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Procedure for Appointment of Managing Director or Whole Time Director

Definitions:

As per Section 2(54) of the Companies Act 2013, “Managing Director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.

Explanation.—For the purposes of this clause, the power to do administrative acts of a routine nature when so authorised by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within the substantial powers of management.

&

As per Section 2(94) of the Companies Act 2013, “whole-time director” includes a director in the whole-time employment of the company

Background:

  • Every listed company and every other public company having a paid-up share capital of ten crore rupees or more shall have whole-time key managerial personnel:
    • Managing Director, or Chief Executive Officer or Manager and in their absence, a Whole-time Director;
    • Company Secretary; and
    • Chief Financial Officer

[Section 203 of Companies Act 2013 read with Rule 8 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014]

  • Key Managerial Personnel”, in relation to a company, means—
    • the Chief Executive Officer or the managing director or the manager;
    • the company secretary;
    • the whole-time director;
    • the Chief Financial Officer;
    • such other officer, not more than one level below the Directors who is in whole-time employment, designated as key managerial personnel by the Board; and
    • such other officer as may be prescribed;

[Section 2(51) of the Companies Act 2013]

  • Also, no company shall appoint or employ at the same time a managing director and a manager.[Section 196 (1) of the Companies Act, 2013] 
  • No company shall appoint or re-appoint any person as its managing director, whole-time director or manager for a term exceeding five years at a time 

Provided that no re-appointment shall be made earlier than one year before the expiry of his term [Section 196 (2) of the Companies Act, 2013] 

Sections/Rules/Regulations 

  • Section 2(54), 2(94), 96, 100, 117, 173, 178, 190, 196, 201, 203 of the Companies Act, 2013 
  • Rule 3, 7 and 8 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014 
  • Regulation 26A, 30, 44, and 46 of the SEBI (LODR) Regulations, 2015 
  • Clauses of Secretarial Standards-1 
  • Clauses of Secretarial Standards-2 

Mandatory Requirements & Important Points: 

  • No company shall appoint or continue the employment of any person as managing director, whole-time director or manager who —

(a) is below the age of twenty-one years or has attained the age of seventy years:

Provided that appointment of a person who has attained the age of seventy years may be made by passing a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person;

Provided further that where no such special resolution is passed but votes cast in favour of the motion exceed the votes, if any, cast against the motion and the Central Government is satisfied, on an application made by the Board, that such appointment is most beneficial to the company, the appointment of the person who has attained the age of seventy years may be made.

(b) is an undischarged insolvent or has at any time been adjudged as an insolvent;

(c) has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; or

(d) has at any time been convicted by a court of an offence and sentenced for a period of more than six months.[Section 196 (3) of the Companies Act, 2013]

  • Subject to the provisions of Section 197 and Schedule V, a managing director, whole-time director or manager shall be appointed and the terms and conditions of such appointment and remuneration payable be approved by the Board of Directors at a meeting which shall be subject to the approval by a resolution at the next general meeting of the company and by the Central Government in case such appointment is at variance to the conditions specified in Part I of that Schedule. [Section 196 (4) of the Companies Act, 2013]. 
  • Where an appointment of a managing director, whole-time director or manager is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid. [Section 196 (5) of the Companies Act, 2013].
  • For a Private Company, Section 196(4) and (5) will not apply. [Notification dated 5th june, 2015.]
  • A managing director or a whole-time director shall not hold office in more than one company at the same time except in its subsidiary company at the same time. However, this will not entitle him from being a Director of any Company with the permission of Board. Also a company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company and such appointment or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all the Directors present at the meeting and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the Directors then in India. [Section 203 (3) of the Companies Act, 2013]
  • If the office of Managing Director or Whole-time Director is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy [Section 203 (4) of the Companies Act, 2013]
  • Any vacancy in the office of Chief Executive Officer, Managing Director, Whole Time Director or Manager shall be filled by the listed entity at the earliest and in any case not later than three months from the date of such vacancy.

Provided that where the listed entity is required to obtain approval of regulatory, government or statutory authorities to fill up such vacancies, then the vacancies shall be filled up by the listed entity at the earliest and in any case not later than six months from the date of vacancy 

Provided further that the listed entity shall not fill such vacancy by appointing a person in interim capacity, unless such appointment is made in accordance with the laws applicable in case of a fresh appointment to such office and the obligations under such laws are made applicable to such person. [Regulation 26A(1) of SEBI (LODR) Regulations, 2015]

  • Vacancy in the office of Chief Executive Officer, Managing Director, Whole Time Director or Manager or Chief Financial Officer of such listed entity in respect of which a resolution plan under section 31 of the Insolvency Code has been approved, shall be filled within a period of three months of such approval. However, in the interim, such listed entity shall have not less than one full-time key managerial personnel managing its day-to-day affairs.] [[Regulation 26A(3) of SEBI (LODR) Regulations, 2015
  • A special resolution is required for appointment of MD/WTD if the remuneration payable exceeds the specified limit
  • Every company shall keep at its registered office,—

(a) where a contract of service with a managing or whole-time director is in writing, a copy of the contract; or

(b) where such a contract is not in writing, a written memorandum setting out its terms.

