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Synopsis:

  • Sections 149 and 150 of Companies Act, 2013
  • Rules  4, 5 and 6 of Companies (Appointment &Qualification) Rules, 2014

Introduction:

Given the responsibility of the Board of Directors to balance various interests, the presence of Independent directors on the Board of a Company would improve the corporate governance. This is more important for public companies or companies with significant public interest. Directors who represent specific interests would be dictated by the interest which they represent. Independent Directors, therefore, becomes necessity. They would be able to bring an element of objectivity so necessary for the company. Law, therefore, recognizes the principle of Independent Directors and spell out their role, qualifications and liability. Presence of Independent directors on the Board depends on the size and nature of a company. Single prescription may not suit all companies. Number of Independent Directors is prescribed by the rules for different categories of companies.

1. Minimum and Maximum Number of Directors

Every company has Board of Directors which will consist only of individuals.

a. Minimum  Number of Directors

For public co.minimum no. of directors is3

For private co., minimum no. of directors is 2

For one person co. , one director is the minimum number

b. Maximum Number of Directors

Maximum Number of Directors  is 15 for each kind of company

With special resolution, co. may appoint more than 15 directors.

2. Number of Independent Directors Listed co. and specified public companies to have independent directors

As per Rule 4 Companies (Qualification & Appointment of Directors) Rules, 2014.

Listed Company and specific public companies will have independent directors

For Listed Company : Listed public company shall have Independent Directors  at least 1/3rd of total number of directors (fraction will be rounded off)   or 2 whichever is higher.  Assuming in Listed Company, there are 3 directors and of 3 directors 2 should be Independent Director.

For Public Company:

Following public companies shall have at least 2 directors.

  1. Public companies with paid up capital of 10 crore of rupees or more or
  2. Public companies having turnover of 100 crore of rupees or more  or
  3. Public companies which have outstanding loans, debentures and deposits exceeding 50 crore rupees.

Note: - Private company subsidiary of a public company is public company.

Vacancy inIndependent Director

Vacancy

Vacancy in Independent shall be filled in by the Board not later than next Board meeting or 3 months whichever is later. (Illustration: Vacancy occurs on 1st April. Board meeting is held on 31st May – two months after the vacancy should be filled in by 3 months i.e. by 30th June.)

Cease to fulfill

Company ceases to fulfill any of 3 conditions for three consecutive years. It shall not be required to appoint Independent Director until it meets any of such conditions.

Illustration: How many independent directors are appointed?

Total number of directors in a Company

Listed Company

Public Company

(A) 3(Three are total number

 2 (Two)  will be independent directors

2 (Two) will be independent directors.

(B) 4(Four) are total number

1/3rd will be independent directors and if in fraction, it is rounded up. 2 (Two) will be independent directors.

2 (Two) will be independent directors

(C) 5 (Five) are total number of directors

1/3rd will be independent directors, if in fraction, rounded up. 2 will be independent directors

2 (Two)  will be independent directors

(D) 6 (Six) are  total number of directors

2 (Two) will be independent directors

Two will be independent directors

(E) 7 (Seven) are total number of directors.

1/3rd will be independent directors which is 2.33 & it is rounded up 3

 2 (Two)

ATTEMPT: XYZ Limited is an unlisted public company having a paid up capital of twenty crore rupees as on 31st March, 2015 and a turnover of one hundred fifty crore rupees during the year ended 31st March, 2015. The total number of directors is thirteen.

Referring to the provisions of the Companies Act, 2013 answer the following:

  1. State the minimum number of independent directors that the company should appoint.
  2. How many independent directors are to be appointed in case XYZ Limited is a listed company? (May, 2016)

(3) (i) Who can be Independent Director?

One who is a person of integrity and has expert knowledge.

ii. Who cannot be Independent Director?

Managing Director

Whole Time Director

Nominee Director.

Nominee director is one nominated by financial institution in pursuance of any law or in pursuance   of an agreement or Govt. or any person may appoint to represent its or his interest. 

