Types of Directors in a Company: Companies Act, 2013

A Director of a company is a key member of the Board of Directors (BOD), responsible for guiding the company’s strategic direction and ensuring compliance with legal standards. This role demands high responsibility, as Directors make decisions that are crucial for the future of the company. They are bound by a fiduciary duty to act in the best interests of the company and its shareholders, encompassing ethical decision-making and due diligence. Legally, directors are accountable for adhering to company law requirements, including governance and financial reporting. Their diverse backgrounds in business, finance, and law enrich their contributions to the company’s strategy and operations.

Geeky Takeaways:

• Appointment to Directorship generally involves selection by shareholders or the board, with certain qualifications mandated by law, such as age and a clean legal record.
• Directors’ primary responsibilities include setting strategic goals, supervising company management, ensuring legal compliance, and managing risks.
• Directors also face potential legal liability for misconduct or negligence, emphasizing the need for ethical and informed decision-making.
• Overall, understanding the role and responsibilities of a company director is crucial for those involved in corporate governance and law.

Maximum and Minimum Number of Directors in a Company

Under the Companies Act, 2013 in India, the requirements for the minimum and maximum number of directors in a company are as follows:

1. Private Companies:

• Minimum Number of Directors: A Private Company is required to have a minimum of 2 directors.
• Maximum Number of Directors: A Private Company can have a maximum of fifteen directors. However, it can appoint more than 15 directors after passing a special resolution.

2. Public Companies:

• Minimum Number of Directors: A public company must have at least 3 directors.
• Maximum Number of Directors: Similar to private companies, a public company can have up to fifteen directors. It can exceed this limit by passing a special resolution.

3. One Person Companies (OPC):

• Minimum Number of Directors: An OPC needs to have a minimum of 1 director.
• Maximum Number of Directors: An OPC can have a maximum of fifteen directors, and this limit can be extended in the same manner as private and public companies; i.e., by passing a special resolution.

There are some additional points that should be considered for being a Director: Residential Status and DIN Requirement.

At least one director in an Indian company should be a resident of India. According to the Act, a resident is someone who has stayed in India for at least 182 days in the previous financial year. Every person intending to become a director in an Indian company must obtain a Director Identification Number (DIN). These provisions in the Companies Act, 2013, outline the basic framework for the composition of boards of directors in Indian companies, ensuring a mix of flexibility and governance standards.

Types of Directors in a Company

In corporate governance, there are several key types of directors, each playing a unique role in the management and oversight of a company. Understanding these roles is crucial for grasping how corporate boards operate. The different types are mentioned below:

1. Residential Director

This refers to a director who resides in the country where the company is headquartered or conducts a significant portion of its business. The presence of a residential director is often required by law in many jurisdictions to ensure that the company maintains a physical and accountable presence in the country of operation. He ensures that the company adheres to the legal and regulatory requirements of the country where it operates. A Residential Director is particularly important in multinational corporations, where local knowledge and presence are essential.

Qualifications: The Act mandates that at least one director on the board of a company must be a person who has stayed in India for a total period of not less than 182 days in the previous calendar year. He should be familiar with its laws, business practices, and culture. May have a background in law, business administration, or relevant industry experience.

2. Independent Director

Independent Directors are crucial for unbiased oversight. They are not part of the company’s executive team and typically do not have any significant financial or familial ties to the company or its executives, which could influence their judgment. They serve on the board of directors of a company but are not affiliated with the company in a way that could compromise their objectivity. They are considered Independent because they do not have any significant financial, familial, or business relationships with the company or its management. They always offer unbiased oversight and guidance, particularly on issues, like executive compensation, audit matters, and corporate governance. Independent directors are key in preventing conflicts of interest. The tenure of Independent Directors is five consecutive years; however, they can be reappointed by passing a special resolution.

Qualifications: Independent Directors are required to meet criteria set out in Section 149(6) of the Act. They should not have any material pecuniary relationship with the company, its holding, subsidiary, or associate companies, or their promoters or directors. They must also possess appropriate skills, experience, and knowledge in areas relevant to the company’s business.

3. Small Shareholders’ Director

A Small Shareholders’ Director, sometimes referred to as a Small Investor Director or Retail Shareholders’ Director, is a member of a company’s Board of Directors who represents the interests of small shareholders or retail investors. Small shareholders typically own a relatively small number of shares in a publicly traded company and may not have significant voting power or influence individually. A listed company upon a notice of a minimum of 1,000 small shareholders or 10% of the total number of small shareholders; whichever is lower, shall have a director who would be elected by small shareholders. To ensure their interests are considered and represented, some companies choose to appoint a Small Shareholders’ Director to the board. They represent the interests of minority shareholders. This type of director ensures that the concerns and rights of Small Shareholders are considered in Board decisions.

