This blog explains the key difference between shareholders and directors, the two apex decision-making authorities in a company. We have attempted to provide a comprehensive comparative analysis to help you understand their individual roles and responsibilities clearly.
A typical company structure consists of three significant stakeholders having distinct and well-defined roles, its shareholders, directors, and employees. However, during the incorporation of the Company, only its shareholders and the first directors play the role of its promoter. The two have very distinct responsibilities in this regard. While the shareholders control the ownership of the company and are entitled to share its profits in the ratio of their shareholding, directors are responsible for controlling the day to day management of the company and ensuring its compliance with all legal, tax, and regulatory frameworks. Let’s understand their responsibilities in a little more depth and detail.
Who is a Shareholder in a Company?
Shareholders are authorities holding the equity shares of a company in a fixed ratio or percentage. This percentage decides their share of ownership, profits and decision making powers in the company. Their responsibility extends to investing capital, and having a final say in key decisions, like appointment of directors and fixing the composition of the Board of Directors. The Shareholders of a company attest its most important constitutional documents viz. the Memorandum of Association (MOA) and the Articles of Association (AOA) through their signatures, which always form a part of these documents until they part ways with the Company.
Decisions are made by the shareholders by passing resolutions in the general meeting. These resolutions may be ordinary (which requires more than 50% vote) and special (which requires more than 75% vote). Although most decisions taken by shareholders require an ordinary resolution, there are certain crucial matters like alterations in MOA & AOA, reduction of share capital, removal of auditor before the expiry of his normal term, and appointment of directors beyond the prescribed maximum limit of 15, which require the passing of a special resolution.
The general meeting of shareholders is held annually within 6 months from the end of the financial year. It is a statutory meeting and is mandatory under law.The key decisions taken at this general meeting are:
- Adoption (Approval) of the audited books of account of the company
- Declaration of the dividend amount to be paid to each shareholder
- Approval of the Auditor’s Appointment
- Approval and Election of directors on rotation
Resolutions are not only required for approving decisions, but also can be passed to disapprove decisions. 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. Other than the AGM, if any specific agenda arises in the middle of the year, shareholders can call an Extraordinary General Meeting to resolve it.
As far as the requirements of shareholders are concerned, it differs for different categories of companies. For a Private Limited Company, the minimum number of shareholders is 2 and the maximum limit can reach up to 200. For a Public Limited Company, the minimum number of shareholders is 7 without any restriction on the maximum limit. A One Person Company, on the other hand, cannot have more than a single shareholder.
Who is a Director in a Company?
As already mentioned earlier, there is a sharp difference between shareholders and directors in terms of their roles, responsibilities and liabilities towards the company. While shareholders are mainly tasked to arrange the investment or capital and give vision or direction to the company through major policy decisions, directors, on the other hand, are responsible for bringing this vision to life by proper management of the company’s affairs and ensuring compliance to various legal and regulatory requirements.
The shareholders appoint the initial and all subsequent directors of a company, who hold office until the satisfaction of the shareholders. To remove a director from his office, shareholders need to pass a resolution with a simple majority at the extraordinary general meeting or EGM. However, even during the removal process, the director will be liable to fulfil all his responsibilities till the day his removal comes into effect.
The primary responsibility of a company’s directors is to control, oversee, and manage the internal affairs of the company, which includes taking decisions regarding the same by passing resolutions at the Board Meeting. Board Meeting is the meeting of the Board of Directors which is a collective body composed of all directors of a Company. Resolutions are passed at the Board meeting through simple majority, where each director is entitled to one vote.
Types of Directors
Not all directors appointed in a company have similar roles and responsibilities. Their roles and responsibilities differ based on the purpose of their appointment. Given below are a few types of directors you will usually find in any incorporated company in India. Their roles and responsibilities have been explained briefly to give you an overall idea.
- Executive Directors – These directors are directly involved in the company’s management and internal affairs. They are appointed whole-time and oversee the day to day operations of the company. They are also incharge of ensuring the company is fulfilling all its legal and regulatory obligations on time so that consequences like fines, penalties, and late fee can be avoided.
- Non-Executive Directors – These directors are not involved in the company’s day to day management and internal affairs. They are either appointed to represent a stakeholder or work in professional capacity for the company.
- Independent / Professional Directors: Independent or professional directors are non-executive directors appointed to serve the company in their professional capacity. They are usually entrusted with the task of assisting the Board of directors make key decisions related to their stream of expertise.
