An independent director is a non-executive director who apart from receiving managerial remuneration, does not have any pecuniary relationship with the company or its promoters or its management or its subsidiary, which otherwise affect their independence of judgement.
Independent directors add credibility to the company and help the company to achieve better growth, profitability and sustainability alongside good corporate governance. An independent director is a member of the Board of Directors.
Independent Director in relation to a company means a director other than a managing director or whole time director or nominee director
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
- is or was not a promoter of the company or its holding, subsidiary or associate company;
- is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed,] 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
(d) none of whose relatives—
(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year:
Provided that the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii);
(e) who, neither himself nor any of his relatives—
(i) holds 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;
Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years.
(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 firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
- 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;
(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 nonprofit 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;
(f) who possesses such other qualifications as may be prescribed.
Applicability of appointment of Independent Directors
Section 149 (4) read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, prescribes applicability criteria for appointment of Independent Directors under the Companies Act, 2013. Listed companies are also required to follow the provisions of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 in addition to the provisions of the Companies Act, 2013. The detailed bifurcation requirement of Independent Directors on Board of on various committees of the Board related to is as under:
Applicability of Independent Directors
Code for Independent Directors
Independent directors are responsible for ensuring good corporate governance by actively involving in several committees set up by the company. Schedule IV of the Companies Act, 2013 provides “The Code for Independent Directors” which serves as a guide to professional conduct for the Independent Directors. It details the guidelines for professional conduct, role and functions of independent directors, duties of independent directors.
Independent directors by adhering to the standards as prescribed under the Code for Independent Directors, are required to fulfill their responsibilities in a professional and faithful manner and promote confidence in the investment community, particularly minority shareholders and regulators.
Qualification of Independent Directors
An independent director shall possess appropriate skills, knowledge and experience in one or more fields of -
- Corporate governance
- Technical operations
or other disciplines related to the company’s business.
Manner of Appointment of Independent Directors
- The appointment process of the independent directors shall be independent of the company management. That means a company may have its own process of selection, evaluation and examination of candidates.
- While selecting an independent director the Board must ensure that there is appropriate balance of skill, experience and knowledge, so that the Board can discharge its functions effectively and efficiently.
- The appointment of independent directors shall be approved by the members at a general meeting.
- Letter of appointment is mandatory to formalise the appointment of independent directors. (General Circular No 14/2014)
- The terms and conditions of appointment of independent directors shall be open for inspection at the registered office of the company by any member during normal business hours.
- The company shall publish on their website under a separate section,
- the terms and conditions of the appointment of independent directors,
- details of familiarization programs imparted for independent directors by the company during the year (on cumulative basis) and
- shall disclose the number independent directors attended the programs and number of hours spent by independent directors on such programs (on cumulative basis).
Process of appointment of independent directors
The process of appointment of independent directors should be independent of the company management. Section 178(3) of the Companies Act, 2013 provides that the Nomination and Remuneration committee shall formulate a policy regarding criteria for determining qualification, positive attributes, independence of directors and remuneration for the directors, KMP & other employees.
A step by step procedure for appointment of independent director is as under:
- Secelation by the Board of Directors
The Board of Directors of the company, depending upon the requirement in the company shall select a suitable candidate whose knowledge, skills, experience and qualification will add more credibility, growth to the company.
The Board of Directors may select an independent Director from the Data Bank maintained by any body or institute or association notified by the Central Government.
Ensure that the proposed Independent Director is not disqualified as per Section 164 and 165 of the Companies Act, 2013, also he fulfils all the criterias of independence as specified under Section 149(6) of the Companies Act, 2013
Director Identification Number is must for appointment, if the proposed independent director does not have, then first DIN shall be obtained.
The company shall obtain Consent Letter in Form DIR-2 (consent to act as independent director)
The requirement of deposit amount is not applicable if the recommendation is received from the Nomination and Remuneration Committee, if applicable or recommendation by a Director to the Board. The Board of Directors shall hold a Board Meeting and pass necessary resolution for appointment of Independent Director, which shall be subject to approval by members at the General Meeting.
Hold a General Meeting of Members by issuing an appropriate Notice and Explanatory statement in terms of the provisions of the Companies Act and LODR Regulations and get approval of members by passing an ordinary resolution.
Appointment shall be formalised through the Letter of Appointment which shall set out the following:
(a) the term of appointment;
(b) the expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to serve and its tasks;
(c) the fiduciary duties that come with such an appointment along with accompanying liabilities;
(d) provision for Directors and Officers (D and O) insurance, if any;
(e) the Code of Business Ethics that the company expects its directors and employees to follow;
(f) the list of actions that a director should not do while functioning as such in the company; and
(g) the remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any.
No person can be appointed as an alternate director to the independent director unless he is qualified to be appointed as an independent director.
File Form DIR-12 with the Registrar of Companies within 30 days of his appointment
Make necessary entries in the Register of Directors and Key Managerial Personnel
Obtain the Declaration of Independence in the first board meeting in which he participates as an independent director and thereafter at every first board of meeting of the financial year or whenever there is any change in the interest.
Tenure of Appointment of Independent Directors
As per the provisions of Section 149(10) and 149(11) of the Companies Act, 2013, an independent director is allowed to hold office for a term of 5 consecutive years.
