Compliance-Adding New Director

Overview

A director is a person elected by the company's shareholders to oversee the company's operations according to the rules set out in the Memorandum of Association (MOA) and Articles of Association (AOA). Anyone who wants to be a director must have a Digital Signature Certificate (DSC) and a Director Identification Number (DIN).

To become a director, you need to be at least 21 years old. The AOA of the company should include guidelines for appointing a new director. The Companies Act of 2013 specifies the procedure a company must follow when adding a new director. In a private company, there must always be a minimum of two directors. But they can have a maximum of fifteen directors.

What is meant by director of a company?

In a Private Limited Company, the Directors have a vital role in how the company operates. They are responsible for running the business and making daily decisions. Shareholders trust the Directors with their money, so the Directors are essential people in the company that investors rely on.

Benefit

The benefits of adding a new director are as follows:

Bringing fresh expertise to the company's board: As the company evolves and extends its reach, it will require new skills and abilities on its board of directors to effectively address the increased demands and complexities. It's a standard practice to adjust or refresh top-level management as the company experiences growth.

Company Growth: As the company grows and expands, it will need to add new members to its board of directors to help it address new challenges and requirements. It's a natural step to adjust top-level management as the company expands.

Protecting Ownership: Directors handle day-to-day management and operations. Appointing additional directors allows shareholders to assign more operational responsibilities without sacrificing their strategic control or ownership.

Dealing with Inefficiency: Sometimes, a company may need to replace existing directors due to their inefficiency. Existing directors might struggle to meet work requirements due to personal issues such as family problems, health concerns, retirement, or other reasons. In such cases, new directors need to be appointed.

Meeting Legal Requirements: According to the Companies Act of 2013, every company must maintain a specific number of directors. If existing directors suddenly pass away or retire, the company may fall below the required minimum number of directors. In this situation, the company must promptly appoint new directors to meet the statutory minimum (which is a minimum of two directors for a private limited company).

Tax & Process

Director's Remuneration Income: Directors can be categorized as either executive (whole time) or independent (non-executive) directors.

Executive Directors: They are involved in day-to-day company activities and are paid a salary as employees.

Independent Directors: They participate in managerial activities and receive sitting fees or commission.

Independent directors should not have been associated with the company as an employee, proprietor, or partner in the three preceding financial years before their appointment.

For tax purposes: 'Independent directors' are not considered employees and their services are subject to GST. Whole-time directors' may or may not be employees, and their taxation depends on their activities and accounting in the company's books.

Remuneration to directors can be treated as 'Salaries' or 'fees for professional or technical services' and is subject to TDS under relevant sections of the Income Tax Act.

Documents Required

Required Documents to Appoint a Director:

• Director's PAN card
• Identification proof (e.g., Voter ID, driving license, Aadhaar card)
• Proof of residence (e.g., utility bills, rental agreement)
• Passport size photograph
• Digital Signature Certificate (DSC)

Procedure

Step 1: The proposed director needs to obtain a Digital Signature Certificate (DSC) if they don't have one.

Step 2: If the proposed director doesn't have an active Director Identification Number (DIN), they should obtain one using Form DIR-3.

Step 3: The company should hold a general meeting to pass a resolution for appointing the new director.

Step 4: The proposed director should provide their consent for appointment by submitting Form DIR-2. Once the company receives this form, the person is officially appointed as a director.

Step 5: Following the director's appointment, the company should issue an appointment letter to the new director.

Step 6: The company must file the necessary forms with the Registrar of Companies (ROC) within 30 days of the appointment.

FAQ's