- Nominee Directors: These directors are appointed to represent a stakeholder of the company in the major decisions taken by the Board of Directors. They ensure the protection of the interests of the party they are representing. Other than this, they do not get involved in the management and day to day operations of the company in any form.
- Additional Director: Additional Directors are appointed to complete any additional work arising unprecedentedly. Their term only extends up to the next AGM held from the date of their appointment.
Directors and Shareholders as Company Promoters
The very first role that a Shareholder and a Director plays in a Company is that of a promoter. Promoters are people who conceive the idea of forming a company, decide about its business activities, determine the investment which is required as its capital based on estimations of working capital, and day to day expenses towards assets. Additionally, promoters may have some sort of monetary interest in the company as well.
As per Section 2(69) of the Companies Act of 2013, a promoter is one:
- Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
- In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, except those who act only in professional capacity for the company.
Difference Between Shareholders and Directors
Directors and Shareholders are two of the major designations in a Company. They serve the company in different ways. While Shareholders bring capital investment for the company’s growth and expansion, directors control its internal management and compliance to ensure its smooth functioning. Understanding the difference between shareholder and director is crucial for running a company. In the table below, we have highlighted the key difference between shareholders and directors along several parameters like induction, roles, responsibilities, minimum requirement and so on.
Shareholders vs Directors: Table of Differences
| Parameters | Shareholders | Directors |
|---|---|---|
|
Induction |
Allotment of Shares |
Appointment by Promoters / Shareholders |
|
Eligible Entity |
Any Individual or Non individual entity |
Individuals who are not minors |
|
Roles |
Holds part ownership of the Company |
Controls the management of the company |
|
Responsibilities |
Infuses capital into the Company |
Ensures that the company is legally compliant |
|
Decision-making |
Takes crucial decision regarding company’s financial performance |
Takes crucial decision regarding company’s internal management |
|
Liability |
Restricted Liability to pay-off the company’s debts |
Personally Liable to pay penalties and fines in case of compliance failures |
|
Minimum Number |
Pvt Ltd Company: 2 Public Limited Company: 7 One Person Company: 1 |
Pvt Ltd Company: 2 Public Limited Company: 3 One Person Company: 1 |
|
Maximum Number |
Pvt Ltd Company: 200 Public Limited Company: Unlimited One Person Company: 1 |
Pvt Ltd Company: 15 Public Limited Company: 15 One Person Company: 15 |
|
Remuneration |
Receives Dividends in the percentage of share of ownership |
Receives Remuneration for professional services offered to the company |
|
Removal from Office |
Cannot be removed from office unless ordered by a Court / NCLT, but can vacate office at will |
Can be removed by shareholders on grounds mentioned in the Companies Act |
(i) Appointment: One of the primary difference between shareholders and directors is related to the manner of their induction or admission in a Company. Initial shareholders are admitted through a fresh allotment of shares while subsequent shareholders are admitted either by transfer of existing shares or allotment of new shares. On the other hand, the First Directors of the company are nominated by the promoters in the Articles of Association (AOA) of the company subject to their express consent given 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 Directors 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) Eligible Entities: A shareholder can be an Individual or any juristic person, like a firm, LLP, another Company, a group of companies or conglomerates, society, trust, section 8 Company, government company, and so on. They can either be Indian or Foreign entities. There is no restriction on the nationality and residence of a company shareholder.
On the other hand, only a non-minor Individual can become a director in a company. He can either be an Indian or foreign citizen. There is no restriction on their nationality. However, the Companies Act places a restriction on the resident status of at least one director in a company. It mandates that at least one director in a Company must be a Resident Indian, that is should have resided or lived in India for more than 120 days in the previous financial year.
(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 control the company’s internal affairs and management, including the completion of various tax, regulatory and legal compliances. The same person can assume both the roles unless articles of association of the company explicitly prohibits it.
(iv) Responsibilities: Based on the roles both shareholders and directors are assigned in a company, they are required to fulfil separate responsibilities. As the owner of a company, the shareholders are required to invest capital and subscribe to the company’s shares. Additionally, they are also required to participate in the annual and extraordinary general meetings to approve key decisions of the company through ordinary and special resolutions.
(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, and appointment of the directors on the recommendation of the board of directors. These decisions are taken by passing resolutions at the Board Meeting and General Meeting respectively. The decision-making or voting power of each shareholder is correlated with their shareholding ratio, implying that the major shareholders are assigned more votes than others. On the other hand, directors have equal decision making powers as they are each assigned one vote while passing a resolution in the Board Meeting.
