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.An Independent Director is a non-executive director who is not affiliated with the company in any other manner than serving on its board. It helps the company in developing its governance standards and corporate credibility. The Independent Director is expected to provide an independent and objective perspective on the board’s decision-making process. They are responsible for monitoring the performance of the company, providing guidance to the management team, identifying and mitigating risks, ensuring compliance with legal and regulatory requirements, and safeguarding the interests of all stakeholders. This article will discuss about the Independent Director, its appointment criteria, process, roles and duties.
Who is Independent Director?
An Independent Director is a member of the board of directors of a company who does not have any personal or financial interest in the organization, apart from their remuneration as directors. Independent Directors are appointed to bring an unbiased perspective to the board’s decision-making process, and they are expected to act in the best interest of the company and its stakeholders.
They are not affiliated with the company’s management or the owners of the company. The Independent Director is expected to provide an objective and impartial perspective on the board’s decision-making process and act as a safeguard against conflicts of interest.
Eligibility Criteria for Appointment of Independent Director
- Independence: The Independent Director should not have any material pecuniary relationships with the company, its promoters, or its management team. They should not be a substantial shareholder or a relative of any of the company’s directors or employees.
- Expertise and experience: The Independent Director should have relevant expertise, experience, and skills in the areas of business, finance, management, law, or other relevant fields. They should have a good understanding of the company’s business and industry.
- Age: The Independent Director should not be more than 75 years of age. However, this criterion can be relaxed with the approval of the shareholders.
- Qualifications: The Independent Director should have a minimum qualification of a graduate degree from a recognized university. They should have a good track record and reputation.
- No other disqualifications: The Independent Director should not have been convicted of any offense involving moral turpitude or economic offenses. They should not have been declared bankrupt or been involved in any other disqualifying event.
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 the company. The independent directors are required because they perform the following important roles:
- Facilitate withstanding and countering pressures from owners.
- Fulfil a useful role in succession planning.
- On issues such as strategy, performance, risk management, resources, key appointments and standards of conduct he or she must support in gaining independent judgment to bear the board’s deliberations.
- While evaluating the performance of the board and management of the company, he or she needs to bring an objective view.
- Scrutinising, monitoring and reporting management’s performance regarding goals and objectives agreed in the board meetings.
- Safeguard the interests of all stakeholders, particularly the minority shareholders.
- Balance the conflicting interest of the stakeholders.
- Check on the integrity of financial information and ensure financial controls and systems of risk management are in operation.
- In situations of conflict between management and shareholder’s interest, aim towards the solutions which are in the best interest of the company.
- Establishing suitable levels of remuneration of executive directors, key managerial personnel, and senior management.
Process of Appointment of Independent Director
- Identification: The board of directors identifies potential candidates for the role of Independent Director. The identification of candidates can be done by the Nomination and Remuneration Committee (NRC) or the board of directors.
- Nomination: Once the potential candidates have been identified, the NRC or the board of directors nominates the candidate to the shareholders for approval.
- Shareholder approval: The shareholders approve the appointment of the Independent Director by passing a resolution at a general meeting. The company will send a notice of the general meeting to all shareholders along with relevant documents such as the notice of appointment of the Independent Director, details of the candidate’s qualifications, experience, and other relevant information.
- Intimation to Registrar of Companies (ROC): After the appointment of the Independent Director, the company is required to intimate the ROC within 30 days of such appointment in the prescribed form.
Duties of Independent Directors
- Duty of care: Independent Directors have a duty to act with care, skill, and diligence while performing their duties. They need to exercise the same level of care and diligence as they would while performing their duties for any other organization.
- Duty of loyalty: Independent Directors have a duty to act in the best interests of the company and its stakeholders. They need to avoid any conflicts of interest and disclose any potential conflicts of interest that may arise.
- Independence: Independent Directors have a duty to act independently and objectively while performing their duties. They should not be influenced by the management or the owners of the company.
- Monitor and supervise: Independent Directors have a duty to monitor and supervise the activities of the management team. They need to ensure that the management team is acting in the best interests of the company and its stakeholders.
- To oversee financial reporting: Independent Directors have a duty to oversee the financial reporting process of the company. They need to ensure that the financial statements are prepared in accordance with applicable accounting standards and that they provide a true and fair view of the company’s financial position.
- To ensure compliance: Independent Directors have a duty to ensure that the company complies with all legal and regulatory requirements. They need to ensure that the company is adhering to applicable laws, regulations, and best practices.
FAQs
Q: Can a company secretary working in a company get appointed as an independent director in the same company?
No. A company secretary is a whole-time employee of the company. However, an independent director cannot be a whole-time employee of a company. Thus, a company secretary of a company cannot be appointed as an independent director of the same company.
Q: Whether an independent director is liable for non-compliance with any provision under the Companies Act, 2013?
An independent director will be held liable only in respect of such acts of commission or omission of a company that has occurred with his/her knowledge, consent, connivance or where he/she had not acted diligently.
Q: What is the minimum age to get appointed as an independent director?
As per company law, the minimum age to get appointed as an independent director is 18 years. There is no maximum age to get appointed as an independent director. As per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for the listed companies the minimum age to get appointed as an independent director is 21 years and the maximum age is 70.
Q: What is the tenure of appointment of independent directors?
An independent director can be appointed for a term of up to five consecutive years. An independent director can also be re-appointed for another term of five consecutive years after passing a special resolution in the general meeting. However, an independent director cannot hold office for more than two consecutive terms.
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