Are you planning to become a director of a company?

From time and again, several hundred companies get registered with the Ministry of Corporate Affairs.

Each of these companies, whether public or private, needs individuals who act as a Director.

As you are reading this, it is likely that  you either are already a director or are planning to become one.

Usually, startups and smaller companies depend upon founders, friends and close relatives to take on the director roles. However, as size grows or needs permit, other people with particular expertise may also be called upon to join a company as a Director and give direction to the company’s affairs.

Every position comes with a role and a responsibility including that of a Director.

This post takes you through all that is required of this role including who can become a Director (eligibility), the duties and the responsibilities / liabilities of a Director.

The post uses Companies Act, 2013 of India as reference.

What is a Director?

A director of a company is an individual who, along with other members, provides direction to the working of a company.

The shareholders, who are the owners of a company, assign the responsibility of the management and working of the company in the hands of the directors. The directors (except the first directors) are appointed by the shareholders of the company.

Every private company needs atleast 2 directors; every public company needs atleast 3 directors and every one-person company needs minimum 1 director.

What are the eligibility criteria?

To become a director of the company, here are the basic criteria:

#1 Age: A person needs to be of minimum 18 years of age. Although the Companies Act, 2013 has not prescriber the minimum age requirement, we always refer to the Indian Contract Act, 1872 and the conditions of a person competent to enter into a contract. So, a minor cannot become a director of any company.

#2 Nationality: There is no bar on the nationality of any individual. Even a foreign national can become a director of a company.

Further requirements as per Companies Act, 2013:

The Companies Act, 2013 specifies further requirements for a Director.

#3 Digital Signature (DSC): The person proposed to be appointed as a director needs to have a DSC of Class-2. The DSC is required to file various forms with Registrar of Companies (RoC) / Ministry of Corporate Affairs (MCA).

#4 Director’s Identification Number (DIN): DIN is the first step for becoming a Director or a Designated Partner. DIN is a unique number which is allotted to an individual who intends to become a Director in a company.

To read more about DIN and how to apply for DIN, click here.

#5 Written consent: The person needs to give a written consent to act as a director before he is appointed as a director. Click here to view the format of the consent letter in form DIR-2.

#6 Check disqualifications: a person shall be disqualified from being a director if the person:

• is of an unsound mind
• is undergoing the process of insolvency
• has applied to be declared as insolvent
• has been convicted of any offence by a court
• has not paid calls of shares of companies held by him and six months have lapsed from the last day when the calls were supposed to be paid.
• if other company, where he is already a director, has not filed annual forms for a continuous period of three financial years.
• if other company, where he is already a director, has failed to repay deposits accepted by it or to pay interest or to redeem debentures on the due date or pay interest due or to pay any dividend declared and such failure continues for one year or more.

There are a few more.

The person should give a declaration in writing that s/he is not disqualified to act as a director under the Companies Act, 2013. Click here to view the draft of the declaration.

Limit to the number of Directorships

The Companies Act, 2013 has prescribed limit on the number of companies a person can be as a director. A person can be a director in maximum 20 companies.

Out of the 20 companies, a person can be a Director in not more than 10 public companies.

A Director can also be appointed to various committees of the Board such as

• Audit Committee
• Nomination and Remuneration Committee
• Corporate Social Responsibility (CSR) Committee
• Stakeholders Relationship Committee

Types of Director & their terms

The person appointed as a director can have various designations and according will have limit on the number of years he can continue to be such a director.

Here are the details:

A director can also be appointed as a Key Managerial Personnel (KMP) –

• Company Secretary
• Chief Financial Officer
• Chief Executive Officer

The director can be executive director or a non-executive director.  Executive director is involved in day-to-day activities of a company. He can obtain benefits from the company in form of salary or commission or equity. A non-executive director or an independent director does not get involved in day-to-day activities of a company.

Duties of Directors

The Companies Act, 2013 has specified various duties of directors in Section 166.

They are (as specified in the Act itself):

1. A director of a company should always act in accordance with the articles of the company.
2. A director of a company should act in good faith in order to promote the objects of the company for the benefit of its members as a whole.
3. A director should act in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
4. A director of a company should exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
5. A director of a company should not get involved in a situation where he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
6. A director of a company should not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
7. A director of a company should not assign his office to someone else and any assignment so made shall be void.

A company may ask you to sign a declaration with the above before appointing you as a Director.

Compliance to be taken care of by the Director

A Director’s role is not easy. There are various compliance which a director should be aware of and take care of.

A director should always ensure that he:

• is never disqualified under Section 164 of the Companies Act, 2013. Some of the disqualifications are mentioned above, in this note.
• attends atleast one meeting in person or through video conferencing, during a financial year
• discloses any conflict of interest while entering into a contract or arrangement with a related party.
• should not be convicted of any offence or disqualified by any court or Tribunal.

Any non-compliance may lead to force resignation from the post of directorship. For example, if a director fails to attend atleast one meeting in person or through video conferencing in a financial year, his office will be vacant as a director.

A director is required to give disclosure of interest (role or equity holding) in companies, LLPs and other entities as on March 31, every year. The form prescribed is MBP – 1. Click here to view the format of Form MBP-1.

A director should always ensure that his DIN is mentioned accurately at all times and in all places where he is going to sign or affix the digital signature.

Can a director be sued?

Yes. A director is included in the term “officer in default” and is liable to penalties under various sections of the Companies Act, 2013. The penalties include imprisonment from a range of six months to ten years and fine from a range of rupees twenty five thousand to rupees twenty five crores or even more.

Hence, it is expected from a director to be aware of the compliance and perform the duties with integrity and honesty.

Contravention of provisions of Section 166 (relating to codified duties) is punishable with a fine which shall not be less than rupees one lakh but which may extend to rupees five lakhs.

A director is always liable for the offences occurred during his tenure, even though he has resigned from his post.

How can a director resign?

If a director wants to resign from the Board of a company, he should give a written communication to the company through a letter or an email, stating his reasons for resignation.

It is the duty of the director has to file form DIR – 11, online, with MCA on his resignation.

If a director resigns from the Board, he automatically resigns from the committees of the Board to which he was appointed.

Can a director be removed by other directors?

No, a director cannot be removed by the other directors. But, the shareholders a company can remove a director. However, one should also check if there are any provisions in the Articles of Association of the company.

The director who is proposed to be removed will be given an opportunity to present his case in the meeting.

Can a director also be a shareholder of a company?

The answer is YES. Lot of companies, especially private companies, have common directors and shareholders. However, it is not mandatory to give equity shares to a director. A director may receive shares as per the terms of his contract.

In conclusion, a director’s role comes up with several responsibilities and obligations. You should size it up with this background to know if you are ready for it or not.