We are all aware the directorship of a company is one of the senior most management positions in a company. But how is a director appointed? What is the regulatory procedure? We look into that with this article.
Unlike other businesses, companies are not run by the owners. This is because a company is owned by its shareholders and a company can have a very large number of shareholders. Such a large number of people will not even be able to reach a consensus on a basic decision, let alone run the company’s operations profitably. Thus shareholders appoint a group of people called directors who will oversee the running of the company on their behalf. These directors make key management appointments, review management decisions and guide the management in the direction the shareholders of the company want to take the company towards. So needless to say, after the shareholders, the directors are the most important people in the company. They wield the power and the responsibilities of the shareholders on their behalf. How Is a Director Appointed in a Company
Needless to say, the process of appointment of a director will have to be thorough and deliberate. The companies act has therefore laid down a very clear framework for the appointment of a director to a company. Let us take a look at the procedure involved in the appointment of a director.
Procedure for Appointment of a Director
Before considering the appointment of the director a few checks have to be made. There are also certain prerequisites to being nominated for the appointment of a director. Let’s first take a look at those.
- First of all the nominee has to be above 21 years of age. This is mandatory as per the Companies’ Act.
- Then, a background check has to be conducted to ensure that the nominee has not been disqualified from being a director by any court or any other competent authority such as the Company Law Board or the Securities Exchange Board of India.
- The nominee should not be suffering from any kind of mental illness that may impair their judgement when it comes to taking decisions in the best interests of the company. These are the minimum mandatory requirements for a person to be nominated as a director.
- The nominee must possess a DIN or a Director Identification number. Any person can apply for this number through the online portal of the Ministry of Corporate Affairs. You have to download a form called form DIR 3 and fill up the necessary details. The details required are usually very general in nature, mostly personal details of the person.
- The nominee must possess a digital signature. This can be purchased through any vendor authorised by the government of India such as eMudhra and TCS.
- The nominee must possess a PAN. This is because any person who becomes a director must file their annual returns every year. Any person in default of filing annual returns for a period of three years consecutively will be automatically disqualified from being a director in any company
- The nominee must not be a director in more than ten companies at a given time. So you must check if the nominee has the regulatory bandwidth to be appointed as a director in the first place.
If all the above requirements have been met, then the company can proceed with the appointment of the nominee through the following procedure.
- Obtaining Consent of the Nominee – First and foremost, the consent of the person who is being nominated has to be obtained. He or she has to declare that they consent to being a director in the company and have no objections with the nomination. He or she then has to provide some basic personal details such as contact details, DIN, nationality, occupation etc. He or she also has to declare that they are eligible to be directors and have not been disqualified by any competent authority from being a director. If the person is a professional member of any professional body such as the Indian Medical Association or the Institute of Chartered Accountants of India, then he or she has to provide the membership number. All of this can be done on the online portal of the Ministry of Corporate Affairs. From this portal the nominee has to download form DIR-2, fill it out with the details mentioned above and upload it back onto the portal.
- Calling for a Board Meeting – Once the DIR-2 form has been processed and put on record by the ministry of corporate affairs, a notice has been sent out for a meeting of the existing board of directors. At the board meeting the appointment of the nominee as a director is put up for a vote and recorded. Once the vote has been passed, a resolution has to be passed confirming the decision of the board. The board also has to pass a resolution to call for an EGM or an emergency general meeting with all the members / shareholders to ratify the decision of the board. As soon as the board meeting has been concluded, the notice for the EGM has to be sent out to all the members to vote for the resolution.
- Holding the EGM – At the EGM the matter is put forth to the members present with regards to the appointment. Here the members can raise any concerns they may have or make any enquiries they may have with regard to the appointment. The members must then vote to either ratify or veto the resolution passed by the board members. The shareholders have the choice of personally voting for the resolution by attending the meeting, conveying their vote through mail ballot or by appointing a proxy who will vote on behalf of the member / shareholder.
- Issuing Letter of Appointment – Once the members / shareholders have ratified the board resolution, the appointment of the nominee is considered finalised for all practical purposes. This leaves the final formalities pending. A letter of appointment is issued to the nominee with details of his or her directorship, roles and responsibilities as well as remuneration during his or her tenure of directorship.
- Filing Form DIR-12 – This form is described as ‘a return containing the particulars of Appointment of director in private Company or key managerial personnel and changes therein.’ This form has to be filed with the ministry of corporate affairs within thirty days of issuing the letter of appointment. Besides certain basic details of the newly appointed director, the key managerial person and the company in general, the form also requires the notarized true copies of the board resolution as well as the resolution of the EGM to be attached as soft copies while uploading the form. Once this form has been processed and taken on record, the procedure for the Appointment of the director is complete.
Conclusion
The provisions and requirements for any kind of structural change in companies can be tedious and deliberate in comparison to other less-regulated business models. But due diligence and corporate governance are the costs one pays to enjoy the various benefits of the corporate style of doing business. As far as the procedures and regulations are concerned, you can always consult a professional expert to guide you through the formalities and procedures. If you have any doubts or queries with regards to corporate law, feel free to get in touch with Vakilsearch and we will put you in touch with a team of experts who will help you out with your requirements.
FAQs
Who appoints directors in a company?
Directors in a company are typically appointed by the shareholders during a general meeting or through provisions outlined in the company's Articles of Association. Shareholders, being the ultimate owners, hold the authority to appoint individuals to the board of directors.
What is the process for appointing a director?
The process for appointing a director involves proposing a candidate, obtaining shareholder approval through voting, and completing necessary documentation. The appointment may be immediate or scheduled for a later date, depending on the company's bylaws.
Are there any other ways to appoint a director?
Directors can also be appointed by the Board of Directors or through nomination by certain shareholders, depending on the company's Articles of Association. These alternative methods provide flexibility in the appointment process, subject to legal and regulatory requirements.
What are the qualifications to become a director?
Qualifications to become a director vary by jurisdiction and company type. Common criteria include legal eligibility, competency, and adherence to any specific qualifications outlined in the company's Articles of Association. Understanding and meeting these requirements are essential for prospective directors.
What are the responsibilities of a director?
Responsibilities of a director include fiduciary duties, strategic decision-making, and ensuring compliance with laws and regulations. Directors are accountable for the company's overall performance, risk management, and safeguarding shareholders' interests, emphasising ethical conduct and transparency.
What are the criteria to be appointed as a director?
Criteria to be appointed as a director typically involve a combination of relevant experience, expertise, and adherence to legal qualifications. Companies may outline specific criteria in their Articles of Association, focusing on skills that contribute to effective governance and strategic decision-making.
How do you appoint first directors in a company?
To appoint the first directors in a company, shareholders typically nominate individuals during the incorporation process. Articles of Association may include provisions for initial director appointments, and once the company is registered, a board meeting is convened to formalise the appointments and outline responsibilities.
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