Types of Directors

By how appointed. Appointed by the members in general meeting under section 152(2), or by the Board under section 161, or by an institution or a Government as a nominee.

First directors: section 152(1)

Where no provision is made in the articles for the appointment of the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first directors until directors are duly appointed; and in a One Person Company an individual being member shall be deemed to be its first director until directors are duly appointed by the member.

Note "who are individuals". Where a body corporate has subscribed to the memorandum, it is not deemed a first director, because a company cannot be a director.

Independent directors, and the databank: sections 149(6) and 150

Section 149(6) defines an independent director as a director other than a managing director, a whole-time director or a nominee director who satisfies a series of conditions: that in the Board's opinion he is a person of integrity possessing relevant expertise and experience; that he is or was not a promoter of the company or its holding, subsidiary or associate company and is not related to promoters or directors in them; that he has no pecuniary relationship with them beyond his director's remuneration or transactions not exceeding ten per cent of his total income, in the two preceding financial years or the current one; that none of his relatives holds security or interest, is indebted, has given a guarantee, or has a pecuniary relationship amounting to two per cent or more of gross turnover or total income, with a proviso permitting a relative to hold security of face value not exceeding fifty lakh rupees or two per cent of the paid-up capital; and that neither he nor his relatives has held key managerial personnel or employee positions in the three preceding financial years, with the further conditions the sub-section sets out.

The full treatment is in [Board Composition and Independent Directors], because MU puts board composition in topic 3.2.

Section 150: where they come from. An independent director may be selected from a data bank containing the names, addresses and qualifications of persons eligible and willing to act, maintained by a body, institute or association notified by the Central Government having expertise in creating and maintaining such a databank, and put on their website for the use of companies making such appointments.

The proviso is the important line: the responsibility of exercising due diligence before selecting a person from the data bank lies with the company making the appointment. The databank is a source of candidates, not a certificate of suitability.

Section 150(2). The appointment shall be approved by the company in general meeting as provided in section 152(2), and the explanatory statement annexed to the notice shall indicate the justification for choosing the appointee as an independent director.

Section 150(3) and (4) provide for the databank to be created and maintained under the rules, and for the Central Government to prescribe the manner and procedure of selection.

The small shareholders' director: section 151

A listed company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed.

The Explanation defines a small shareholder as a shareholder holding shares of nominal value of not more than twenty thousand rupees, or such other sum as may be prescribed.

Three points. It applies to a listed company. It is permissive, "may have", not compulsory on the face of the section. And the qualifying figure is twenty thousand rupees of nominal value, not market value.

The four directors under section 161

(1) Additional director

The articles may confer on the Board the power to appoint any person as an additional director at any time, who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier.

Two limits, and both are examined.

Who cannot be appointed: any person who fails to get appointed as a director in a general meeting. The Board cannot install through the back door a candidate the members have rejected.

Tenure: to the next annual general meeting, or the last date on which it should have been held, whichever is earlier. The second limb stops a company extending an additional director's term simply by not holding its meeting.

(2) Alternate director

The Board may, if so authorised by the articles or by a resolution passed in general meeting, appoint a person to act as an alternate director for a director during his absence for a period of not less than three months from India.

Who cannot be an alternate: a person holding any alternate directorship for any other director in the company, or holding directorship in the same company. So one man cannot be alternate for two directors, and a sitting director cannot double as somebody's alternate.

Three provisos.

No person shall be appointed as an alternate for an independent director unless he is himself qualified to be appointed as an independent director.

An alternate shall not hold office longer than is permissible to the original director, and shall vacate office if and when the original returns to India.

If the original director's term ends before he returns, any provision for the automatic re-appointment of retiring directors in default of another appointment applies to the original director, not to the alternate.

The trigger is absence from India for not less than three months. An absence of six weeks does not permit an alternate.

