In this article we take a look at the criteria that should be considered while appointing a director in a company

Every company has a board of directors a company. It is mandatory by law. It is meant to be a council of sorts, elected by the shareholders, which oversees and reviews the decision-making and administration of company affairs by the company’s senior management. In most other business formats, the senior management is the company’s owner, and their decision-making powers are absolute. But a company is the only format of business where the owners, who are the shareholders, do not participate in running the business or decision-making for the business. They are people who just invest the money and hire competent managers to work for the company. And these managers report to the shareholders and consult with them on what Direction the company should take. Abilities For Becoming A Director In India 

But a private limited company can have up to two hundred shareholders, and a public limited company can have an unlimited number of shareholders. The difference of opinion on a particular decision can throw a company’s operations into limbo, eventually hurting the shareholders’ interests. So for this purpose, the office of a director was created. A director would represent the shareholders’ interest and assert the shareholders’ authority on the company’s management. The management would be answerable to the board as they would be answerable to the shareholders and accept the board’s decisions as they would accept the shareholders’ decision.

The number of directors in a company has been restricted to fifteen. This is because otherwise, each shareholder will want to elect their own director, defeating the purpose of creating a more unified direction in decision-making. The restriction on the number of directors makes the shareholders agree with each other on the direction the company should take when choosing a director on their behalf. Of course, there is no restriction on a shareholder becoming a director. Suppose any of the shareholders feel that they are qualified to be a director. In that case, they can put their names forward for the position. So what is it that makes a person eligible to be a director? Let’s find out.

Abilities for Being a Director

Of course, the law cannot tell a shareholder whom they can and cannot make a director. A shareholder has the right to look after his or her interests in any way they deem best, including choosing whom they feel will best represent their interests in the company’s functioning. But there are certain basic eligibility criteria per the law to determine if a person can be allowed as a director. Let us look at these.

• Section 157 of the Companies Act states that a person must be at least 21 years of age to become eligible to be a director. So this is the first mandatory criterion. This is not to say that people below that age cannot be competent. But the reasoning behind this is that a appointment of director must act as a company representative. The legal age to do things like signing a contract or holding a power of attorney is 18. But the logic is that by age 21, the individual would have had a fair bit of experience as an adult. That’s why 18 is considered the age one attains adulthood and 21 is the age one attains maturity.
• All companies’ provisions that define a person’s eligibility for a particular role, responsibility, or power have one requirement in common. And that is soundness of mind. The company is considered a distinct legal entity per the law. And since it cannot think or act for itself, the company law requires every person acting on behalf of the company to act in its best interests. And to be able to make that judgement in the best interests of the company, one should be of sound mind. So this is another mandatory requirement. No real certification or documentation needs to be provided in lieu of soundness of mind while appointing a director. But if a person is found to be unsound of mind during his or her directorship, he or she can be removed, and their decisions vetoed or reversed.
• And finally, there must be no ruling against the individual, barring him or her from being a director in a company by a competent judicial authority. This means that if a person has conflicted with the law or some other regulatory body in the past and the judge or the presiding authority rules that the individual’s conduct has made him or her unfit to be a director in any company, then they are automatically considered ineligible to be a director. Apart from the courts, other statutory bodies that hold the authority to bar a person from being a director are the Company Law Board (CLB) and the Securities Exchange Board of India (SEBI).
• Companies with paid-up share capital greater than ₹ 100 crores or a turnover greater than ₹ 300 crores are mandatorily required to have at least one woman director. So, in this case, the gender of the individual becomes an additional criterion of eligibility for directorship.
• Companies with a paid-up capital of greater than ₹ 10 crores, a turnover of ₹ 100 crores, or outstanding borrowings exceeding ₹ 50 crores are required to have an independent director on the board. An independent director has not been elected by the shareholders and has nothing to do with the company. An independent director is a third-party director who comes on board to ensure that individual interests do not outweigh the company’s interests when it comes to decision-making. There are several additional criteria for a person to be an independent director.

