Independent Director- Definition- Clause -149 (6)
An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship 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 has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two percent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
(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;
(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) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
(B) 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 percent. or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.
Composition of Board of Independent Directors:- Clause 149 (4)
Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.
Declaration of Independence: Clause:149 (7)
Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6).
Selection of Independent Directors- Clause 150
An independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by any body, institute or association, as may by notified by the Central Government, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors.
The appointment of independent director shall be approved by the company in general meeting and the explanatory statement annexed to the notice of the general meeting called to consider the said appointment
The data bank shall create and maintain data of persons willing to act as independent director in accordance with such rules as may be prescribed.
Appointment of directors by minority Shareholders:- Clause 151
A listed company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed. “small shareholders” means a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.
Formal letter of appointment:
A formal letter of appointment should be issued to NEDs and IDs.
The letter should specify:
a. The term of the 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&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, including sitting fees and stock options etc, if any.
This letter should also be placed by the company on its website, if any, and in case the company is a listed company, also on the website of the stock exchange where the securities of the company are listed.
Minimum and maximum age for IDs/KMPs:
The Bill didn’t fixes the minimum and maximum age limit for IDs, but in clause 49 of LA fixes minimum age for the IDs to be 21 years.
The Bill prescribes maximum age limit for key managerial personnel (KMPs) to retire at age of 70,
Remuneration to IDs- Clause 149 (9):
An independent director shall not be entitled to any stock option and may receive remuneration by way of:
a. Fees provided under sub-section (5) of section 197,
b. Reimbursement of expenses for participation in the Board and other meetings and
c. Profit related commission as may be approved by the members
Maximum tenure for IDs: Clause 149 (10) &(11)
Independent Directors shall;
a. Hold office for a term up to 5 consecutive years on the Board of a company,
b. Eligible for re- appointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report.
c. Hold office for not more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director;
During the said period of three years, he shall not be appointed in or be associated with the company in any other capacity, either directly or indirectly.
Requiring Independent directors to disclose reasons of their resignation:
As per Companies Bill, a director may resign from his office by giving a notice in writing to the company and the Board shall, on receipt of such notice take note of the same and the company shall intimate the Registrar and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company. Director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation.
Liability of IDs/NEDs: Clause 149 (12)
An independent director and a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such;
a. Acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes,
b. With his consent or connivance or
c. Where he had not acted diligently.
Performance evaluation of IDs:
The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.
On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.
Separate meeting of IDs:
The independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management..All the independent directors of the company shall strive to be present at such meeting;
The meeting shall:
a. Review the performance of non-independent directors and the Board as a whole;
b. Review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;
c. Assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.
Guidelines of professional conduct for IDs:
An independent director shall:
(1) Uphold ethical standards of integrity and probity;
(2) Act objectively and constructively while exercising his duties;
(3) Exercise his responsibilities in a bona fide manner in the interest of the company;
(4) Devote sufficient time and attention to his professional obligations for informed and balanced decision making;
(5) Not allow any extraneous considerations that will vitiate his exercise of objective independent judgment in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making;
(6) Not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person;
(7) Refrain from any action that would lead to loss of his independence;
(8) Where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly;
(9) Assist the company in implementing the best corporate governance practices.
Role and functions of IDs:
The independent directors shall:
(1) Help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;
(2) Bring an objective view in the evaluation of the performance of board and management;
(3) Scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;
(4) Satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
(5) Safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) Balance the conflicting interest of the stakeholders;
(7) Determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;
(8) Moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.
Duties of IDs
The independent directors shall—
(1) Undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
(2) Seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;
(3) Strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;
(4) Participate constructively and actively in the committees of the Board in which they are chairpersons or members;
(5) Strive to attend the general meetings of the company;
(6) Where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;
(7) Keep themselves well informed about the company and the external environment in which it operates;
(8) Not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
(9) Pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;
(10) Ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;
(11) Report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
(12) Acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
(13) Not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information.