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What is difference between independent director and director

GAURAV SINGH (Managing Director) (99 Points)

06 October 2013

I want to know that what is the difference between the Independent director and Director.

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Samrendra (Asst. Manager- Internal audit) (221 Points)
Replied 06 October 2013

Who is an Independent Director?

Independent Director means non-executive Director who, apart from receiving directors remuneration, does not have any material/ pecuniary relationship or transaction with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates, which in judgment of the Board may affect independence of judgment of the Director.

The Companies Act, 1956 do not specifically gives the definition of the Independent Director. However clause 49 of the Listing Agreement gives the definition.

As per revised clause 49 of the Listing Agreement the definition of the term ‘independent directors’ would mean a non-executive director who:

1. Does not have a pecuniary relationship with the company, its promoters, senior management or affiliate companies.

2. Is not related to promoters or the senior management.

3. Has not been an executive with the company in the immediately three preceding financial years.

4. Is not a partner or executive of the auditors/lawyers/consultants of the company for the last three years.

5. Is not a supplier, service provider or customer of the company.

6. Does not hold 2 per cent or more of the shares of the company.

‘Senior management’ means personnel of the company who are members of its core management team excluding the Board of Directors, and would comprise of all members of management one level below the executive directors, including all functional heads.

Normally Nominee Directors of Bank or Financial Institution will not be considered as independent Director as per the Companies Act. However under Clause 49 of the Listing Agreement issued by SEBI such Directors are considered as independent Director.

Role of Independent Director

An independent director is a person having many years of experience and acts as a guide for the company. The role they play in a company broadly includes improving corporate credibility and governance standards, function as watchdog, play a vital role in risk management. Independent Director plays an active role in various committees to be set up by a company to ensure good governance. Listed companies are required to set up audit committees of minimum three directors, on which, two-thirds should be Independent Director.

The role and responsibility of an Independent Director arising out clause 49 requirements of role of audit committee would include

1. Oversight of company financial reporting process and disclosure of its financial information.

2. Recommending to Board on the appointment, re-appointment and if required replacement or removal of statutory auditor and fixation of audit fees.

3. Review with management, the annual financial statements before approval by the board with particular reference to Directors Responsibility Statement, changes in accounting policy, major accounting estimates, audit findings adjustments, compliance with listing and other legal requirements, disclosure of related party transactions and qualification in the draft audit report.

4. Review of quarterly financial statements.

5. Review with management, performance of statutory and internal auditors, adequacy of internal control systems, adequacy of internal audit function including their structure, frequency, reporting.

6. Discussing significant finding of internal auditors, including internal investigations made by them into areas of fraud, irregularities or major failures of internal control systems.

7. Discussing with auditors on the scope of the audit.

8. Reviewing reasons for defaults into payments.

9. Reviewing the whistle blower mechanism.

10. Mandatory review must be made of related party transactions and internal control weaknesses.

11. Review financial statements of subsidiary companies with special attention to investments made by them.

12. Review uses/application of funds from public issues, rights issues, preferential issues etc.

13. Disclose shareholdings in the listed company.

Duties & Responsibilities of an Independent Director

The duties and responsibilities of independent Directors are normally as they are of director of the Company:

1. He should furnish information in the prescribed form to the company about disclosure of General Notice of directorship, membership of body corporate and other entities.

2. He should also inform the Company about any change in the details submitted subsequently.

3. He should provide a list of his relatives as defined in the Companies Act and their directorship and interest in other concerns.

4. The Director shall have fiduciary duty to act in good faith and in the interest of the company.

5. It is the duty of the Independent Director to acquire proper understanding of the business of the Company.

6. He should act only within the powers laid down by the Memorandum of Association and Articles of Association and by applicable law and regulations.

7. He should not be a Director of more than fifteen Companies.

Such an Independent Director could be working as member of Audit Committee prescribed under Section 292A of the Companies Act. In such situation he has to look into the obligations of Audit Committee and perform the duty.

Chinnu Raj (CA Final Student B.Com) (1067 Points)
Replied 06 October 2013

A director is a person who manages a propretary limited company. There are laws governing the roles and responsibilities of the director of the company while

Independent Director have a responsible position with the public (minority shareholders)