Role of Directors in a

Company & Types of

Directors
Subject – Company Law II
Semester VI
Unit 1
Curated by – Prof. Shreya Madali
- A company, being an artificial person aims to achieve its objects as enshrined in the
objects clause of its Memorandum of Association & it has necessarily to depend
upon some agency, known as Board of directors.
- The Board of directors of a company is a group of directors, selected according to
the procedure prescribed in the Act and the Articles of Association of the company.
- Members of the Board of directors are known as directors
- Acting collectively as a Board of directors, they can exercise all the powers of the
company except those, which are prescribed by the Act to be specifically exercised
by the company in general meeting.
- The directors of a company are its eyes, ears, brain, hands, nerves and other
essential limbs, upon whose efficient functioning depends the success of the
company.
- The directors formulate policies and establish organisational set up for
implementing those policies and to achieve the objectives as contained in the
Memorandum, muster resources for achieving the company objectives and control,
guide, direct and manage the affairs of the company.
- The Companies Act, 2013 does not contain an exhaustive definition of the term
“director”.
- Section 2 (34) of the Act prescribes that “director” means a director appointed to
the Board of a company.
- Section 2 (10) of the Companies Act, 2013 defines that “Board of Directors” or
“Board”, in relation to a company, means the collective body of the directors of the
company.
- Under the Companies Act, 2013 only an individual can be appointed as a Director;
a corporate, association, firm or other body with artificial legal personality cannot
be appointed as a Director. (Section 149)
- Directors of a company are individuals that are elected as, or elected to act as,
representatives of the stockholders to establish corporate management related
policies and to make decisions on major company issues. The success of the
company depends, to a very large extent, upon the competence and integrity of its
directors.
- Section 166 (6) of Companies Act, 2013, prohibits assignment of office of director to
Minimum/Maximum Number of Directors in a Company-
Section 149(1) of the Companies Act, 2013 requires that every company shall have
a minimum number of:
- 3 directors in the case of a public company,
- two directors in the case of a private company,
- and one director in the case of a One Person Company.
- A company can appoint maximum 15 fifteen directors.
- A company may appoint more than fifteen directors after passing a special
resolution in general meeting and approval of Central Government is not
required.
Section 149 also requires that:
- Every company shall have at least one director who stays in India for a total
period of not less than one hundred and eighty-two days during the financial
year
- Every listed public company shall have at least one-third of the total number of
directors as independent directors and the Central Government may prescribe
the minimum number of independent directors in case of any class or classes of
public companies
EXECUTIVE & NON EXECUTIVE DIRECTORS
- A director so appointed may either be executive director or non-executive director.
- An Executive Director can be either a Whole-time Director of the company (i.e.,
one who devotes his whole time of working hours to the company and has a
significant personal interest in the company as his source of income), or a Managing
Director (i.e., one who is employed by the company as such and has substantial
powers of management over the affairs of the company subject to the
superintendence, direction and control of the Board).
- They are generally responsible for overseeing the administration, programs and
strategic plan of the organization.
- Other key duties include fund raising, marketing, and community out reach.
- In contrast, a non-executive Director is a Director who is neither a Whole-time
Director nor a Managing Director.
- A director to the Board may be appointed as • First Director • Resident Director •
Women Director • Independent Director • Alternate Director • Additional Director
• Small Shareholder Director • Nominee Director • Director by Casual Vacancy
DIFFERENCE BETWEEN EXECUTIVE & NON EXECUTIVE DIRECTORS
EXECUTIVE DIRECTOR
Active & Routine Contribution - involved in the management
of the company as well as he/she is the full-time employee of
the company.
Main tasks are - Formulation and Implementation
They are paid a monthly/timely remuneration
are the whole-time directors of the company who report to
the company’s Chairman. They work for the company in a
senior capacity, mainly associated with the policy concerns
and functional areas of primary strategic importance.
They are elected to the board by the Nomination Committee
or by the company’s board itself.
charged with executive responsibilities of managing the
enterprise.
Ex: Whole time director, managing director,
NON-EXECUTIVE DIRECTOR
Expertise, Selective Contribution - is a member of the
company's board, but he/she does not possess the
management responsibilities
Consideration and Review
Paid service fees or consultation charges
does not take part in the management and operation of the
company but plays a crucial role in the formulation of policies
and plans, and decision making of the company.
