Section 2(26) of the Companies Act, 1956 defines a managing director as,
“a director who, by virtue of an agreement with the company, or of a resolution passed by the company in general meeting, or by its Board of Directors, or by virtue of its Memorandum or Articles of Association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called.”
From the above definition it is clear that a managing director is also a director, but he enjoys substantial powers to act as the chief executive under the control and supervision of the Board. Thus, he is both a director and manager. As a director he takes a seat in the Board meeting and participates in the policy-making function. As a manager or chief executive, he is responsible for the day-to-day management of the company.
Appointment of Managing Director
Usually the Articles of most companies empower the Board to appoint one of their member as managing director by a resolution of the Board and under a separate service agreement setting out the terms and conditions of his service. Only an individual can be appointed as a managing director. No person can act as managing director of more than two companies at a time. No company can appoint a person as managing director for a term exceeding five years at a time. A managing director can be re-appointed for further periods not exceeding five years at a time.
Rights, Powers and Duties of Managing Director
A managing director has two fold function – he is both a director and a manager. As a director he takes a seat in the Board meetings and helps in the formulation of policy matters. As a manager or chief executive he is responsible for the routine management of the company’s business. But compared to other directors, he enjoys substantial powers of management under the control and supervision of the Board.
The managing director derives his powers from the Memorandum and Articles of the company or from the resolution of the general meeting or the Board or from the service agreement entered into by him with the company. He enjoys substantial powers of management delegated to him by the Board. Thought the Act excludes certain routine administrative acts from his substantial powers of management, he can exercise these powers provided the Board authorizes him. He also derives certain powers from the service agreement between him and the company.
The managing director, being essentially a director, has all the rights and duties of a director. In addition, he enjoys some other rights and has to perform many other duties in the day-to-day management of the company. These additional rights and duties are usually provided for in the Articles and conferred on him by the Board. The service agreement defines the limits of his powers and duties.
Remuneration of Managing Director
A managing director may be remunerated either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other. But such remuneration must not exceed 5% of the net profits without the sanction of the Central Government. Where there are more than one such managing directors, the remuneration must not exceed 10 percent of the net profits without sanction of the Central Government.