Appointment of director
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Adding or appointing a director - an overview
When a new company is incorporated, whether private or public or one person or any other, it is necessary for it to appoint a director. A director is a person who is appointed to control, manage and direct the affairs of the company. Section 2(34) of the companies act 2013 provides for “who is a director?” According to this, a director means a director appointed to the board of a company. He is a person appointed to perform the duties and functions of the director of the company.
The criteria to appoint the director differs for both first and subsequent directors. The first director is the director who is appointed immediately after the incorporation of the company. Section 152 of the companies act 2013 provides for the provisions of the appointment of directors. As per section 152 subsection 1 where there is no provision is made in the articles of the company, for the appointment of the first director then the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed. However, in the case of one person company an individual being a member shall be deemed to be the first director until the director is duly appointed.
Whereas the subsequent director is the director appointed by the company in the general meeting by passing an ordinary resolution.
Types of directors in a company
The directors of the company are of several types which are as follows:
Resident director: This refers to a director who stays in India for not less than 182 days during the financial year
Independent director: An independent director is a non-executive director and is independent of the company. The provisions relating to the appointment and qualifications of an independent director is provided under section 149(4) and 149(6) of the companies act 2013
Small shareholder director: A listed company may, upon notice of not less than a thousand small shareholders or one-tenth of the total number of small shareholders whichever is less, appoint a small shareholder director.
Women director: A listed company or other class or classes of a public company as prescribed in the companies act 2013(i.e. A public company having paid-up share capital not less than a hundred crores and turnover not less than three hundred crores) shall appoint a woman director
Additional director: Any person eligible to be appointed as a director to meet the immediate requirements of the management may hold the office of an additional director till the date of the next annual general meeting
Alternate director: It refers to the director appointed by the board of directors during the absence of the original director in India for a continuous period of three months or more.
Nominee director: This director is nominated by any institutions like banks or financial institutions, in pursuance of the provisions of any law for the time being in force or of any agreement or by government
Executive director: This is a full time working director of the company who has a high responsibility towards the company
Non-executive director: This refers to a part-time or non-working director who is not involved in the everyday working of the company
Managing director: This refers to the director who is entrusted with substantial powers of management of the company by virtue of articles or agreement or any resolution passed by the company or board.
How many directors are required based on the type of companies.?
Companies act has prescribed various types of companies like a private company, public company, and one person company. The requirement for a minimum number of directors varies in all of these companies. Section 149 of the companies act 2013 provides for the minimum and the maximum number of directors that companies need to appoint. According to that section, every company shall have a board of directors consisting of individuals as directors and shall have -
- A minimum number of three directors in the case of a public company, two directors in the case of a private company and one director in the case of a one-person company and
- A maximum of fifteen directors (this limit is the same for all companies). However the limit can be increased by passing a special resolution in the general meeting.
Why should a company add or appoint a director?
A director plays a vital role in managing and directing the affairs of the company. Not only this, but directors also help in determining the objectives and policies of the company. They monitor the company’s progress towards achieving those objectives and policies. Hence it is necessary for a company to appoint a director. The directors act as both agent and trustee for the company.
Eligibility criteria for being a company director
Section 149 of the companies act 2013 states that only an individual can be appointed as a director. This means that a body corporate or an association of persons or a firm cannot be appointed as a director of the company. However, the companies act does not provide for any professional qualification for a person to be eligible for an appointment as a director.
Further section 164 of the companies act provides for the disqualifications of a director. This means that the following person is not eligible to be appointed as a director of the company:
- A person who is of unsound mind and stands so declared by a competent court
- A person who is an undischarged insolvent
- A person who has applied to be adjudicated as an insolvent and whose application is pending
- A person who has been convicted by a court of an offense involving moral turpitude or otherwise and sentenced to imprisonment for six months or more and a period of five years has not been elapsed from the date of expiry of the sentence.
Note: if a person has been convicted of any offense and sentenced to imprisonment for a period of seven years or more then he shall not be eligible to be appointed as a director in any company.
- Any order disqualifying a person for appointment as a director has been passed by a court or Tribunal and the order is in force.
- Any person who has not paid 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 payment of call.
- A person who has been convicted of the offense dealing with related party transactions provided under section 188 of the companies act at any time during the last preceding five years.
- A person who has not complied with section 152(3) of the companies act 2013.
- A person who has not complied with the provisions of section 165(1) of the companies act 2013.