The appointment of Non-Executive Directors is based on their
qualification such as depth of knowledge and breadth of
experience
appointed with the aim of bringing a certain degree of
objectivity in the organization’s decision
Ex: Independent Director
First Director
- Section 152 -provides for the appointment of first directors,
- where there is no provision made in Articles of Association of the company for
appointment of first directors then the subscribers to the memorandum who are
individuals shall be deemed to be the first directors of the company until the
directors are duly appointed.
- Directors specified in the memorandum and articles at the time of incorporation.
- If not specified then shall be selected by majority of memorandum subscribers
or all the subscribers are first directors.
- They are appointed till the company appoints subsequent directors.
- In the case of a One Person Company, an individual being a member shall be
deemed to be its first director until the director(s) are duly appointed by the
member in accordance with the provisions of Section 152.
Woman Director
- Second proviso to Section 149(1) read with Rule 3 of Companies (Appointment and Qualification of
Directors) Rules, 2014 following class of companies must have at least one Women Director:
(mandatory)
a) All Listed Companies Public companies with paid up capital of `100 crore or more or
b) with turnover of `300 crore or more
- For listed entities of SEBI - shall have at least one independent woman director
- appointment of woman director is applicable to the company within a period of six months from the
date of its incorporation.
- can be an executive director or a non-executive director.
- can hold the position of a director until the next Annual General Meeting from the date of
appointment. She is also entitled to seek reappointment at the general meeting.
- It is pertinent to note that the tenure of a woman director is liable to retirement by rotation (Section
152(6)) similar to other types of directors.
- penalty for non–compliance of the appointment of woman director is - In case of non-compliance,
the erring company will be fined ₹10,000. If no amendments are made, there will be a further fine of
₹10,000 per day till it continues – Sec 149 (1)
- (company or officer in default punishable with fine which shall not be less than Rs. 50,000 but
Director elected by Small Shareholders [Section 151]
- every listed company may have one director elected by such small shareholders
- “Small shareholder” means a shareholder holding shares of nominal value of
not more than twenty thousand rupees or such other sum as may be
prescribed.
- Here, the ‘nominal value’ of shares is relevant. It does not matter how much is
the ‘paid up value’ or ‘market value’ of shares. However, a small shareholder
may be a holder of equity shares or preference shares or both.
- For example: Mr. X holds 3000 equity shares of `10 each (`5 paid up) in ABC Ltd. However, Mr. X cannot
be considered as small shareholder since the nominal value of shares held by him (i.e. `30,000)
exceeds `20,000.

A listed company, may upon notice of not less than (a) 1000 small shareholders; or
(b) one-tenth of the total number of such shareholders, whichever is lower; have a
small shareholder’s director elected by the small shareholder. A ‘Small
Shareholders’ Director’ may be elected voluntarily by any listed company.
Notice of intention to propose a candidate:
- small shareholders intending to propose a person as a candidate for the post of
small shareholder’s director shall leave a signed notice of their intention with
the company at least 14 days before the meeting specifying their details and
proposed director’s details.
- The details shall include name, address, shares held and folio number etc. If the
proposer does not hold any shares in the company, the details of shares held
and folio number need not be specified in the notice.
- Small shareholders’ director shall be considered as an independent director, if
(a) he is eligible for appointment as an independent director
(b) he gives a declaration of his independence
- The tenure of small shareholders’ director shall not exceed a period of 3
consecutive years and he shall not be liable to retire by rotation.
- Further he shall not be eligible for re-appointment after the expiry of his tenure.
- A person shall not hold the office of small shareholders’ director in more than
two companies.
- If second company is in competitive business or is in conflict with business of the
first company, he shall not be appointed in second company.
- He shall directly or indirectly not be appointed or associated in any other
capacity with the company either directly or indirectly for a period of 3 years
from the date of cessation as a small shareholder’s director.
Alternate Director
- Section 161(2) - empowers the Board, if so authorized by its articles or by a resolution
passed by the company in general meeting, to appoint a director (termed as ‘alternate
director) to act in the absence of an original director for a period of not less than three
months from India.
