An Independent Director is a non-executive director who does not have any kind of pecuniary relationship with the Company that may affect the independence of his/her judgment and helps the Company in improving corporate credibility and governance standards.
Applicability On Appointing An Independent Director (ID)
1. As per Companies Act, 2013:
- Listed Public Company: Every listed Public Company shall have at least one-third of a total number of directors as ID.
- Unlisted Public Company: Every unlisted Public Company shall have at least 2 directors as ID, if its:
i. Paid up share capital is Rs. 10 crores or more or
ii. Turnover is Rs. 100 crore or more or
iii. In aggregate outstanding loans, debentures, and deposits exceed Rs. 50 crores.
2. As per LODR Regulations:
- The Board of the Company shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than fifty percent of the Board of directors shall comprise of non-executive directors. Provided that the Board of directors of the top 500 listed entities shall have at least one Independent woman director by April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one Independent woman director by April 1, 2020;
- Where the listed company has outstanding SR (Superior voting Rights of equity shares), at least half of the board shall comprise of Independent Directors.
3. Where the Chairman of the Board is a non-executive director: At least 1/3 of the Board shall comprise of Independent Directors.
4. Where the Company is not having a regular non-executive chairman: At least 1/2 of the Board shall comprise of Independent Directors. However, where the regular non-executive Chairman is a promoter of the entities or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the entities shall consist of Independent Directors.
Definition & Qualifications Of Independent Director (ID)
1. As per of Section 149 (6) of Companies Act, 2013, ID means a director other than a managing director or whole-time director or a nominee director.
2. An ID shall possess appropriate balance of skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations and other disciplines related to company’s business; and
- who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience; and
- who is or was not a promoter of the company or its holding, subsidiary or associate company;
- who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
3. who has or had no pecuniary relationship (other than remuneration as such director or having transaction not exceeding 10% of his total income) 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;
4. None of whose relatives:
i. Is holding any security or interest in the Company, its holding, subsidiary or associate company, during the two immediately preceding financial years or during the current financial year;
However, relative may hold security or interest in the Company of the face value not exceeding 50 Lakh rupees or 2% of the paid up capital of the company or its holding, subsidiary or associate company;
ii. Is indebted to the Company, or its holding, subsidiary or associate company or their promoters, or directors for an amount in excess of Rs. 50 Lakh during the two immediately preceding financial years or during the current financial year;
iii. Has given any guarantee or provided any security in connection with the indebtedness of any third person to the company, or its holding, subsidiary or associate company or their promoters, or directors of such holding company, for an amount of Rs. 50 Lakh during the two immediately preceding financial years or during the current financial year;
iv. Has any other pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, amounting to 2% or more of its gross turnover or total income singly or in combination with the transactions referred in above sub clause i., ii., or iii.;
5. who, neither himself nor any of his relatives:
- 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, relative who is an employee, such restriction shall not be applicable for his employment during preceding three financial years; (this exemption is not available to listed Company)
- 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 10% or more of the gross turnover of such firm;
- Holds together with his relatives 2% or more of the total voting power of the Company; or
- Is a Chief Executive or director, by whatever name called, of any non-profit organization 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;
6. Some additional requirement of LODR regulation in case of a Listed Company:
“Independent Director” means a non-executive director, other than a nominee director of the listed entity.
- Who in the opinion of the board of Directors, is a person of integrity and possesses relevant expertise and experience.
- Who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity.
- Who is not related to promoters or Directors in the listed entity, its holding, subsidiary and associate Company.
- who, apart from receiving director’s remuneration, has or had no material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;
- None of whose relatives has or had pecuniary relationship or transaction with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of its gross turnover or total income or 50 lakh rupees or such higher amount as may be prescribed from time to time, whichever is lower, during the two immediately preceding financial years or during the current financial year;
- who, neither himself, nor whose relative(s) is a material supplier, service provider or customer or a lessor or lessee of the listed entity;
- Who is not less than 21 years of age;
- Who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director.
Manner Of Appointment
- Declaration at the time of appointment and subsequently: Every Independent Director shall give a declaration that he meets the criteria of independence alongwith his details regarding registration in the Databank when:
- he attends the first board meeting as an independent director;
- in every financial year, at the first meeting of the board of directors
- When a situation arises that affects his status of independence being an independent director.
- The appointment of Independent Director(s) shall be approved in the meeting of the shareholders.
- The explanatory statement attached to the notice of the meeting for approving the appointment of independent director shall include a statement that in the opinion of the Board, the independent director proposed to be appointed fulfills the conditions specified in the Act and the rules made thereunder and that the proposed director is independent of the management.
- The appointment of independent directors shall be formalized through a letter of appointment.
- 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 terms and conditions of appointment of independent directors shall also be posted on the company’s website.
- An Independent Director shall not be liable to retire by rotation in terms of the provisions of Companies Act, 2013.
- The appointment of an ID shall be formalized by a letter of appointment which shall set out:
- The term of appointment i.e. the tenure for which the independent director has been appointed.