• The person must not be a promoter of the company or related to a promoter of the company.
• The person must not have had any material financial transactions with the company within the two financial years immediately preceding such appointment.
• The person must not have relatives who have had any material financial transactions with the company within the two financial years immediately preceding such appointment.
• The person or any relative must not have held any key managerial position or any other kind of employment with the company within the three financial years immediately preceding such appointment of director.
• The person should not have been appointed as an auditor or a legal counsel within the three financial years immediately preceding such knowing about appointment of directors.
• The person should not be an employee, promoter or key managerial person in any non-profit organisation that receives more than 25% of its receipts from the company.

These are all the mandatory eligibility criteria for directorship as per the law. But there are a few other things shareholders must remember while appointment of directors in company .

1. Make sure that the individual understands and agrees with the vision and objectives of the company and has had some experience in the field that he can bring to the board of directors’ table.
2. Make sure that the individual understands the technical aspects of the company well enough to make competent decisions on behalf of the company.
3. Ensure that the individual understands the law and the regulatory framework within which the company operates.
4. Make sure that the individual has a vested interest in the company. This is why many companies insist that the directors own a few shares so that they may align themselves fully towards the better interests of the company.

Types of Directors

There are various types of directors, each with specific organisational roles and responsibilities. Here are some of the most common:

By Function

• Executive Directors: Responsible for the day-to-day operations of the organisation and reporting directly to the Board of Directors.
• Non-Executive Directors: Provide independent oversight and strategic guidance to the Board and management.
• Independent Directors: Have no material financial interests in the company and offer objective perspectives to the Board.
• Managing Directors: Head the executive team and are responsible for the overall management of the company.
• Financial Directors: Oversee the financial affairs of the company and provide financial advice to the Board.
• Marketing Directors: Lead the company’s marketing and sales efforts.
• Human Resources Directors: Manage the company’s human resources function, including recruitment, training, and employee relations.

By Board Position

• Chairman/Chairwoman: Leads the Board of Directors and presides over Board meetings.
• Vice Chairman/Vice Chairwoman: Assists the Chairman and assumes their duties in their absence.
• Secretary: Responsible for administrative matters of the Board, including keeping minutes and preparing meeting materials.
• Treasurer: Oversees the financial affairs of the Board and manages its budget.

Other Types

• Nominee Directors: Appointed by a specific shareholder or group of shareholders.
• Alternate Directors: Act in place of a regular director when they are unable to attend meetings.

Skills Required to Become a Director

Becoming a successful director requires a diverse set of skills and experience. Here are some of the most important:

• Leadership: The ability to inspire and guide others, make sound decisions, and navigate complex situations.
• Strategic Thinking: The ability to develop and implement long-term plans for the organisation.
• Financial Acumen: A strong understanding of financial statements and the ability to analyse financial information.
• Governance Knowledge: Familiarity with corporate governance principles and best practices.
• Communication Skills: Effective written and verbal communication skills to interact with stakeholders.
• Negotiation Skills: The ability to negotiate effectively with different parties.
• Integrity and Ethics: High ethical standards and a commitment to acting in the best interests of the organization.
• Industry Knowledge: Understanding of the relevant industry and market trends.

Conclusion

The company law in India is vast, and all provisions have been made after consideration to as many stakeholders as possible. So sometimes, they may seem complicated and not necessarily common sense, given that not everyone has the kind of bird’s eye view that the policymakers have. So it is best to consult an expert on matters relating to corporate law and company regulations. If you are looking for any queries or have requirements regarding the appointment of director, get in touch with Vakilsearch today, and we will connect you to the best experts in the industry to help you with your requirements.

FAQs on Abilities For Becoming A Director In India

Also, Read:

• Responsibilities and Duties of a Company Director
• Complete process on appointment of MD
• Types of Directors in Companies under Act, 2013