, Dr. Manoj Edward, Gender Diversity as a facilitator towards Human Capital Development in Boardrooms – the case of Corporate Governance law in India, Research Gate I, 3 (2016). Available at: <https://www.researchgate.net/publication/319065330_Gender_Diversity_as_a_facilitator_towards_Human_Capital_Development_in_Boardrooms-the_case_of_Corporate_Governance_law_in_India> [Accessed on 19thJuly, 2025]
[12] Dr. Rajesh Kumar Agarwal, A study on Appointment of Woman Directors by Companies in Mumbai, 2 International Journal of Ethics in Engineering and Management 1, 4 (2015).
[13] Punishment. – If a company contravenes any of the provisions of this Chapter and for which no specific punishment is provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.
[14] Punishment where no specific penalty or punishment is provided.- If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.
[15] “independent director” means an independent director referred to in sub-section (6) of section 149.
