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Directors, their appointment terms and procedural formalities

Learning objectives

In this chapter, you will learn about:

  • Mechanism for appointment of directors for private and public companies
  • Compliance requirements in connection with directors’ appointment
  • Removal of directors

Day-to-day affairs of a company are run by its directors and employees. The companies act recognizes the board of directors and key managerial personnel in the company as the persons responsible to execute the activities of the company. Some directors may also have an employment relationship with the company. For example, the office of the Chief Executive Officer, the Chief Financial Officer or the Chief Operating Officer positions may be offered to persons who are also directors. This chapter explains the provisions relating to the directors of the company.

Number of directors
The Companies Act, 2013 fixes the minimum and maximum number of directors a company can appoint. Under the 2013 Act, a private company is required to appoint at least two directors; while a public company must appoint at least three directors and a one person company is required to appoint at least 1 director. A company can appoint a maximum of 15 directors (a maximum of 12 directors were allowed under the Companies Act, 1956).It is possible for a company to increase the number of directors beyond 15 by passing a special resolution to this effect. Moreover, one of the directors of the company must be resident in India, that is, he must have stayed in India for a period of not less than 180 days in the previous calendar year.

How are directors appointed?
Generally for a private company, typically the promoters (i.e. the founders who are signatories to the articles of association) of the company become the first directors of the company.
Although the articles of association should ideally mention names of the first directors of the company, if that is not done, the subscribers to the memorandum (that is, the initial shareholders who incorporate the company) shall be considered as the directors. In all other cases, the directors can be appointed by the company through a resolution passed in the general meeting. However, before such appointment can be made, the members must be informed by either email or through postal communication at least seven days before the meeting about the candidature of the person as a new director.

How to accept appointment as director

Step 1: A person who is intended to become a director must apply to the Registrar for obtaining a Director Identification Number (DIN) in Form No DIR-3.

Step 2: A person who has been appointed as a director must notify the company about his consent to act as director in Form No DIR-2

Step 3: The prospective director should give a declaration to the company that he holds a DIN and is not otherwise disqualified to become a director in Form No. DIR-8.

Step 4: File Form MBP-1 for disclosure of interest of the director as required under Section184(1) read with rule 9(1) of Companies (Meetings of Board and its Powers) Rules, 2014.

Step 5: Form No DIR-12 must be submitted to the Registrar within thirty days of appointment.

Appointment of Additional Director
If the articles of a company allows, the Board of Directors of a company can appoint any person as an additional director (other than who has failed to get elected as a director during the general meeting), at any point of time. Such directors can hold office till the next general meeting.

What will happen if the director or the company fails to notify the Registrar within the specified date?
Failure to notify the Registrar of one’s appointment as a director is an offence - if a director fails to notify the Registrar of his appointment within the specified dates as mentioned in the previous paragraph, he is punishable with imprisonment for a period of six months or may have to a pay fine which may extend to fifty thousand rupees and if the non-compliance continues he might have pay an additional fine of rupees five hundred per day of non-compliance[u1] .

Block A person cannot be a director in more than twenty companies (out of which a person can be a director in a maximum of ten public companies) at the same time. However, a company is allowed to fix any lesser number of companies a director is allowed to act as directors, by passing a special resolution.
Special requirements for public companies
The new Companies Act has imposed additional requirements with respect to appointment of independent directors and women directors on public companies (whether they are listed or not). All listed companies are required to appoint special categories of directors like independent directors, small shareholders (minority) directors and woman directors in the Board. Some of these requirements even apply to unlisted public companies, if certain share capital, debt or turnover thresholds are exceeded.

Independent Director All listed public companies must appoint independent directors (i.e. those who are not related to the promoters of the company and do not have a financial relationship with the company) as per the listing agreement, however, the proportion of independent directors cannot fall below more than one-third of the toal directors, for better transparency and good governance.

Unlisted public companies must appoint at least two independent directors in the following circumstances:
  1. If their paid up share capital exceeds Rs. 10 crores.
  2. If their turnover exceeds Rs. 100 crores.
  3. If the aggregate of all the outstanding loans, debentures and deposits exceeds Rs 50 crores.
Woman director All listed companies and other public companies having a paid-up share capital of more than Rs 100 crores or turn-over of more than three hundred crore must appoint atleast one woman director.

Director appointed by minority shareholders- To have a fair representation of the minority shareholders in a listed company[T2]  (a shareholder having shares whose nominal value is less than twenty thousand rupees), the minority shareholders may elect one director

Term of appointment of directors
Generally a director is appointed in the Annual General Meeting (AGM), and can hold the post till the next AGM. However, the articles of the company can provide for appointment of permanent directors in the articles of the company. In case of a public company or its subsidiaries, only one-third of the directors can be appointed as permanent directors, rest of the directors must retire by rotation at the AGM of the company.

An independent director can be appointed for a period of consecutive five years. Such directors can be re-appointed after passing a special resolution by the Board for a period of another 5 years. After two consecutive terms, an independent director can be re-appointed only after a gap of three years (provided that the person was not appointed or associated with the company during these three years).

Resignation and removal of directors
A director can by giving a notice in writing to the company and the board, resign from the post of director. The effect of resignation will take place from the date when such notice has been received by the company or on such date as the director has conveyed to the company, whichever is later. Moreover, a director must convey the notice of resignation along with reason for resignation to the Registrar in Form No DIR-11 within thirty days from the date of resignation. The company in a similar manner has to inform the Registrar and post the information on the website of the company about the resignation of the director within thirty days from the date of notice of resignation in Form No DIR-12.

Suppose the company found out that one of the directors is working in a manner which is detrimental to the interest of the company, or the director is involved in fraudulent activities. What are the steps the company can take to remove the director? Can they remove them immediately?

A director can be removed at any time by passing an ordinary resolution (at least 51 % of the shareholders must pass the resolution) at a shareholders meeting, at any time before the completion of the term of the director. However, the director must be given reasonable opportunity of being heard before the decision is taken.

For this purpose, a shareholders meeting (called a general meeting) can be specifically called (see the chapter on meetings for further details). The notice that must be given to shareholders is called a ‘special notice’.

 [u1] Section 159. If any individual or director of a company, contravenes any of the provisions ofsection 152, section 155 and section 156, such individual or director of the company shall be
punishable with imprisonment for a term which may extend to six months or with fine which
may extend to fifty thousand rupees and where the contravention is a continuing one, with
a further fine which may extend to five hundred rupees for every day after the first during
which the contravention continues.
 [T2]Yes it applies only for listed companies Section 151

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