- The expectation of the Board from which the appointed director. The board-level committee in which the director is expected to serve his/her tasks.
- the fiduciary duties and liabilities that come with such an appointment;
- Directors and Officers insurance.
- The code of Business Ethics that the Company expects from its directors and employee to follow.
- Enumerated actions that a director should follow while working in a Company
- The remuneration, mentioning the periodic fee, compensation of expenses for contribution in the Boards and other meetings and profit related commission.
- The terms and conditions of selection of independent directors shall be open for inspection at the registered office of the company by any member during normal business hours.
- The terms & conditions of appointment of independent directors shall also be posted on the company’s website.
- As per Regulation 17 (1) (A) of LODR Regulations, listed entity shall not appoint a person or continue the directorship of any person as a non-executive director who has attained the age of seventy-five years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.
Limit On Number Of Directorships
- As per Companies Act, 2013: The Companies Act, 2013 does not provide any specific limit on the number of independent directorships. As per the provisions of section 165 of the Companies Act, 2013, the maximum number of directorships:
- Maximum directorships in aggregate (including alternate directorships) are twenty companies;
- Maximum directorship in public companies is 10 companies. This includes directorship in private companies that are either holding or subsidiary company of a public company.
However, the members of a company may by passing a special resolution specify any lesser number of companies in which a director of the company may act as director. While calculating the limit of directorship of 20 companies, the directorship in a dormant company will not be included.
- As per LODR Regulation:
- A person may serve as an Independent Director in maximum seven (7) listed Entities.
- If a person is appointed as Whole-time Director/Managing Director in any listed entity, he can be an Independent Director in maximum three (3) listed entities.
Tenure Of Independent Directors
- An independent director shall hold office for a term up to 5 consecutive years on the Board of a company but he shall be eligible for re-appointment on the recommendation of the Nominations & Remuneration Committee of the Board and subject to approval of the Board of Directors and of the Shareholders by way of special resolution.
- An Independent Directors will serve for not more than two terms of five years each on the Board of the Company subject to the maximum tenure of ten years, but such independent director shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director provided that he shall not be associated with the company in any way during the said period of 3 years.
- The appointment of an Independent Director for any term (whether 5 years or less) would be treated as a one term.
Remuneration Payable To Independent Directors
- The Independent Directors shall not be entitled any stock option. However, The Independent Directors may be paid any remuneration with the approval of the Board of Directors by way of sitting fees for attending the meetings of the Board or any Committee thereof. Maximum sitting fees of Rupees 1 lakh may be paid to ID but should not be less than the sitting fee payable to other directors and profit related Commission as may be approved by the members.
- Reimbursement of expenses: In addition to the remuneration described above, the Company shall reimburse actual cost incurred for travel, hotel and other incidental expenses incurred by the directors for participation in the meeting of the Board and Committees thereof in the performance of their role and duties.
- As per LODR Regulations:
- The board of directors shall recommend all fees or compensation, if any, paid to non-executive directors, including independent directors and shall require approval of shareholders in general meeting.
- The requirement of obtaining approval of shareholders in general meeting shall not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 2013 for payment of sitting fees without approval of the Central Government.
- The approval of shareholders by special resolution shall be obtained every year, in which the annual remuneration payable to a single non-executive director exceeds fifty per cent of the total annual remuneration payable to all non-executive directors.
Resignation Or Removal Of An Independent Director (ID)
- Resignation by ID: An Independent Director may resign from his/her position at any time by serving reasonable written notice to the Board of directors as per section 168 of the CA, 2013.
- Removal of ID: An Independent Director may be removed just like any other director by passing an Ordinary Resolution as per section 169 of the Companies Act, 2013.
- Upon resignation or removal, the vacancy is to be filled in by the Board within a period of 3 months from the date of such resignation or removal.
- In case of any other intermittent vacancy of an Independent Director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later
- As per LODR Regulation: An Independent Director who resigns or is removed from the board of directors of the listed entity shall be replaced by a new independent director by listed entity at the earliest but not later than the immediate next meeting of the board of directors or three months from the date of such vacancy, whichever is later:
Liability Of Independent Director
An independent director shall be held liable, only in respect of such acts of omission or commission by the listed entity which had occurred with his knowledge, attributable through processes of board of directors, and with his consent or connivance or where he had not acted diligently with respect to the provisions contained in these regulations.
Duties Of An Independent Director
Director shall abide by the ‘Code for Independent Directors’ as outlined in Schedule IV to the Companies Act, 2013. The Independent Directors are also required to comply with Company’s Code for Prevention of Insider Trading, the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the relevant provision under the Companies Act, 2013. Director’s obligation to maintain confidentiality shall survive even after termination or cessation of directorship with the Company. The Independent Directors shall:
- undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company
- 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
- strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;
- participate constructively and actively in the committees of the Board in which they are chairpersons or members;
- strive to attend the general meetings of the company;
- 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
- keep themselves well informed about the company and the external environment in which it operates
- not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board
- 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;
- 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
- report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy
- act within their authority assist in protecting the legitimate interests of the company, shareholders and its employees;
- not 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.