Post completion of the first term, an independent director shall be eligible for re-appointment and such reappointment shall be authorised by a special resolution and disclosure of such appointment in the Board’s Report. However, an independent director can hold office for a maximum of 2 consecutive terms (each term not exceeding 5 consecutive years). The re-appointment should be on the basis of performance evaluation.
Cooling-off period of 3 years is provided post completion of 2 consecutive terms of appointment The Independent Director shall be eligible for appointment after expiration of 3 years of ceasing to become an independent director. But during the period of 3 years, an independent director shall not be appointed in or be associated with the company in any other capacity either directly or indirectly.
It is also important to note that the MCA vide General Circular 14/2014 dated 9th June 2014, has clarified that the term of appointment of independent directors need not be 5 years, it can be lesser than that. Appointment for any term (maximum 5 consecutive years) whether 5 years or less, is to be treated as one term under Section 149(10) of the Companies Act, 2013.
Retirement by rotation
As per Section 149(13) and Explanation to Section 152(6) of the Companies Act, 2013, Independent Directors are not liable to retire by rotation.
Resignation or removal of Independent Directors
The resignation or removal of Independent Directors shall be in the same manner as provided under Section 168 and 169 of the Companies Act, 2013
The Board of Directors shall fill such intermittent vacancy caused due to resignation or removal at the earliest within 3 months from the date of such vacancy or before next immediate board meeting, whichever is later.
An independent director appointed for a second term can be removed only by passing special resolution and after giving him a reasonable opportunity of being heard.
If a company fulfills the requirement criteria of having independent directors on its Board post resignation or removal, then such company need not fill out such vacancy.
Limit on number of Directorship
Section 165(1) of the Companies Act, 2013 limit the number of directorships to 20 companies including alternate directorships, if any. There is no separate limit specified for independent directors.
However, Regulation 17A of the SEBI (LODR) Regulations, 2015, provide the maximum number of directorship in case of independent directors of listed companies,
- A person may serve as an Independent Director in maximum 7(seven) listed companies.
- any person who is serving as a whole time director / managing director in any listed entity shall serve as an independent director in maximum 3 (three) listed entities.
For the purpose of the count of the number of listed entities on which a person is an independent director, only those entities whose equity shares are listed on a stock exchange shall be considered.
Remuneration of Independent Directors
According to Section 149(9) of the Companies Act, 2013, Independent Directors are not entitled to stock option scheme and may receive remuneration by way of sitting fees for attending the board meeting and other meetings and profit related commission as may be approved by the members of the company. The remuneration shall be payable as per the policy framed by the Nomination and Remuneration committee.
Independent directors may get reimbursement of expenses for participation in the Board and other meetings as may be approved by the members.
Declaration of Independence by the Independent Directors
Section 149(7) of the Companies Act, 2013 and Regulation 25(8) of the SEBI (LODR) Regulations, 2015 requires an independent director to disclose at first meeting of Board of Directors in which he participates and thereafter at every first Board Meeting of the financial year or whenever where is any change in the circumstances that may affect his status of independence, give a declaration that he meets the criteria of independence as provided under Section 149(6) of the Act and Regulation 16(1)(b) of the LODR Regulations and that he is not aware of any circumstance or situation, which exist or may be reasonably anticipated, that could impair or impact his ability to discharge his duties with an objective independent judgment and without any external influence.
Independent Directors on various Committees of the Board of Directors
Presence of Independent Directors on various committees on the Board as required under the Companies Act, 2013 and Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 is illustrated below:
Immunity to Independent Director
Section 149(5) of the Companies Act, 2013 and Regulation 25(5) of the Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulations 2015, provides that an independent director shall be held liable only in respect of such acts or omissions by a company which had occurred
- with his knowledge attributable through Board processes and
- With his consent or connivance or
- where he had not acted diligently with respect to the provisions of Act and Regulations.
Attending Board and General Meetings
The independent directors shall attend:
- Board Meetings and committee meetings
- General Meetings: An independent Director being Chairperson of the Audit committee, Nomination and Remuneration Committee shall be present at the Annual General Meeting to answer shareholders queries.
Separate Meeting of Independent Directors
The independent directors shall hold at least one meeting in a financial year, without the attendance of non-independent directors and members of the company and all independent directors of the company shall strive to be present at the meeting.
Data bank of Independent Directors and Proficiency Test
The independent director may be selected from the data bank maintained by the Indian Institute of Corporate Affairs,Manesar which is notified under Section 150(1) of the Companies Act, 2013 for creation and maintenance of data bank for Independent Directors.
Every individual whose name is included in the data bank is required to pass an online proficiency self assessment test conducted by IICA within a period of 1 year from the date of inclusion of his name in the databank, failing which the name shall stand removed. A score of not less than 60% in aggregate is must for passing the proficiency test. However an individual is not required to pass an online proficiency test, if he has served as a director or key managerial personnel for a total period of at least 10 years as on the date of inclusion of his name in the databank, in one or more of the following:
- Listed public company or
- Unlisted public company having paid up share capital of Rs. 10 crore or more or
- Body corporate listed on the recognised stock exchange.
Note: for the purpose of calculation of experience of 10 years, any period during which an individual was acting as director or key managerial personnel in two or more companies or body corporate at the same time shall be counted only once.
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