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Appointment of Director

Who Appoints Board of Directors in India?

Delve into the world of director appointments in India. Uncover the roles of various entities, qualifications, and essential procedures while exploring the significance of responsible directorship.

Introduction

In the realm of corporate governance, the appointment of directors is a critical facet that shapes the trajectory of a company’s growth and governance. This article serves as a comprehensive guide to understanding the process of appoints board of directors in India, shedding light on the pivotal role they play in corporate affairs.

Appointment of Directors: Legal Framework

The appointment of directors in India is governed by the Articles of Association (AOA) of a company and the provisions of Section 152 of the Companies Act, 2013. These legal provisions lay the foundation for how directors are designated and their roles within the company.

Types of Directors

In India, directors come in various categories, each serving a unique purpose:

Women Directors: Mandatory for companies with a paid-up capital of Rs 100 crore or more or a turnover of Rs 300 crore or more.

Independent Directors: Regulated under Section 149(6) of the Companies Act, 2013.

Small Shareholder Directors: Elected by small shareholders, as per Section 151.

Resident Directors: Mandatory for companies residing in India for at least 182 days in the previous year, under Section 149(3).

Additional Directors: Appointed under Section 161.

Alternative Directors: Appointed in the absence of the main director for a minimum of three months or more.

Nominee Directors: Appointed by a third party or the Central Government in cases of mismanagement or oppression.

Players in Director Appointments

Shareholders: Shareholders are a pivotal force in the appointment of directors. They exercise their voting rights to elect or re-elect directors during general meetings, particularly the Annual General Meeting (AGM). Shareholders also play a role in approving the appointment of independent directors.

Nomination Committees: Many larger Indian companies have nomination and remuneration committees, also known as Nomination and Remuneration Committees (NRCs). These committees are typically composed of non-executive directors and are responsible for recommending suitable candidates for director positions. NRCs focus on identifying individuals with the right skills, experience, and qualifications to contribute effectively to the board.

Board of Directors: The existing board members may also play a role in the nomination process, especially when appointing additional directors between AGMs. They evaluate potential candidates and make recommendations to the shareholders.

Appointment Process Based on Company Type

The process of appointing directors varies based on the type of company:

Public Company or a Private Company and a Subsidiary of a Public Company: Two-thirds of directors are appointed by shareholders, while the remaining one-third is determined by the Articles of Association.

Private Company (Not a Subsidiary of a Public Company): The AOA dictates the appointment procedure unless otherwise specified.

Summary of Legal Provisions Related to Director Appointment

The appointment of directors follows a prescribed procedure outlined in Sections 152 to 159 of the Companies Act, 2013:

Section 153: Application for Director Identification Number (DIN) is made to the Central Government with the necessary fees.

Section 154: The Central Government allots DIN within one month of receiving the application.

Section 155: A person cannot possess multiple DINs

Section 156: Existing directors must disclose their DIN to the company or companies where they serve as directors

Section 157: The company must inform the Registrar of Companies (ROC) about the DIN of all directors within 15 days, accompanied by the requisite fees

Failure to comply with these sections can result in penalties, ranging from fines to imprisonment for the directors involved.

Ways of Appointment of Directors

Directors can be appointed through various methods:

  • In accordance with the AOA, especially for first directors.
  • By the company in an annual general meeting (AGM).
  • By the board of directors in some cases.
  • By lenders of the entity as authorized by the AOA.
  • By the Central Government in cases of oppression or mismanagement.
  • Documents Required for Appointment

Typical Nomination and Voting Process

The appointment of directors in Indian companies follows a structured process:

  1. Identifying the Need: The process begins with the identification of the need for a new director. This need can arise due to various reasons, such as board expansion, the retirement of existing directors, or the desire to bring specific expertise onto the board.
  2. Nomination: Nomination committees or the board itself identifies potential candidates. These candidates are assessed based on their qualifications, experience, and alignment with the company’s strategic goals. 
  3. Shareholder Approval: In the case of public companies, shareholders have the ultimate say in director appointments. During AGMs, shareholders vote on the appointment of directors. Typically, a simple majority is required for the appointment to pass. Shareholders can also vote against re-electing directors who they believe are not serving the company’s best interests.
  4. Compliance with Legal Requirements: The appointment process must adhere to legal requirements, including those outlined in the Companies Act, 2013. Companies must ensure that candidates meet eligibility criteria and disqualifications, as mandated by the law.
  5. Disclosure and Reporting: Following the appointment, companies are required to disclose the details of new directors in their annual reports and filings with regulatory authorities like the Registrar of Companies (ROC). This transparency ensures that stakeholders are informed about changes to the board.

Notable Appointments in Indian Companies

Chanda Kochhar: Chanda Kochhar served as the Managing Director and CEO of ICICI Bank, one of India’s leading private sector banks. Her appointment marked a significant milestone in the banking industry, as she became one of the most prominent women leaders in Indian finance.

Naina Lal Kidwai: Naina Lal Kidwai’s appointment as an independent director on the board of Nestle India exemplified the increasing focus on diversity and gender balance in corporate governance. She brought extensive experience in banking and finance to the table.

Conclusion

The appointment of directors in India involves a well-structured legal framework and compliance procedures. Directors, as stewards of corporate affairs, bear significant responsibility. Ensuring that these processes are followed meticulously is vital for the smooth operation and growth of any company. 

For assistance and guidance in director-related matters, seek expert services from Vakilsearch and navigate the complexities of director appointments and compliance. 

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