An independent director is a non-executive director who does not have any kind of relationship with the company that may affect the independence of his/her judgment. An independent director should not have been a partner or executive director of the auditors/lawyers/consultants of the company in preceding three years or should not hold 2% or more of shares of the company. In this article, we look at the process for appointment of an independent director in a company. The Board of Directors manage the operations of a company. The Board of Directors consists of individual directors of a company. As per the Companies Act, 2013 (‘Act’), certain companies must have independent directors on their Board of Directors. The Companies Act, 1956 did not provide a 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 their appointment, duties, role, and responsibilities. Independent Director An independent director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. The independent director should not be a managing director, a whole-time director or a nominee director. He or she does not have any kind of relationship with the company that may affect the independence of his/her judgment. The provisions relating to the 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 Requirement for Independent Director As per the Companies Act 2013, all listed public limited companies are mandatorily required to have at least one-third of the total number of directors as an independent directors. Unlisted public companies should appoint at least two independent directors in the following situations: If the paid up share capital is in excess of Rs.10 crores; If the turnover is in excess of Rs.100 crores; If the total of all the outstanding loans, debentures and deposits is in excess of Rs.50 crores. Applicability On Appointing An Independent Director Listed Public Company Every listed public company must have at least one-third of a total number of directors as independent directors. Any fraction contained in that one-third shall be rounded off as one. Unlisted Public Company As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following classes of companies must have at least 2 directors as independent directors: Public companies with paid-up share capital of Rs.10 crore or more. Public companies with a turnover of Rs.100 crore or more. Public companies with aggregate outstanding loans, debentures, and deposits, exceeding Rs.50 crore. Points to remember : 1. The amount existing on the last date of latest audited financial statements shall be taken into account for calculating the paid-up share capital or turnover or outstanding loans, debentures and deposits. 2. The company must appoint a higher number of directors if a higher number of independent directors ir required to compose audit committee. 3. These unlisted public companies – joint venture, wholly owned subsidiary and dormat company are not required to appoint an independent director even if they meet the criteria. Every independent director should give a declaration that he/she meets the criteria of independence 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 when a situation arises which affects his status of independence. The terms and conditions of appointment of independent directors should also be posted on the company’s website. Qualifications of an Independent Director The person should possess appropriate experience, skills and knowledge in one or more fields of law, finance, management, marketing, sales, research, administration, technical operations, corporate governance, or other disciplines related to the company’s business. The relatives of an independent director should not – be indebted to the company, its subsidiary, holding or associate company or their director or promoters. have given a guarantee or security in connection with the indebtedness of a third person to the company, its subsidiary, holding or associate company or their directors or promoters of such holding company, for an amount of Rs.50 lakhs, at any time during the two immediately preceding financial years or during the current financial year. The person is not: A promoter of the company or its subsidiary, holding or associate companies. Related to the directors or promoters in the company, or any of its subsidiary, holding or associate companies. The person should not have any financial relationship (other than remuneration as a director or havingtransaction not exceeding 10% of the total income) with company or any of its subsidiary, holding or associate companies or their directors or promoters, during the current financial year or the last two immediately preceding financial years. The person or his/her relatives should not: Held or holds the position of Key Managerial Personnel (KMP) or has been the employee of the company or any of its subsidiary, holding or associate companies in any of three financial years immediately preceding the financial year in which such person is proposed to be appointed. Be or has been and employee, proprietor or a partner in any three financial years immediately preceding the financial year in which such person is proposed to be appointed – as an auditor firm, cost auditor, legal consultant or company secretary of the company or any of its subsidiary, holding or associate companies. Holds together with relatives a total voting power exceeding 2% in the company. Be a Chief Executive or director of any non-profit organisation that receives 25% or more of its receipts from the company, any of its promoters or directors or its subsidiary, holding or associate companies or that holds 2% or more of the total voting power of the company. Duties of an Independent Directors The guidelines, role, functions and duties of an Independent Director is defined in the Code of conduct under Schedule IV related to the Companies Act, 2013. The key role and functions of an Independent Director