(4) Qualifications of Independent Director: Independent Director is a non-executive director. Following persons can be considered & appointed as Independent Directors:

i. One who is not a promoter

Of the company,or its holding, or its subsidiary or its associate company. This includes a person who was at any time not a promoter of the company, holding, subsidiary or associate company.   (Associate co. is one  in which other co. has significant influence  by way of 20 per cent of its capital )

ii. One who is not relative

Of promoter or directors of the company, its holding, subsidiary or associate company.

iii. One who has no pecuniary relationship

With the company, it’s holding, subsidiary or associate company or their promoters or directors in current financial year or immediately preceding 2 financial years. (Transaction entered into by an Independent Director (“ID”) with the company at par as a member of public enters and at the same price. “ID” will not be said to have pecuniary relationship )

iv. None of his relatives has or had pecuniary relationship or transaction

With the company, it’s holding, subsidiary or associate company or their promoters or directors. Pecuniary relationship may amount to 2 per cent or more of its gross turnover or total income (of company)or 50 lakh of rupees or such higher amount as prescribed whichever is lower during 2 immediately preceding financial years or during the current financial year. ( 50 lakhs of rupees is not in aggregate of two years but  per annum )

v. One who neither himself or any of his relative holds or has held

The  position of Key Managerial Personnel or has been employee of the company, or its holding, subsidiary or associate company in any of 3 financial years immediately preceding the financial year in which he is proposed to be appointed.(Key managerial personnel include the Chief Executive Officer or the managing director or the manager, or the whole time director or chief financial officer).

vi. One who neither himself nor any of his relatives

Has been an employee or proprietor or a partner of firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company in any of the 3 financial years (2012-13, 2013-14, 2014-15)immediately preceding financial year (2015-16)in which he is proposed to be appointed

vii.  One who neither himself nor any of his relatives

Has been employee or proprietor or partner of legal or consulting firm that has or had transaction with company its holding, subsidiary or associate company and the transaction may amount to 10 per cent or more of the gross turnover of such firm. (Remember 10 per cent or more of the firm & not of company with which transaction is made.

viii. He  does not hold  together with his relatives 2 per cent or more of the total voting power in the company or

ix. Who possesses such other qualifications as may be prescribed.

x. Neither one nor his relative is Chief Executive or director

Of  non-profit organisation that receives 25 per cent or more of its receipt (remember of its receipts) from the company, or any of its promoters, directors or its holding, subsidiary or associate company or that holds 2 percent or more of the total power of the company

Other Attributes: - Rule 5 of Companies (Appointment &Qualification of Directors) Rules

He should be a person of integrity. He should possess relevant expertise and experience.  Nomination and Remuneration Committee   should identify qualified to become directors. Nomination & Remuneration Committee shallalso formulate the criteria for determining qualifications, positive attributes and independence of a director.

One who may possess other qualifications as prescribed. Rule 5 of Companies (Appointment of Directors) Rules. 2014 prescribes the following other qualifications –

i. He shall possess appropriate skills, experience and knowledge in one or more fieldsof finance, law, management, sales, marketing, administration, research, corporate governance, technical operations

ii. He may have other disciplines related to the company’s business.

(5) Code for Independent Directors and its performance evaluation

Schedule IV of the Act contains a code for Independent Directors. Code has 8 clauses which relate to guidelines of professional conduct, role and functions,duties, manner of appointment, reappointment, resignation or removal. Besides, independent directors will have at least one meeting in a year without the attendance of non-independent directors and members of management.  

Performance evaluation of Independent Directors.

The Nomination & Remuneration Committee shall lay down the evaluation criteria for the performanceof Independent Directors.  Company shall disclose in its report the criteria of performance evaluation as laid down by the Nomination Committee. Performance evaluation of Independent Directors shall be done by the entire Board of Directors excluding the director being evaluated.

(6) Term of the Independent Director:

Term :

He shall hold office for a term up to 5 consecutive years.  On the expiry of his Ist term,   he is eligible for the re-appointment. Re-appointment can be done bypassing a special resolution by the company. Disclosure of such appointment  is to be  made in the Board’s report

 Term of the independent director is up to five consecutive years. (Remember one term is up to 5years)

Not more than 2 consecutive terms

No independent director shall hold office for more than 2 consecutive terms. After the completion of 2 consecutive terms, he will only be not eligible for the appointment after a gap of 3 yearsand during 3 years he shall not be appointed in the company nor be associated with the company in any capacity.

