Independent directors as the
name suggests are directors on Board of a company who are independent
individuals, not having any other relationship or transaction with the company.
The concept of Independent directors gained momentum in the late 1980s and
early 1990s due to the uncovering of various corporate frauds and misfeasance.
In India, Clause 49 of the listing agreement mandates appointment of
independent directors on Board of a listed company. With the passage of the new
Companies Act of 2013, the concept of independent directors has found place in
the Companies Act itself. The requirements prescribed under the Companies Act
2013 seem to be much more stringent than that of the listing agreement.
Meaning/Definition
of Independent Director
As per Section 2(47), “independent director” means an independent
director referred to in sub-section (5) of section 149;
Section 149 (6) contains
that –
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 per cent. 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 per cent. or more of the total voting power of the company; or
(f) who possesses such other
qualifications as prescribed below:
An independent director 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 or other disciplines related to the
company’s business.
Applicability
to Companies
Following class of companies
are required to appoint directors on their Board of Directors as independent
directors:
·
Listed Companies – Atleast
1/3 of Board
·
Other public companies as
listed below – Atleast 2 independent Directors
-
Public Companies having paid
up share capital of Rs. 100 Crores or more; or
-
Public Companies having
turnover of Rs. 300 Crores or more;
-
Public Companies which have,
in aggregate, outstanding loans or borrowings or debentures or deposits,
exceeding Rs. 200 Crores.
Explanation:
·
Any fraction contained in
the 1/3rd number shall be rounded off as one.
·
The criteria specified for
unlisted public companies shall be applicable for the first year and shall
continue to apply to that company in subsequent years during the tenure of the
Independent Director even if the paid up share capital or turnover, or
borrowings/deposits, as the case may be, fall below the limits specified
therein.
·
A company belonging to any
class of companies for which a higher number of independent directors have been
prescribed in or under the law/regulations governing such class of companies
shall comply with the requirements specified in such law/regulation.
·
Every company existing on or
before the date of commencement of this Act shall, within one year from such
commencement or from the date of notification of the rules in this regard as
may be applicable, comply with these requirements.
Term of
Office of Independent Director
·
An independent director
shall hold office for a term up to 5 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.
·
No independent director
shall hold office for more than 2 consecutive terms, 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, during
the said period of 3 years, be appointed in or be associated with the company
in any other capacity, either directly or indirectly.
·
Any tenure of an independent
director on the date of commencement of this Act shall not be counted as a term
under the above provisions.
Other
Provisions relating to Independent 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 shall indicate the justification for choosing
the appointee for appointment as independent director.
·
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.
·
The company and independent
directors are required to abide by the provisions specified in Schedule IV of
the Act.
·
An independent director
shall not be entitled to any stock option and may receive remuneration by way
of fee, reimbursement of expenses for participation in the Board and other
meetings and profit related commission as may be approved by the members.
·
An independent director
shall be held liable, only in respect of such acts of omission or commission by
a company which had occurred with his knowledge, attributable through Board
processes, and with his consent or connivance or where he had not acted
diligently.
·
The provisions relating to
retirement of directors by rotation shall not be applicable to appointment of
independent directors.
Manner of selection of independent directors and
maintenance of databank of independent directors
To ease the process of
selection of independent directors, the Act provides that the Central
Government shall create and maintain a data bank of persons willing and
eligible to be appointed as independent director and such data bank shall be
placed on the website of the Ministry of Corporate Affairs or on any other
website as may be approved or notified by the Central Government. The Central Government will authorise
anybody, institute or association for this purpose having expertise in creation
and maintenance of such data bank. The data bank will contain all the basic
details about the proposed appointee. However, responsibility of exercising due
diligence before selecting a person from the data bank referred to above, as an
independent director shall lie with the company making such appointment. The
Central Government or such body, institute or association shall neither be
responsible for any contravention of any law committed by any company or its
directors by the reason of the fact that the person appointed by the company as
an independent director was selected from the databank nor it will be a defense
in any court of law.
