Vipan Kumar, PhD

June 22nd, 2026

A. Cover Story

[A.1] Can a cousin of a promoter or director be appointed as an independent director?

Under the Companies Act, 2013, the term ‘relative’ is defined in Section 2(77). It specifies that a person is considered a relative of another if: (1) They are members of a Hindu Undivided Family (HUF); (2) They are husband and wife; or (3) They are related to each other in a manner prescribed by the central government.

The Central Government has prescribed the following relations under Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014, as relatives of another:

  • Father: Includes a stepfather.

  • Mother: Includes a stepmother.

  • Son: Includes a stepson.

  • Son’s wife.

  • Daughter.

  • Daughter’s husband.

  • Brother: Includes a stepbrother.

  • Sister: Includes a stepsister.

Notably, this list is exhaustive and crucial. Exhaustive because relationships such as cousins, uncles, aunts, nephews, nieces, or grandparents are generally not included in this definition for the purposes of the Companies Act, 2013. This definition is crucial for several provisions of the Act, such as identifying related parties (Section 2(76)), determining the independence of directors, and governing the disclosure of interests.

On March 2nd, 2026, SEBI provided informal guidance clarifying that a cousin of a promoter or director is eligible to be appointed as an independent director under the SEBI (LODR) Regulations, 2015.

A company (Maithan Alloys Ltd) sought guidance on whether a cousin falls under the category of related to promoters or directors per Regulation 16(1)(b)(iii) of the SEBI LODR regulations. SEBI, while referring to Section 2(77), Rule 4 and Regulation 2(1)(zd), clarified that the definition of a relative under the Companies Act, 2013, and the LODR Regulations does not include a cousin.

This guidance provides clarity for companies evaluating the independence of board candidates, confirming that the familial relationship of a cousin does not trigger the related party disqualification for independent director roles.

B. Q&A

[B.1] Is it mandatory to appoint a chief financial officer in a company?

The answer to this question lies in section 203 of the Companies Act, 2013 read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. According to Rule 8, a public company (which may be listed or unlisted) is mandatorily required to appoint whole-time key managerial personnel. Section 203 prescribes the whole-time key managerial personnel that includes, inter alia, a Chief Financial Officer. Thus, public companies with a paid-up capital of ₹10 crore or more are mandatorily required to appoint a whole-time CFO.

However, as per Rule 8A, a private company which has a paid-up share capital of ten crore rupees or more must have a whole-time company secretary.

Any default in the appointment of key managerial personnel is liable for a penalty of five lakh rupees, and key managerial personnel of the company who are in default shall be liable to a penalty of fifty thousand rupees. In case of continuing default, a further penalty of one thousand rupees for each day after the first during which such default continues can be levied (up to a maximum of five lakh rupees).

C. Case Laws

[C.1] An investor with unperfected equity cannot seek civil court injunction against director’s removal

The Calcutta High Court in Merico Tea Estates Ltd v. Mukesh Kumar Agarwal has clarified that civil courts lack the jurisdiction to interfere with internal corporate governance matters, specifically the removal of a director.

In this case, Merico Tea Estates Ltd. (the appellant) was the lessee of a large tea estate. Due to financial distress, it entered into a Memorandum of Understanding (MoU) with Mukesh Kumar Agarwal (Respondent No. 1) to acquire 100% of the company. As part of this arrangement, Respondent No. 1 was inducted onto the Board of Directors (via Form DIR-12) to facilitate an initial ₹3 crore advance, despite having no registered shareholding.

When the respondent failed to complete due diligence or pay the remaining consideration, the company resolved to rescind the MoU and initiated the statutory process to remove him from the board under Section 169 of the Companies Act, 2013.

The respondent filed a civil suit seeking to quash the removal notice and obtained an ex-parte ad-interim injunction from the trial court. The company appealed this order, challenging the civil court’s jurisdiction.

The following issues were considered by the high court:

Issue No. 1: Whether the holding of physical equity or qualification shares is a condition precedent to being classified as a ‘director’ under Section 2(34) of the Companies Act, 2013, and thus subject to the removal mechanism under Section 169?

The Court held that the definition of a director is purely functional and status-based. Modern corporate jurisprudence has severed the historical link between holding ‘qualification shares’ and holding a boardroom seat. By voluntarily executing and filing Form DIR-12, the respondent assumed a public, statutory office. Once in that office, he became subject to the entire regulatory and disciplinary architecture of the Act, regardless of his lack of equity ownership.

Thus, shareholding is not a condition precedent to being a director, and the respondent is fully subject to the statutory removal mechanism under Section 169.

