Types of Directors and other Managerial Personnel in a Company

Dr. Vijay Kumar Singh

Associate Professor & Head
School of Corporate Law, IICA

Module Overview: A significant role is played by Directors and other Managerial Personnel
in a company in running the affairs of the company which has already been seen in the
previous modules on director’s position, powers and duties as well as director’s responsibility
statement and their duties laying accounts before the shareholders. There are different types
of directors and managerial personnel in a company having different roles, responsibilities
and powers. The present module would delve into the types of directors and managerial
personnel in a company.

Learning Objectives:
To explain the types of directors and types of key managerial personnel in a company.

Keywords: Executive – Non-Executive directors, Independent Directors, Women Directors,

Whole-Time Directors,

Introduction: It has always been confusion as to the types of directors and key managerial
personnel with several terminologies in vogue in this regard. The concept of Chairman or
President, Chief Operating Officer or Chief Executive Officer, executive and non-executive
directors, independent directors, etc. have led to a necessity to understand them as per the
legal definitions provided in the statute. The present module would attempt to clear this
confusion.

Learning Outcomes: At the end of this module the learners would be able to:
 Explain the concept of key managerial personnel
 Enumerate the types of directors and their key characteristics
 Discuss the role of independent directors

Electronic copy available at: https://ssrn.com/abstract=2972430

1. INTRODUCTION
Director means “a director appointed to the Board of a company1”. This definition of
Director under the Companies Act 2013 has changed the concept of de facto directorship2
which was based on the position he holds and the functions and duties which he discharges3.
Thus, the concept of Shadow Director is done away with under the 2013 Act (except in
relation to foreign company4 as a person in accordance with whose directions or instructions
the Board of Directors of the company is accustomed to acting)5. Now, a person may be
referred to as Director only after a de jure appointment to the Board.

Company is a separate legal entity and it functions through the instrumentality of its
Memorandum of Association (MOA) and Articles of Association (AOA). Members
(shareholders making financial investment in the company) exercise the right to appoint the
Directors to the Board of the Company, which in turn appoint the managerial personnel
(management) of the company that performs day to day functions of the company. Board of
Directors is the brain of the company and they perform key statutory functions and supervise
the management. Shareholders, though the de facto owner of the company (company itself
being the owner de jure), have no rights to involve in company’s management directly. This
relationship is the essence of ‘corporate body’. The aforesaid relationship may be depicted as
follows:

Company through its Shareholders

Board of Directors

Key Managerial Personnel Manager

CEO : CS : WTD : CFO

1
Section 2(34) of the Companies Act, 2013 – compared to Section 2(13) of the 1956 Act – director includes any
person occupying the position of director, by whatever name called.
2
See Taxmann’s Company Law, Vol. 1 (2015), pp.130
3
A. Ramaiya, Guide to the Companies Act, (18th Edition, 2015) Vol 1, pp. 144.
4
Section 386 (b) of the Companies Act, 2013
5
A. Ramaiya, id. However, ss. 2(59) and 2(60) dealing with officer and officer in default do include the concept
of shadow director although compliances under the 2013 Act relating to directors is not attracted in case of such
shadow directors.

Electronic copy available at: https://ssrn.com/abstract=2972430

2. KEY MANAGERIAL PERSONNEL (KMP)
On the recommendations of the J.J. Irani Committee, the Companies Act 2013 has provided
for a definition of KMP identifying the following6:
i. Chief Executive Officer (CEO),
ii. Company Secretary (CS),
iii. Whole Time Director (WTD),
iv. Chief Financial Officer (CFO) and
v. Such Other Officer as may be prescribed by the Central Government.

[Companies Amendment Bill of 2016 which is presently before the Standing Committee on
Finance, has recommended for a further inclusion of a clause before clause (v) i.e. a category
of officer who is not more than one level below the directors in whole-time employment and
is designated as KMP by the board]

Companies Act, 1956 did not provide for such classification and statutory recognition.
Section 203 (1) of the CA 2013 prescribes that every company belonging to such class or
classes as may be prescribed7 shall have the following whole time KMP,
 Managing Director (MD) or CEO or Manager and in their absence, a Whole Time
Director.
 Company Secretary
 Chief Financial Officer
Let us understand the role of the aforesaid three set of KMPs.

2.1 CEO means an officer of a company, who has been designated as such by it8. CEO is
sometimes also referred to as Chief Operating Officer (COO) and is basically a designation
given to an officer of a company. This may even be a Manager or a Managing Director as is
evident from the requirement of whole-time KMP.

