We are all aware that the directorship of a company is one of the senior management positions in a company. But how is a director appointed? Let us take a look at the procedure involved in the appointment of directors.
Introduction to Appointment of Directors
The director is an individual chosen by the shareholders of the company for managing the company affairs in accordance with the Memorandum of Association (MOA) and Articles of Association (AOA).
Any person above 21 years can be appointed as a director of a company. The AOA of a company should provide for appointment of a director. The procedure for appointment of directors is discussed under the Companies Act, 2013, which provides that a company must follow the prescribed procedure. A private company shall have at least two directors. However, the total number of directors cannot exceed fifteen.
Step 1: Ensure Eligibility and Qualifications
Complying with the Companies Act, 2013, the AOA of the company should be checked before appointing a director. AOA must have a provision for the appointment or addition of a director. In case no such provision is incorporated in the AOA for the appointment of directors, then AOA be amended having a provision for the appointment of additional directors. Apart from the basic qualification of being a natural person, some criteria and requirements have to be satisfied for a person to be eligible to be a director-eligibility of the person and legal requirements:
Verify Age and Residency Requirements
Directors must be at least 18 years old and capable of entering into a contract. The prescribed legal age for directors varies: Full-Time, Independent, and Managing Directors must be between 21 and 70 years.
While there are no restrictions on nationality for directors in a Private Limited Company, at least one board member must be an Indian national to incorporate a company in India, adhering to the Companies Act, 2013 provisions regarding residency requirements.
Obtain Director Identification Number (DIN)
DIN Requirement: Individuals aspiring to become directors must obtain a valid Director Identification Number (DIN). This unique identifier is essential for director registration and ensures legal compliance with records maintained by the Ministry of Corporate Affairs. The DIN application process involves submitting necessary documentation and adhering to guidelines.
Check for Disqualification Criteria
Valid Directorship: Under Indian laws, a person can only serve as a director in up to 20 companies simultaneously, with a limit of 10 public companies. Directors must monitor these thresholds to avoid director disqualification. Individuals facing issues such as criminal convictions or bankruptcy may be subject to legal restrictions and Companies Act disqualification, necessitating their resignation from excess directorships if required.
A nominee’s consent has to be provided. This process is completed through the Ministry of Corporate Affairs online portal, where the nominee downloads Form DIR-2, fills it out, and uploads it back to the portal.
Step 2: Board Approval for Appointment of Directors
A company actually needs to formally appoint its director, through a general resolution in its general meeting. That would be done in an Annual General Meeting. Still, if necessary for the installation of a director in the middle of the year, the company would make the appointment in an Extraordinary General Meeting.
For holding an EGM, a resolution is passed in the board meeting for calling the EGM. Thereafter, the same meeting passes another resolution to appoint a fresh director. This newly appointed director again has to file a copy of the resolution with the Registrar of Companies within 30 days from the date on which the resolution has been passed in Form MGT-14. A board meeting has to be initiated for further processing.
Pass a Board Resolution
The appointment of a new director usually requires approval from the existing Board of Directors. This process involves:
- Board Resolution: A formal resolution is passed at a board meeting, where the directors discuss and agree on the appointment. This resolution serves as the official record of the board’s decision.
- Appointment of Directors Procedure: During the board meeting, the nominee’s qualifications, role, and responsibilities are discussed. A vote is taken, and if the majority agrees, the appointment is approved.
- Formal Approval Process: Once the resolution is passed, the decision is documented in the meeting minutes and other relevant internal records. The company must also notify the regulatory authority (such as the Registrar of Companies) about the new appointment within the prescribed time limit.
Record Minutes of the Meeting
Recording the minutes of the meeting during the appointment of directors process is crucial for ensuring transparency and adherence to legal requirements. The minutes should include the following key elements:
- Date and Time: When the meeting was held
- Who Attended: All directors present, including those absent
- Agenda: The purpose of this meeting; most especially why one was nominated and discussed.
- Discussion Points: Summarise key discussions about the qualifications of the nominee, proposed roles, and responsibilities.
- Voting Outcome: Record the outcome of vote on appointment, indicating who voted in favour, against, and abstained.
- Resolution Passed: Stating clearly the resolution to approve the appointment of the nominee including the effective date of the appointment.
Minutes should be dated, signed by the chairman of the meeting, and kept in official records for reference against any further inquiries for compliance.
Step 3: Shareholder Approval (If Required)
Appointment of directors may need shareholders’ approval in some cases, especially when it is for public companies or the company’s bylaws require it. This procedure may include:
Conduct Shareholder Voting
The nomination is then proposed to shareholders at a general meeting. Shareholders approve the resolution in electing a director, especially with independent directors or directors with specific interests from the shareholders. Shareholders can nominate and elect the company’s directors according to the specific rules of the company. This is done by formal procedure as provided in the constitution of the company.
Draft Shareholder Resolution
The result of the vote of shareholders is captured through a resolution that details whether the nominee is made a director. The result is then captured, and necessary corrections are done to the regulatory body.
Step 4: Filing with the Registrar of Companies (ROC)
After a director is formally appointed, several documentation and legal filings must be completed to ensure compliance with corporate laws. These documents are necessary to officially record the appointment and notify relevant authorities, such as the company registrar, ensuring the company’s records are up to date.
Complete and Submit Necessary Forms
- ROC Filing: After passing the resolution for the appointment of a director and obtaining the DIR-2 form, the company can appoint him formally. Both the DIR-2 and the DIR-12 forms (Particulars of Appointment of Directors) with the ROC within 30 days thereafter should be filed by it. Besides that, as applicable listed public companies are required to make known the general meeting’s proceedings about the appointment within 24 hours of the adjournment of the meeting under SEBI (LODR) Regulations, 2015. They are also expected to post any news relating to the appointment on the company website within two working days.
