Law and You > Corporate Laws > Companies Act, 2013 > Appointment of Directors
In this article, we shall study the appointment of directors and qualifications required from them.
The supreme executive authority controlling the management and affairs of a company vests in the team of directors of the company, collectively known as its Board of Directors. At the core of corporate governance, practice is the Board of Directors which oversees how the management serves and protects the long term interests of all the stakeholders of the Company. Directors are regarded as being the Key Managerial Persons of a company, with special importance to the listed companies. They can hold multiple high and responsible positions in the companies, such as the Managing Director, Manager, Whole Time Director, or an Independent Director. The institution of the board of directors was based on the premise that a group of trustworthy and respectable people should look after the interests of a large number of shareholders who are not directly involved in the management of the company.
A company, though a legal entity in the eyes of law, is an artificial person, existing only in contemplation of law. It has no physical existence. It has neither soul nor body of its own. As such, it cannot act in its own person. It can do so only through some human agency. The persons who are in charge of the management of the affairs of a company are termed as directors. They are collectively known as Board of Directors or the Board.
In Indian States Bank Ltd. v. Sardar Singh, AIR 1934 ALL 855 case, it was held that it is necessary that management of companies should be in proper hands.
Individual as a Director:
Under Section 149(1) of the Companies Act, only an individual can be appointed as a director of a company and no company, firm or association can be appointed as a director. No company is to appoint or appoint any individual as a director unless he has been allotted a Director Identification Number under section 154.
Board of Directors:
- Every company should have a board of directors consisting of individuals as directors.
- A public company is to have a minimum of 3 directors
- A private company is to have 2 directors.
- In the case of one person company, only one director is compulsory.
- There can be a maximum of 15 directors. A company may appoint more than 15 directors only after passing a special resolution.
- The Central Government may prescribe a class or classes of companies who are to have at least one woman director. The Government has now notified that every listed company and every other public company having a paid-up share capital of Rs. 100 crores or more; or having a turnover of Rs. 300 crores or more shall appoint at least one woman director. Section 149(1)
- Every company is to have at least one director who has stayed in India in the previous year at least for 182 days. Section 149(3)
- Every listed company must have at least one-third of the total number of directors (if fraction, then next whole number), who are independent directors. An Independent Director is that member of the board of a company, who does not possess any financial relationship with the company (except the sitting fees), nor can own shares in the company. The Act empowers the Government of India to include other categories of companies within the scope of this provision or requirement. Section 149(6). Central Government has prescribed under Rule 4, public companies with specified limits as on the last date of latest audited financial statements mentioned below shall also have at least 2 directors as independent directors:- (i) paid-up share capital of Rs. 10 crore or more; or turnover of Rs. 100 crore or more; or (ii) in aggregate, outstanding loans/borrowings/ debentures/ deposits/ exceeding Rs. 50 crore or more.
- A listed company may have one director elected by such small shareholders as may be prescribed. For the purpose of this section, a small shareholder is a shareholder holding shares of the nominal value of not more than Rs.20,000 or such other sum as may be prescribed. (Section 151)
- The first directors of the company are to be appointed by the subscribers of the memorandum which are listed in the articles of the company. If no appointment is made then all the subscribers who are individuals become directors. The first directors hold office only up to the date of the first annual general meeting of the company and subsequent directors must be appointed in accordance with the provisions of the Act.
- In newly formed OPC, the individual who is the member becomes the first director of a company.
- Unless otherwise so provided in the Act, all directors are to be appointed by the company in general meeting.
- The person to be appointed as a director has to furnish his Director’s Identification Number and a declaration that he is not disqualified to become a director under the provision of the Companies Act. The person appointed as a director has to file his consent to act as a director with the Registrar within 30 days of his appointment in the prescribed manner.
- The Articles of the company may provide for the retirement of all the directors by annual rotation. Otherwise only 1/3 can be given permanent appointment and remaining2/3 rd are retiring directors. The effect of these provisions is that the rotational director has to be appointed at general meetings except where the act provides otherwise. At every annual general meeting, one-third of the total number of retiring directors must retire from the office. Such a vacancy is to be filled up by appointing the retiring director or any other person. If such number is not three or multiple of three, the number closest to one-third is to retire. Nominees of certain Financial Institutions are not liable to retire. The total number of directors for this purpose does not include independent directors.
- The directors who retire by rotation are those who have been longest in office since their last appointment. If two or more persons became directors on the same day, they may agree as to who is to retire, and if they do not, this is to be determined by drawing lots.
- The vacancies thus created by retiring directors should be filled up at the same meeting but the general meeting may resolve not to fill the vacancies. If it has done neither, the meeting shall be deemed to have been adjourned for a week. If at the reassembled meeting also no fresh appointment is made, nor there is a resolution against the appointment, the retiring directors shall be deemed to have been reappointed, except in the following cases.
- at that meeting or at the previous meeting a resolution for the reappointment of such director has been put to the meeting and lost;
- the retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so re-appointed;
- he is not qualified or is disqualified for appointment;
- a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of any provisions of this Act; or