Appointment of Director

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Director Appointment Guidelines

Directors play pivotal roles in various types of companies, and the appointment of directors is subject to specific regulations depending on the type of company. This document outlines the essential criteria and disqualifications related to director appointments.

The company’s articles provide insight into the different categories of directors and the procedures for their appointment. According to Section 2(34) of the Companies Act, 2013, a director is an individual appointed as such within the company. It is crucial to note that individuals appointed but not designated as directors do not fall under the purview of this Act. This restriction to individuals is imposed to ensure clarity in defining roles and responsibilities, particularly in the case of corporate entities and firms. Additionally, minors are ineligible to become directors due to their inability to obtain a Director Identification Number (DIN) as stipulated in Section 152(3). Furthermore, as per Section 149(3), at least one director must be a resident of India.

Key Directorship Requirements:

  • Minimum Number of Directors: Public limited companies must have a minimum of 3 directors, private companies require at least 2 directors, and one Person Company (OPC) can function with a single director. However, the company’s articles may specify a higher minimum if necessary.
  • Maximum Number of Directors: By default, the maximum number of directors is set at 15, but this limit can be exceeded through a special resolution. Government companies and companies licensed under Section 8 are exceptions to the special resolution requirement, subject to specific conditions.
  • Restrictions on Multiple Directorships: Section 165 of the Companies Act prohibits any person from holding directorship in more than 20 companies. For public companies, this limit is further restricted to 10. It’s important to note that dormant companies and companies licensed under Section 8 are excluded from this count. For example, if an individual serves as a director in 15 companies, comprising 9 public and 6 private entities, they are eligible to be appointed as a director in only one more public company or up to four private companies (if no public companies are included). In the context of this section, any subsidiary of a public company is regarded as a public company.

Disqualification of Directors (Section 164):

The following individuals are ineligible to serve as directors:

  • Persons of unsound mind.
  • Undischarged insolvents.
  • Individuals who have applied for insolvency and have pending applications.
  • Individuals imprisoned for more than 6 months within the last 5 years.
  • Persons disqualified by a court or tribunal.
  • Individuals who have not paid any call on shares, and 6 months have passed.
  • Those convicted of an offense related to a party transaction within the preceding 5 years.
  • Persons without a Director Identification Number (DIN).
  • Any company in which the candidate serves as a director and has not filed annual returns for three consecutive years, defaulted in payment or redemption of deposits or debentures, interest, or dividend, is ineligible for reappointment in the same company and any other company for a duration of 5 years.