- Section 161(2) of the Act applies to public or private companies.
- The Board of Directors of a company must be authorised by its articles or by a resolution
passed by the company in a general meeting for appointment of the alternate director.
- The person in whose place the Alternate Director is being appointed should be absent for
a period of not less than 3 months from India.
- The person to be appointed as an Alternate Director shall be a person other than the
person holding any alternate directorship for any other Director in the company or
holding directorship in the same company.
- If it is proposed to appoint an Alternate Director to an Independent Director, it must be
ensured that the proposed appointee also satisfies the criteria of Independence.
- The right to appoint an alternate director vests in the Board. The original director has no
right to appoint an alternate director.
- An alternate director shall not hold office for a period longer than that
permissible to the director in whose place he has been appointed.
- If the original director ceases to be a director by reason of death or vacation of
office under section 167, the alternate director shall immediately cease to hold
his office.
- The alternate director shall vacate his office when the original director in whose
place he has been appointed returns to India
- If the term of office of an original director expires before he returns back to
India, the provision for automatic reappointment of a director as envisaged
under section 152(7)(b) shall be applicable to the original director, and not to
the alternate director.
Nominee director
- nominee director is an individual nominated by an institution, including banks and financial
institutions, on the board of companies where such institutions have some ‘interest’.
- The ‘interest’ can either be in form of financial assistance such as loans or investment into
shares. Such strategic investment may have a direct bearing on the profitability of a
nominator and therefore, the appointment of nominee director becomes essential to
facilitate monitoring of the operations and business of the investee company.
- The main purpose of appointment of such person(s) is to safeguard the interest of the
nominator, without conflicting with his/ her fiduciary duty as a director.
- Such a director has several roles and responsibilities, including adequate disclosure of
interest, reporting to the nominator and protection of the interest of the company in its
entirety.
- Under Companies Act, 2013, the appointment of a nominee director is made in accordance
with section 161(3): Subject to the articles of a company, the Board may appoint any person
as a director nominated by any institution in pursuance of the provisions of any law for the
time being in force or of any agreement or by the Central Government or the State
Government by virtue of its shareholding in a Government company.”
- a nominee director is “nominated” by a nominator.
- The nominator has all the rights with respect to appointment, removals and the
terms and conditions of appointment to form a part of an agreement entered
into with the company by such investor or creditor or other stakeholders.
- Acts as a ‘watchdog’
- Participation and decision making
- Maintains Confidentiality
INDEPENDENT DIRECTORS
- The concept of Independent Directors emerged when the Cadbury Committee in
1992 was set up following the corporate scandals
- The focus was on appointment of independent directors as a part of the new
practices for better governance.
- ID function as an oversight body in monitoring the performance and raise red flags
whenever suspicion occurs.
- are expected to be more aware and question the company on relevant issues in
their position as trustees of stakeholders.
- Are critical for ensuring good corporate governance and it is necessary that the
functioning of the institution is critically analysed and proper safeguards are made
to ensure efficacy.
- An independent director means a director other than a managing director or a
whole-time director or a nominee director who does not have any material or
pecuniary relationship with the company/ directors.
- Basically an independent director is a non-executive director.
Number of directorships- Section 165
- Maximum number of directorships, including any alternate directorship a person can hold is
20.
- It has come with a rider that number of directorships in public companies/ private companies
that are either holding or subsidiary company of a public company shall be limited to 10.
- Further the members of a company may restrict the abovementioned limit by passing a special
resolution.
- Any person holding office as director in more than 20 or 10 companies as the case may be
before the commencement of this Act shall, within a period of one year from such
commencement, have to choose companies where he wishes to continue/resign as director.
- There after he shall intimate about his choice to concerned companies as well as concerned
Registrar.
- Such person shall not act as director in more than the specified number of companies after
despatching the resignation or after the expiry of one year from the commencement of this
Act, whichever is earlier.
- If a person accepts an appointment as a director in contravention of above mentioned
provisions, he shall be punishable with fine which shall not be less than Rs. 5,000 but which
may extend to Rs. 25,000 for every day after the first day during which the contravention