Director in company act

Director in company act, 2013

1. Director in company act –

On incorporation, a company becomes an artificial person in the eyes of law, it has a perpetual succession, its members may come and may go but the company lives till its death as aforementioned. It is empowered to hold all properties in its own name and in its own right. It can sue others and can be sued by others in its own name.

In order to enable a company to achieve its objects as enshrined in the objects clause of its Memorandum of Association, it has necessarily to depend upon some agency, known as Board of directors.

The Board of directors of a company is a nucleus, selected according to the procedure prescribed in the Act and the Articles of Association.

Members of the Board of directors are known as directors, who unless especially authorised by the Board of directors of the Company, do not possess any power of management of the affairs of the company.

Acting collectively as a Board of directors, they can exercise all the powers of the company except those, which are prescribed by the Act to be specifically exercised by the company in general meeting.

The directors formulate policies and establish organisational set up for implementing those policies and to achieve the objectives as contained in the Memorandum, muster resources for achieving the company objectives and control, guide, direct and manage the affairs of the company.

The Companies Act 2013 does not contain an exhaustive definition of the term “director”. Section 2(34) of the Act prescribed that “director” means a director appointed to the Board of a company.

Section 2(10) of the Companies Act, 2013 defined that “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.

The term ‘Board of Directors’ means a body duly constituted to direct, control and supervise the affairs of a company.

As per Section 149 of the Companies Act, 2013, the Board of Directors of every company shall consist of individual only. Thus, no body corporate, association or firm shall be appointed as director.

Again Section 166 of Companies Act, 2013, prohibits assignment of office of director to any other person. Any assignment of office made by a director shall be void.

Minimum/Maximum Number of Directors in a Company [Section 149(1)]
Section 149(1) of the Companies Act, 2013 requires that every company shall have a minimum number of 3 directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company.

A company can appoint maximum 15 fifteen directors. A company may appoint more than fifteen directors after passing a special resolution in general meeting and approval of Central Government is not required.

The restriction of maximum number of directors shall not apply to section 8 companies.

Maximum Number of Director is 15, which can be increased by passing a special Resolution. Section 8 companies can have more than 15 directors.

2. Number of directorships [Section 165]

Maximum number of directorships, including any alternate directorship, a person can hold is 20. It has come with a rider that number of directorships in public companies/ private companies that are either holding or subsidiary company of a public company shall be limited to 10

i.e., a person cannot be a director of more than 10 public companies. For the purpose of counting such directorship in public company, directorship in private companies that are either holding or subsidiary of a public company shall be included.

Alternate directorship shall also be included while calculating the directorship of 20 companies.

Section 8 company will not be counted for the purpose of maximum number of Directorship. Further the members of a company may restrict abovementioned limit by passing a special resolution.

If a person accepts an appointment as a director in contravention of above mentioned provisions, he shall be punishable with fine which shall not be less than five thousand rupees but which may extend to twenty five thousand rupees for every day after the first day during which the contravention continues.

3. Indian Resident Director

The provision relating to appointment of Indian resident director are contained in section 149 (3) of the Companies Act, 2013. i.e. every company shall have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year.

Companies incorporated after 30.9.2014 need to have the resident director from the date of incorporation itself.

4. Woman Director

Second Proviso to section 149(1) read with
Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, prescribes the following class of companies shall appoint at least one woman director-

(i) every listed company;

(ii) every other public company having :-

(a) paid–up share capital of one hundred crore rupees or more; or

(b) turnover of three hundred crore rupees or more .

A company, which has been incorporated under the Act and is covered under provisions of second proviso to sub-section (1) of section 149 shall comply with such provisions within a period of six months from the date of its incorporation:

However any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board Meeting or three months from the date of such vacancy whichever is later.

For example: in case of ABC Ltd., the vacancy of the woman director arises on January 15, 2015 and the next Board meeting is scheduled to take place on February 15, 2015, then the vacancy shall be filled up either by February 15, 2015 or by April 14, 2015, whichever is later i.e.

