Designation and Category of Directors

When an applicant files a form for incorporation of a company, we need to select the designation and category of first directors in incorporation Form 32 (popularly called Spice) or wherever company appoints a director. There are four different categories of directors. We will discuss confusion regarding these categories of directors.

There are three different set of selection required in these forms –

1. Designation of director
   1. Director (simple director)
   2. Managing Director
   3. Whole time Director
   4. Nominee Director
   5. Alternate Director
   6. Additional Director
   7. Director appointed in casual vacancy

      {Please note, last three designations are possible only in existing companies, not at the time of incorporation}

2. Category
   1. Promoter
   2. Professional
   3. Independent
   4. Nominee (This option as a category not available for existing companies in Form DIR – 12, which I find strange. This forces the company to select not so properly correct option all the time – professional director.)
   5. Small shareholders’ director (in existing companies)
3. Chairman
4. Executive Director or Non – Executive Director

Interesting rules

There are interesting rules relating these combos –

• A person cannot be an Executive director and non–executive director same time.
• Managing Director and whole time director may be an Executive director as per the form, however, they always should be Executive Director. Any other director drawing salary ideally should be executive director.
• A Nominee Director by designation may belong to the category of a promoter, professional or nominee director but no independent director.
• Nominee director as the designation is a different thing from the Nominee director as the category but to select the category of Nominee Director the designation must be Nominee Director.
• A Nominee Director may be an executive director as well.
• A Professional Director need not be an executive director.
• In case of existing companies, director designated as nominee directors should ideally be categorized as no so correct option – professional director. MCA should make a correction in Form DIR – 12 and align it with Form INC-32 (SPICe) in this matter.

Small Shareholder’s Director

According to Section 151 read with rule 7, as discussed earlier herein details, 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 shareholders. [Sub – Rule (1) of Rule 7]

Professional Director

This term “professional director” or “professional” does not define in the Companies Act, 2013.

However, Proviso to subsection (4) of Section 197 of the Companies Act, 2013 has reference to professional services by a director. Section 200 has reference to the professional qualification in relation to managerial remuneration.

The dictionary defines word “professional” as a person competent or skilled in a particular activity. Accordingly, a person having some competence or skill relating to a particular activity to contribute decision making of the board may be appointed under the category of the professional director. A doctor may be a professional director in a hospital company.

Nominee Director

According to Section 149(6) of the Companies Act, 2013, an independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director.

According to the explanation to Section 149, “nominee director” means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests.

Accordingly, a nominee nominated by promoter group to represent its interests may be nominee director by designation but it shall promoter director as the appropriate category.

In case of nominee director as designation, the name of company or institution nominating such director is required in the forms.

Promoter Director

The Companies Act, 2013 does not define promoter director but define promoter.

According to Section 2(69), promoter” means a person—

(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;

Unless a person is a promoter as per this definition or representing a promoter, it may not be called as promoter director. A promoter director should be a member of promoter group or nominated to the board by promoters to represent them.

I faced an interesting question – whether an applicant signing application for incorporation or an application for name reservation is a promoter? A mere applicant representing all subscribers for incorporation need not be a promoter unless he has a control over affairs of the company. While signing application, applicant just representing all subscribers/first shareholders of the company.

Independent Director

Section 149(6) of the Companies Act, 2013 defines Independent Directors. This definition earlier discussed here and here needs no further discussion. Just to have quick look, an independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two percent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(e) who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten percent or more of the gross turnover of such firm;

(iii) holds together with his relatives two percent or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non-profit organization that receives twenty-five percent or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two percent or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

Selection of correct category is important for the long-term interest of the company and concerned director as an individual.