Introduction
Corporate governance is one of the important elements for the functioning of a company. In today’s times the merit of companies is also evaluated based on their corporate governance practices by the stakeholders and potential clients, investors, and customers. Efficient corporate governance is sometimes synonymous with compliance with laws, regulations and guidelines issued by the authorities. However, corporate governance is more than just compliance. It would not be wrong to say it is over and above compliance. To establish a robust corporate governance practice in a company, it is essential to appoint the directors and have them function with the same motive as the lawmakers intended.
In this article we shall be discussing the basic and one of the most important elements of a company, i.e., the directors. A company, being a legal person, is owned by its shareholders whether listed or unlisted. Though shareholders are the owners of the company, they are not involved in its all-day-to-day operations and functions. Shareholders in turn appoint directors who steer the company. Directors are responsible for the operations and governance of the company and are also considered custodians of interest of shareholders or agents of shareholders, though not in the literal sense. The fundamental duty of directors of a company, collectively the board of directors (“Board”), is to work for the interest of the shareholders of the company and their achievement is measured against the value they create for the investor.
However, in recent times, the concept of the Board working for the sole interest of the shareholders has slumped, considering recent scams and corporate frauds. Regulators have taken steps to redefine the role of directors and to ensure directors work for the interest of all the stakeholders of the company which includes investors, creditors, debenture holders, deposit holders, employees, customers, and not shareholders alone.
The role of directors has changed in the recent past so have the powers, duties, responsibilities, and most importantly the liabilities of directors. We shall be discussing the types of directors, their roles and responsibilities in a company and the liabilities they may incur while holding a seat in the board.
This article is divided into two parts; Part I, which describes the types of directors, their respective responsibilities and appointment procedures and Part II, which discusses the liabilities of the directors as detailed in the Companies Act, 2013 and under Securities law.
We have divided this blogpost into 2 parts for easy reading. This first part refers to the types of directors, their respective responsibilities and appointment procedures. The second part describes the liabilities of the directors.
PART 1
1. Executive Directors and Non-Executive Directors
To start with the basics, every company, whether listed or unlisted, has two types of directors, Executive Directors, and Non-Executive Directors. The Companies Act, 2013 (“Act”) has used these terms to differentiate between directors, however, the terms are not defined in the Act. In general, executive directors are the ones who are responsible for day-to-day operations, functioning and management of the company and non-executive directors are not involved in operations and functioning of the company but play a key role in strategic and policymaking decisions. One of the major differences is that executive directors are usually employees of the company and are paid salary for their contribution and non-executive directors are not the employees on pay-roll of the company and are usually paid fees for their services.
2. Independent Directors
Independent directors are non-executive directors appointed by the company at the general meeting and can be reappointed only by passing a special resolution at a duly convened general meeting of the Company. Unlike other directors, an independent director is mandatorily appointed in an unlisted company only if it falls under the thresholds specified in the Act.
The primary purpose to mandate appointment of an independent director is to safeguard the interests of stakeholders and to seek rationally or oppose any resolution put before the board which he believes not be in the interest of the company and raise a dispute if found necessary in the interests of the company. A company appointing an independent director shall ensure that the candidate fulfills the criteria as specified in Section 149(6) of the Act. In the case of listed companies, it is mandatory to have an independent director on the Board and to protect the independence, companies, both listed and unlisted, are restricted from offering stock options to independent directors.
Appointment of Independent Directors
Independent directors being one of the most essential positions on the Board and from the governance perspective of the company, the appointment procedure of such directors has been made more stringent. Act mandates that independent director shall be appointed exclusively from the candidates listed in the data bank maintained by Indian Institute of Corporate Affairs. Along with maintaining a data bank, an individual willing to be appointed as independent director shall pass an online proficiency self-assessment test within 2 years from date of inclusion of his name in the databank. Although, certain exceptions have been provided from the requirement for individuals possessing qualifications and experience as specified in the Companies (Appointment and Qualifications of Directors) Rules, 2014.
Role and Significance of Independent Directors
The role of independent directors is similar to that of a watch dog appointed to the Board. He is expected to seek clarifications and ask questions to the board as and when necessary, before the board passes resolutions.
He shall strive to attend most of the meetings of the board and board committees if not all, seek clarification and information from the board and when necessary, obtain professional advice and highlight issues of concern before the board and audit committee as the case may be. One of the most important duties of an independent director is to bring in an independent view and balance the conflicting interests of the stakeholders, particularly minority shareholders, and provide independent judgment.
The independent director shall attend the general meeting of the company as a good corporate governance practice.
Though the independent director is a non-executive director not in the full-time employment of the company, but the duties and responsibilities vested in independent directors make it a full-time job and no person shall be of the view that an independent director is merely a position under the Act since it’s an important pillar of robust corporate governance in a company.
Independent directors are also appointed to the audit committee and nomination and remuneration committee of the company.
3. Woman Director
Like independent directors, the appointment of a woman director in a company is also mandatory where a company reaches the threshold as specified in the Act. However, in case of a listed company it is mandatory to appoint at least 1 woman director on the board and for top 1000 listed companies it is mandatory to appoint at least one independent woman director.
4. Nominee Director
A company, subject to the articles, may appoint a person nominated by any institution or by central government or state government by virtue of shareholding in the company or an agreement as nominee directors on the board of the company. They are not considered as employees of the company but appointed on the board only to protect the interest of the nominating entity.
5. Small Shareholder’s Director
A listed company may have only one small shareholders’ director. The appointment of small shareholder directors shall be by small shareholders. A small shareholder means a shareholder holding shares of nominal value of not more than INR 20,000/- (Rupees Twenty Thousand). A listed company may upon notice of not less than, one thousand small shareholders, or one-tenth of the total number of such shareholders, whichever is lower have a small shareholders’ director elected by the small shareholder. Also, A ‘Small Shareholder’s Director’ may be elected voluntarily by any listed company. Thus, a listed company may, on its own, act to appoint a small shareholder’s Director. In such a case, no notice from small shareholders is required.
6. Alternate Director
As the name suggests, an alternate director is appointed by the Board in place of a director in his/her absence from India for a period of at least 3 months. While appointing an alternate director, it shall be noted that no person can be appointed as a nominee director for more than one director in the company and an alternate director for an independent director shall be qualified to be appointed as an independent director under the provisions of the Act.
7. Additional Director
A company can appoint directors only in a duly convened general meeting. However, an additional director is appointed in a board meeting, subject to articles of the company to hold office up to the date of the next annual general meeting or last date to conduct annual general meeting, whichever is earlier. While appointing an additional director, the board must ensure that the person proposed to be appointed has not been rejected in the general meeting from being appointed as a director in the company.
– Faizan Khatri, Associate
For Part II click here.
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