Directors’ Duties in India

>> Board Requirements in India

Appointment of directors

The Companies Act prescribes a minimum of two and a maximum of fifteen directors, unless increased by  special resolution.

Directors are to be appointed in general meeting via a shareholders resolution. Additional directors can be appointed by the board of directors at a board meeting by passing a board resolution. The new  additional director holds 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.

Further, it is to be noted that the company shall at all times have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two (182) days in the previous calendar year.

Qualifications and Disqualifications of Directors

To qualify, as a director and ensure that the Board of Directors fulfils all requirements as per law, the following qualifications must be observed:

  • The Companies Act, 2013 read together with the Companies (Appointment and qualification of Directors) Rules, 2014 states that only an individual can be appointed as a director of a company.
  • every person who has been appointed to hold the office of a director shall on or before the appointment, furnish to the company a consent in writing to act as a director
  • every director to be appointed must have a registered Director’s Identification Number

(DIN)

However, please note that no specific academic or professional qualifications are prescribed under the Companies Act, 2013. However, there are certain restrictions on the persons who cannot be appointed as directors mentioned as follows:

  • they are a minor
  • they have been found to be of an unsound mind by a court of competent jurisdiction
  • they have been declared as undischarged and insolvent
  • where they have applied to be judged as an insolvent and his/her application is pending
  • they have been convicted by a court for any offence involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of where 5 years have not elapsed from the date of expiry of the sentence
  • an order disqualifying them from appointment as director has been passed by a Court or Tribunal and the order is in force
  • they have been sentenced to imprisonment for any offence for a period of seven years or more they have not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call
  • they have been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years
  • a person shall not be re-appointed and appointed in any other company for a period

of five years, who is or has been a director of a company which

  • has not filed financial statements or annual returns for any continuous period of three financial years
  • has failed to repay the deposits accepted by it or pay interest thereon, or to redeem any debentures on the due date or pay interest due thereon, or pay any dividend declared and such failure to pay or redeem continues for one year or more

Committees of the Board of Directors

Every company having a net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more, or a net profit of Rs. 5 crore or more in any financial year, shall establish a Corporate Social Responsibility Committee of the board, consisting of three (3) or more directors, out of which at least one (1) director shall be an independent director.

However, a private company which is covered under above said provision, which is not required to appoint an independent director, shall have its CSR Committee without such director;

A private company having only two directors on its Board shall constitute its CSR Committee with two such directors.

Signatory Rights / Powers of Directors

The Board derives the powers both from the Act as well as from Memorandum and Articles of Association of the company. The board of directors of a company is entitled to exercise all powers, and to do all acts and things, as the company is authorised to exercise and do. However, while exercising such powers the board of directors have to bear in mind that the powers are subject to the provisions of the Companies Act and the restrictions contained in the Memorandum and Articles of Association of the Company as well as the regulations made by a Company in a general meeting.

Further, the board of directors cannot exercise any power or do any such act or thing that is strictly for the general meeting (Shareholders’ meeting) of the Company.

Conflicts

A conflict of interest can arise when a director or a member of his/her immediate family receives improper personal benefits as a result of his or her position as a director of the company without the knowledge of the board. A conflict situation can also arise when a director takes an action or has an interest that may make it difficult for him or her to perform his or her duties, functions and responsibilities objectively and effectively.

Every director, shall, at the first meeting of the board in which he participates as a director and thereafter at the first meeting of the board following the new financial year, or whenever there is a change in his interests, disclose his interests in any organisation (including shareholdings) by providing a notice in writing in accordance with Section 184 of the Companies Act, 2013.

Any transactions which are potentially conflicted must be approved by a resolution of the company. They must also be mentioned into the board’s report to the shareholders, alongside the justification for entering into the agreement or contract.

In addition, a director who is in any way, whether directly or indirectly, interested in a contract or arrangement (proposed or otherwise) to be entered into by the company, shall disclose the nature of his interest at the meeting of the board in which the contract or arrangement is discussed and the interested director may participate in such meeting after disclosure of his interest

If a director of the company fails to comply with the above disclosures, they are liable to imprisonment for a term which may extend to one year and/or a fine between Rs. 50,000 – Rs. 500,000.  Additionally, the contract shall be voidable at the request of the company. The company will also have the option to bring action against the director to recover any losses sustained by the company as a result of this contract or arrangement.


Latest version updated 22nd March 2018

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