An Independent Director (also sometimes known as outside Director) is a Director (member) of a Board of Director who does not have material or pecuniary relationship with company or related persons, except sitting fees.
Companies Act 2013 mandates the appointment of independent directors by listed companies and other class of companies it also prescribes other aspects such as maximum tenure of independent directors, separate meeting of independent directors, tenure, their qualifications, liability, appointment, remuneration and other aspects.
Definition/Meaning of Independent Director
Section 149(6) gives the definition of Independent Director, in relation to a company, means a director other than a managing director or a whole time director or a nominee director:
- Who is in opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
♦who is or was not promoter of the company or its holding, subsidiary or associate company;
♦who is not related to promoters or directors in the company, its holding,subsidiary or associate company;
2. 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.
3. 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 percent or more of its gross turnover or total income or fifty lakhs or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
4. Who neither himself nor any of his relatives
♦ 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
♦ 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 firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
→ any legal or the 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;
5. Holds together with his relatives two per cent or more of the total voting power of the company;
6.Is a Chief Executive or director, by whatever name called of any nonprofit organization that receives twenty-five percent 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.
- NUMBER OF INDEPENDENT DIRECTORS
Sub-Section 4 of section 4 provides that every listed public company shall have at least one-third of the total number of directors.
The Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.
According to the Rule 4 of Companies (Appointment and Qualification of Directors) rules 2014, provides that the following class or classes of companies shall have at least two directors as independent directors –
◊the public companies having paid up shares capital of ten crore rupees or more;
◊the public companies having turnover of one hundred crore rupees or more;
◊the public companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees.
- MANNER OF SELECTION OF AN INDEPDENT DIRECTOR
According to section 150(1) of the Act, independent directors may be selected from a data bank of eligible and willing persons maintained by the agency (ANY BODY, INSTITUTE OR ASSOCIATION AS MAY BE AUTHORISED BY CENTRAL GOVERNMENT). Such agency shall put data bank of independent directors on the website of Ministry of Corporate Affairs or any other notified website.
Any person who desires to get his name included in the data bank of independent directors shall make an application to the agency in Form DIR -1 According to Rule 6(4).
Agency may charge a reasonable fee from the applicant for inclusion of his name in the data bank independent directors according to Rule 6(5).
Any person who has applied for inclusion of his name in the data bank of independent directors or any person whose name appears in the data bank, shall intimate to the agency about any changes in his particulars within fifteen days of such change according to Rule 6(6).
Rule 6(7) prescribed that the data posted on website shall:
♠ be accessible at the website;
♠ be substantially identical to the physical version of the data bank;
♠ be searchable on the parameters specified in rule 6(2);
♠ be presented in a format or formats convenient for both printing and viewing online; and
♠ contain a link to obtain the software required to view the particulars of free of charge.
- MANNER OF APPOINTMENT
- Appointment process of independent directors shall be independent of the company management; while selecting board of directors 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.
- The appointment of Board of directors(s) of the company shall be approved at the meeting of the shareholders.
- The explanatory statement attached to the notice of the meeting for approving the appointment of independent director shall include a statement that in opinion of the Board, the independent director proposed to be appointed fulfills the specified Act and the rules made there under.
- Lastly, the appointment of independent director shall be formalized through a letter of appointment, which shall set out:
♦the term of appointment
♦the list of actions that a director should not do while functioning as such in the company;
♦the code of business Ethics that the company expects its directors and employees to follow;
♦the fiduciary duties that come with such an appointment with such an appointment along with accompanying liabilities;
♦the remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any.
- TENURE OF INDEPENDENT DIRECTOR
→ An Independent Director shall hold office for a term office for a term up to five consecutive years in the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and the disclosure of such appointment in the Board’s report.
→ No Independent Director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director.
→ An Independent Director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.
- LIABILITY OF INDEPENDENT DIRECTOR
section 149(2) provides that, notwithstanding anything contained in this Act –
→ an independent director;
→ a non-executive director not being promoter or key managerial personnel, 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.
- SEPARATE MEETING
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;
The meeting shall:
→ review the performance of non-independent directors and the Board as a whole;
→ review the performance of the Chairperson of the company, taking into account the views of executive directors and non- executive directors.
→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.