Illustration: A is appointed as independent director for a period 3 years initially (less than 5 years) This appointment will be considered as one term. For another term he is reappointed for 5 years. Total period in his case is not more than 8 years of 2 consecutive terms. After the completion of his 2 terms he can be appointed after the gap of 3 years. Suppose two terms of 8 years is over in 2022. Then until 2025 he cannot be appointed.

Note: - Board of Directors will appoint Independent Directors subject to the approval by the company in general meeting. Explanatory statement which is annexed to the notice of general meeting shall indicate that in the opinion of the Board, they fulfill the conditions necessary for their   appointments. 

(7) Obligation of Independent director to make a declaration:

He shall, at the first meeting of the Board, give a declaration that he meets the guidelines of being independent. Thereafter such a declaration has to be made at the first meeting of the Board in every financial year. He will also make a declaration as and when changes occur which affect his status as an independent

(8) Remuneration of the Independent director: (Sub sec. 9)

Entitlement :

  1. He may receive remuneration by way of fee for attending the meetings of Board or of committee or for other purpose as may be decided by the Board.
  2. Reimbursement of expenses for participation in the Board and other meetings.
  3. Profit related commission as may be approved by the members.

Not entitlement

He shall not be entitled to stock option.

(9)  Liability of Independent Director:

  1. Independent director
  2. Non-executive director who is not promoter nor  key managerial personnel

Shall only be liable in the following circumstances -

  1. Of acts of omission or commission which had occurred with his knowledge.Board’s agenda, board notes and minutes will play a vital role in determining participation by director and consequently his knowledge can be attributed.
  2. Of acts of commission or omission committed with his consent or connivance or
  3.  Of acts which show that he had not acted diligently.

Note: - Executive Director means whole time director or managing director

(10) Non-applicability:

Provisions in regard to “Retirement of Directors by Rotation” shall not apply to Independent Directors. In case Independent Director ceases to be independent, he will step down from his directorship? He is Independent Director because of his being independent in nature. That nature is taken out, he automatically ceases. This is further corroborated by Rule 7 of Companies (Appointment and Qualification of Directors) Rules which provides that small shareholders’ director has to vacate the office if he ceases to meet the criterion of independence. (Small shareholder director is deemed to be independent director)

Note: - Provisions in regard to Independent director are not applicable to companies with charitable objects formed u/s 8 – F.No. 1/2/2014- CL.I, dt. 5-6-2015

MAINTENANCE OF DATA BANK:

(Section 150 Rule 6)

Data Bank shall be kept & maintained and Independent director may be selected from a data bank

Data Bank will contain particulars of one whois eligible and willing to act as Independent Director.Data Bank shall contain -

Director Identification Number (DIN), Name and surname in full, Father’s name, Date of birth, Gender, Nationality, Occupation, Full address with PIN CODE, Phone Number, e-mail id, Educational and Professional qualifications, experience or expertise, Legal proceedings , if any, initiated or pending against such person.,

1. Data Bank shall be maintained by anybody, institute (known as agency)   having expertise in the creation andauthorized by the Govt.

2. Agencies shall put on their website for the use by the company making the appointment of such directors.  Databank shall also be placed on the website of the Ministry of Corporate Affairs or on other website as approved by the Govt.

3. Disclaimer shall be displayed on the website that the responsibility for selecting a person from Data Bank as independent director shall be with the company making the appointment.  Company must carry out its own due diligence before appointment.  Agency maintaining the data bank shall not be liable for the accuracy of information or lack of suitability of the person

4. Person who desires to get his name included in data bank shall make an application to the “agency”

5. Agency may charge a reasonable fee for the inclusion of his name in the data bank.

6. A person who has applied for the inclusion of his name shall intimate to the agency about changes in his particulars in 15 days.

Note:-This section shall not apply to companies with charitable objects formed us 8

Conclusion: - Independent Director is a person of integrity & of expert knowledge. It is mandatory for Listed and specified Public Company to appoint Independent Director. Number of Independent Directors and nature of companies required to appoint are regulated by rules while his obligation, his liability, his qualifications, his term, and his remuneration are governed by Section 149.  Keeping & maintenance of Data Bank are provided in section 150 and Rule 6 is also to that effect.

Courtesy: Prof. R. D. Maheshwari
To enrol Corporate & Allied Laws (CA Final) subject of the author: Click here


 

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