India is a huge opportunity for startups as well as large enterprises, and we are witnessing an unprecedented surge in the number of incorporation of new companies with the registrar of companies. The process of company registration has been simplified to the extent that with few primary documents of the promoters, you can incorporate a company within 1-2 days. The promoters need to understand the meaning, differences, roles, and responsibilities of the Key Managerial Persons (KMP) of the company.
A typical company structure consists of three significant stakeholders having distinct and well-defined roles; These are the shareholders, directors, and the employees of the company. At the time of starting a limited company, only shareholders and the first directors have to play a role as the promoter of the company. The shareholders are the owners of the company. They shall be entitled to share in the profits of the company at the ratio of their shareholding. In contrast, the directors shall be responsible for the day to day management of the company and compliance.
Meaning of Company Promoter
You must have come across the term Promoter or Promoters, as a startup, you should have a good understanding of the terms used regarding a company and its significance. The promoter(s) is the person or group of persons who conceive the idea of forming a company, decide about the business activities which the startup shall be taking up, and determine the investment which is required as capital given the estimation of the working capital of the company and expenses towards assets, plant, and machinery.
The Indian Companies Act, 2013 defines the term Promoter (Section 2(69) to mean and include a person who controls the affairs of the company directly or indirectly, or the Board of Directors of the company is accustomed to act on the instructions of such persons. The persons holding designation as director or shareholder or both are considered as the promoter. The term promoter also includes a person named a promoter in the prospectus of the company or in the annual return of the company as reported under section 92.
Shareholders of Company, Meaning & Significance
More than two people own the corporations except in the case of a one-person company where only one person owns the company. In the case of a private limited company, the minimum number of shareholders is two, and the maximum number can be up to 200. However, for a limited company, the minimum is seven, and there is no limit on the maximum numbers of its shareholders. When a company is incorporated for the first time then before the incorporation, they are known as subscribers of the Memorandum of Association and Articles of Association. They always remain as a part of the MOA and AOA even if they part away from the company. In a company form of organization, the shareholding plays a vital role, and the dividend is determined based on shareholding % in the company. For our discussion, wherever we are mentioning “share”, we mean equity share capital
The shareholders are the most powerful body in the company and in general controls the composition of the Board of Directors of the company. The decisions by the shareholders are taken by passing resolutions in the shareholder’s meeting. Though most of the company decisions can be taken in the shareholders meeting by majority vote, However, there are critical decisions that can be made by the approval of the 3/4th majority of the shareholder. Voting rights are a direct reflection of % shareholding.
Every year a company is under a legal obligation to call and hold an annual general meeting (In abbreviation it is also called AGM). The AGM is a statutory meeting of the shareholders which is mandatory under law, and the shareholders have to take at least these four decisions
- Adopt (Approve) the audited books of account of the company
- Declare the amount of dividend to be paid to the shareholder
- Consider approving the appointment of auditors of the company
- Consider and approve the election of directors on rotation
When we say consider and approve, it also means the power to disapprove. The AGM can even be adjourned if the agendas of the meeting remain unfinished. It is pertinent to mention here that all decisions/resolution of the shareholders is recorded in the minutes of the meeting of the shareholders. The resolutions requiring approval of the 3/4th majority of shareholders are reported to ROC by filing a copy of the resolution in form MGT-14.
Meaning of Director of a Company
As already explained, there is a clearcut distinction in the roles and responsibilities of various stakeholders, while the shareholders are mainly tasked to arrange the investment or capital of the company and give vision and direction for the company including making major policy decisions. The directors, on the other hand, have the responsibility of implementing the policies of the company and maximize the wealth of the shareholders or investors. In today’s regulations laid economy, the directors are also responsible for compliance with all the laws as applicable to the company.
The shareholders appoint the first directors of the company by naming them as the First Directors of the company in the AOA. The directors hold office until the satisfaction of the shareholders, & they can be removed with a simple majority vote in the shareholder’s meeting. Until the day a person holds the office of the director, he is liable to the regulations & their compliance.
For the smooth functioning of the company, the directors take a day to day decisions in a meeting of the director, which is also known as the Board of Directors of a Company. The decisions of the board of directors are taken on a simple majority, and every person has one vote. The designation of a director is of Duty and Care and being a compliance management company; we consider each director to be responsible for compliance.