6
Section 2(51) of the CA 2013
7
Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 prescribes
that every listed company and every other public company having a paid up share capital of ten crore or more
shall have whole-time key managerial personnel.
Further, under Rule 8A, a company not covered above, but has a paid up capital of five crore or more shall have
a whole-time Company Secretary.
8
Section 2(18) of the CA 2013
2.1.1 Manager9
An individual10 who
 Subject to the superintendence, control and director of the Board of Directors
 Has the management of the whole, or substantially the whole, of the affairs of a
company.
It is important to note here that what matters is not that a person is described as a manger but
whether he is exercising substantial powers of management11. Accordingly, a shop manager
or factory manager cannot be a ‘manager’ under the Act. There is no need that manager must
be an employee of the company.

2.1.2 Managing Director (MD)

A director who is entrusted with substantial powers of management of the affairs of the
company by virtue of:
 The articles of association of the company or
 An agreement with the company or
 A resolution passed in its general meeting or by its Board of Directors.

It may be noted here that the difference between manager and managing director is that while
manager exercises the management of substantially the whole of the affairs of the company,
the managing director has substantial powers of management. Further, there is no stipulation
for the managing director to exercise his powers subject to superintendence, control and
directions of the BOD (as was the case in 1956 Act), while manager is subject to
superintendence, control and direction of the BOD. While a Managing Director essentially
has to be a Director before whereas a manager can continue to be a manager whether or not
he holds the office of a director.

2.1.3 Whole Time Director (WTD)

It includes a director in the whole-time employment of the company12. It may be noted that a
director may be appointed as chief executive officer, manager, company secretary or chief
financial officer if so provided in the Articles of the Association of a company and would
then be treated as the Whole Time Director.

9
Section 2(53) of the CA 2013
10
Not a firm or body corporate or association of person – section 196 of CA 2013 (384 of CA 1956).
11
CIT Kerala v. Alagappa Textiles (Cochin) Ltd. AIR 1980 SC 235
12
Section 2(94) of CA 2013 – corresponding section 269 of the 1956 Act.
2.2 CS is appointed by a company to perform the functions of a CS under the Companies
Act13. Every listed company and others having a paid up capital of Rs. 5 crores or more will
have to appoint a CS14. Though the secretary’s duties are largely of ministerial or
15
administrative nature , it plays a very important role in corporate governance.

2.3 CFO means a person appointed as the Chief Financial Officer of a company16. This
is a new definition provided under the 2013 Act and suggests that CFO will be in full charge
of all financial and accounting aspects of a company though not specifically mentioned under
the definition17.

2.4 Senior Management:

The expression ‘‘senior management’’ has been defiled to mean personnel of the company
who are members of its core management team (excluding Board of Directors) comprising all
members of management one level below the executive directors (including the functional
heads)18.

4. Types of Directors
Board of Directors or often referred to as Board means the collective body of the directors of
the company. Generally the composition of the Board includes executive and non-executive
directors. This differentiation stems from the Corporate Governance principles and norms.
For example, Clause 49 of the Listing Agreement provided that the Board of directors of a
company shall have an optimum combination of executive and non-executive directors with
not less than 50% of the Board comprising of non-executive directors19. The following is the
minimum and maximum limit of directors in a Board of various classes of companies20:

13
Section 2(24) of the CA 2013 – means a company secretary as defined in clause (c) of the Company
Secretaries Act, 1980 – i.e. a person who is a member of the the Institute of Company Secretaries of India.
14
Section 203(1) read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel)
Rules 2014.
15
see Section 205 which specifies the duties and responsibilities of a CS.
16
Section 2(19) of the CA 2013
17
A. Ramaiya, pp. 75
18
Explanation to Section 178 of CA 2013. See Sections 128, 129 and 137 of CA 2013.
19
Listing Agreement has now been replaced with SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 (Listing Regulations); Reg. 17 provides for Board of Directors.
20
Section 149 of CA 2013 – Company to have Board of Directors
 Type of Company Minimum Maximum21
One person Company 1 15
Private Company 2 15
Public Company 3 15
Producer Company 5 15

A person cannot hold more than directorship of more than 20 companies (in case of public
company the maximum number being 10 only)22.

4.1 Executive and Non-Executive Directors

The term executive director has been defined to mean a WTD as per Companies
(Specification of Definition Details) Rules, 2014 . The difference between executive and
non-executive director lies in their being internal and external to the organisation and their
involvement in day-to-day management of the company. As per Kumar Mangalam Birla
Committee Report on Corporate Governance:
“…the executive directors (like director finance, director personnel) are involved in
the day-to-day management of the companies. The non-executive directors bring
external and wider perspective and independence to the decision making….”