Qualifications: Should have a good understanding of shareholder rights and corporate governance. Often, they are elected from among the small shareholders, thus having a direct interest in representing this group effectively.

4. Women Director

Many jurisdictions now encourage or mandate the inclusion of women on corporate boards. Women directors bring diverse perspectives and experiences to board discussions, contributing to more balanced and comprehensive decision-making processes. A company, whether public or private would be required a appoint a minimum of one woman director in case it satisfies any of the following criteria:

• The company is a listed company and its securities are listed on a stock exchange.
• The paid-up capital of such a company is ₹100 crore or more with a turnover of ₹300 crores or more.

Qualifications: Should have a good understanding of shareholder rights and corporate governance. Often, they are elected from among the small shareholders, thus having a direct interest in representing this group effectively.

5. Additional Director

An Additional Director serves a vital, though often temporary, role on a company’s board of directors. This role is designed to fulfill specific strategic needs that the current board composition might lack. Additional Directors are appointed by the board between the company’s Annual General Meetings (AGM) and typically serve until the next AGM, where their position might be regularized based on shareholder approval. He brings in new skills, insights, or expertise that complement the existing board capabilities. They might be experts in emerging technologies, international markets, specific legal areas, or other fields that align with the company’s strategic objectives.

Qualifications: Depends on the board’s current needs. They might be experts in a particular field relevant to the company’s operations, such as technology, international markets, or environmental issues.

6. Alternate Director

An Alternate Director is appointed to serve on a company’s board of directors in the absence of a regular director. This role is essential for maintaining continuity in the board’s functioning and decision-making processes. They are appointed by the Board to fill in a director who might be absent from the country, for more than 3 months. An Alternate Director has the same rights, duties, and responsibilities as the director, they are replacing. This includes attending meetings, participating in discussions, and voting on board resolutions. Their primary role is to represent the interests and viewpoints of the original director, ensuring these perspectives are not overlooked during their absence. The tenure of an Alternate Director is typically temporary, lasting only until the original director is able to resume their duties. In some cases, they are specifically chosen for their expertise or knowledge that complements the board’s current needs.

Qualifications: Typically have similar qualifications and experience as the original director they are replacing, ensuring continuity in skills and knowledge.

7. Nominee Director

A Nominee Director occupies a specialized role on a company’s board, representing the interests of a particular stakeholder or group of stakeholders, such as major investors or creditors. This role is critical in ensuring that the specific concerns and priorities of these entities are reflected in the board’s decision-making processes. He advocates for and protects the interests of the entity that appointed them. Despite this focused representation, they participate in all aspects of board governance, including meetings, discussions, and strategic decision-making. A Nominee Director must balance their duty to represent their nominating entity’s interests with the broader responsibilities owed to the company and its shareholders.

Qualifications: Their expertise is often aligned with the interests of the entity they represent. This could include financial expertise for a creditor’s nominee or industry-specific knowledge for an investor’s nominee.

8. Executive Director

An Executive Director holds a unique and influential position within a company, and has a higher responsibility towards the company. This role is typically assumed by a senior executive who also serves on the Board of Directors, providing a vital conduct between the company’s operational management and its strategic oversight body. Executive Directors are tasked with a dual responsibility. On one hand, they actively participate in the board’s deliberations, contributing insights gleaned from the company’s day-to-day operations. This dual perspective enables them to offer invaluable guidance in board discussions, ensuring decisions are well-informed and operationally feasible. On the other hand, in their executive capacity, they are often tasked with executing the strategies and policies formulated by the board, overseeing the daily workings of the company, and effectively managing its resources.

Qualifications: Senior-level management experience is typical, often in the company or its industry. They usually have a strong background in business administration, finance, or the specific sector of the company.

9. Non-Executive Director

Non-Executive Directors hold a pivotal position on a company’s board, distinct from the daily operational management of the organization. Their role is predominantly focused on providing an impartial and objective perspective in board discussions and decision-making processes, ensuring that the company’s long-term strategy aligns with the interests of its shareholders and other stakeholders. These directors are tasked with monitoring the performance of the executive management, ensuring that the company operates efficiently and effectively.

Qualifications: They often come from diverse backgrounds such as academia, public service, or other industries. Their value lies in their external perspectives and varied experiences.

