The director plays a vital role in the functioning of the company. As per the Companies Act, 2013, a public company must have a minimum of three directors, whereas a private company shall have a minimum of two directors. One Person Company (OPC) must have a minimum of one director. All the companies can have a maximum of 15 directors.
In this law note, you will read about the different types of directors in a company, along with the meaning and definition of each director.
Meaning and Definition of Director
The highest authority that controls the management and working of the company is known as the director.
‘Director’ is defined under section 2(34) of the Companies Act, 2013, which states a director is a person appointed to the board of the company. This means that any person who is not appointed to the board of the company is not a director.
‘Board’ or ‘Board of Directors’ of a company is defined under section 2(10) of the Companies Act, 2013, which means a collective body of company directors.
Types of Directors in a Company
A company has different types of directors, and all of them have different roles in the company. Let’s study about all the directors one by one.
Managing director is a person who has substantial powers of management of the company. He is given this power by the articles of the company, agreement with the company, passing resolution in the general meeting of the company, or by the board of directors.
A person becoming the independent director of the company must fulfil certain criteria given under section 149(6) of the Companies Act, 2013, which states that an independent director is a person other than managing director, whole-time director, or nominee director, and:
- He must have relevant experience and should be a person of integrity as per the board.
- A person appointed as an independent director shall not be a promoter of the same company or any other company which is the holding, subsidiary, or associate company of the same company in which he has been appointed.
- The person shall not be related to the promoters or directors of the company or its holding, subsidiary, or associate company.
- The person must not have any money-related relationship with the company or its holding, subsidiary, or associated company other than his salary.
- None of his relatives or he himself shall not have any kind of interest in the company. Provided, the relative can hold shares of face value up to Rs. 50 Lakhs or 2% of the paid-up capital.
Section 149(4) of the Companies Act, 2013, states that every listed public company must have 1/3rd of its total directors as independent directors.
Example: XYZ Ltd is a listed public company having a total of 15 directors. 1/3rd of 15 is 5. Therefore, the company will have 5 directors as independent directors.
Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 states that the following companies will have at least two independent directors:
- Companies having paid-up share capital of Rs. 10 crores or more.
- Companies having a turnover of Rs. 100 crores or more.
- Companies having outstanding loans, debentures, deposits, in aggregate of more than Rs. 50 crores.
Small Shareholders Director
As per the Companies Act, 2013, a small shareholder means a shareholder holding shares of the nominal value of Rs. 20,000 or less.
As per Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014, every listed company having paid-up share capital of Rs. 5 crores or more and also having one thousand or more shareholders holding shares of the nominal value of Rs. 20,000 or less may have a small shareholder director elected by such small shareholders.
Every listed company, and every other public company having a turnover of Rs. 300 crore or more and paid-up share capital of Rs. 100 crore or more must appoint at least one women director in the company.
The women director can be appointed at any time during registration of the company or even after incorporation and shall hold the office till the next annual general meeting (AGM) of the company from the date of her appointment. She can also resign from the office at any time by giving notice to the company.
The board of directors has the power to appoint additional directors if required by the company. If a person has not been appointed as an additional director in the general meeting, then he or she will not be appointed as an additional director of the company.
The tenure of the additional director will be till the time of the next annual general meeting (AGM) or the last date on which the annual general meeting should be held, whichever is earlier.
Example: In the year 2020-21, if the last date for the company to take AGM is 30th September, but the company has not taken AGM on that date due to some reasons and postponed the same to 30th October. Still, the tenure of the additional director appointed during the last AGM will come to an end on 30th September.
If the existing director of the company is not present in India for the last three months, then the company shall appoint an alternate director in his place.
A company can appoint an alternate director if the articles of the company authorise so or by way of passing a resolution in the company’s general meeting.
The alternate director will hold the office till the term of the existing director on whose place he has been appointed or if the existing director returns to India.
The nominee director is not appointed or removed by the company. He is appointed by the financial institution, by an agreement, by the Government, or by any other person in order to represent his interest in the company.
The company does not have the power to retire such directors, nor are they retired by rotation. Only the agencies who have nominated such a director can remove the nominee director.
Example: If XYZ Ltd took a loan from SBI bank, then the bank (to monitor the activities of the company) will appoint a nominee director in the company till the time the company does not repay the loan.
An executive director is the company’s full-time working director. They are in charge of the company’s activities and have a higher level of accountability. During their operations in the company, they must be attentive and cautious.
A non-executive director is not involved in the day-to-day operations of the company. They may take part in the planning or policy-making process, challenging the executive directors to make decisions that are in the company’s best interests.
A company must have a total of 15 directors, but there are different types of directors that a company must have depending upon the requirements and provisions of the Companies Act, 2013.
It is not important that every company must have every director. It solely depends upon the nature and revenue of the company as prescribed under the company law.