Meaning of Director

A company, being an artificial legal person, cannot manage its own affairs. It requires human agency to carry out its business operations and make decisions. The individuals who are entrusted with this responsibility are known as directors. Collectively, the directors form the governing body of the company, which is called the Board of Directors. The Board is the supreme policy-making and executive authority of the company.

Section 2(34) of the Companies Act, 2013, provides a very simple and functional definition: "director" means a director appointed to the Board of a company.

This definition implies that a person is a director if they are formally appointed to the Board. The Board of Directors acts as the brain of the company, directing its actions and ensuring it operates in pursuit of its objectives as laid down in the Memorandum of Association.

Appointed to Direct and Manage the Affairs of the Company

The role of a director is multifaceted. While they are not employees in the traditional sense, their legal position is a blend of three distinct capacities:

1. As Agents: Directors act as agents of the company. When they act within the scope of their authority on behalf of the company, their actions bind the company. They are not, however, agents for the individual shareholders.
2. As Trustees: Directors are considered trustees of the company's money and property, which they must manage and deal with for the benefit of the company. They are also trustees of the powers entrusted to them, which they must exercise in good faith and not for their own personal benefit.
3. As Managing Partners: Directors are also described as managing partners because they are entrusted with the ultimate responsibility of managing the company's business and taking key entrepreneurial decisions. They formulate the company's strategy and oversee its implementation.

Ultimately, a director is a professional appointed by the shareholders to direct and manage the business and affairs of the company in a manner that is prudent, lawful, and in the best interests of the company and its stakeholders.

Director Identification Number (DIN) (Section 153)

A Director Identification Number (DIN) is a unique identification number allotted by the Central Government to any individual who intends to be appointed as a director or is an existing director of a company. It is a mandatory requirement under the Companies Act, 2013, and is designed to create a comprehensive database of all directors, preventing fraudulent activities and tracking individuals who may be associated with multiple companies.

Key Provisions Regarding DIN

• Mandatory Requirement (Section 152(3)): No person shall be appointed as a director of a company unless they have been allotted a DIN.
• One DIN per Individual: An individual can have only one DIN, regardless of the number of companies in which they are a director.
• Application for Allotment (Section 153): An individual must make an application for a DIN to the Central Government in the prescribed form (Form DIR-3) along with the necessary fees and identity/address proofs.
• Intimation to Company (Section 156): Every existing director must, within one month of receiving the DIN, intimate their DIN to all the companies where they are a director.
• Intimation by Company (Section 157): The company, in turn, must intimate the DIN of its directors to the Registrar of Companies (RoC) within fifteen days of receiving the intimation from the director.
• Quoting DIN (Section 158): Every person or company, while furnishing any return, information, or particular as required under the Act, must mention the DIN in such return or document.

Failure to comply with the provisions relating to DIN attracts penalties. The DIN system is a crucial tool for corporate governance and regulatory oversight.

Types of Directors

The Companies Act, 2013, provides for various categories of directors to ensure a balanced and effective Board structure, catering to different governance needs.

First Director (Section 152)

The first directors are the individuals who are in place when the company is initially formed. Their names are usually mentioned in the Articles of Association (AOA). If the AOA does not name them, the subscribers to the Memorandum of Association are deemed to be the first directors of the company until directors are duly appointed at the first general meeting.

Nominee Director (Section 161(3))

A nominee director is appointed by a specific stakeholder to represent their interests on the Board. This is common in cases where a financial institution or a bank has given a substantial loan to the company, or where a major investor (like a venture capital firm) has a significant shareholding. The nominee director's primary role is to ensure that the company's actions do not harm the interests of the entity that nominated them.

Additional Director (Section 161(1))

The Board of Directors can appoint an additional director if such power is conferred on them by the AOA. This is often done to bring a new person with specific expertise onto the Board between two Annual General Meetings (AGMs). An additional director holds office only up to the date of the next AGM. They must be regularized by the shareholders at the AGM to continue as a director.

Alternate Director (Section 161(2))

An alternate director is appointed by the Board to act in the place of an original director who is absent from India for a period of not less than three months. The alternate director vacates the office as soon as the original director returns to India. They are a temporary replacement to ensure the Board's functioning is not hampered by the original director's absence.

De facto Director

A de facto director is a person who is not validly appointed as a director but acts as one and is held out by the company as a director. They perform the duties and exercise the powers of a director. In the eyes of the law, such a person is treated as a director and can be held liable for their actions just as a formally appointed director would be.

Shadow Director

A shadow director is a person in accordance with whose directions or instructions the Board of Directors of the company is accustomed to act. This person is not officially appointed to the Board and operates "in the shadows". The law, however, recognizes their influence and can impose the same duties and liabilities on them as on a formally appointed director. Professionals giving advice in their professional capacity are not considered shadow directors.

Independent Director (Section 149(6))

An independent director is a non-executive director who does not have any material or pecuniary relationship with the company, its promoters, or its senior management. Their role is to provide an independent judgment and an objective view on the Board's deliberations. They are crucial for good corporate governance as they protect the interests of minority shareholders and ensure adherence to ethical standards. The Companies Act mandates certain classes of public companies to have a minimum number of independent directors on their Board.

