An independent director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. They also ensure that there is no dominance of one individual or special interest group. They act as a coach, mentor and sounding Board for their full time colleagues. They can bring an objective view to the evaluation of the performance of Board and management In addition, they can play an important role in areas where the interest of the management company and shareholders.
MEANING OF INDEPENDENT DIRECTOR
SECTION 149(6) OF COMPANIES ACT, 2013
An independent director in relation to a company. "Independent Director" 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, [other (i than remuneration as such director or having transaction not exceeding 10% 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 2 immediately preceding financial years or during the current financial year; (This provision does not apply to Gov. Co.)
(d) None of whose Relatives -
i. Is HOLDING ANY SECURITY OF OR INTEREST in the company, its holding. subsidiary or associate company during the 2 immediately preceding financial years or during the current financial year:
Provided that the relative may hold security or interest in (the company only) of FACE VALUE not exceeding Rs.50 lakh or 2% 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 [Rule 5(2)-Rs. 50lacs] during the 2 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 3rd 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 [Rule 5(2)-Rs. 50lacs during the 2 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 2% 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 3 FY 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 3 financial years.
ii. Is or has been an employee or proprietor or a partner, in any of the 3 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 10% or more of the gross turnover of such firm;
iii. Holds together with his relatives 2% or more of the total voting power of the company; or
iv. Is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company or
(f) Who possesses such other qualifications as may be prescribed. [RULE 5]
Q. WHICH COMPANIES ARE REQUIRED TO APPOINT INDEPENDENT DIRECTORS?
Section 149(4) read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 prescribed the companies which are required to appoint independent directors.
- Every LISTED PUBLIC company shall have at least 1/3 of the total number of directors as independent and
- The following class or classes of companies shall have at least 2 directors as independent directors:
The PUBLIC COMPANIES having:
- Paid up share capital-> Rs.10 crore rupees or more; or
- Turnover Rs.100 crore rupees or more; or Aggregate, Outstanding loans, Debentures and Deposits, Exceeding Rs.50 crore.
- The amount existing on the last date of latest audited financial statements shall be taken into account for calculating the paid-up share capital or turnover or outstanding loans, debentures and deposits.
- The company must appoint a higher number of directors if a higher number of independent directors ir required to compose audit committee.
The provision of independent director shall not apply to:
(a) Section 8 companies,
(b) Specified IFSC public companies,
(c) Unlisted Public Companies which are joint venture or Wholly Owned Subsidiary or Dormant company .
ROLE OF INDEPENDENT DIRECTOR
They acts as a guide, coach, and mentor to the Company. The role includes improving corporate credibility and governance standards by working as a watchdog and help in managing risk. Independent directors are responsible for ensuring better governance by actively involving in various committees set up by the company.
Schedule IV of the Companies Act 2013 specifies the independent directors shall: -
- Impartial judgment
- Strategic advisor to the company
- Watchdog for interest of stakeholders
- Moderate in the interest of the company in conflict situations.
- Innovative or creative suggestions for better future prospects of the company
- Overview that the company is following good governance policy.
DUTIES OF AN INDEPENDENT DIRECTOR
- Undertake appropriate induction and regularly update and refresh their skills, knowledge, and familiarity with the company.
- Attempt to attend company’s general meetings.
- Attempt to attend BOD’s meetings and board committees meeting being a member.
- Have adequate knowledge about the company and the external environment in which it operates.
- Report matters concerning unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.
- Acting within his or her authority, assist in protecting the legitimate interests of the company, shareholders and its employees.
- Not to unfairly obstruct the functioning of the company or committee of the Board.
- Participate in the Board’s committee being chairpersons or members of that committee.
- Not to disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.
- 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.
What is the minimum age to get appointed as an independent director?
As per company law, the minimum age to get appointed as an independent director is 18 years. There is no maximum age to get appointed as an independent director.
What is the relevance of DATA BANK?
The Act provides that an ID may be selected from a data bank containing names, addresses and qualifications of person who are eligible and willing to act as ID maintained by the Indian Institute of Corporate Affairs 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 ID1. The Companies (Appointment and Qualification of Directors) Rules, 2014 (“Rules”) provides for various provisions related to ID, such as number of ID to be appointed, qualifications of ID and compliances required by a person eligible and willing to be appointed as an ID.
CODE FOR INDEPENDENT DIRECTOR
In order to promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors, the Act in Schedule IV prescribes a code which is a guide for the professional conduct to be adhered to by the ID.
Schedule IV of the Act makes provision -
(i) Guidelines of professional conduct
(a) to uphold ethical standards of integrity and probity;
(b) act objectively while exercising his/her fiduciary duties; and
(c) exercise responsibilities in a bonafide manner in the interests of the company.
MANNER OF APPOINTMENT
The appointment of independent director(s) of the company shall be approved at the meeting of the shareholders. The appointment of independent directors shall be formalised through a letter of appointment, which shall set out the terms and other specified details of the appointment.
TENURE OF INDEPENDENT DIRECTOR
As per Section 149(10), independent director shall hold office for a term up to five consecutive years on the Board of a company but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report. However, no independent director shall hold office for 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.
How to appoint independent director?
- Obtain Written Consent and Declaration from the Proposed Independent Director
- Obtain Form MBP-1 from the Proposed Independent Director
- Obtaining DIN and Digital Signature Certificate [Section 153]
- Documents for DIR-3
- Meeting of Nomination and Remuneration Committee
- Convene a Meeting of Board of Directors [As per section 173 & SS-1]
- Filing of Form DIR-12 with the ROC
- Convene General Meeting [Section 96, 100 and SS-2]
- File Form MGT-14 with ROC
- Making Necessary entries in Register of Directors
- Regularize the appointment of Additional Independent Director at Annual General Meeting
- File Form DIR-12 with ROC
- Undertake Directors and Officers insurance
- File Necessary Amendment Application under following Acts
Reappointment shall be on the basis of report of performance evaluation.
RESIGNATION OR REMOVAL
(1) The resignation or removal of an independent director shall be in the same manner as is provided in sections 168 and 169 of the Act.
(2) An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within 2 three months" from the date of such resignation or removal, as the case may be.
(3) Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.
SEPARATE MEETINGS OF THE INDEPENDENT DIRECTORS
- The independent directors of the company shall hold at least 1 meeting in a financial year. without the attendance of non-independent directors and members of management.
- All the independent Directors of the company shall strive to be present a such meeting.
Why independent director plays a significant role?
- Balance the often-conflicting interests of the stakeholders.
- Facilitate withstanding and countering pressures from owners.
- Fulfill a useful role in succession planning.
- Act as a coach, mentor and sounding Board for their full-time colleagues.
- Provide independent judgment and wider perspectives.
An independent director (non-executive director) constitutes the category of directors who help the company in improving corporate credibility and governance standards. They play an important role in bringing transparency, accountability, and credibility to the firms.
Tags corporate law