The copies of the contract or the memorandum kept under sub-section (a) shall be open to inspection by any member of the company without payment of fee. [Section 190 of the Companies Act, 2013]

Procedure for appointment of Managing Director/ Whole-time Director:

Obtain Form DIR-8:

  • A declaration as to disqualification under form DIR-8 from the proposed managing director/whole-time director to be obtained

Meeting of Nomination & Remuneration Committee (NRC): 

  • Where the companies are required to constitute NRC, the appointment and remuneration of the Managing director(MD)/ Whole-time Director(WTD) shall be recommended by this committee to the Board.(NRC  – In case of Listed companies and Public Companies having a paid-up share capital of Rs. 10 cr or more or turnover of Rs. 100 cr or more or aggregate o/s loans/debentures/deposits exceeding Rs. 50 cr, a meeting of Nomination and Remuneration Committee shall be held for identifying the persons who may be appointed in senior management as per the criteria laid down and recommend to the Board their appointment. NRC also formulates a Policy relating to remuneration of Directors, KMP and other employees) [Section 178 of the Companies Act, 2013]

Meeting of Board of Directors :

  • As per Section 173 of the Companies Act, 2013 and Secretarial Standard-1:   
    • Notice of the Board Meeting shall be issued to all Directors at their registered addresses by post or hand delivery or by electronic means at least 7 days before the date of the board meeting, with provision for shorter notice in case of urgent business.   
    • The notice shall include agenda, notes to agenda, and draft resolution. The Notice should also include the terms and conditions for appointment and the remuneration payable to the MD or WTD
    • The Board at its meeting shall pass the necessary board resolution  
      • To approve the appointment of MD/WTD based on the recommendations made by the NCR (if required).Such appointment shall be subject to the approval by members of the Company.
      • To fix day, time and venue for holding General Meeting of the Company
      • To approve draft Notice of GM along with Explanatory Statement u/s 102 of the Companies Act 2013
      • To authorize Director/CS to sign and file the relevant forms and to perform all the necessary deeds for implementing board’s resolution.  
    • Appointment letter shall be issued to the newly appointed MD. 
    • Listed companies shall disclose the outcome of the Board Meeting to the Stock Exchange 30 minutes/ 3 hours as applicable*[Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015] and also on website of the Company within 2 working days from the date of board meeting. [Regulation 46 (3) of LODR 2015]. The listed entity may provide the exact link to the webpage of each of the recognized stock exchanges where such information has already been made available by the listed entity.   

*If the Board meeting is concluded after normal trading hours but more than 3 hours before the beginning of the normal trading hours the outcome to be disclosed within 3 hours from the closure of the board meeting.   

[It is pertinent to note that SEBI has provided timeline for disclosing events given in Part A of Schedule III of LODR as 12 hours , however in a small note appended at the end of the said document, it’s stated that where the event emanates from a decision taken in Board Meeting, the same shall be disclosed within 30 min/3 hours as applicable as per Regulation 30(6), from the closure of the meeting as against the timeline of 12 hours]

    • Draft Minutes shall be prepared and circulated within 15 days from the conclusion of the Board Meeting.   
    • MGT-14 shall be filed with the Registrar within 30 days from the date of passing Board resolution by the company, who shall record the same.  

For more insights refer the Procedure for Conducting A Board Meeting

Convene General Meeting: 

  • As per Sections 96 and 100 of the Companies Act, 2013 and Secretarial Standard-2
    • A notice of general meeting shall be given at least 21 days prior to the conduct of meeting in writing/by hand/post/courier/fax/e-mail/any electronic means(as per Section 101 of the Companies Act, 2013 and Rule 18 of the Companies (Management & Administration) Rules, 2018). A shorter notice can be issued with the consent is given as specified under Section 101 of the Companies Act, 2013. (consent of members holding 95% of the paid-up capital of the company entitled to vote)
    • The Notice shall be sent to all the directors, members and auditors (incl Secretarial Auditors), Debenture Trustees and all other persons entitled to receive Notice of GM of the company. 
    • The notice shall specify the day, date, time, full address of the venue, and include a statement on the business to be transacted. 
    • The General Meeting shall pass an ordinary resolution/Special resolution as the case may be for the appointment of the Managing director or Whole Time Director and payment of remuneration
    • At the time of passing of the resolution the quorum has to be maintained.
    • Listed companies shall disclose the outcome of the General Meeting to the Stock Exchange within 12 hours from conclusion of General Meeting [Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015] and also on website of the Company within 2 working days from the date of passing of resolution for the appointment. [Regulation 46 (3) of LODR 2015]. The listed entity may provide the exact link to the webpage of each of the recognized stock exchanges where such information has already been made available by the listed entity. 
    • Voting results shall be submitted to the stock exchange within two working days from the conclusion of the General meeting. (Regulation 44 of the SEBI (LODR) Regulations, 2015).*

* Regulation 44(3) compliance has been made a part of Integrated Filing (Governance) now as per Circular on Ease of Doing Business for listed entities under LODR as per which Listed entities are now required to do Integrated Filing (Governance) with the Stock Exchange for Statement on redressal of investor grievances (under Reg 13(3)),Compliance  Report  on Corporate Governance(under Reg. 27(2)(a)), Reconciliation of Share Capital &AR(reg 76 of DP reg), Meeting of shareholders and voting (reg 44(3)) of LODR within 30 days of the end of Quarter

    • Minutes of meeting shall be prepared and are to be signed by the authorized person. 