(vi) Liability: One of the other major difference between shareholder and director is related to their liability towards the company. The Liability of Shareholders in a company are with respect to the Company’s dues and debts. Shareholders are required to pay off the company’s dues and debts in events like sudden winding up, if the company is facing losses or if the company has accumulated huge amounts of debts it is unable to pay off. However, this liability is restricted to the unpaid amount of share capital and the personal assets of the shareholders are not at risk of seizure under any circumstance.
As far as the director’s liability is concerned, it is related to their duty of ensuring the company’s legal compliances under laws like the Companies Act, Income Tax Act, GST Act and others. Since the director is incharge of overseeing the fulfilment of all compliances, any failure or delay in the same makes him personally liable to pay penalties and fines as the case may be. In a few severe non-compliance actions, the directors can also be imposed with imprisonment after prosecution by the government.
(vii) Minimum and Maximum Requirement: The minimum requirements of shareholders and directors differ for different types of companies. A Private Limited Company requires at least 2 shareholders and 2 directors. Their maximum numbers can go up to 200 and 15 respectively. A Public Limited Company, on the other hand, requires at least 7 shareholders and 3 directors. Unlike a Private Company, it does not place any restrictions on the maximum limit of shareholders, but the maximum number of directors can only be increased up to 15. A One Person company cannot have more than one shareholder. The minimum number of directors it needs is also 1, and can be raised to a maximum limit of 15. Note that, to appoint more than 15 directors in each of these companies, a special resolution must be passed by the shareholders to that effect.
(viii) Removal from Office: Similar to the process of induction, the process of removal also marks a key difference between shareholder and director. Shareholders cannot be removed unless an order to this effect has been passed by the National Company Law Tribunal (NCLT) or any other court of law. However, they can leave the company at will and transfer their shares to a new or existing shareholder. 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 from his office, shareholders can call an EGM, and by a simple majority pass a resolution to that effect.
Also, Section 164 of the Companies Act prescribes various grounds on which a director is declared as disqualified. Upon being declared a disqualified director under section 164, the director automatically vacates the office, and he or she no longer is considered a part of the company’s Board of Directors. Any board meeting having a disqualified director as part of quorum count shall be considered invalid, and the decisions taken in such meeting shall be considered void.
(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 if they are serving the company in their professional capacity.
Conclusion
Understanding the difference between shareholders and directors is fundamental to grasp the distinct and complementary roles they play within a company’s framework. While shareholders provide crucial capital, ownership, and act as a pivotal decision-making authority, directors are responsible for the day-to-day management, legal compliance, and operational efficacy. Recognizing and navigating these differences is essential for fostering a harmonious and prosperous corporate environment.
FAQs
Q1: What is the primary role of a shareholder in a company?
The primary role of a shareholder in a company lies in providing essential capital and owning a stake in the business. This ownership entails decision-making authority and a vested interest in the company’s performance and growth. A difference between shareholders and directors is that shareholders contribute financially and have a say in key company matters, while directors oversee management and compliance.
Q2: Can a shareholder be removed from a company?
Unlike directors, shareholders cannot be forcibly removed from a company. However, they can choose to exit by transferring their shares to others.
Q3: How are directors appointed and removed from office in a company?
First directors are nominated by the promoters or first shareholders and are mentioned as “first directors” in the AOA. The subsequent directors are appointed by existing shareholders through resolutions passed at the EGM. Similarly, directors can be removed by shareholders through a simple majority vote at an EGM. However, the roles and responsibilities of directors continue until their removal takes effect.
Q4: What is the liability of directors and shareholders in a company?
The difference between shareholders and directors is well evident in their liabilities towards the company. Shareholder’s liability lies in paying off the company’s dues. However, this liability is limited for each shareholder to the unpaid amount of his share capital. Also, his personal assets are not at risk under any circumstance. Directors, in contrast, have narrower liability. They are accountable for legal and regulatory compliance, facing potential penalties, fines, and even prosecution for non-compliance.
Q5: How do directors and shareholders contribute to a company's overall success?
Directors and shareholders play distinct yet interconnected roles in driving a company’s success. Shareholders contribute by providing capital and participating in critical decisions. Directors ensure efficient management, adherence to regulations, and strategic decision-making. Together, their collaboration fuels the company’s growth and prosperity.
Wow, this article is truly awesome! It made it so easy for me to understand the difference between shareholders and directors. Thank you for simplifying it!