Issue No. 2: Whether the statutory bar under Section 430 of the Companies Act, 2013, prevents a civil court from granting an injunction against an internal corporate process (director removal) regulated by Section 169?

Yes, the civil court is barred by Section 430 from entertaining disputes or granting injunctions concerning corporate procedures regulated by the Act.

Issue No. 3: Is a substantial financial investor, whose equity title is unperfected, remedies-deprived, thereby justifying the invocation of civil court jurisdiction?

No, the waiver mechanism under Section 244(1) provides a complete and adequate remedy before the NCLT, precluding the need for civil court intervention.

[C.2] Erring directors can be compelled to contribute to the corporate debtor’s assets during CIRP, but SFIO investigation requires procedural adherence

The NCLAT in Nitin Ramchandra Jadhav v. Vijendra Kumar Jain (May 20th, 2026) has affirmed that the suspended directors can be held liable to contribute to a corporate debtor’s assets under Section 66 of the IBC if they fail to provide satisfactory explanations for suspicious financial transactions.

As per the facts of the case, during the Corporate Insolvency Resolution Process (CIRP), a forensic audit revealed several irregularities, including the diversion of shares in a Singapore subsidiary without consideration, the creation of fictitious sales, and transactions with entities linked to ex-employees. The suspended directors claimed that proceeds from an alleged share sale were used to settle a penalty for a contract breach with a UAE-based entity.

The NCLAT found this explanation unsubstantiated, viewing the transaction as a sham designed to syphon off corporate funds to the detriment of creditors. Given the directors’ non-cooperation and failure to provide credible evidence to rebut the audit findings, the NCLAT upheld the Adjudicating Authority’s direction for them to contribute to the corporate debtor’s assets.

However, the NCLAT set aside the Adjudicating Authority’s direct order for an investigation by the Serious Fraud Investigation Office (SFIO). The tribunal clarified that the discretion to order an SFIO investigation lies solely with the central government under Sections 212 and 213 of the Companies Act, 2013. The matter was instead referred to the Ministry of Corporate Affairs for investigation by an inspector or inspectors, who may then refer the case to the SFIO if the gravity of findings warrants it.

This judgement reinforces that while an adjudicating authority has the power to hold directors accountable for fraudulent trading, it must strictly adhere to statutory procedures regarding the initiation of high-level investigations like those conducted by the SFIO.

[C.3] Enforcement of employee incentive plan during corporate restructuring upheld

In a significant ruling, the Karnataka High Court in Trianz Holdings (P.) Ltd. v. Sri P. Muralidhar (April 28th, 2026) has reinforced the enforceability of employee incentive schemes against restructuring efforts.

As per the facts of this case, a managing director was hired by TCPL (an Indian subsidiary of a US company, Trianz Inc.) in 2002 with the promise that he would receive a share of the company’s future value through something called ‘Value Creation Units’ (VCUs).

In 2004, the company officially set up a Value Creation Plan (VCP), and the MD was allotted 30,000 units. The MD resigned in 2006. Shortly after, the company went through a major restructuring. A new parent company (Trianz Holdings) was formed, which bought out the old US parent company.

When the company was reorganised and received new investment, the MD argued that a liquidity event (a major financial triggering event defined in the plan) had occurred. Based on his 30,000 units, he claimed he was owed approximately ₹4.2 crores.

The company refused to pay, arguing that the incentive plan was only for the US parent company, not the Indian subsidiary. Further, no liquidity event actually happened that would trigger a payout, and lastly, the MD had already received a severance payment of ₹67 lakhs, which they claimed was a full and final settlement for all his claims.

The High Court ruled in favour of MD. The court found clear evidence (including emails and legal opinions) that the plan was indeed intended to include employees of the Indian subsidiary, not just the US parent. Secondly, the court agreed that when the new holding company bought out the old US parent, it qualified as the liquidity event described in the plan. Lastly, the Court noted that the company’s complex restructuring, creating a new entity just to route investments, looked like a deliberate design to avoid paying the employees who held these units. Because of this, the court lifted the corporate veil, ignoring the complex corporate structure to see who was actually responsible and ensure the MD got his due. The company couldn’t prove that the ₹67 lakh payment was meant to wipe out the VCU claim. Since the VCU claim hadn’t crystallised (or become due) at the time he received that severance money, it couldn’t have been part of that settlement.

This judgement serves as a stern reminder that internal incentive plans are binding obligations. Courts will look past complex corporate layering to prevent the avoidance of contractual commitments during liquidity events or acquisitions.