For more insights refer the Procedure for Conducting General Meeting

Post Appointment Requirement 

  • Form DIR-12 shall be filed with the Registrar within 30 days from the date of appointment of the MD/WTD by the Company along with certified true copy of the resolution for appointment, Form DIR-8, Letter of Appointment, Details of interest in any other entity, etc
  • Form MR-1 being Return of Appointment of MD/WTD to be filed with ROC within 60 days of the appointment along with certified true copy of Board and General Meeting resolution along with Explanatory Statement. [Rule 3 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014]
  • Form MGT-14 shall be filed with the Registrar within 30 days from the date of passing special resolution by the company along with certified true copy of special resolution, copy of Notice along with Explanatory Statement & annexures, GM Attendance sheet copy, shorter notice consent, if any.
  • Necessary entries to be made in the Register of Director and Key Management Personnel & Register of Contract/arrangements, if any

General Notice for Approval of Central Government: 

  • Approval of the Central Government is required in case the appointment of Managing Director is at variance to the conditions specified in Part I of that Schedule V and when appointment of the Managing director who has attained the age of 70 years has been done without passing the special resolution.[Proviso of Section 196 (3) (a)  and 196(4) of the Companies Ac      t, 2013]

The Approval Shall be taken as per Section 201 of the Companies Act, 2013 

  • Before any application is made by a company to the Central Government under section 196, there shall be issued by or on behalf of the company a general notice to the members thereof, indicating the nature of the application proposed to be made.
  • Such notice shall be published at least once in a newspaper in the principal language of the district in which the registered office of the company is situate and circulating in that district, and at least once in English in an English newspaper circulating in that district.
  • The copies of the notices, together with a certificate by the company as to the due publication thereof, shall be attached to the application.
  • An application to the Central Government shall be made under Form MR-2 within 90 days of appointment and the appointment process shall be deemed to be completed only on receipt of the approval from the Central government.[Rule 7 of the Companies (Appointment & Remuneration of Managerial Personnel) 2014]
  • Listed companies shall disclose the approval of the Central government to the Stock Exchange within 12 hours if the information is emanating from within the listed company and or within 24 hours if the information is not emanating from within the listed company [Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015] and also on website of the Company within 2 working days from the date of approval. [Regulation 46 (3) of LODR 2015]. The listed entity may provide the exact link to the webpage of each of the recognized stock exchanges where such information has already been made available by the listed entity.  

Latest Amendments : 

  • As per Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 (dated June 1, 2022), Form DIR-2 shall now include a declaration regarding security clearance from the Ministry of Home Affairs, Government of India. 

In case the person seeking appointment is a national of a country which shares land border with India (China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, Afghanistan), necessary security clearance from the Ministry of Home Affairs, Government of India shall also be attached with the application for DIN and along with the consent letter of Director.  Clearance can be obtained at E-Sahaj Sewa Portal, launched by MCA.  

  • Pursuant to Companies (Appointment and Qualification of Directors) Amendment Rules, 2023 (dated January 20, 2023): 
    • Form DIR-2 need not be separately attached to Form DIR-12 but certified within Form DIR-12 itself by the director. 
    • Form DIR-8 now requires information about personal disqualifications under Section 164(1) along with company-related disqualifications under Section 164(2). 
    • Companies shall file Form DIR-9 with the Registrar of Company within 30 days of receipt of DIR-8. 
    • Form DIR-12 includes additional purposes for appointment due to disqualification of existing directors or appointment by liquidator/Interim Resolution Professional/Resolution Professional, requiring SRN (Service Request Number) of INC-28 and NCLT order if applicable. 

Penalties & Punishments: 

  • As per Companies Act, 2013
    • Section 117: If any company fails to file the resolution or the agreement under sub-section (1) before the expiry of the period specified therein, such company shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees and every officer of the company who is in default including liquidator of the company, if any, shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of fifty thousand rupees
    • Section 203 (5): If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees
    • Section 190: If a Company fails to keep Contract of employment with MD/WTD at the registered office, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees for each default.
    • Section 172: For non-filing of DIR-12, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default

 

  • As per SEBI (LODR) Regulations, 2015: 

Regulations 

Penalty & Punishments 

30  

General penalty:  

Listed entity/any other person who contravenes any provision of the regulations shall be liable for one or more of the following penalties/actions as deemed fit by the regulator :  

a) action as per Securities Law 

b) fine 

c) suspension of trading 

d)freezing of promoter/promoter group holding of designated securities, as may be applicable, in coordination with depositories 

e) any other action specified by Board  

44 (3)

Rs. 10,000/- per instance of non-compliance

46  

Advisory/warning letter per instance of non-compliance per item ₹10,000 per instance for every additional advisory/warning letter exceeding  the four advisory/ warning letters in a financial year  

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