INDEPENDENT DIRECTOR

INDEPENDENT DIRECTOR

The Satyam scandal and other corporate scams exposed the growing need for introducing the concept of Independent Directors in Corporate Governance. Revised Corporate Governance structure gave rise to reconstitution of board so as to include high-calibre Non-Executive Independent Directors and prevention of the concentration of power in one individual or a special influence. The presence of independent representatives on the board who are capable of opposing the decisions of the management plays a significant role in protecting the interests of shareholders as well as other stakeholders.

The concept of “Independent Directors” is new to India; it was first brought to India by the 1999 Kumar Mangalam Birla Committee on corporate governance. Three years later the Naresh Chandra Committee gave governance more thought. Finally, in 2004, the Narayan Murthy Committee affected changes to clause 49 of the listing agreement to adopt Corporate Governance structure. The Companies Act, 2013 was introduced with the objective of improving the standards of Corporate Governance and ensuring transparency to the minority shareholders. The provisions relating to Independent directors have been included in the 2013 Act.

COMPANIES REQUIRED TO APPOINT INDEPENDENT DIRECTOR

APPOINTMENT OF INDEPENDENT DIRECTOR

Section 149(4) of Companies Act

Every listed public company shall have at least one-third of the total number of directors as independent directors,

AND

Rule 4 of Companies (Appointment and Qualification of Directors) rules, 2014

The following class or classes of companies shall have at least two directors as independent directors –

(i) the Public Companies having paid up share capital of ten crore rupees or more; or

(ii) the Public Companies having turnover of one hundred crore rupees or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees

PROVISIONS UNDER COMPANIES ACT, 2013

S. NO.SECTIONPROVISIONS
1.Section 149(6)

 

Definition of Independent Director

An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,

Ø  (a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

Ø  (b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

Ø  (ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

Ø  (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;

Ø  (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);

Ø  (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

Ø  (f) Who possesses such other qualifications as may be prescribed.

2.Section 149(7)

 

Declaration by Independent Director

 Every independent director shall 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 whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence.
3.Section 149(8)

 

Code for Independent Director

The company and independent directors shall abide by the provisions specified in Schedule IV regarding code for Independent Director. The Code is a guide to professional conduct for independent directors. Adherence to these standards by independent directors and fulfilment of their responsibilities in a professional and faithful manner will promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors.

 

Code of Conduct Includes

Ø  Guidelines of professional conduct

Ø  Role and functions

Ø  Duties

Ø  Manner of appointment

Ø  Re-appointment

Ø  Resignation or removal

Ø  Separate meetings

Ø  Evaluation mechanism

4.Section 149(9)

 

Remuneration of Independent Director

Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of sections 197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.
5.Section 149(10)/(11)

 

Tenure of Independent Director

Section 149(10) provides that Subject to the provisions of section 152, an independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.

 

Section 149(11) provides that Notwithstanding anything contained in sub-section (10), 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:

 

Provided that 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.

 

6.Section 149(12)

 

Liability of Independent Director

Section 149(12) provides that  Notwithstanding anything contained in this Act,—

Ø  (i) an independent director; &

Ø  (ii) 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.

7.Section 149(13)

 

Retirement by Rotation

The provisions of sub-sections (6) and (7) of Section 152 in respect of retirement of directors by rotation shall not be applicable to appointment of independent directors

 

QUALIFIACTION OF INDEPENDENT DIRECTOR

Rule 5 of Companies (Appointment and Qualification of Directors) rules, 2014 provides that An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.

MANNER OF SELECTION OF INDEPENDENT DIRECTOR

  • Every individual –
  • who has been appointed as an independent director in a company, on the date of commencement of the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019, shall within a period of five months from such commencement; or
  • who intends to get appointed as an independent director in a company after such commencement, shall before such appointment,

Apply online to the Indian 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 shall file an application for renewal for a further period of one year or five years or for his life-time, within a period of thirty days from the date of expiry of the period upto which the name of the individual was applied for inclusion in the data bank, failing which, the name of such individual shall stand removed from the data bank of the institute.

Provided that any individual, including an individual not having DIN, may voluntarily apply to the institute for inclusion of his name in the data bank

Provided also that no application for renewal shall be filed by an individual who has paid life-time fees for inclusion of his name in the data bank.

  • The responsibility of exercising due diligence before selecting a person from the data bank, as an independent director shall lie with the company making such appointment.
  • The appointment of independent director shall be approved by the company in general meeting and the explanatory statement annexed to the notice of the general meeting called to consider the said appointment shall indicate the justification for choosing the appointee for appointment as independent director.
  • Every individual whose name is so included in the data bank shall pass an online proficiency self-assessment test conducted by the Indian Institute of Corporate Affairs within a period of one year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the databank of the institute:

 

Provided that an individual shall not be required to pass the online proficiency self-assessment test, when he has served as a director or key managerial personnel, for a total period of not less than ten years, as on the date of inclusion of his name in the databank, in one or more of the following, namely:-

(a) Listed public company; or

(b) Unlisted public company having a paid-up share capital of rupees ten crore or more; or

(c) Body corporate listed on a recognized stock exchange

COMPANIES (CREATION AND MAINTENANCE OF DATABANK OF INDEPENDENT DIRECTORS) RULES, 2019

The Central Government hereby makes the Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019 which shall come into force with effect from the 1st day of December, 2019. These Rules covers the following:

  • Limited access to databank

The information available in the data bank shall be provided only to companies required to appoint independent director after paying a reasonable fees to the institute.

  • Restricted disclosure of personal information

A person, whose name is included in the data bank, may restrict his personal information to the institute, to be disclosed in the data bank.

  • Reasonable fees for companies using the databank
  • Online Proficiency test
  • List to be shared with Central Government

 

 

REQUIREMENTS FOR THE APPOINTMENT OF DIRECTOR

 

  • DSC
  • Photograph of Applicant
  • Self-Attested Copy of PAN Card
  • Self-Attested Copy of Aadhar Card
  • Active E-Mail I’d and Phone Number

(OTPs will be sent on E-mail I’d and Phone Number)

  • DIN Application – Form DIR-3 ( If not Having DIN)
  • Photograph of Applicant
  • Self-Attested Copy of PAN Card
  • Self-Attested Copy of Aadhar Card
  • Active E-Mail I’d and Phone Number
  • Qualification and Occupation Details
  • DSC of the Applicant and Director of the Company
  • Board Resolution for the Application of DIN of a person who is proposed to be appointed in the Company
  • Intimation to ROC – Form DIR-12
  • Board Resolution for the Appointment of Independent Director
  • DIR-2 Consent to act as Director
  • DIR-8 Declaration by Director
  • Notice of General Meeting and the explanatory statement annexed to the notice
  • Resolution Passed in General Meeting
  • Appointment Letter
  • DSC of the Applicant and Director of the Company

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