4.1.1 Chairman of the Board

The Chairman of the Board provides leadership to the Board and also chairs the General
Meetings. There is always a need for better coordination between the Chairman of the Board
and CEO of the company who is responsible for the day to day management of the business
(except in cases where the Chairman and CEO/ MD is the same person – for e.g. Mr. Pawan
Munjal is the Chairman, MD and CEO of Hero MotoCorp).

"The people you bring on board will represent your company, share your vision, and
complement your weaknesses. (This is why you should not get people who resemble
you.) They should have different skills to increase the "human wealth" of the
company."
Gilles Babinet, serial entrepreneur23

21
May appoint more than 15 directors by passing a special resolution in this regard.
22
See Section 165: Number of Directorship for details.
23
https://www.iod.org.nz/FirstBoards/How-to-set-up-a-board/Types-of-directors
4.2 Independent Director
A detailed provision has been provided in relation to independent directors under the
Companies Act, 2013. An independent director has been exhaustively defined24 to mean a
director other than a Managing Director or a Whole-Time Director or a Nominee Director.
An independent director in the opinion of the Board is a person of integrity and possesses
relevant expertise and experience. Further, he is a person:
 who is or was not a promoter of the company or its holding, subsidiary or associate
company;
 who is not related to promoters or directors in the company, its holding, subsidiary or
associate company;

Independent director must not have any 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; and also none of whose
relatives has or had pecuniary relationship or transaction with the company, its holding,
subsidiary or associate company, or their promoters, or directors25.

Further, an Independent Director neither himself nor any of his relatives —

(i) may hold 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 per
cent or more of the gross turnover of such firm;

24
Section 149(6) of the Act
25
amounting to two per cent. 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;
 (iii) holds together with his relatives two per cent 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
organisation that receives twenty-five per cent or more of its receipts from the
company, any of its promoters, directors or its holding, subsidiary or associate
company or that holds two per cent. or more of the total voting power of the
company; or
Further qualifications may be prescribed by Central Government in relation to an independent
director which he has to confirm to.

Every independent director is required to give a declaration confirming independence at the

first Board meeting in every financial year or whenever there is any change in circumstances
which may affect his status as an independent director in terms of qualifications noted above.
Further, Schedule IV to the Act contains a detailed code of conduct for independent directors.

4.2.1 Interested Director

Directors are in fiduciary capacity and are under a duty to disclose their interest in a contract
or arrangement or proposed contract or arrangement to be discussed in the Board Meeting26.
Section 2(49) of CA 2013 defines “interested director”27. It may be noted here that the
Company Law Committee has suggested that in view of the redundancy, this definition may
be omitted (as proposed in the Companies Bill 2016).

4.3 First Directors

These are named as such in the articles of the company at the time of incorporation28. When
there are no provisions in AOA regarding first directors, the subscribers to the MOA who are
individuals are deemed to be the first directors of the company until the directors are duly
appointed29.

26
Section 184(2) of CA 2013 – Disclosure of interest by Director.
27
Has a director who is in any way, whether by himself or through any of his relatives or
firm, body corporate or other association of individuals in which he or any of his relatives is a
partner, director or a member, interested in a contract or arrangement, or proposed contract or
arrangement, entered into or to be entered into by or on behalf of a company;
28
Section 7 of CA 2013
29
Section 152 (1) of CA 2013
4.4 Resident Director:
This type of director is introduced under the Companies Act, 2013 which requires every
company to have at least one director who has stayed in India for a total period of not less
than 182 days in the previous calendar year30.

4.5 Nominee Director

It is a director who represents the interests of its appointer, which may be any financial
institution, any Government, or any other person (say for example representing lending
institutions/banks, small shareholders)31. This may be in pursuance of the provisions of law
(as in case of small shareholders32) or by way of any agreement. It is a good governance
practice to have nominee directors. The nominee director is appointed under Section 161(3).

4.6 Small Shareholders Director

This is a director who is elected by (one thousand small shareholders or one-tenth of the total
number of such shareholders) and represents the small shareholders. Small shareholder
means a shareholder holding shares of nominal value of not more than twenty thousand
rupees or such other sum as may be prescribed)33.

4.7 Additional Director

This type of director is appointed by the Board of Directors by virtue of power conferred
under the Articles of Association at any time until the next general meeting or the last date on
which the annual general meeting should have been held, whichever is earlier. However,
such person shall not be the one who fails to get appointed in a general meeting34.

