Proposed to be a director – hardships

Interestingly, proposed to be a director is a legally valid official status, now. This is a period between two board meetings one proposing him to be a director of an existing company and second board meeting actually appointing him as director. This status comes into being on 26^th January 2018 due to the amendment in the Companies (Appointment and qualification of Directors) Rules, 2014.

According to Section 153 of the Companies Act, 2013, every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number (DIN) to the Central Government in such form and manner and along with such fees as may be prescribed. [Emphasis added]

The form and manner is prescribed in the Companies (Appointment and qualification of Directors) Rules, 2014 as amended by the Companies (Appointment and qualification of Directors) Amendment Rules, 2016 with effect from 26^th January 2018.

According to recently amended Rule 9(1), every applicant, who intends to be appointed as director of an existing company shall make an application electronically in Form DIR-3, to the Central Government for allotment of a Director Identification Number (DIN) along with such fees as provided under the Companies (Registration Offices and Fees) Rules, 2014. [Emphasis added]

For the purpose of allotment of Director Identification Number (DIN), there are now two classes: (a) a person proposed to be a director in a company going to be incorporated, and (b) a person proposed to be a director of an existing company. Persons with Director Identification Number are a class itself and out of the preview of this blog post.

Proposed Director of Proposed Company

In first case of proposed directors not having approved DIN in a company to be incorporated, the particulars of maximum three directors shall be mentioned in Form INC – 32 (SPICe) and DIN may be allotted to maximum three proposed directors through Form INC – 32 (SPICe), as per proviso to Rule 9(1). This must be to reduce the number of applications to be filed before filing for main application of incorporation of a company.

The proviso puts an arbitrary limit of maximum three directors. In case of producer companies, the minimum numbers of directors are 5. Usually, producer companies are to be incorporated by agriculture sector or rural persons. This is the immense hardship for their promoters to hunt for two persons who may land them their name as the director to comply the statutory requirement. Where promoters want to appoint more than three directors, as per their joint venture agreement shareholders agreement, need to wait until the incorporation of their company.

Proposed Director of Existing Company

In the Second case, subclause (iiia) of clause (a) of sub-rule (3) of rule 9 mandate a board resolution proposing his appointment in an existing company. Section 152(3) mandates, no person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154 [or any other number as may be prescribed under section 153]. Section 152 makes Director Identification Number (DIN) a precondition of actual appointment as director. Therefore, rules being subordinate legislation retain Director Identification a precondition for actual appointment as Director. Ministry of Corporate Affairs seems to curb a practice to have a DIN without any actual intention to be a director. Therefore, this hardship is caused by existing companies. This hardship may be avoided.

This requirement of Rule 9(3)(a)(iiia) make the appointment of a new person as a director an affair of either:

• two board meeting;
• a resolution by circular followed by a Board meeting; or
• a board meeting and a general meeting.

Impact on corporate Democracy

This requirement of Rule 9(3)(a)(iiia) also have far-reaching implications for the implementation of Section 160 of the Companies Act, 2013. Section 160 gives a right to a person who is not a retiring director in terms of Section 152 shall, subject to the provisions of this Act, be eligible for appointment to the office of a director at any general meeting. This right to be appointed in general meeting under Section 160 does not have any precondition of a proposal from Board of Directors.  This section confers a right to a person, including a person who does not have the support of a majority on the Board, to propose his candidature. There is no question of formal resolution to appoint him as director of the Board of directors. Section 160 of the Companies Act, 2013 is a successor of Section 257 of the Companies Act, 1956 and a foremost well-settled principle of corporate governance in India. The combined reading of Section 160, 152 and Rule 9(3)(a)(iiia) do not match this well-established principle of corporate governance and democracy.

Form DIR – 3

Form DIR – 3 does not have a mention of Board Resolution proposing an appointment of the applicant as director. Board Resolution is not mentioned as the mandatory requirement in Form and its help document. However, Help document refers the Rule 9(3)(a)(iiia) academically under the heading “Laws governing the eform”. This form in hybrid (STP/non-STP) mode for approval purpose.