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Independent Directors under the Companies Act, 2013
Introduction:
An “Independent Director” is a non-executive board member of a company whose role is to enhance the company's corporate credibility and uphold governance standards. They play a vital role in preventing any undue influence or dominance by a single individual or a specific interest group within the company.
The ‘Independent Director’ (ID)is defined under sub- section (6) of section 149 of the Companies Act, 2013.
(6) An independent director in relation to a company, means a director other than 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 than remuneration as such director or having transaction not exceeding ten per cent. 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 two immediately preceding financial years or during the current financial year;
(d) none of whose relatives—
(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year:
Provided that the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two per cent. 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 during the two 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 third 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 during the two 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 two per cent. 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 three financial years 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 three financial years.]
(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 may be prescribed.
The Birla Committee has proposed the below mentioned definition:
“Independent Directors’ are those Directors who, apart from no other material pecuniary relationship with the Company, its promoter, its Management or its Subsidiaries, which in the judgement of the Board may affect their independence of Judgement.”
Restriction on the Number of Directorship:
In order to discharge the oversight function effectively and ‘steering’ the company in the right direction, regulation 17 of SEBI listing obligations and disclosure requirements regulations 2015 [SEBI LODR] has stipulated that a person may serve as an ID in maximum seven (7) listed companies and any person serving as a whole time director in any listed company shall serve as an ID in maximum three 3 listed companies
Whole Time directors holding the Post of ID:
It is opined that the Whole Time Directors (WTD) should be allowed to hold the post of IDs only in group companies otherwise it may go against the very meaning of WTD
Number of IDs:
As per sub section 4 of section 149 of CA, every listed public company is mandatorily required to have at least one third of the total number of directors as IDs
Unlisted public companies must appoint at least two ids if the following criteria are met:
- The paid up share capital exceeds ₹10crore
- The turnover exceed ₹100 crore
- The aggregate of all the outstanding loans, debentures and deposits exceeds ₹50 crore
As per the regulation 17 of SEBI LODR, where the chairperson of the board of directors is a non-executive director, at least one-third of the Board of directors shall comprise of IDs and where the listed entity does not have a regular a regular non-executive chairperson, at least half of the Board of directors shall comprise of IDs. It has been provided that where the regular non-executive chairperson is a promoter of the listed entity or is related to any promoter or person occupying management positions at the level of board of Directors or at one level below the board of Directors, at least half of directors of the listed entity shall consist of IDs.
Appointment:
Clause IV (2) of the scheduled IV of the CA specifies that the appointment of the IDs shall be approved at the meeting of the shareholders. SEBI LODR prescribes that the appointment and re-appointment shall be subject to the approval of the shareholders by special resolution.
Section 150 of the CA stipulated that an ID may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as ID, maintained by anybody, institute or association as may be notified by the central government having expertise in creation and maintained of such data bank. This data should be put on their website for use by the company making the appointment of such IDs. The Indian Institute of corporate affairs at Manesar has been notified as the institution under this section.
Qualification of IDs
Clause IV (1)of the Schedule IV of the CA prescribes that while selecting IDs, the Board shall ensure that there is appropriate balance of skills, experience, and knowledge in the Board so as to enable the Board to discharge its functions and duties effectively.
Thus Rule 5 of Companies (Appointment and Qualification of Directors) (CAQDR), specifies as follows:
- An independent director shall possess appropriate skills experience, and knowledge in one or more fields of finance., law, management, sales marketing, an administrative research, corporate, governance, technical operations or other discipline related to the company’s business.
- It should be ensured that none of the relatives of an independent director, for the purpose of sub section (ii) and (iii) of clause (d) of sub section (6) of section 149:
- Is indebted to the company, its holding, subsidiary or associate company or their promotions, or directions or
- Has given a guarantee or provided any security in connections with the indebtness of any third person to the company, its holding, subsidiary or associate company or their promoters or directors of such holding company, for an amount of fifty lakhs rupees, at any time during the two immediately preceding financial years or during the current financial years.
Passing of Proficiency test
As per Rule 6 of CAQDR, every person who intend to get appointed as an Independent Director in a company shall before such appointment apply online to the institute of corporate affairs for inclusion of his name in the data bank for a period of one year or five years or for his life time, and from time to time take steps, till he continues to hold the office of an independent director in any company.
Exemption from passing the proficiency test
The following persons have been exempted from passing the proficiency test:
If he has served for a total period of not less than three years as on the date of inclusion of his name in the data Bank:
- a director or KMPs as on the date of inclusion of his name in the data bank, in one or more of the following:
- Listed public company
- Unlisted public company having a paid up capital of 10 crore or more
- Body corporate listed on any recognized stock exchange
- Body corporate incorporated outside India having a paid up capital of US$2 million or more
- Statutory corporations set up under an act of parliament
- In the pay scale of Director or equivalent or above in Ministry or department, of the central government or any state government and having experience in handling
- the matters relating to commerce, corporate affairs, finance, industry or public
- the affairs related to Government companies or statutory corporations set up under an act of Parliament or any State Act of commercial activities.
The following professional have also been exempted from the Proficiency test.
Individuals, who are or have been, for at least 10 years: -
- An advocate of a court; or
- In practice as a Chartered Accountant;
- In practice as a Cost Accountant
- In practice as a Company Secretary
Note: These professionals in employment should also be included in the exempted category
Presently the IDs are appointed for a period of five years and thereafter most of the Companies re-appoint them for a further period of 5 years by passing special resolution in the General Meeting.
IDs for one term of Five years
It is suggested that IDs should not be allowed to hold the office after completion of the first five-year period.
Removal
Sub section (1) of section 169 of the CA and SEBI LODR stipulated that a special resolution is needed for removal of ID appointed for the seconds term.
Authored by:
Neeraj Kumar Tiwari
Company Secretary & Chief Compliance Officer
References:
- Companies Act 2013
- Birla Committee report on corporate Governance
- SEBI LODR
- Chartered Secretary