DIRECTOR AND MD

Course: BBA ISubject : Introduction to Business Organization

Unit: I

Board of Directors The Board of Directors of a company is a nucleus

selected according to the procedure prescribed in the Act and the Articles of Association, out of the entire mass of shareholders and even non-shareholders.

Acting collectively as a Board of Director, they can exercise all the powers of the company except those, which are prescribed by the Act to be specifically exercised by the company in the general meeting.

Directors, as a body, frame the general policy of the company, direct its affairs, appoints the company officers, ensures that they carry out their duties and recommend to the share holders regarding distribution of dividend.

Board of Directors There are mainly two types of company

directors - Executive Directors or Whole-Time Directors (MD, Technical Directors) and, Non-executive or part-time Directors who are professionals and serve on the board of many companies.

Executive directors have employment stake in the company. They wield substantial power, enjoy maximum remuneration, perquisites, fees, commission and allowances.

Part-time directors get only sitting fees for the board meetings attended by them and wield little or no powers.

Board of Directors "A director includes any person

occupying the position of director by whatever name called." [Section 2(13)]

Only individual, and not a body corporate, association or firm, shall be appointed as director. [Section 253]

"An individual who direct, control, manage, superintend the affairs of the company in the form of the board of directors."

Types of Directors Professional Directors Specialist in different fields of management. Income derives principally from sitting fees. Nominee Directors Appointed by FIs, or Banks Powerful tool of project supervision,

monitoring and control. Executive Directors Is a full time employee of the company. May not be members of the board, as such

not a director in strict sense.

Types of Directors Independent Directors Do not have any material pecuniary

relationship or transaction with the company.

Entitle to receive director's remuneration. Government Directors (Section 408) Appointed by the Central Government on

the recommendation of the CLB. To safeguard the interest of the company

or its shareholder or in public interest. When the operations of the company are

conducted in such a manner as to oppress any member of the company or in a manner prejudicial to the company.

Types of Directors Whole-time Directors [Section 269(1)] Includes a director in the whole time

employment of the company. Technical director, legal director, works

director sales director if appointed on full time basis.

A whole-time director is also a managerial person. [Section 268(1)]

They cannot accept the office of executive or whole-time director in any other company.

There is no restriction on the period of appointment of a whole time director, he may be appointed for a longer period.

Types of Directors There are mainly two types of company

directors - Executive Directors or Whole-Time Directors (MD, Technical Directors) and, Non-executive or part-time Directors who are professionals and serve on the board of many companies.

Executive directors have employment stake in the company. They wield substantial power, enjoy maximum remuneration, perquisites, fees, commission and allowances.

Part-time directors get only sitting fees for the board meetings attended by them and wield little or no powers.

Managing Director A director who, by virtue of an agreement,

or of a resolution passed in the general meeting or board meeting or by virtue of the Memorandum or Articles, is entrusted with substantial power of management and includes a director occupying the position of MD, by whatever name called. [Section 2(26)]

Powers exercised subject to the superintendence, control, and direction of the company's board of directors.

A person who is not a director of the company must be first appointed as an additional director in accordance with Section 260 to be appointed as MD.

Managing Director

He must sign and file his consent to act as a director pursuant to the provisions of Section 264 and obtain qualification shares u/s 270.

He may have dual capacity that of an employee and agent.

It obligatory for public companies having paid up capital of Rs 5 crore or more to appoint a MD or whole-time director.

Appointment of MD or whole-time director in a public company only with the prior approval of the central govt.

Legal Position of Directors Public companies must have at least three directors. [Section 252]

The Act does not lay down any qualification, but it lays down disqualifications.

Directors are the agent of the company. A single director has no authority to

bind the company unless such powers are delegated to him by the board.

To some extent directors are also trustee of the company's properties.

Legal Position of Directors Barring directors in the whole time employment, directors are not in the employment of the company and are not entitled to any remuneration beyond what is allowed by the Act, i.e. sitting fees.

They are not also required to hold any shares in the company on whose board they serve.

A director can hold an office or place of profit in the company in addition to his usual directorship. [Section 314]

Qualification of Directors

According to Sec 274 a person shall not be capable of being appointed as director if:

found to be of unsound mind; an un-discharged insolvent; applied to be adjudicated as an

insolvent; convicted of any offence involving moral

turpitude and sentenced for not less than six months and a period of 5 years has not elapsed;

Qualification of Directors

has not paid any call in respect of shares and six months have elapsed;

an order u/s 203 is passed by a court disqualifying him;

is already a director of a public company which - has not filled annual returns for three years, or has failed to repay the deposits or interest thereon or redeemed its debentures.

