Appointment of Directors under the new Companies Act, 2013

Directors of a company hold the most crucial position in the Company. With the new Companies Act, 2013 (“New Act“) already in force, their position has become even more significant than ever before. They are now formally included within the definition of “key managerial personnel” or “KMP” under Section 2(51) of the New Act.

New Categories and Qualifications of Directors

Resident Director: The new Act has made certain important changes in the earlier regime, particularly in respect of the appointment of directors. For instance, as per Section 149 of the New Act, Board of Directors of a company, must have at least one resident director, i.e. a person who has lived not less than 182 days in India in the previous calendar year. The second proviso added to section 149 in the New Act requires all companies to comply with section 149 within a year.

Woman Director: Similarly, a new provision is introduced under section 149, which requires certain categories of companies to have at least one woman director on the board. Such companies are any listed company, and any public company having-

1. paid up capital of Rs. 100 cr. or more, or
2. turnover of Rs. 300 cr. or more.

Independent Director:  Independent Director is for the first time introduced in the New Act, and has been clearly defined as “any director other than a managing director, a whole time director, and a nominee director.” Such a director not having any significant pecuniary relationship with the company is more efficient. Section 149 (4) requires that one third of the directors should be independent directors. Section 149(6) lists in detail the specific qualifications for an independent director-

1. Person of integrity and relevant experience
2. Is not a promoter, nor has any relation with the promoters or directors of  the company, its holding, subsidiary or associate company;
3. Has no pecuniary relationship with company, its holding, subsidiary or associate company, its promoters or directors in the preceding two years of his appointment
4. Has no relatives who have pecuniary relationship with company, its holding, subsidiary or associate company, its promoters or directors, amounting to two percent  in the preceding two years of his appointment
5. Neither he, nor any of his relatives have held a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed.
6. Neither he nor any of his relatives have been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of (a) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or (b) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;
7. Neither he nor any of his relatives hold together with his relatives two per cent. or more of the total voting power of the company; or
8. Neither he nor any of his relatives is a Chief Executive or director, by whatever name called, of any nonprofit organization that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or
9. who possesses such other qualifications as may be prescribed.

The appointment of independent directors has to also be approved by the shareholders.

Additional Directors: Additional Directors may be appointed by a company under section 161 of the New Act. The article should confer such power on the Board of Directors of the Company. A provision further added in 2013 with regards to such appointment is that the proposed person should not have failed to get appointed as a Director in a General Meeting.

Nominee Director: Nominee Director is defined under an explanation to section 149. He is a Director nominated by any financial institution pursuant to any law for the time being in force, or of any agreement or appointed by any Government or any other person to represent its interest.

Alternate Directors: Alternate Directors, under section 161(2) of Companies Act, 2013, may be appointed by a company if the articles confer such power or  a decision is passed by a resolution if an independent Director is absent from India for not less than three months. He must be qualified to become an independent director, but should not hold any Directorship. An alternate Director cannot hold the office longer than the term of the Director in whose place he has been appointed. Additionally, he will have to vacate the office, if and when the original Director returns to India. Any alteration in the term of office made during the absence of the original Director will apply to the original Director and not to the Alternate Director.

Number of Directors

The New Act, by adding 149 (1) (b), has also increased the maximum number of directors that a company can have from twelve to fifteen. The number can be further increased by passing a special resolution instead of requiring approval from Central Government as was under the Old Act.

Appointment of Directors

Section 152 of the New Act governs the appointment of directors. Certain specific requirements for appointment of director as laid down in the New Act are-

• If there is no provision for appointment of Director in the Articles (AoA), the subscribers to the memorandum, i.e. the shareholders, who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed;
• Director to be appointed in a general meeting. If it is so done, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfills the conditions specified in this Act for such an appointment;
• The proposed Director has to furnish his DIN (Director Identification Number) mandatorily. DIN is allotted by the Central Government on application by a person intending to be the Director of a company. DIN can be obtained in pursuance of section 153 and 154;
• The proposed Director has to also furnish a declaration stating that he is not disqualified to be a director.
• Furthermore, such appointment should be with his consent. Earlier such consent was not mandatory for private companies.Consent implies that being appointed a director and taking the charge of the office are two different things;
• Consent has to be filed with the Registrar of Companies within 30 days of appointment

The provisions for optional proportionate representation which was earlier mandated only for public companies and the private companies which are subsidies of a public company, has now been extended to all private companies also (section 163 of the Companies Act, 2013). Also, the disqualifications for appointment and reappointment of directors have been made applicable to the private companies. Therefore, prior to appointing a director, a company must tick off the various disqualifications for appointment as director under Section 164 of the New Act.

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Author: Vishakha Gupta   |   Editor: Vivek Verma   |   Image from here