April 14, 2015. If for any reason the meeting of Board of directors shifted to May 10, 2015, then the vacancy shall be filled up either by April 14, 2015 or May 10, 2015, whichever is later i.e. May 10, 2015.

The paid up share capital or turnover, as the case may be, as on the last date of latest audited financial statements shall be taken into account.

5. Independent Directors

Director elected by Small Shareholders [Section 151]

According to section 151 of the Act every listed company may have one director elected by such small shareholders in such manner and on such terms and conditions as may be prescribed.

“Small shareholder” means a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.

Here, the ‘nominal value’ of shares is relevant. It does not matter how much is the ‘paid up value’ or ‘market value’ of shares. However, a small shareholder may be a holder of equity shares or preference shares or both.

For example: Mr. A holds 5000 equity shares of Rs. 10 each (Rs. 5 paid up) in XYZ Ltd. However, Mr. A cannot be considered as small shareholder since the nominal value of shares held by him (i.e. Rs. 50,000) exceeds Rs. 20,000.

Terms & Conditions for Small Shareholders’ Director
Rule 7 of Companies (Appointment and Qualification of Directors) Rules, 2014 laid down the following terms and conditions for appointment of small shareholder’s director, which are as under:

(i) Election of small shareholders’ director: A listed company, may upon notice of not less than
(a) One thousand small shareholders; or

(b) one-tenth of the total number of such shareholders,

which ever is lower; have a small shareholder’s director elected by the small shareholder.

A ‘Small Shareholders’ Director’ may be elected voluntarily by any listed company. Thus, a listed company, may, on its own, act to appoint a Small Shareholders’ Director.

In such a case, no notice from small shareholder(s) is required.

(ii) Notice of intention to propose a candidate:

The small shareholders intending to propose a person as a candidate for the post of small shareholder’s director shall leave a signed notice of their intention with the company at least 14 days before the meeting specifying the their details and proposed director’s details.

The details include name, address, shares held and folio number etc. If the proposer does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.
Shareholders eligible to give notice: The notice shall be given by at least-

(a) 1000 small shareholders; or

(b) 1/10th of the total number of small shareholders, which ever is lower.

(iii). Statement by the proposed small shareholders’ director:

The notice shall be accompanied by a statement signed by the proposed director for the post of small shareholders’ director stating
(a) his Director Identification Number;
(b) that he is not disqualified to become a director under the Act; and
(c) his consent to act as a director of the company.

(iv) Small shareholders’ director to be an independent director:

Small shareholders’ director shall be considered as an independent director, if-
(a) he is eligible for appointment as an independent director as per sub-section (6) of section 149; and
(b) he gives a declaration of his independence as per sub-section (7) of section 149.

(V). Tenure of office and no retirement by rotation: The tenure of small shareholders’ director shall not exceed a period of 3 consecutive years and he shall not be liable to retire by rotation. Further he shall not be eligible for re-appointment after the expiry of his tenure.

(vi). Grounds of disqualification: Disqualifications of a small shareholders’ director are the same as that of any other director specified under section 164 of the Act.

(vii). Grounds of vacation of office: A Small shareholders’ director shall vacate the office if –

(a) he ceases to be a small shareholder, on and from the date of cessation;

(b) he incurs any of the disqualifications specified in section 164;

(c) the office of the director becomes vacant in pursuance of section 167;

(d) he ceases to meet the criteria of independence as provided section 149 (6).

(viii). Number of small shareholders’ Directorship: A person shall not hold the office of small shareholders’ director in more than two companies. If second company is in competitive business or is in conflict with business of the first company, he shall not be appointed in second company.

(ix) No association with the company for next 3 years: He shall directly or indirectly not be appointed or associated in any other capacity with the company either directly or indirectly for a period of 3 years from the date of cessation as a small shareholder’s director.

Important points to note:

(i) A small shareholders’ director may be removed by passing an ordinary resolution in the general meeting in accordance with the provisions of section 169 of the Act. At the time of voting on such resolution, every equity shareholders shall have a right to vote irrespective of the fact as to whether he is a small shareholder or not.

(ii) A small shareholders’ director shall be included in the ‘total number of directors’ as prescribed under section 152 (6) of the Act.


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