Only individuals can be a director. [Sec 253]

Appointment of Directors First directors may be named in the Articles

or subscriber to the memorandum shall be first directors.

One third of the total directors are liable to retire by rotation every year and are eligible for re-appointment in the General Meeting. [Section 256]

Directors who have been longest in the office to retire first.

Directors nominated by financial institutions or by the Central Govt. u/s 408 are not liable to retirement.

MD and Whole-time director shall not be liable to retire by rotation.

Appointment of Directors A retiring director may be re

appointed at the same AGM, some other person may also be appointed in his place. [Section 256(3)]

At the adjourn meeting, if the vacancy is not filled and it was not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been reappointed, provided:

Appointment of Directors Any person other than the retiring

director may give a notice not less than 14 days before an AGM about his candidature as a director or any member may give such notice signifying his intention to propose him as a candidate for that office.

Two or more directors should not be appointed en bloc or by single resolution. [Sec 263(1)] unless a resolution to do so has first been agreed by the meeting without any vote given against it.

Small Shareholder's Director A public company having a paid up capital of Rs.5 crore or above may have a director from amongst small shareholders.

Shareholders not less than 1/10th (or 100) of the total shareholders may elect suo-moto or upon a notice served at least 14 days before the AGM.

Listed company shall elect small shareholder's director through postal ballot while an unlisted company on the recommendation of the majority of small shareholders.

Small Shareholder's Director Hold office for a maximum period of

three years. Same person may be reappointed for

another term if so decided. He is treated as director for all

purposes but cannot be appointed as MD or whole-time director.

No individual can hold office of Small Shareholder's Director at the same time in more than 2 companies.

Managerial Remuneration Not defined in the Act but reference to

be found in Sections 198, 309, 311 and 387 suggesting that director and managerial personnel are entitled to receive managerial remuneration.

Managerial Remuneration may take the form of monthly payment, say, salary or a specified percentage of net profits or a commission and /or by way of a fee for each meeting of the board, besides any or all of the following:

Rent free accommodation; Any other amenity provided free of

charge or at concessional rate; and

Managerial Remuneration

Any insurance, annuity, or gratuity. Payment received for holding an

office/place of profit is not managerial remuneration. [Section 309(1)]

The overall Managerial Remuneration payable not to exceed 11% of the net profit. [Section 198 (1)]

MD and Whole-time directors may be paid a monthly salary or specified percentage of net profit. [Section 309 (3)]

Remuneration to Non-Exe Directors Non-executive directors may be paid remuneration either:

Monthly, quarterly or annual payment with approval of Central Govt.;

By way of commission authorised by special resolution.

In either case remuneration shall not exceed:

1% of net profit if company has MD or whole-time director;

3% of net profit in any other case.

Remuneration to Non-Exe Directors The company with the approval of

Central Govt. in an AGM authorise a higher commission than 1% or 3%.

Such resolution shall remain in operation for five years, though renewable.

If a director is paid sitting fees for attending board meeting it shall not be considered for computing overall Managerial Remuneration u/s 198

Provisions of Sections 309 and 198 shall not apply to a private company.

Co. having no or Inadequate Profits

Capital of company

Less than 1 crore B/wn Rs 1 and Rs 5

cr B/w Rs 5 and Rs

25 cr B/w Rs. 25 and Rs

100 cr Above Rs 100

crore

Monthly Remuneration

75,000 1,00,000

1,25,000

1,50,000 2,00,000

Managerial Remuneration In addition, the managerial personnel

shall also be eligible for: Contribution to PF, Superannuation Fund

or annuity fund to the extent not taxable under Income Tax Act, 1961;

Gratuity @ not exceeding half a month's salary for each completed year;

Encashment of leave at the end of tenure.

In case of an expatriate managerial person:

Managerial Remuneration

Children education allowance - maximum Rs 5000 per month per child;

Holiday passage for children, spouse and members of family; and

Leave travel concession. All remuneration payable aforesaid shall

be subject to approval by a resolution in AGM.

References

1. Fundamentals of Business Organization and

Management by Y.K.Bhushan- Sultan Chand publications

2. Principles & Practices Of Management by L M Prasad – Himalaya Publishing House

Thank You!!