Independent Director

Independent Director

Section 149(4) of Companies Act, 2013

Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

Explanation.—For the purposes of this sub-section, any fraction contained in such one-third number shall be rounded off as one.

The Companies Act,1956 does not provide us the specific definition of an Independent Director. But Independent Directors are in the limelight as per the Companies Act, 2013. The term “Independent Director” has been defined in the Act, along with several new requirements relating to new requirements relating to their appointment, duties, role, and responsibilities. The provisions relating to appointment of Independent directors are contained in Section 149 of the Companies Act, 2013 should be read along with Rule 4 and Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014

As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following classes of companies shall have at least 2 directors as independent directors.

• Public Companies with paid-up share capital of  Rs. 10 crores or more.
• Public Companies with turnover of  Rs. 100 crore or more.
• Public Companies with aggregate outstanding loans, debentures, and deposits, exceeding  Rs. 50 crore

There are two things that need to be done now for all Would Be and Existing Independent Directors of the Company. First, they have to get themselves registered online in the databank of Independent Directors that will be maintained by the Indian Institute of Corporate Affairs, Manesar (Haryana) and second, they have to clear a Common Proficiency Test as will be conducted by the Institute.

Basically, we can say that an independent director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. He/ She does not have any kind of relationship with the company that may affect the independence of his/ her judgment.

Every independent director shall, at 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 when a situation arise which effects his status of independence

The terms and conditions of appointment of independent directors shall also be posted on the company’s website.

Professional Conduct of an Independent Director

An independent director shall:

(1) uphold ethical standards of integrity and probity;

(2) act objectively and constructively while exercising his duties;

(3) exercise his responsibilities in a bona fide manner in the interest of the company;

(4) devote sufficient time and attention to his professional obligations for informed and balanced decision making; 

(5) not allow any extraneous considerations that will vitiate his exercise of objective independent judgment in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making;

(6) not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person;

(7) refrain from any action that would lead to loss of his independence;

(8) where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly; 

(9) assist the company in implementing the best corporate governance practices.

Role of an Independent Director

Independent Director 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 company.

The independent directors shall:

(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;

(2) bring an objective view in the evaluation of the performance of board and management;

(3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; 

(4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible; 

(5) safeguard the interests of all stakeholders, particularly the minority shareholders;

(6) balance the conflicting interest of the stakeholders;

(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management; 

(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest. 

Duties of an Independent Director

The independent directors shall—

(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company; 

(2) 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;

(3) strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;

(4) participate constructively and actively in the committees of the Board in which they are chairpersons or members; 

(5) strive to attend the general meetings of the company;

(6) 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;

(7) keep themselves well informed about the company and the external environment in which it operates; 

(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;

(9) 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; 

(10) 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; 

(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy; 

(12) acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees; 

(13) 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.

Separate Meetings of Independent Directors

(1) The independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management; 

(2) All the independent directors of the company shall strive to be present at such meeting;

(3) The meeting shall:  

              (a) review the performance of non-independent directors and the Board as a whole;

              (b) review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors; 

            (c) assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.
Other Provisions related to Independent Directors under Companies Act, 2013:

1. The terms and conditions of appointment of independent directors shall also be posted on the company’s website, if any.

 2. If the provisions of CSR is applicable to a company, the Companies Act, 2013 requires the CSR Committee to consist of at least three directors, including at least one independent director.

Where a company is not required to appoint an independent director, it shall have in its Corporate Social Responsibility Committee two or more directors.

3. Independent director shall be appointed for a maximum term upto 5 years. He can be appointed for less than 5 years as well, but the same shall be taken as “ one term”. The term shall not be more than 2 consecutive terms.

4. A person must be an independent director in not more than 7 listed companies at a time. (As per SEBI guideline)

5. An independent director shall not retire by rotation and shall not be included in “total number of directors’ for the purpose of computation of rotational directors.

6. A person can be appointed as an alternate director. But he must be qualified to be appointed as an independent director.

7. If the Board meeting is called at shorter notice so as to transact some urgent business, then the presence of at least 1 independent director is mandatory. In absence of any independent director, a decision shall be circulated to all the directors and later approved by at least 1 independent director.

8. Independent director’s appointment process must be independent of the company’s management. Databank may be used to appoint an independent director.

9. Every independent director shall give a declaration that he meets the criteria of independence when

•    he attends the first board meeting as a director;
•    in every financial year, at the first meeting of the board of directors
•   when a situation arises which affects his status of independence being an independent director

10. No need to give any security deposit for the candidature .

11. Not entitled to any Stock options, but can get Remuneration by way of sitting fees.

12. Vacancy created by Resignation or Removal must be filed by Board/members within 3 months from the date of resignation/removal.

13. In case the Board meets the criteria of Independent director provisions, then no need to fill the vacancy created by Resignation/Removal.

14. A small shareholder director shall be considered as an independent director, if-

• he is eligible for appointment as an independent director u/s 149 (6), 
• he gives a declaration of his independent u/s 149(7).

Compiled by :

CA IP Mukesh Mittal

B.Com., FCA

Insolvency Professional

Independent Director

Certified Concurrent Auditor

9215536951, 9813340495

ca.mukeshmittal@gmail.com

https://camukeshmittal.blogspot.com

DISCLAIMER: The Author have taken utmost care while drafting the article but it may occur that certain error creeps in. This article is for academic purpose and should not be treated as a professional advice. The readers are advised to refer the Bare Acts and Rules before making any judgment.