Difference Between Shareholders & Directors
The shareholders and the directors are the most crucial body in the corporate structure of a company. They are interdependent for the smooth functioning of the affairs of the company. They share a complex and interconnected relationship and take their decisions by way of passing resolutions in their meetings. Mutual respect and harmony in their relationships are necessary for achieving the mission and vision of the organization.
(i). Appointment: The main difference between the shareholder and the director is that the initial shareholder(s) are the subscribers of the MOA & AOA of the company. The new or say subsequent shareholders are added by way of fresh allotment of shares by the company for consideration.
The First Directors of the company are nominated by the promoters of the company in the Articles of Association (AOA) of the company subject to the express consent by the said first directors of the company in Form DIR-2.
The shareholders generally make the subsequent appointments of the directors through the Extra-Ordinary General Meeting (EGM). However, the casual vacancy on account of resignation or death of an existing director can be filled by the Board of Director’s subject to the confirmation by the shareholders in EGM. The NCLT/Central government/Financial Institutions can also appoint a director of a company, as per law or the funding terms, if the need arises.
(ii). Individual Vs Non-Individual: A shareholder can be an Individual or any juristic person, for example, Individual, Firm, LLP, Another Company, A group of company or conglomerate, society, trust, section 8 Company, government, any other artificial or the juristic person. On the other hand, only an Individual can become a director in a company.
(iii). Roles: Both the shareholder, as well as the directors, have to play critical roles in the company. While the shareholder is the owner of the company, the directors are the managers of the company. The same person can assume both the roles unless articles of association of the company prohibit it.
(iv). Responsibilities: The shareholder’s primary responsibility is to infuse capital in the company and participate in the shareholder’s meetings such as EGM or AGM, whereas the directors of a company. The directors are entrusted with the responsibility to comply with legal formalities under various laws that apply to the company.
(v). Decision Making Powers: The Board of Directors takes the decisions of day to day managing the company. The shareholders make the crucial decisions such as the investment, declaration of dividend, alteration of the MOA or AOA of the company, appointment of the directors on the recommendation of the board of directors.
(vi). Liability: The shareholders are protected from the debts of the company by the doctrine of Limited Liability. However, they shall remain liable to pay their unpaid share of the subscribed share capital of the company is called for by the board. The position of the directors is a powerful position to run the company by the collective decisions of the board.
Directors are personally liable for the lapses of the compliance of all laws which apply to the company. The liability of the director is generally a tremendous amount of penalty, but in a few cases, they may be sent to imprisonment after prosecution by the government. For support, write an email to firstname.lastname@example.org for due diligence of your company to avoid severe penalties later on.
(vii). Limit of Number: The Companies Act prescribes 15 to be the maximum number of directors in a company; however, it can be increased by the shareholders if the need arises. Whereas the number of shareholders for a company starts from 2 in the case of a private limited company and the maximum number of shareholders can be 200. For a public limited company, the minimum number of shareholders is prescribed at 7, and there is no maximum limit. The OPC can have a single shareholder/director; however, even in OPC, you can have up to 15 directors
(viii). Removal from Office: The shareholders can transfer their stake in the company at their discretion subject to the provisions of the Articles of Association. However, they can’t be forced to exit the company. The only exception to this basic rule is the removal of shareholders as per the orders of the courts or national company law board (NCLT).
The directors, on the other hand, can hold office only until they are discharging their responsibilities to the satisfaction of the shareholders. To remove a director, shareholders can call an EGM, and by a simple majority vote, a director may be removed.
Section 164 of the companies act also prescribes various grounds on which a director is declared as disqualified. Upon being a disqualified director under section 164, the director automatically vacates the office of the directorship, and he or she is no longer part of the board of the directors. Any board meeting having a disqualified director as part of quorum count is an invalid meeting, and all the decision taken by such board is void having no legal force and sanction.
(ix). Remuneration or Profit-Sharing: The shareholders are not entitled to any compensation, salary, or wages from the company, and their only interest from the company is the dividend or increase in the value of the stock which they own in the company. On the other hand, directors are entitled to remuneration subject to the limits set by section 197 of the companies act and sitting fees.