Types of Directors in Companies

  • Executive Directors: These directors are actively employed within the company and play a hands-on role in its day-to-day operations. They possess in-depth knowledge of the company’s inner workings and include positions such as managing directors and whole-time directors.
  • Non-Executive Directors: Non-executive directors are individuals who are neither employed by the company nor deeply involved in its daily management. This category typically includes professional directors and nominee directors who maintain an impartial perspective towards the company.
  • Rotational Directors: In non-private and specific government companies, at least two-thirds of directors must retire by rotation. The company’s articles may even specify that all directors retire by rotation. Out of these, at least one-third of rotational directors must retire either by a random selection process or by agreement. Reappointment of retiring directors is possible, except in cases specified under section 152(7)(b). However, a retiring director’s tenure cannot extend beyond the last Annual General Meeting (AGM). Independent directors and nominee directors appointed by financial institutions are excluded from the count when determining the total number of directors.
  • Non-Rotational Directors: Any directors not subject to rotation are classified as non-rotational directors.
  • First Directors: These directors are individuals specified in the company’s articles at the time of incorporation. In the absence of such specifications, they are chosen by a majority vote among the subscribers of the memorandum, as per Table F. If Table F is not applicable, all subscribers become the first directors. Their appointment lasts until the company appoints subsequent directors.
  • Manager/Managing Director/Whole-Time Directors: Section 203 mandates that listed companies, public companies with a paid-up share capital exceeding 10 crores, or companies with a paid-up share capital exceeding 5 crores appoint a managing director, manager, whole-time director, company secretary, and chief executive officer. These positions are defined under sections 2(54), 2(53), and 2(94) respectively. The maximum tenure for these appointments is five years, except for private companies, which are exempt from this restriction. Section 196 outlines the appointment process for these key managerial roles. Eligible candidates must be Indian residents aged between 21 to 70 years, with additional eligibility criteria as specified in Schedule V.
  • Independent Directors: Independent directors are not affiliated with the company in specific ways. They cannot be managing directors, whole-time directors, or nominee directors and must meet the criteria specified in section 149(6). Independent directors can serve consecutively for up to two years, with a mandatory gap of three years before reappointment to the same company for the same position. Listed public companies must have at least one-third of their directors as independent directors. Some prescribed public companies require a minimum of two independent directors, including those with a paid-up share capital of 10 crores or more, a turnover of 100 crores or more, or outstanding loans, debentures, and deposits exceeding 50 crores. Joint ventures, wholly-owned subsidiaries, and dormant companies are exempt from this requirement. If a company has an audit committee, more than half of its members must be independent directors, and this becomes the minimum number of independent directors required for such companies.
  • Nominee Directors: Nominee directors are appointed by third parties, following the company’s articles and in accordance with relevant laws. For instance, a bank may appoint a nominee director.
  • Woman Directors: Listed companies and public companies with a paid-up share capital of 100 crores or more, or a turnover of 300 crores or more, must appoint at least one woman director. Vacancies must be filled within three months or at the immediate next board meeting, whichever is later.
  • Additional Directors: Public and private companies can appoint additional directors if their articles permit it. Such appointments do not require approval at a general meeting and can be made through a board meeting or by passing a resolution by circulation. The tenure of an additional director cannot extend beyond the next AGM or the due date for the AGM.
  • Alternate Directors: When a director is leaving India for three months or more, the board may appoint an alternate director. This alternate director should not serve as a director in the same company or hold alternate directorships elsewhere in the same company. They assume the same role as the original director and serve until the original director’s return or the end of their designated term.
  • Directors by Small Shareholders: Listed companies whose shareholders hold a nominal value of less than 20,000 must provide notice at least 14 days before a meeting if they intend to appoint a small shareholder’s director. This notice requires the support of 1,000 small shareholders or 10% of the total shareholders, whichever is lower. A small shareholder’s director cannot serve for more than three consecutive years, with a cooling-off period of three years before reappointment in the same company. Additionally, a person can hold such directorship in a maximum of two companies, provided the second company is not a competitor of the first. The grounds for disqualification, vacation of office, and regulations for independent directors also apply to small shareholder’s directors.
  • Casual Vacancies: Boards have the option to fill casual director vacancies if the departing director was appointed during a general meeting. However, there is no obligation to fill such vacancies, and the term of the director appointed to fill the vacancy cannot exceed the original director’s term.
  • Proportional Representation: Except for government companies, to prevent majority shareholders from dominating the decision-making process, a company can appoint not less than two-thirds of its directors through proportional representation. This ensures that minority shareholders maintain their influence and rights within the company.
  • Right to Stand as Director: Every individual has the right to apply for a director’s position in a public company. According to section 160 of the Act, any person can submit their candidacy with a deposit of Rs. 1 lakh (or Rs. 10,000 for Nidhi companies) at the registered office of the company at least 14 days prior to the meeting. This deposit is refunded if the person is appointed as a director or receives at least 25% of the votes in their favor.

Adding a Director to a Private Limited Company

Directors play a pivotal role in the operations of a Private Limited Company, as they are responsible for making crucial business decisions on a day-to-day basis. If you need to add a director to your company, follow these steps:

  • Obtain Consent from the Proposed Directors:
  • Before proposing someone as a director, ensure you have their consent. This step is vital.
  • Use Form DIR-2 to record their consent, as it is a crucial document required by the company.
  • Secure Digital Signatures (DSC) for the Proposed Directors:
  • If the proposed directors don’t already have digital signatures, they must obtain one.
  • Digital signatures are essential for various official transactions and filings.
  • Apply for Director Identification Number (DIN):
  • If the Proposed Director doesn’t possess a DIN, you need to apply for one on their behalf.
  • DIN can be obtained by individuals who are at least 18 years old, regardless of their nationality.
  • This means that Indian Nationals, Non-Resident Indians, and Foreign Nationals are eligible to obtain a DIN and be appointed as directors in a Private Limited Company in India.

By following these steps, you can successfully add a director to your Private Limited Company, ensuring compliance with legal requirements. Please note that there may be associated fees for certain processes, which should be considered during the director addition process.