The appointment of a director must adhere to the qualifications outlined in the Companies Act, 2013. It is not only a matter of significant supervision but also a regulated procedure that every company must follow. According to the Act, only an individual person can be appointed as a director; firms, institutions, corporations, or other entities cannot be appointed.
Requirements for Directors
As per Section 149(1) of the Companies Act, 2013, public companies must have at least three directors, private companies must have two directors, and One-Person Companies (OPCs) must have one director. A company can appoint up to fifteen directors, but a special resolution is required for a firm to appoint more than fifteen directors in a public company. Section 152(2) states that every director should be elected at a general meeting of the company unless stated otherwise in the Act.
Terms of Appointment
The following terms apply to the appointment of company directors:
- Only individuals can be appointed as directors.
- A person must have a Director Identification Number (DIN) to be nominated as a director.
- The person should possess a Digital Signature Certificate (DSC) for authentication as a director.
- Each individual appointed as a director must provide their DIN and a statement confirming their eligibility as a director under the Companies Act, 2013.
- Every director must submit Form DIR-2, expressing their consent to act as a director, either before or after their appointment.
- A person cannot be eligible for appointment as a director if they are not registered under subsection (1) of Section 164 of the Companies Act, 2013.
- A director cannot hold directorship in more than twenty companies simultaneously, including any other directorial positions. Furthermore, the number of public companies for which an individual can be elected as a director should not exceed ten.
Qualifications of Directors
The Companies Act, 2013 does not specify educational or experiential qualifications for directors. The Act also does not mandate qualifications for directors unless a company’s articles include such requirements. However, articles typically include a minor percentage of eligibility.
Company articles state that each director must hold a specific percentage of shares, known as qualification shares. Directors must purchase the required number of shares within two months of their appointment. If a person is not elected as a director, they are not obligated to acquire the desirable shares.
The price of the qualification shares cannot exceed ₹5000 unless the nominal value of the shares exceeds this amount. Directors can only own shares and cannot enter into any contracts. Failure to obtain the required shares can lead to consequences, such as the director’s position becoming vacant or the director incurring a penalty for continuing to act as a director. Directors are expected to hold the shares themselves.
Section 274 outlines the minimum qualifications for directors. A person cannot be elected as a director in the following circumstances:
- Mental instability recognized by the court.
- Determination of insolvency.
- Non-payment for the qualification shares within six months of becoming a director.
- Conviction of misconduct leading to imprisonment for at least six months, not exceeding five years from the date of expiry of the sentence.
- Being found guilty of fraud under Section 203.
- Inability to pay debts not covered by assets, or if a case has been filed against the director by an issuer.
- A private company, not being a subsidiary of a public company, may have flexibility with disqualifications. However, a public company and its subsidiaries cannot be flexible with other disqualifications.
Appointment of Directors at General Meeting
As per Section 152(2), directors must be elected by the company at a general meeting unless stated otherwise in the Act.
Appointment of Directors in Private Companies
If a private company’s documents do not specify the appointment of directors or do not provide for the appointment of directors other than at a general meeting, directors must be elected at a general meeting by the shareholders.
According to Section 152(6)(c), the first annual general meeting of a public company should take place after the general meeting at which the first directors are appointed. Subsequent annual meetings require a rotation of directors, with approximately one-third of the directors retiring from office. If the number of directors is not three or a multiple of three, the nearest number to one-third will retire.
The directors who retire at the annual meetings should be those who have been in office the longest since their last appointment. In the case of multiple directors appointed on the same day, those who are to retire must be determined by agreement or other means [Section 152(6)(d)].
A robust five-year agreement ensures that individuals with essential skills are authorized to lead the company. However, privacy-related requirements are specified by law, and a 30-day grace period is provided for directors to rectify any filing errors. It is crucial for companies to thoroughly assess and evaluate directors before appointing them. For any queries, you can consult our experts at Start-Up Kro.
FAQs – Appointment and Qualification of Directors
Q: What are the qualifications required for the appointment of a director?
A: To be appointed as a director, an individual must meet the following qualifications:
- They must be a real person.
- They should have a Director Identification Number (DIN).
- They must possess a Digital Signature Certificate (DSC) for authentication.
- They need to provide their DIN and a statement confirming their eligibility as a director under the Companies Act, 2013.
- Consent to act as a director is required, which can be provided through Form DIR-2.
- The individual should be registered under subsection (1) of Section 164 of the Companies Act, 2013.
- There are limitations on the number of directorships, such as not holding more than twenty directorships at once or serving as a director in more than ten public companies.
Q: How many directors should a company have?
A: The number of directors required varies depending on the type of company:
- Public companies must have at least three directors.
- Private companies should have a minimum of two directors.
- One-Person Companies (OPCs) require only one director.
Q: What are qualification shares?
A: Qualification shares are specific percentages of shares that directors are required to hold in the company. Company articles may specify the percentage. Directors must purchase the required number of shares within two months of their appointment.
Q: Can a firm or organization be appointed as a director?
A: No, only individuals can be appointed as directors. Firms, institutions, corporations, or other entities cannot be appointed as directors.
Q: Are there any disqualifications for directors?
A: Yes, certain circumstances can disqualify an individual from being appointed as a director. Some of the disqualifications include:
- Mental instability recognized by the court.
- Being determined as insolvent.
- Failing to pay for qualification shares within six months.
- Being convicted of misconduct leads to imprisonment for at least six months.
- Being found guilty of fraud.
- Inability to pay debts or having a case filed against the director by an issuer.
Q: Can a private company have flexibility with disqualifications?
A: Yes, if a private company is not a subsidiary of a public company, it may have some flexibility with disqualifications. However, public companies and their subsidiaries cannot be flexible with disqualifications.
Q: How are directors appointed at general meetings?
A: Directors are typically elected by the company at a general meeting. This is the usual process unless the Companies Act specifies otherwise.
Q: What happens if the company’s documents do not specify the appointment of directors?
A: In the case of private companies, if the documents do not specify the appointment of directors or do not provide for appointments other than at a general meeting, directors must be elected at the general meeting by the shareholders.
Q: Is there any provision for the rotation of directors?
A: Yes, according to the Companies Act, a rotation policy is in place for public companies. At each annual general meeting, approximately one-third of the directors retire from office. The directors who retire should be those who have served the longest since their last appointment.