Section 164 subsection 2 further provides for the director’s disqualification for appointment. As per the section, no person who is or has been a director of a company which -
a. Has not filed financial statements or annual returns for any continuous period of three financial years or
b. Has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay the interest due thereon or pay any dividend declared and such failure to pay or redeem continues for a year or more,
shall be eligible to be reappointed as a director of that company or appointed in another company for a period of five years from the date on which the said company fails to do so.
However, it is provided that the person appointed as a director of the company which is in default under clauses (a) and (b) of section 164(2) of the companies act 2013, then he shall not incur the disqualification for a period of six months from the date of his appointment.
Note: A private company may by articles add additional grounds of disqualification for the appointment of director of the company.
Process of adding a director or how to add a director
The process to appoint a director is different from director to director. The first director of the company is appointed as prescribed in the articles. Where the articles do not prescribe for appointment of director then the subscribers to memorandum are appointed as the director of the company.
The subsequent director is appointed in the general meeting. The procedure for that is as follows:
- Take consent of the proposed director in form DIR 2.
- Obtain digital signature certificate and DIN of that proposed director
- Convene a general meeting
- Pass an ordinary resolution in that meeting
- Issue a letter of appointment
- The consent of the director shall be filed by the company in Form DIR-12 with the registrar within 30 days of appointment of such director.
The procedure to appoint an independent director is the same as above except that a special resolution is required to reappoint an independent director.
However, an additional director, alternate director, Nominee director, and a director appointed to fill the casual vacancy are appointed by the board of directors in a board meeting.
The procedure to appoint an additional and alternate director is as follows:
- Check for authorization of articles of association
- Obtain DIN, digital signature certificate, and consent of the proposed director in form DIR-2
- Call for a board meeting
- Pass board resolution or resolution by circulation
- Appoint the director by issuing a letter of appointment
Note: No authorization of articles is required to fill the casual vacancy and it should be approved by the members of the company in the next general meeting. The casual vacancy can not be filled by passing a resolution by circulation. However, the remaining process is the same as an additional or alternate director.
Documents required for adding or appointing a director
For appointing a director there is no specific list of documents provided in the companies act except for
- Director identification number of the proposed director along with a declaration from that proposed director that he is not disqualified to become a director
- Consent of the proposed director in form DIR 2 prior to the date of appointment (the company is required to file this consent to the registrar in form DIR 12 within thirty days of such appointment.
- Digital signature certificate of the proposed director.
As per section 154 of the companies act 2013 no person shall be appointed as a director of a company unless he has been allotted the DIN (i.e., director identification number).
However to obtain the director identification number a person is required to submit the following documents in form DIR 3:
- Passport size photographs
- Proof of identity, which should be self-attested along with sign and seal of the existing director of the company
- Proof of residence, which should be self-attested along with sign and seal of the existing director of the company
- Board resolution passed by the company for application of allotment of DIN
- Letter of appointment as director of the company issued by the company
How does an eAuditor office help in adding a new director of a company?
The appointment of a director involves several provisions under the companies act. From different types of companies and directors to the appointment procedure, a lot of things are there to understand and comply with. This can be very tricky and complicated for a company without the help of an auditor. An eAuditor office can help the company to appoint the director without having to go through much hassle. That complicated process can become seamless and quick with the help of an eAuditor office. An eAuditor knows about the law and performs their services with utmost brilliance and dedication towards their clients.
FAQs on the appointment of director
An individual holding a valid DIN as per section 152 of the companies act 2013 and who is not disqualified to be appointed as a director as per section 164 of the companies act 2013 can be appointed as a director of the company.
Yes, directors prescribed under section 161 i.e., additional director, alternate director, nominee director, and a director appointed to fill the casual vacancy can be appointed by board of directors.
DIN refers to a director identification number that is allotted to a prospective director by the Central Government in order to be eligible to be appointed as a director of the company. The provisions related to DIN are prescribed under section 152 of the companies act 2013.
If a person already holds a DIN then it is not mandatory for him to obtain a digital signature certificate. However, if he does not hold a DIN and intends to be appointed as a director then he should obtain a digital signature which is required to make an application for DIN.
No, there is no such age limit prescribed except for a managing director, manager or whole time director. A person who is above the age of seventy years can not be appointed as a managing director, manager or whole time director. However, some exceptions are provided for the age limit under section 196 subsection 3 of the companies act 2013.