Introduction
Generally, by business parlance, the directors are either appointed or addressed as “executive directors” or “non-executive director”. Generally, “executive directors” are in employment of the company, whereas non-executive directors are domain experts or practising professionals and are appointed by companies for their expertise, specialised knowledge. Under the Companies Act, 1956, the expression “executive director” was not defined. However, under the Companies Act, 2013 (the Act), “executive director” means a whole-time director under the Act i.e. director in whole-time employment of the company. Generally, companies appoint functional heads as “directors”, such directors are whole-time directors or executive directors i.e. Director (Sales), Director (Production), Director (R&D), Director (Marketing), etc. Generally, such directors do not have substantial powers of the management of the company. This article provides an analysis of relevant provisions of the Act and Rules made thereunder along with detailed checklist w.r.t. to appointment of Executive Director or whole-time Director in a company.
1. Director Identification Number (DIN).— Every individual intending to be appointed as Director of a company shall make an application for allotment of director identification number to the Central Government (under Section 153 of the Act).
2. Modes of Appointment of Executive Director or Whole-Time Director.—The Managing Director is appointed virtue of articles of association of the company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors. However, in the case of executive director or whole-time director, there is no provision for a specific mode of appointment. The articles of association of company may also provide for appointment in a particular manner. In any case, the Board of Directors of the company can appoint Executive Director or whole-time Director.
3. Approval of Board of Directors.— W.r.t. the appointment of Executive Director or whole-time Director by Board of Directors, the notice convening the meeting of Board of Directors shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any.
4. Appointment Letter or Agreement.— The Act has not defined the specific role or powers that can be given to executive director or whole-time director of the company. The terms of appointment shall specifically state the powers, functions, roles, responsibility and duties of the appointee. At the same time, it is important that substantial powers of the management of the company are not entrusted to the executive director or whole-time director. Such powers can only be entrusted to the managing director or manager.
5. Appointment of Executive Director and Whole-Time Director.— Under the Act or the Rules, there is no restriction for a private company or public company for appointment of Executive Director or whole-time Director and whole-time Director at the same time.
6. Tenure.— A private company or public company shall appoint or reappoint any person as its Executive Director or whole-time Director for a maximum term of 5 years. However, the reappointment shall not be made earlier than 1 year before the expiry of his term. According to the provisions of the articles of association of the company, such reappointment can be subject to the approval of the Board of Directors and/or shareholders of the company.
7. Age Criteria.— In case of private company or public company, a company shall not appoint or continue the employment of any person as Executive Director or whole-time Director who is below the age of 21 years or has attained the age of 70 years. However, the appointment of a person who has attained the age of 70 years may be made by passing a special resolution. In such case, the explanatory statement annexed to the notice of general meeting shall indicate the justification for appointing such person.
8. Other Criterias & Qualifications (As Prescribed in Section 196 of the Act).— In case of private company or public company, the appointee shall not be an undischarged insolvent or has not at any time been adjudged as an insolvent. The appointee has not at any time suspended payment to his creditors or makes, or has at any time made, a composition with them. The appointee has not at any time been convicted by a court of an offence and sentenced for a period of more than 6 months. In order to ensure compliance of the said provisions, the company shall obtain a declaration from such appointee.
9. Other Disqualifications Under Section 164 of the Act.—The appointee shall not be disqualified to be a director under Section 164 of the Act (i.e. the appointee shall be of sound mind, solvent, not convicted for a particular offence, etc.). In order to ensure compliance of the said provisions, the company shall obtain a declaration from such appointee. With reference to certain provisions, the appointee shall inform to the company about his disqualification under sub-section (2) of Section 164, if any, in Form DIR-8 before he is appointed or reappointed.
10. Consent.— In case of private company or public company, the proposed appointee shall give his consent to hold the office as executive director or whole-time director of the company.
11. Compliance of Criteria Specified in Part I to Schedule V of the Act.— In case of public companies only, the provisions of Part I to the Schedule V of the Act are applicable. Accordingly, a person shall be eligible for appointment as executive director or whole-time director, if he satisfies the following conditions: (i) he has not been sentenced to imprisonment for any period, or to a fine exceeding Rs 1000, for the conviction of an offence under 19 prescribed statutes; (ii) he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974; (iii) he has completed the age of 21 years and has not attained the age of 70 years; and (iv) he is resident of India. In order to ensure compliance of the said provisions, the company shall obtain a declaration from the executive director or whole-time director.
12. Shareholders’ Approval.— In case of public companies, the terms and conditions of such appointment and remuneration payable to the Executive Director or whole-time Director shall be first approved by Board of Directors and then by the shareholders at the next general meeting of the company. The notice convening the general meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any. Subject to the provisions of the Act, where an appointment of a Executive Director or whole-time Director is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid.
13. Central Government’s Approval, in Certain Cases.— The approval of the Central Government shall be obtained if there is a variance in the terms of appointment (i.e. criteria specified in Part I to Schedule V of the Act) of Executive Director or whole-time Director.
14. Appointment of Key Managerial Personnel (KMP).— Every company belonging to such class or classes of companies shall have the following whole-time KMPs i.e. managing director or CEO or managing and in their absence, a whole-time director, CS and CFO. Such class or classes of companies includes listed company and every other public company having a paid-up share capital of Rs 10 crore or more. This provision shall be also considered, if applicable, at the time of appointment of Executive Director or whole-time Director.
15. Number of Directorships.— A person shall not hold office as a director in not more than 20 companies, including alternate directorship (under Section 165 of the Act). The appointee and the company in which he is appointed as Executive Director or whole-time Director shall confirm the same.
16. Filing of E-Form & Returns.— (i) The company shall file e-Form DIR-12 for the appointment of Executive Director or whole-time Director; and (ii) in case of public companies, it shall file e-Form MR-1 within 60 days of such appointment of Executive Director or whole-time Director.
17. Entry in the Register of Directors & KMP and their Shareholding.— The company shall make necessary entry of the requisite particulars in the register of directors and key managerial personnel and their shareholding (under Section 170 of the Act).
18. Disclosure of Concern or Interest.— The appointed Director shall disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in Form MBP-1 (under Section 184 of the Act). Such disclosure shall be made at the first Board meeting in which he participates as a director and thereafter at the first Board meeting in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change. Such disclosure made by the executive director or whole-time director shall be noted in the minutes of the Board meeting.
*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com