What is Meant By Company Director?
A director is a person or an entity (partnership) appointed to the board of directors, who is responsible for managing the affairs of the company and ensuring that the company is operating as per the rules and regulations.
Company Director Under Companies Act 2013
A company's directors must be appointed in accordance with the Companies Act 2013. Every business must have a specific number of directors in line with the Companies Act of 2013.
The Appointment of directors plays a crucial role in a company's governance. It ensures efficient management while protecting stakeholders' interests.
Why is it Important to Appoint a Director?
A director is essential to the company's governance, decision-making, and general management. In India, the Companies Act 2013 lays down the rules for appointing directors and defining their authority and responsibilities. According to the Companies Act of 2013, a private company needs at least two directors, a public corporation needs three, and a one person company needs only one.
The Main Reasons Why the Appointment of a director is important:
Expertise and experience
The private limited company's overall direction and strategy may benefit from the directors' extensive knowledge and expertise.
Diverse viewpoints
A private limited business may benefit from the various viewpoints and methods that a diverse board of directors can contribute to problem-solving and decision-making.
Directors are in charge of monitoring the company's management and making sure it is conducted responsibly and openly. This can enhance the private limited company's overall governance.
Enhanced credibility
In the view of stakeholders, including shareholders, clients, and staff, the private limited company's credibility can be improved by appointing reputable and experienced people as directors.
Enhanced value for shareholders
A strong board of directors can contribute to the company's performance, which in turn may result in higher value for shareholders.
Legal Requirements for Director Appointment
Appointing a director in an Indian company is governed by the Companies Act, 2013, specifically Sections 149 to 172. A director must be an individual (not a body corporate), at least 21 years old, and not disqualified under Section 164 (e.g., undischarged bankrupt, convicted of fraud, or removed by court).
Section 149 mandates a minimum of one director for a private company and three for a public company. There must be at least one woman director for listed or specified public companies. The director must obtain a Director Identification Number (DIN) under Section 153 and consent via Form DIR-2.
Section 152 requires shareholder approval for appointments, except for additional or nominee directors. Independent directors, mandated for listed companies under Section 149(6), must meet integrity and experience criteria. Non-compliance attracts penalties under Section 172.
Directors’ details must be filed with the Registrar of Companies (ROC) within 30 days.
Eligibility Criteria for Company Directors
To become a director of a business in India, one must fulfil specific qualifying requirements as stipulated in the Companies Act 2013. The eligibility for company directors is:
Minimum Age
A candidate for a directorship must be at least eighteen years old. Becoming a Director has no upper age limit. A child, or someone under the age of eighteen, cannot be appointed as a director.
DIN, or Director Identification Number
A current Director Identification Number (DIN) from the Ministry of Corporate Affairs (MCA) is required of the person. A DIN is a special identifying number that is needed to be appointed as a director of a business.
Declaration and Consent
The individual must declare that they are not ineligible to serve as a director under the Companies Participation of 2013 and submit their approval to participate as a director of the company.
Disqualifications
The Act lists a number of disqualifications that would bar someone from being nominated or serving as a director going forward. Among these disqualifications are convictions for specific crimes, being pronounced mentally ill, and being an undischarged insolvent. Reviewing the particular disqualifications listed in Section 164 of the Companies Act of 2013 is crucial.
Types of Directors in a Company
Depending on the particular requirements and organisational structure, a private limited company may choose a variety of directors. A firm may have types of directors, such as:
Executive Directors
Usually part of the senior management team, these full-time directors are in charge of running the business on a daily basis.
Non-Executive Directors
Part-time directors who have no executive duties within the private limited company are known as non-executive directors. They are usually appointed to supervise and advise the board of directors and are not affiliated with the company's management.
Independent Directors
Non-executive directors who have no other connection to the business, such as being shareholders or employees, are known as independent directors. They were chosen to provide the board of directors with an unbiased viewpoint.