(3) Nominee director

Subject to the articles, the Board may appoint any person as a director nominated by any institution in pursuance of any law for the time being in force or of any agreement, or by the Central Government or a State Government by virtue of its shareholding in a Government company.

Three sources of nomination: a statute, an agreement, or the Government's shareholding. Note that a nominee director is excluded from being an independent director by the opening words of section 149(6).

(4) Casual vacancy

If the office of any director appointed by the company in general meeting is vacated before his term expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles, be filled by the Board at a meeting of the Board, which shall be subsequently approved by members in the immediate next general meeting.

The proviso: any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.

Two things to fix. The vacancy must be in the office of a director appointed in general meeting, so a casual vacancy in an additional director's office is not within the sub-section. And since the 2017 amendment the Board's appointment must be approved by the members at the next general meeting.

Voting individually, and proportional representation: sections 162 and 163

Section 162(1). At a general meeting, a motion for the appointment of two or more persons as directors by a single resolution shall not be moved unless a proposal to move such a motion has first been agreed to at the meeting without any vote being cast against it.

Section 162(2). A resolution moved in contravention shall be void, whether or not any objection was taken when it was moved.

Section 162(3). A motion for approving a person for appointment, or for nominating a person for appointment, as a director shall be treated as a motion for his appointment.

The purpose is to protect the members' choice. A single resolution appointing five directors forces a member who objects to one of them to vote against all five. Section 162 makes each appointment a separate decision unless nobody at all objects to taking them together.

Section 163: proportional representation. Notwithstanding anything in this Act, the articles may provide for the appointment of not less than two-thirds of the total number of directors in accordance with the principle of proportional representation, whether by the single transferable vote, by a system of cumulative voting, or otherwise; such appointments may be made once in every three years; and casual vacancies of such directors are filled under section 161(4).

Three numbers: not less than two-thirds, once in every three years, and casual vacancies under section 161(4). The purpose is to let a minority secure Board representation, which straight majority voting never allows.

Standing for election: section 160

A person who is not a retiring director is eligible for appointment at any general meeting if he, or some member intending to propose him, has, not less than fourteen days before the meeting, left at the registered office a notice in writing signifying his candidature, or the member's intention to propose him, along with a deposit of one lakh rupees or such higher amount as may be prescribed, which shall be refunded if the person gets elected or gets more than twenty-five per cent of the total valid votes.

Fourteen days, one lakh rupees, and twenty-five per cent. The deposit exists to deter frivolous candidatures, and it comes back to anyone who is either elected or seriously supported.

A worked example

Nashik Auto Components Limited, a listed public company, has a Board of nine.

An additional director. Its articles empower the Board to appoint additional directors. In June it appoints Ms Ranade. She holds office up to the next annual general meeting, or the last date on which it should have been held, whichever is earlier. She may then be appointed by the members in the ordinary way.

A rejected candidate. In the same year the members voted down Mr Bhosale's appointment. The Board cannot make him an additional director: section 161(1) excludes a person who fails to get appointed as a director in a general meeting.

An alternate. Mr Iyer, a director, leaves for Canada for eight months. That is not less than three months from India, so the Board, being authorised by the articles, may appoint an alternate. It may not appoint another sitting director of the company, nor anybody who is already an alternate for somebody else. When Mr Iyer returns to India, the alternate vacates office at once.

An alternate for an independent director. Had Ms Fernandes, an independent director, gone abroad, her alternate would have to be qualified to be an independent director himself: first proviso to section 161(2).

A nominee. A bank that has lent forty crore rupees has, under its loan agreement, the right to nominate a director. The Board appoints him under section 161(3). He cannot be counted as an independent director, because section 149(6) excludes a nominee director.

A casual vacancy. In November a director appointed by the members dies. The Board fills the vacancy at a Board meeting, and that appointment must be approved by the members at the immediate next general meeting. The appointee holds office only up to the date to which the deceased director would have held office.

A small shareholders' director. Being listed, the company may have one director elected by small shareholders, that is, shareholders holding shares of nominal value not more than twenty thousand rupees, in the prescribed manner.

