Directors - Role, Responsibilities, Qualification, Appointment, Removal, Remuneration and Powers: formula sheet

Key formulas

Definition of director

Director = a director appointed to the Board of a company (section 2(34))

The Board is the collective body of the directors (section 2(10)).

Minimum number of directors

Public company ≥ 3; Private company ≥ 2; One Person Company ≥ 1

These are the minimums under section 149(1).

Maximum number of directors

Maximum = 15; more only by special resolution

Under section 149(1), a company may appoint more than fifteen directors after passing a special resolution.

Resident director

At least 1 director who stayed in India for ≥ 182 days in the previous calendar year

Section 149(3) applies this to every company. The 182 days are a total, not necessarily continuous.

Woman director

At least 1 woman director in prescribed classes of companies

Second proviso to section 149(1), read with the Companies (Appointment and Qualification of Directors) Rules, 2014. Check the Rules for the exact classes of companies.

Independent directors in a listed public company

Independent directors ≥ 1/3 of total directors; a fraction is rounded up

Section 149(4) and its proviso: any fraction in the one-third number is rounded off as one. Example: 10 directors gives 3.33, so at least 4 independent directors.

Independent directors in prescribed public companies

At least 2 independent directors

Section 149(4) applies this to prescribed classes of public companies. The classes are set in the Rules (Rule 4), so check the Rules for the limits.

DIN

One individual = one DIN, valid for life

A DIN is needed before a person is appointed as director.

Conviction bar

Imprisonment ≥ 6 months → ineligible until 5 years from expiry of sentence; imprisonment ≥ 7 years → ineligible in any company

Applies to any offence, whether or not it involves moral turpitude. Section 164(1)(d) and its proviso.

Unpaid calls

Calls unpaid + 6 months elapsed from last day fixed for payment → disqualified

Applies to shares held alone or jointly. Section 164(1)(f).

Related party conviction

Convicted under section 188 offence in the last preceding 5 years → disqualified

Section 164(1)(g).

Company default

Company fails to file financials or annual returns for 3 continuous financial years, or fails on deposits, debentures or dividend for 1 year or more → 5 years bar

Applies to re-appointment in that company and appointment in other companies. Section 164(2).

New appointee in a defaulting company

No disqualification for 6 months from the date of appointment

Proviso to section 164(2).

Absence

Absent from all Board meetings held during 12 months, with or without leave → office vacated

Section 167(1)(b).

Grace on conviction or disqualification order

Office not vacated for 30 days; if appeal is filed within 30 days, until 7 days after disposal; if further appeal is filed within 7 days, until it is disposed of

Applies to section 167(1)(e) and (f) only.

Penalty for acting after vacancy

Fine of ₹1,00,000 to ₹5,00,000

For a person who functions as a director knowing the office is vacant. Section 167(2).

Proviso on default disqualification

If vacation arises under section 164(2), the office is vacated in all companies other than the defaulting company

Proviso to section 167(1)(a).

Board size (section 149(1))

Public company: minimum 3. Private company: minimum 2. One Person Company: minimum 1. Maximum 15 for all.

More than fifteen is allowed only after passing a special resolution.

Resident director (section 149(3))

At least one director who stays in India for not less than 182 days in the financial year

For a newly incorporated company, it applies proportionately at the end of the financial year of incorporation.

Independent directors in a listed public company (section 149(4))

Number required = at least ⅓ × total directors; any fraction is rounded up to one

Example: 7 directors gives 2⅓, so the fraction rounds up and 3 independent directors are needed.

Rotational directors (section 152(6))

At least ⅔ of total directors (excluding independent directors) must be liable to retire by rotation

Independent directors are left out of the 'total number of directors' for this purpose.

Retirement at each AGM (section 152(6)(c))

Retiring = ⅓ of rotational directors, or the number nearest to ⅓ if their number is neither 3 nor a multiple of 3

Longest in office since last appointment retire first; same-day appointees are decided by lot unless they agree otherwise.

Consent filing (section 152(5))

Consent to act filed with Registrar within 30 days of appointment

A person appointed must not act as director until he gives consent.

Independent director tenure (section 149(10) and (11))

One term up to 5 consecutive years; maximum 2 consecutive terms; cooling-off of 3 years

Re-appointment for the second term needs a special resolution and disclosure in the Board's report. During the three years he cannot be associated with the company in any other capacity, directly or indirectly.

Independence declaration (section 149(7))

At first Board meeting he attends, then first meeting of every financial year, and whenever circumstances change

The declaration states that he meets the criteria in section 149(6).

Independent director remuneration (section 149(9))

No stock option; may get sitting fee, expense reimbursement and profit-related commission approved by members

If the company has no profits or inadequate profits, remuneration is as per Schedule V, apart from sitting fees.