Alternate Directors
Directors designated to serve instead of a director who is unable to attend board meetings because of illness or other circumstances are known as alternate directors. The responsibilities and authority of alternate directors are identical to those of the directors they are designated to represent.
Nominee Directors
Nominee directors are those who have been chosen by a third party to represent their interests on the board of directors, such as a lender or investor who funds start-ups.
Step-by-Step Process to Appoint a Director
According to the Companies Act of 2013, a Private Limited Company in India must follow a number of legal and procedural procedures when appointing a director.
Step 1: Examine the articles of association (AoA)
Examine the Articles of Association (AoA) of the business to see whether there are any special rules about the selection of directors.
Modify the AoA by means of a special resolution if necessary.
Step 2: Getting the Director Identification Number (DIN)
The Ministry of Corporate Affairs (MCA) must award the proposed director with a current Director Identification Number (DIN).
The person must apply for a DIN using Form DIR-3 if they don't already have one.
Step 3: Acquire a Certificate of Digital Signature (DSC)
In order to file forms with the MCA, the proposed director needs to possess a Digital Signature Certificate (DSC).
Step 4: Get the Director's Consent
To serve as a director, the individual being appointed must provide their assent on Form DIR-2.
The business must keep this form on file.
Step 5: Call a Board Meeting
- All directors should receive notice of the upcoming board meeting at least seven days in advance.
- Adopt a board resolution authorising the new director's appointment.
- Call a general meeting if the appointment (such as an independent or additional director) needs shareholder approval.
Step 6: Send a Letter of Appointment
Give the new director a formal appointment letter outlining their duties, responsibilities, and terms of service.
Step 7: Send MCA the DIR-12 file.
The company must submit Form DIR-12 to the MCA within 30 days of being appointed, together with the following:
- Board resolution Consent Form DIR-8: Director's declaration that they are not disqualified
- DIN: Confirmation of the director's identity and address
- An Extract of the Board Resolution and General Meeting
Step 8: Update ROC Records and Company Registers
Update the Key Managerial Personnel and Directors' Register.
If necessary, make the requisite adjustments of ROC records and Company registers with bank accounts, letterheads, and company records.
Compliance and Legal Considerations
Additional compliance documentation, including a notarised/appostile/consularised passport and visa, might be required if the director is a foreign national.
Section 164 of the Companies Act, 2013 provides that the director must not be disqualified.
The legal foundation for the corporate governance procedure and the responsibilities of directors is provided by the Companies Act of 2013. The directors are responsible for making sure the business abides by all Act requirements, which include:
- Sending financial statements, yearly reports, and other papers to regulatory bodies within the allotted time
- Among the prerequisites for preserving compliance are openness in financial dealings, accurate bookkeeping, and audits.
- Good corporate procedures, such as holding board meetings and recording decision minutes, should be used by the directors to run the business effectively. They ought to always uphold the greatest moral standards.
Conclusion
The selection of directors is the first step in a process as basic as helping businesses find responsible, moral, and productive leadership. The rules and legalities both guide the board, demonstrating responsibility and honesty. Therefore, understanding one's qualifications, responsibilities, and regulatory requirements helps businesspeople establish sound governance while following best practices to enable the achievement of their strategic objectives and goals in the hands of capable and responsible directors.
FAQs
Who chooses a Director?
At the Annual General Meeting (AGM) or, in more extreme cases, at an Extraordinary General Meeting (EGM), directors are typically chosen by the shareholders.
What qualifications are necessary to become a director?
A suitable educational or professional experience, integrity, the independence of the majority of independent directors, and everything specified in a firm's bylaws are generally expected. However, requirements vary.
Is it possible for someone to be denied the opportunity to serve as a director?
Indeed, a person is disqualified if they have a criminal past, are insolvent, have conflicts of interest, or have a mental disease that might affect their ability to make sound choices.
What is the difference between an executive and a non-executive director?
The degree of involvement in a company's daily operations is the primary distinction between an executive director and a non-executive director. Unlike non-executive directors, executive directors participate in day-to-day management.