- Legal Filing for Director: The company must also submit the board resolution through MGT-14 within 30 days of the director’s appointment
- Official Records: Once submitted, these filings become part of the company’s official records and are accessible to the public, ensuring transparency and that all relevant stakeholders are aware of changes in the company’s directorship.
Obtain a Certificate of Appointment
The next important procedure in an organisation following the updating of the company records and registers is to obtain the Certificate of Appointment for the newly appointed director. The appointment of directors legally serves as a document proof and must be provided for documentation for the records of an organisation.
Here are some things to remember:
- Appointment Certificate: This serves as proof of one’s appointment as a director, with the certificate usually issued by the company or, in some jurisdictions, by the regulatory body in charge.
- Legal Confirmation: The certificate affirms that the appointment is in compliance with all the provisions of statues; hence, the company observes its legal implications.
- Official Documentation: The certificate shall be retained in the company’s filing since it may be required for future legal or regulatory purposes.
- Registering with the authorities: The new appointed director needs to register himself with the relevant authorities. This may involve submitting a certificate and other required documents.
Obtaining the Certificate of Appointment is critical for completing the formal appointment procedure for the appointment of directors in the company.
Step 5: Issue a Director Appointment Letter
A formal director appointment letter is an essential part of the documentation process. This letter acts as a legal contract between the company and the newly appointed director, outlining the terms of their role. Key elements include:
- Appointment Letter: This document formally confirms the director’s appointment and includes critical details such as the start date, term of office, and the specific role the director will play in the company.
- Director Contract: The letter may also serve as a contract that details the director’s remuneration, benefits, and other entitlements.
- Terms of Appointment: It outlines the director’s duties, responsibilities, reporting structure, and the company’s expectations regarding governance and compliance.
- Legal Documentation: The appointment letter must be signed by both the company and the director, making it a legally binding document. Copies are kept in the company’s internal records and may be referenced in any future disputes or changes to the director’s position.
Step 6: Update Company Records and Registers
All company records and registers must be updated with the appointment of a new director. This step simply reflects legal compliance, but also ensures that stakeholders are informed, thus keeping transparency within the organisation.
Statutory Registers
You’re bound to update statutory registers containing the information of the new director so as to abide by the required legal requirements.
- Statutory Register of Directors: The full name and address of the new director, date of birth, and any other dates for appointments that are applicable need to be listed.
- Company Records: All official documents must demonstrate the latest changes – copies of all resolutions at any meetings where the appointment was moved and agreed.
Statutory registers should always be up to date and correct to avoid penalties for being incorrect.
Notification to Stakeholders Concerning Appointment
It is a good practice that the appointment is communicated to the stakeholders after completion of the statutory updates. Follow these steps to complete the process:
- Stakeholder Communication: It requires making a formal announcement about the new director
- Company Announcement: Communicate this news through proper media like news or newsletter
- Internal Communication: Through appropriate channel communication, the employees and internal stakeholders must be made aware of the new director role and contributions he will bring in regarding the objectives of the company.
Effective communication makes the changes of this kind known to stakeholders and allows them to be able to work with a new director who will gradually grow into the position.
Step 7: Compliance with Corporate Governance and Legal Obligations
Compliance with corporate governance and laws is imperative for maintaining the company’s integrity and reputation. This step covers understanding fiduciary responsibilities that one incurs during the induction of a new director.
Ensure Adherence to Fiduciary Duties
The appointment of directors must be respectful of their duties while exercising fiduciary compliance. These include:
- Fiduciary Duties: Directors must, legally, ensure the business actions are in the best interest of the company and shareholders, involving careful and diligent decision-making.
- Director Duties: Directors must familiarise themselves with their duties as established in the governance documents of the company as well as respective laws.
- Good Corporate Governance: Compliance with high standards of corporate governance not only ensures that all conditions are met but also instils trust in stakeholders.
Ongoing Legal and Regulatory Compliance
Directors can be thought liable as they see that the company is abreast of laws under which it operates, and that, at times, may require professional training and updates on those specific legal and regulatory aspects.
In this regard, the directors are undertaking responsibility for ensuring legal and regulatory compliance, which makes them part of an all-important role toward ensuring business success and sustainability in the long term. Understand the duties and expectancies of the Companies Act and ensure the company complies with them. This includes keeping records, having regular meetings, and making available required documents.
FAQs on Appointment of Directors
What is the minimum qualification required to appoint a director?
The minimum qualifications for a director are specified under the Companies Act and include legal eligibility criteria such as age and educational background.
What forms need to be filed with the Registrar of Companies (ROC) for director appointment?
The necessary ROC forms include Form DIR-12 for director appointment filing, along with other legal documentation for company compliance.
Is it mandatory to obtain a Director Identification Number (DIN)?
Yes, obtaining a DIN is a mandatory requirement for director registration to ensure legal compliance under the Companies Act.
What are the responsibilities of the board when appointing a director?
The board responsibilities include ensuring due diligence in the director appointment process, adhering to corporate governance, and meeting legal obligations.
Can a foreign national be appointed as a director in India?
Yes, foreign nationals can be appointed as directors, provided they meet the foreign director eligibility, nationality requirements, and residency criteria.
Is shareholder approval always required to appoint a director?
Shareholder approval is generally required unless the company resolution or voting process in the Companies Act allows for exceptions.
How long does the director appointment process take?
The appointment timeline varies, but it typically includes time for board approval, regulatory filings, and completion of necessary formalities.