Liability of independent and non-executive directors (section 149(12))

Liable only for acts that occurred with his knowledge (attributable through Board processes) and with his consent or connivance, or where he did not act diligently

Applies to independent directors and to non-executive directors who are not promoters or KMP.

Removal of a director (section 169(1))

Ordinary resolution + reasonable opportunity of being heard, before expiry of term

Not available for a director appointed by the Tribunal under section 242.

Independent director on second term

Special resolution + reasonable opportunity of being heard

Applies to an independent director re-appointed for a second term under section 149(10).

Special notice (section 169(2))

Required for a resolution to remove a director, and for a resolution to appoint someone in his place at that meeting

The company must forthwith send a copy of the notice to the director, who may be heard at the meeting whether or not he is a member (section 169(3)).

Representation by the director (section 169(4))

Written representation, if time permits: state it in the notice and send a copy to members; otherwise it can be read out at the meeting

The Tribunal can stop this if the rights are being abused to secure needless publicity for defamatory matter.

Filling the vacancy (section 169(5)-(7))

Fill at the same meeting if special notice of the appointment was given; the new director serves the predecessor's remaining term

If not filled, it is a casual vacancy. The removed director cannot be re-appointed by the Board.

Resignation (section 168)

Written notice to the company; effective on the date of receipt or the date specified, whichever is later

Company intimates the Registrar and reports it in the directors' report. Director may file reasons with the Registrar within 30 days. He remains liable for offences during his tenure.

All directors gone (section 168(3))

If all directors resign or vacate under section 167, the promoter, or in his absence the Central Government, appoints the required directors

They hold office until directors are appointed by the company in general meeting.

Overall cap (public company)

Total managerial remuneration ≤ 11% of net profits

Net profits computed under section 198. Directors' remuneration is not deducted from gross profits. A general meeting may authorise more, subject to Schedule V.

MD / WTD / manager limit

One such person ≤ 5% of net profits; more than one ≤ 10% in total

Exceeding needs approval of the company in general meeting by a special resolution. If the company is in default on dues to a bank, public financial institution, debenture holders or other secured creditor, their prior approval is needed first.

Other directors' limit

Neither MD nor WTD: ≤ 1% of net profits if there is an MD, WTD or manager; ≤ 3% in any other case

Exceeding needs approval of the company in general meeting by a special resolution, with the same prior creditor approval if the company is in default on secured dues.

Sitting fees

Fees under section 197(5) are outside the percentage limits

Board decides the fee, but it cannot exceed the prescribed amount. Different fees may be prescribed for classes of companies and for independent directors.

No or inadequate profits

Pay only as per Schedule V

Applies to all directors, including non-executive and independent directors, apart from sitting fees.

Excess received

Refund within 2 years (or lesser period allowed); hold in trust meanwhile

Waiver of recovery needs a special resolution within two years from the date the sum becomes refundable.

Penalty for default

Person in default: ₹1,00,000; company: ₹5,00,000

Under section 197(15).

NRC: who must form it

Every listed public company + other prescribed classes

Section 178(1). The word 'public' was added in 2018. A listed company is not covered unless it is a public company.

NRC composition

Minimum 3 members, all non-executive directors, at least 1/2 independent

Section 178(1). The chairperson of the company can be a member but cannot chair the NRC.

NRC functions

Identify and recommend directors and senior management; specify evaluation manner; frame criteria and remuneration policy

Sections 178(2) and 178(3).

Remuneration policy tests

Reasonable and sufficient pay; clear link to performance; balance of fixed and incentive pay

Section 178(4)(a), (b) and (c). Policy goes on the company website, if any. Its salient features go in the Board's report.

SRC trigger

More than 1,000 security holders at any time during a financial year

Section 178(5). Holders include shareholders, debenture-holders, deposit-holders and other security holders.

SRC composition and role

Chairperson = non-executive director; other members decided by Board; considers and resolves grievances

Sections 178(5) and 178(6).

Penalty for contravention

Company: fine ₹1,00,000 to ₹5,00,000. Officer in default: liable to a penalty as stated in section 178(8)

Section 178(8) covers sections 177 and 178. Inability to resolve a grievance in good faith is not a contravention.

General power of the Board

Board power = all powers of the company − powers reserved for general meeting

Section 179(1). Board is also subject to the Act, memorandum, articles and valid regulations.

Powers by Board resolution at a meeting (s.179(3))

(a) calls on shares; (b) buy-back under s.68; (c) issue securities; (d) borrow money; (e) invest funds; (f) loans, guarantee, security; (g) approve financial statement and Board's report; (h) diversify business; (i) amalgamation, merger, reconstruction; (j) take over a company or acquire controlling or substantial stake; (k) any other prescribed matter

Memory aid: C-B-I-B-I-L-F-D-A-T. Passed at a meeting, not by one director.