An outsider stands. Mr Deshpande, not a retiring director, wishes to stand. He must leave a notice in writing at the registered office not less than fourteen days before the meeting, with a deposit of one lakh rupees, refunded if he is elected or polls more than twenty-five per cent of the total valid votes: section 160.

Voting. The company proposes to appoint four directors by one resolution. That motion cannot be moved unless a proposal to move it is first agreed to without any vote being cast against it: section 162(1). If it is moved anyway, the resolution is void, even if nobody objected at the time.

Distinctions that carry marks

What this does NOT mean

It does not mean the Board may appoint anybody as an additional director. A person who failed to get appointed in a general meeting is excluded.

It does not mean an alternate can be appointed for any absence. The original must be absent from India for not less than three months.

It does not mean the databank guarantees an independent director's suitability. The proviso to section 150(1) puts the due diligence on the company.

It does not mean directors can be appointed in a batch. Section 162 requires individual voting unless a proposal to take them together is agreed without any vote against.

Quick revision

• 152(1): subscribers who are individuals are the first directors where the articles are silent; in an OPC, the individual member.
• 149(6) and 150: an independent director is not an MD, whole-time or nominee director and satisfies the independence tests; he may be selected from a notified data bank, but due diligence lies with the company, and the explanatory statement must give the justification.
• 151: a listed company may have one director elected by small shareholders, being holders of shares of nominal value not more than twenty thousand rupees.
• 161(1) additional: by the Board if the articles allow; not a person rejected in general meeting; holds office to the next AGM or the last date it should have been held, whichever is earlier.
• 161(2) alternate: for a director absent from India not less than three months; not a person already an alternate or a director of the same company; an independent director's alternate must himself qualify; vacates when the original returns; automatic re-appointment applies to the original.
• 161(3) nominee: nominated under a law, an agreement, or a Government's shareholding in a Government company.
• 161(4) casual vacancy: in the office of a director appointed in general meeting, filled by the Board and approved by members at the immediate next general meeting, holding office only for the unexpired term.
• 160: a non-retiring candidate needs fourteen days' notice at the registered office and a one lakh rupee deposit, refunded on election or more than twenty-five per cent of the total valid votes.
• 162: no single resolution appointing two or more directors unless agreed without any vote against; otherwise void. A motion to approve or nominate counts as one for appointment.
• 163: the articles may provide for not less than two-thirds of directors by proportional representation, by single transferable vote, cumulative voting or otherwise, once in every three years.

Test yourself

1. How long does an additional director hold office? Up to the date of the next annual general meeting, or the last date on which that meeting should have been held, whichever is earlier: section 161(1).

2. When may an alternate director be appointed, and when does he go? Where a director is absent from India for a period of not less than three months, and the Board is authorised by the articles or by a general meeting resolution. He vacates office if and when the original director returns to India, and may not hold office longer than the original could: section 161(2).

3. Who cannot be appointed an alternate director? A person already holding an alternate directorship for another director in the company, or holding directorship in the same company; and no person may be an alternate for an independent director unless he is himself qualified to be appointed as an independent director.

4. What is a small shareholder, and what right does section 151 give? A shareholder holding shares of nominal value of not more than twenty thousand rupees, or such other sum as may be prescribed. A listed company may have one director elected by such shareholders, in the manner and on the terms prescribed.

5. What must a person who is not a retiring director do to stand for election? He, or a member intending to propose him, must leave at the registered office, not less than fourteen days before the meeting, a notice in writing signifying his candidature, with a deposit of one lakh rupees, which is refunded if he is elected or obtains more than twenty-five per cent of the total valid votes: section 160.

6. Can two directors be appointed by one resolution? Only if a proposal to move such a motion has first been agreed to at the meeting without any vote being cast against it. A resolution moved in contravention is void, whether or not any objection was taken when it was moved: section 162.