The director has to be appointed based on qualifications provided under the Companies Act, 2013 read to know more!
The appointment and qualification of a director is not just a substantial supervision provision but also a procedure regulation that must be met by every firm. Under the Companies Act, 2013 only one person may be elected as a director; a firm, institution, corporation, or other body with valid capability cannot be appointed as a director.
Introduction to Director Appointments
A director is appointed by the shareholders of a company to oversee its operations in accordance with the Memorandum of Association (MOA) and Articles of Association (AOA). To be eligible for this role, an individual must possess a Digital Signature Certificate (DSC) and a Director Identification Number (DIN).
Anyone aged 21 or older can serve as a director. The company’s AOA must include guidelines for appointing new directors. The Companies Act, 2013 outlines the necessary procedures for adding a director. A private company is required to have at least two directors but can have no more than fifteen directors at any given time.
Basic Qualifications for Directors
A person who plans to serve as a director of a company must fulfil the following conditions-
- Age requirement: The candidate should be above 18 years as law has excluded minors from directorship
- Compliance with the Companies Act, 2013: Such a person does not fall under any of the disqualifications contemplated by the Companies Act,2013
- Consensual Agreement: It should be an agreement consensual in nature and supported by the Board of Directors and the shareholders along with the individual proposed for the position of a director.
Nationality and Residency Requirements
The Indian Companies Act establishes specific provisions regarding the nationality of directors. It allows for the appointment of foreign directors, provided they comply with the relevant nationality laws and regulations. Directors must also meet residency requirements, which ensure that the company has sufficient oversight from individuals who are accessible within India.
Foreign Directors on Indian Boards
Foreign nationals are permitted to hold offices of directors in Indian companies provided they meet the residence conditions that are applicable. For foreign directors, they have to ensure that they are compliant with the law so that they are found in all respects compliant with relevant regulations and maintain character as well as the standard of governance that is expected in Indian corporate law.
Legal Restrictions and Disqualifications
The minimum qualifications for directors are outlined in Section 274 of the Companies Act, 2013. A person may be disqualified from serving as a director under the following circumstances:
- If the individual is deemed mentally unstable by a court
- If the individual is declared insolvent
- If the individual fails to pay for their qualifying shares within six months of becoming a director
- If the individual receives a prison sentence of six months or more due to misconduct, or if the sentence has not expired within the last five years.
- If the individual is found guilty of fraud under Section 203.
- If the individual cannot pay their debts that exceed their assets or if legal action has been initiated against them by an issuer.
For private companies that do not serve as subsidiaries of public firms, there may be more flexibility regarding disqualifications. However, public companies and their subsidiaries must adhere strictly to these disqualification criteria.
Criminal Convictions and Bankruptcy
Directors may face disqualification due to criminal convictions or bankruptcy. A director found guilty of a serious crime or declared bankrupt may lose their eligibility to serve in this capacity.
Disqualification Due to Corporate Mismanagement
Directors can also be disqualified for corporate mismanagement. The Companies Act outlines specific responsibilities, and failure to uphold these can lead to disqualification.
Conflict of Interest Restrictions
Directors must navigate potential conflicts of interest with care. Restrictions are in place to uphold fiduciary duties and maintain the integrity of the company, ensuring that directors act in the best interests of the organisation.
Shareholding and Financial Standing (If Applicable)
In many jurisdictions, individual persons need not have shares in a company before they are appointed as directors in the company. However, in certain situations, companies ensure that all of their directors hold some minimum number of shares in a company; such requirements may be more typical for private limited companies or closely held businesses.
- Shareholding Directors: They are directors who have shares in the company. In this regard, being a shareholder director places one in the position of either being an investor or part of the company’s management team. Holding shares tends to keep their interests ‘in line’ with a successful outcome regarding financial matters in the company and, by and large, with voting rights on key business matters.
- Non-shareholding Directors: Many companies include non-share holders as directors. Such directors participate in governance and management without being shareholders. For instance, appointment might be based on the person’s expertise, experience in the industry, or even fulfilment of legal requirements.
The ownership requirement or the role of a director can vary greatly from one jurisdiction to another and by company structure. In general terms, most public companies don’t have a duty in which a director has to hold equity. However, holding shares is normally a condition for appointment in smaller firms.