4.8 Alternate Director

As the name suggests, this type of director is in the alternate position of another director
(during his absence for a period not less than 3 months from India) appointed by the Board of
Directors (authorised by AOA or by a resolution passed by the company in general
meeting)35. The appointment of alternate director is subject to the condition that:

30
Section 149(3) of the Companies Act, 2013. Also see
http://www.mca.gov.in/Ministry/pdf/General_Circular_25_2014.pdf
31
See Explanation to Section 149: Company to have Board of Directors
32
Explanation to Section 151 of CA 2013
33
Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014.
34
Section 161(1) of the Companies Act, 2013
35
Section 161(2) of the Companies Act, 2013
  He must not be holding another alternate directorship.
 He is not appointed as alternate to an Independent Director, unless, he is qualified to
be appointed as independent director under the provisions of the Act.
 He shall not hold office longer than the period permissible for the director whole
position he is holding.
 He shall vacate the office if an when the director in whose place he has been
appointed returns to India

4.9 Women Directors

The following categories of companies are required to appoint at least one women director on
their board36:
 Every listed company
 Every other public company having paid up share capital of Rs. 100 crores or more or
turnover of Rs. 300 crore or more as on the last date of latest audited financial
statements

36
See Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014
 Q-III: Web Resources
Reference / End Notes:
 National Foundation for Corporate Governance, http://www.nfcgindia.org/
 Institute of Directors (IOD), http://www.iodonline.com/
 http://www.tatasteel.com/investors/pdf/terms-and-conditions-of-appointment-of-
independent-directors.pdf (terms and conditions of an independent director)
 Independent Director’s repository, https://www.independentdirector.in/
 http://www.mca.gov.in/MCA21/dca/din/processdoc.pdf
 http://www.womencorporatedirectors.com/
 ICSI – Independent Director’s Handbook,
https://www.icsi.edu/webmodules/CompaniesAct2013/INDEPENDENT%20DIRECT
OR.pdf

Books:
 Avtar Singh, Company Law, 15th Edition 2013, Eastern Book Company, Lucknow
 Taxmann’s Company Law, Vol. 1 & 2 (2015)
 Ramaiya, Guide to the Companies Act, (18th Edition, 2015) Vol 1 & 2

Statutes
 Companies Act, 2013
 Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014
 SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing
Regulations)
 Companies (Appointment and Qualification of Directors) Rules, 2014
 Companies (Specification of Definition Details) Rules, 2014
 Q-IV: Self-Assessment
Self Assessment Exercises:

Long Answer Questions

1. Write a note on types of directors under the Companies Act, 2013

2. Elaborate the definition of Key Managerial Personnel (KMP)

Short Questions:

1. Differentiate between executive and non-executive directors.

2. Write short notes on
 Women director
 Shadow director
3.

Multiple Choice Questions

1. Which of the following is not included in the definition of a Key Managerial Personnel under
the Companies Act, 2013?

a) Chief Executive Officer (CEO),

b) Company Secretary (CS),
c) Managing Director (MD),
d) Chief Financial Officer (CFO) and

2. CEO means an officer of a company, who has been appointed as such by the company.

a) True
b) False

3. A person who has the management of the whole, or substantially the whole, of the
affairs of a company is known as:
a) Manager
b) Managing Director
c) Chairman
d) All of the above

4. A director may be appointed as chief executive officer, manager, company secretary

or chief financial officer.
 a) True
b) False

5. CFO means a person nominated as the Chief Financial Officer of a company

a) True
b) False

6. Arrange them in their order of authority beginning with the top-most.

a) Shareholders
b) Chairman of the board
c) CFO
d) CEO
e) CS

7. Minimum number of director in case of a producer company is:

a) 1
b) 2
c) 3
d) 5

8. Which of the following may act as an Independent Director

a) Managing director
b) Nominee director
c) Whole time director
d) None of the above

9. The pecuniary limit to decide the independence of a director is

a) 2% or more of its gross turnover or total income or 50 lakh rupees whichever is lower.
b) 5% or more of its gross turnover or total income or 25 lakh rupees whichever is lower
c) 5% or more of its gross turnover or total income or 50 lakh rupees whichever is lower
d) 2% or more of its gross turnover or total income or 25 lakh rupees whichever is lower
10. Provision relating to resident director requires every company to have at least one
director who has stayed in India for a total period of not less than ……… days in the previous
calendar year

a) 365
b) 150
c) 182
d) 162

12. Small shareholder means a shareholder holding shares of nominal value of not more
than ……………. rupees or such other sum as may be prescribed