Delegable powers

Clauses (d) to (f) of s.179(3) = borrow, invest, loans/guarantee/security

Board may delegate these by a resolution passed at a meeting to a committee of directors, the managing director, the manager or another principal officer (or branch principal officer). Others cannot be delegated.

Powers needing special resolution (s.180(1))

(a) sell, lease or dispose of whole or substantially whole of an undertaking; (b) invest compensation from merger or amalgamation otherwise than in trust securities; (c) borrow beyond paid-up share capital + free reserves + securities premium; (d) remit or give time for repayment of a director's debt

Temporary loans from bankers in ordinary course are excluded from the borrowing limit.

Undertaking and substantially the whole

Undertaking: investment > 20% of net worth, or generates 20% of total income. Substantially the whole: 20% or more of the value of the undertaking

Net worth and value are taken from the audited balance sheet of the preceding financial year; income is of the previous financial year.

Borrowing limit

Total borrowings (existing + new) ≤ paid-up share capital + free reserves + securities premium

Beyond this, special resolution needed, stating the total amount up to which the Board may borrow (s.180(2)).

Penalty for breach of s.166

Fine: ₹1,00,000 minimum to ₹5,00,000 maximum; plus repayment of undue gain to the company

Section 166(7) and 166(5).

Quick revision

• The minimum number of directors is 3 for a public company, 2 for a private company and 1 for a One Person Company. The maximum is fifteen, which can be exceeded by passing a special resolution.
• Check the type of company before applying a rule, since private, public and listed companies differ.
• A director must hold a Director Identification Number before appointment.
• Disqualification and vacation of office are different; learn the grounds under each separately.
• Independent directors must satisfy independence conditions. They cannot receive stock options, but they may receive sitting fees, reimbursement of expenses and profit-related commission as allowed.
• Removal of a director by ordinary resolution needs special notice and a chance to be heard.
• Resignation takes effect from the date notice is received by the company or the date stated in it, whichever is later. The company must file Form DIR-12 with the Registrar within 30 days, and the director may also file Form DIR-11 with the Registrar.
• Managerial remuneration is linked to net profits and has overall limits, with approval needed beyond them.
• The Nomination and Remuneration Committee recommends appointment, removal and pay of directors and senior management.
• The Stakeholders Relationship Committee handles grievances of security holders.
• Certain powers of the board can be exercised only at board meetings, through resolutions.
• Directors owe fiduciary duties and must act in good faith, with due care and without conflict of interest.

Common mistakes

• Saying a private company needs three directors. Fix: Remember 3-2-1: public 3, private 2, One Person Company 1.
• Thinking 'executive' and 'non-executive' director are defined in the Act. Fix: Say they are working labels. Link executive directors to the whole-time director definition in section 2(94) and managing director in section 2(54).
• Treating section 164 and section 167 as the same thing. Fix: Remember: 164 decides who may be appointed; 167 decides when an existing director must leave. Section 167(1)(a) links the two.
• Saying a conviction disqualifies only if the offence involves moral turpitude. Fix: Under sections 164(1)(d) and 167(1)(f) the offence may involve moral turpitude or otherwise. What matters is imprisonment of not less than six months.
• Including independent directors when calculating the rotational base. Fix: Section 152(6) Explanation excludes independent directors from the total for rotation. Subtract them first.
• Saying independent directors retire by rotation. Fix: Section 149(13) says section 152(6) and (7) on retirement by rotation do not apply to independent directors.
• Saying every director needs a special resolution for removal. Fix: Remember the default is an ordinary resolution. Special resolution is only for an independent director re-appointed for a second term.
• Forgetting special notice. Fix: Special notice is needed both for the removal resolution and for appointing someone in his place at that meeting.
• Including sitting fees inside the 11%, 1% or 3% limits. Fix: Remember that section 197(2) says the percentages are exclusive of fees under sub-section (5).
• Using 1% for non-executive directors when the company has no MD, WTD or manager. Fix: Use 1% only if there is an MD, WTD or manager. In any other case the limit is 3%.

Exam tips

• Write section 2(34) at the start of any 'define director' answer. Then add the Board definition in section 2(10).
• In MCQs, check the type of company first. The three numbers 3, 2, 1 and the limit of 15 decide most questions.
• For a 'types of directors' answer, use a list with one line of meaning for each type. Six types in six lines earn clean step marks.
• Quote the independent director definition as 'referred to in section 149(6)', as section 2(47) does. Do not invent extra conditions.
• In a numerical on independent directors, show the division and the rounding up as separate lines.
• Always cite the section and clause, such as 164(1)(d) or 167(1)(b). Examiners give step marks for the correct reference.
• In case studies, write the numbers from the facts into your reasoning, such as months of default and years elapsed, then compare with the statutory limit.
• For a difference-between question, write two columns of points: who it applies to, timing, source section, effect and consequence.