Small Shareholders' Director (Section 151)

To protect the interests of minority investors, the Act allows listed companies to have a director elected by their small shareholders. A "small shareholder" is defined as a person holding shares of a nominal value of not more than twenty thousand rupees (₹20,000). A listed company may, upon notice from a specified number of small shareholders, appoint a small shareholders' director.

Women Director (Section 149(1))

To promote gender diversity on corporate boards, the Companies Act, 2013, mandates certain classes of companies to appoint at least one woman director. This applies to every listed company and every other public company having a paid-up share capital of one hundred crore rupees or more, or a turnover of three hundred crore rupees or more.

Definition of KMP

Key Managerial Personnel (KMP) are the high-ranking executives of a company who are responsible for its overall management and for making key strategic decisions. The concept of KMP was formally introduced by the Companies Act, 2013, to identify and regulate the individuals who have the most significant influence on the company's governance and performance. By defining and regulating KMPs, the Act aims to enhance corporate governance and fix accountability at the highest level of management.

Section 2(51) of the Companies Act, 2013, defines "key managerial personnel" in relation to a company, as:

1. the Chief Executive Officer or the managing director or the manager;
2. the company secretary;
3. the whole-time director;
4. the Chief Financial Officer;
5. such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and
6. such other officer as may be prescribed.

These individuals are at the helm of the company's affairs and are responsible for its day-to-day functioning and compliance with legal and regulatory requirements.

1. Chief Executive Officer (CEO) or Managing Director (MD)

These two roles are often at the apex of the company's management structure.

• Managing Director (MD) (Section 2(54)): An MD is a director who, by virtue of the company's Articles of Association, an agreement with the company, or a resolution passed by the Board or at a general meeting, is entrusted with "substantial powers of management" of the affairs of the company. An MD must be a director on the Board.
• Chief Executive Officer (CEO) (Section 2(18)): A CEO is an officer of a company who has been designated as such. Unlike an MD, a CEO is not required to be a director on the Board, though they often are. They are responsible for implementing the Board's decisions and managing the overall operations and resources of the company.

A company can have either an MD or a CEO, or both, but not an MD and a Manager simultaneously.

2. Company Secretary (CS) (Section 2(24))

A Company Secretary is a vital link between the company, its Board, shareholders, and regulatory authorities. They are the chief compliance officer of the company.

• Definition: A "company secretary" or "secretary" means a company secretary as defined in the Company Secretaries Act, 1980, who is appointed by a company to perform the functions of a company secretary.
• Functions: The CS is responsible for ensuring that the company complies with all statutory and regulatory requirements, implementing the decisions of the Board, and advising the Board on matters of corporate governance. They are responsible for convening meetings, maintaining minutes, and filing various documents with the Registrar of Companies (RoC).

3. Whole-Time Director (WTD) (Section 2(94))

A Whole-Time Director is a director who is in the "whole-time employment" of the company. This means they dedicate their full working time to the company and are actively involved in its day-to-day management. An MD is also a WTD, but a WTD may not have the "substantial powers of management" that an MD possesses. A WTD could be in charge of a specific function, like marketing, production, or finance, and is known as a functional or executive director.

4. Chief Financial Officer (CFO) (Section 2(19))

The Chief Financial Officer is the senior executive responsible for managing the financial actions of the company. Their duties include tracking cash flow, financial planning, analysing the company's financial strengths and weaknesses, and proposing corrective actions. The CFO is responsible for the accuracy and integrity of the company's financial reporting.

Appointment of KMPs

The appointment of KMPs is a mandatory requirement for certain classes of companies to ensure a minimum standard of professional management and governance.

Mandatory Appointment (Section 203)

Section 203 of the Companies Act, 2013, mandates the appointment of the following whole-time KMPs for specific companies:

1. Managing Director, or Chief Executive Officer or Manager and in their absence, a Whole-time Director;
2. Company Secretary; and
3. Chief Financial Officer.

This requirement applies to:

• Every listed company.
• Every other public company having a paid-up share capital of ten crore rupees or more (₹10 Crores).

Furthermore, every private company which has a paid-up share capital of ten crore rupees or more shall have a whole-time company secretary.

Procedure for Appointment

1. Appointment by Board Resolution: A KMP must be appointed by a resolution of the Board of Directors. The resolution must contain the terms and conditions of the appointment, including the remuneration.
2. Filing with RoC: The company must file a return of the appointment of a KMP with the Registrar of Companies in Form MR-1 (for MD, WTD, or Manager) or Form DIR-12 (for other KMPs) within 30 days of the appointment.
3. Restrictions on Appointment:
   • An individual cannot be appointed as the chairperson of the company as well as its MD or CEO at the same time, unless the articles provide otherwise or the company deals in multiple businesses. This is to ensure a separation of powers between the head of the Board and the head of management.
   • A whole-time KMP shall not hold office in more than one company, except in its subsidiary company at the same time.
4. Vacancy of KMP: If the office of any whole-time KMP is vacated, the resulting vacancy must be filled up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

The formal recognition and regulation of KMPs is a significant step towards improving corporate governance, as it clearly defines the key roles and responsibilities within a company's management structure and holds these key individuals accountable for their actions.