10. Managing Director

The Managing Director occupies a central role in a company often seen as the highest-ranking executive responsible for the daily operations and overall management. This position is critical in steering the company’s strategic direction and ensuring its success through a blend of governance, strategic planning, and hands-on operational management. He oversees the company’s day-to-day activities, ensuring that the business operates efficiently and in alignment with the strategic objectives set by the board. They are instrumental in setting the company’s strategic direction, collaborating with the board to develop strategies and then translating these into operational plans and goals.

Qualifications: Typically, they have extensive experience in management and leadership roles, often in the same industry. Skills in strategic planning, financial management, and operations are crucial.

Liabilities of a Director

Directors of corporations shoulder significant responsibilities and are subject to various liabilities, which can vary depending on the laws and regulations of the jurisdiction in which the company operates. Their liabilities can encompass a range of areas, including tax obligations, inaccuracies in the company’s prospectus, debts incurred by the company, involvement in fraudulent practices, issues regarding share application funds, and obligations concerning qualification shares.

• Tax-Related Liability: Directors might be held personally accountable for specific tax-related issues of the company. This liability typically arises in scenarios where the company has not appropriately remitted collected taxes, such as employee withholdings or sales taxes, to the government. Directors might also be liable for failing to file the necessary tax returns or for instances of underpayment of taxes due to oversight or misconduct.
• Liability for Prospectus Misstatements: If a Director is involved in preparing a company’s prospectus that contains misleading or false information, they could be held liable. Investors who incur losses due to these inaccuracies might have the grounds to pursue legal action against the directors. The extent of liability often depends on the director’s knowledge of the misstatement and their level of involvement in preparing the prospectus.
• Liability for Company Debts: Generally, Directors are shielded from personal liability for the company’s debts, thanks to limited liability principles. However, exceptions exist, particularly in cases of wrongful trading or insolvent trading, where directors could be held personally liable for debts incurred during periods of insolvency.
• Liability for Fraudulent Practices: Directors engaged in fraudulent business activities can face personal liability, which can extend to both civil and criminal penalties. This encompasses situations where business operations are conducted with the intent to defraud creditors or for any other fraudulent purposes.
• Liability Regarding Share Application Funds: In situations where a company does not allocate shares within a certain period after receiving share application money and subsequently fails to refund these funds within the prescribed timeframe, directors could face personal liability to return these funds, often with interest.
• Qualification Shares Liability: In jurisdictions where directors are required to own a specific number of shares in the company (known as qualification shares), failure to acquire and pay for these shares within the required period can result in liability for the directors for the amount owed.

Conclusion

In a company, different types of directors play various important roles. Residential Directors make sure the company follows local laws and understands the area’s business environment. Independent Directors are important because they help make decisions without being influenced by the company’s internal matters. Directors representing small shareholders and women bring in diverse opinions and look out for minority interests. Additional, Alternate, and Nominee Directors are there to fill specific needs, like bringing in special skills, covering for others, or representing certain investors. Executive Directors connect the board’s plans with what happens in the company every day, while Non-Executive Directors focus more on giving advice and strategic direction. The Managing Director is the boss of the daily operations and overall strategy.

Directors have to be careful about several things like making sure taxes are paid correctly, being honest in company reports, managing the company’s debts wisely, and avoiding any fraudulent activities. In India, the Companies Act, 2013 lays down rules about how many directors a company should have, ensuring they have a mix of different skills and backgrounds. This includes rules about at least one director living in India and everyone having a Unique Identification Number for Directors. All these rules are there to make sure that directors lead the company well, make smart decisions, and follow the law, showing just how important and complex their job is in running a company.

Frequently Asked Questions (FAQs)

1. What is the role of a Residential Director?

Answer:

A Residential Director ensures that the company complies with the laws and regulations of the country where it operates. They bring local business knowledge and help the company maintain a physical presence in the region.

2. What does an Independent Director do?

Answer:

An Independent Director provides unbiased decision-making on the board, free from internal company influences. They help in areas, like executive compensation and audit matters, preventing conflicts of interest.

3. Who is a Small Shareholders’ Director?

Answer:

A Small Shareholders’ Director represents the interests of minority shareholders, making sure their views and rights are considered in board decisions.

4. Why are Women Directors important on a board?

Answer:

Women Directors bring diversity and different perspectives to the board, contributing to more balanced and comprehensive decision-making processes.

5. What is the function of an Additional Director?

Answer:

Additional Directors are appointed to meet specific needs, like bringing new skills or expertise to the board. They usually serve temporarily until the next annual general meeting.

6. What is the role of an Alternate Director?

Answer:

An Alternate Director steps in for a regular director who is temporarily unable to perform their duties, ensuring continuity in the board’s functioning.