Professional Expertise and Experience (If Applicable)
Appointing a director emphasises the relevance of professional experience and expertise. Thus, shareholders would expect a director to bring valuable skills and knowledge that can fit into the strategic goals of a company. Such skills may include specific experience, management capabilities, and good knowledge of corporate governance in an industry.
Industry-Specific Expertise
Directors have knowledge relevant to the sector in which the industry operates and professional qualifications which augment their decision-making capacity. Industry experiences help them answer problems and spot opportunities in the industry, which keeps the company at the competitive edge as well as innovative.
Leadership and Management Experience
Strong leadership and management experience are crucial for directors. A broad and proper background of executive roles will provide them with a wide base of skills to help carry out and execute the responsibilities of the directors. Such experience will foster strategic thinking, guiding the organization towards meeting or accomplishing all the objectives it sets for itself, while also managing risks as well as developing a company culture that is positive.
Appointment Process and Legal Formalities
A formalised appointment process of a director ensures compliance with the law. To begin with, provisions for appointments must be found in the Articles of Association and passed at a general meeting. To do so, the director would first have obtained a DIN and a DSC. Here is a detailed process:
- Cross Verify the AOA: Check whether AOA has made a provision for appointment of directors. If not, then AOA needs to be amended.
- Resolution at General Meeting: When appointment is required other than the AGM, then the board is bound to call an EGM, a resolution to appoint the director and filed with the Registrar of Companies by submitting Form MGT-14 within 30 days.
- Obtain DIN and DSC: The new director shall get a Digital Signature Certificate (DSC) and a Director Identification Number (DIN). With these, he is required to attach a DIN and a declaration of no disqualification under the Companies Act, 2013 while filing the application.
- Obtain Consent of Director (Form DIR-2): The nominee director is mandated to sign the Form DIR-2 providing an official consent for his appointment.
- Letter of Appointment: After fulfilling all the requirements, the company issues a letter of appointment stating the duties and remuneration with the official heading in its letterhead.
- ROC Filings: File the consent (Form DIR-2) along with the appointment details (Form DIR-12) within 30 days with the Registrar of Companies.
- Alter Register of Directors: Update in the Register of Directors and Key Managerial Personnel with regard to the information of the new director.
Alter Regulatory and Tax Records: Lastly, update the director’s information with the GST Network and with the concerned tax authorities for compliance.
Conclusion
A strong five-year agreement fulfills an outstanding way to authorise someone with the crucial capabilities to direct the company. However, the requirement of interest due to privacy is given under the law and a remedy period of 30 days is accessible for the director to improve any filing mistakes. The company should make sure to analyse and assess the director before appointing them. You can reach out to our experts at Vakilsearch in case of any queries.
Frequently Asked Questions
What are the minimum qualifications for appointing a director?
The minimum qualifications for appointing a director typically include being of legal age (usually 18 years or older), being of sound mind, and not being disqualified under applicable laws. Specific requirements can vary by jurisdiction and are outlined in the relevant company laws.
Can someone with a criminal conviction be appointed as a director?
Generally, individuals with certain criminal convictions may be disqualified from being appointed as directors. This includes convictions related to fraud or financial misconduct. The specifics depend on local laws and the nature of the conviction.
Can foreign nationals be appointed as directors in Indian companies?
Yes, foreign nationals can be appointed as directors in Indian companies. However, they must comply with the requirements set forth in the Companies Act, including obtaining a Director Identification Number (DIN) and fulfilling any regulatory obligations.
Is it mandatory for a director to hold shares in the company?
No, it is not mandatory for a director to hold shares in the company. However, some companies may have internal policies that encourage or require directors to hold a certain number of shares to align their interests with those of shareholders.
What professional qualifications are required for directors?
While specific professional qualifications are not always mandated, having relevant experience and expertise is essential. Many companies prefer directors with backgrounds in management, finance, or specific industry knowledge to ensure effective governance.
Can a person be disqualified from being a director due to bankruptcy?
Yes, individuals who have been declared bankrupt may face disqualification from serving as directors. This disqualification is often subject to specific legal provisions and may vary based on the jurisdiction.
What are the legal restrictions on appointing a director?
Legal restrictions on appointing a director include disqualifications due to criminal convictions, bankruptcy, mental incapacity, or non-compliance with statutory requirements. The Companies Act, 2013 outlines specific criteria that must be met to ensure eligibility.
