Independent directors under companies act, 2013 and rules made there under
December, 02nd 2014
Chapter XI of the Companies Act, 2013 (‘Act’ for short) deals with the appointment and qualification of Directors. Section 149(4) provides that every listed public company shall have at least one third of the total number of directors as independent directors. The Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies. Any fraction contained in such one third number shall be rounded off as one. Vide Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 (‘Rules for short) provides that the following class or classes of companies shall have two directors as independent directors-
The public companies having a paid up share capital of ₹ 10 crores or more; or
The public companies having a total turnover of ₹ 100 crores or more; or
The public companies which have, in aggregate, outstanding loans, debentures and deposits exceeding ₹ 50 crores
For this purpose the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of last audited financial statements shall be taken into account.
If a company is required to appoint a higher number of independent directors due to composition of audit committee, such higher number of independent directors shall be applicable to it. A company belonging to any class of companies for which a higher number of independent directors has been specified in the law for the time being in force shall comply with the requirements specified in such law.
Qualification of independent director
Section 149(6) provides that 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-
who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
who is or was not a promoter of the company or its holding subsidiary or associate company and who is not related to promoters or directors in the company, its holding subsidiary or associate company;
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;
name 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 2% or more of its gross turnover or total income of ₹ 50 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;
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 a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;
holds together with his relatives 2% or more of the total voting power of the company; or
is a Chief Executive or director, by whatever name called, of any non profit organization that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company; or
who possesses such other qualification as may be prescribed.
Rule 5 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 company’s business.
Procedure for appointment of Independent Director
The appointment process of independent directors shall be independent of the company management. The Board shall ensure that there is appropriate balance of skills, experience and knowledge in the Board so as to enable to Board to discharge its functions and duties effectively.
The shareholders have to approve the appointment of independent directors in the general meeting. For this purpose while sending notice of the general meeting for the approval of independent director, the explanatory statement shall include a statement that in the operation of the Board, the independent director proposed to be appointed fulfils the conditions specified in the Act and the rules made there under and that the proposed director is independent of the management.
The appointment of independent directors shall be formalized through a letter of appointment. Such letter shall set out the following:
The term of appointment;
The expectation of the Board from the appointed director, Board level committee(s) in which the director is expected to serve and its tasks;
The fiduciary duties that come with such an appointment along with accompanying liabilities;
Provision for Directors and Officers insurance, if any;
The Code of Business Ethics of the company expects its directors and employees to follow;
The list of actions that a direct should not do while functioning as such in the company; and
The remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Board’s and other meetings and profit related commission, if any.
Any member may cause the inspection of the terms and conditions of the appointment of independent directors which shall be open at the registered office of the company during normal business hours. The company should also post the terms and conditions of appointment of independent directors in its web site.
Section 150 of the Act provides that an independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as an independent directors, maintained by any body, institute or association as may be notified by the Central Government having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors.
The responsibility of exercising due diligence before selecting a person from the data bank as an independent director shall be with the company making such appointment.
Any intermittent vacancy of independent director shall be filled up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.
The Schedule IV prescribes the guidelines of professional conduct to be followed by an independent director, which are as follows:
to uphold ethical standards of integrity and probity;
to act objectively and constructively while exercising his duties;
to exercise his responsibilities in a bona fide manner in the interest of the company;
to devote sufficient time and attention to his professional obligations for informed and balanced decision making;
not to allow any extraneous considerations that will vitiate the 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;
not to 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;
to refrain from any action that would lead to loss of his independence;
to inform the Board the circumstances which make an independent director losing his independence;
to assist the company in implementing the best corporate governance practices.
Role and functions of independent director
Schedule IV prescribes the role and duties of independent directors which are as follows:
to 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;
to bring an objective view in the evaluation of the performance of board and management;
to scrutinize the performance of management in meeting agreed goals and objective and monitor the reporting of performance;
to satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
to safeguard the interests of all stakeholders, particularly the minority shareholders;
to balance the conflicting interest of the stakeholders;
to 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;
to moderate and arbitrate in the interest of the company as a whole in situations of conflict between the management and shareholder’s interest.
Duties of independent director
Schedule IV prescribes the duties to be performed by the independent director which are as follows:
to undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
to 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;
to strive to attend all meetings of the Board of Directors and of the Board Committees of which he is a member;
to participate constructively and actively in the committees of the Board in which they are chairpersons or members;
to strive to attend the general meetings of the company;
where they have concerns about the running of the company or a proposed action, to 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;
to keep themselves sell informed about the company and the external environment in which it operates;
not to unfairly obstruct the functioning of an otherwise proper Board or Committee of the Board;
to 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;
to 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;
to report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
to act within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
not to disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensible information, unless such disclosures is expressly approved by the Board or required by law.
Obligation of 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.
Meetings of Independent Directors
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.
Entitlement to independent director
The independent director shall not be entitled to any stock option. He may receive remuneration by way of fee, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.
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 re-appointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report. No independent director shall hold office for more than 2 consecutive terms, but shall be eligible for appointment after the expiry of the three years of ceasing to become an independent director. The said director shall not, during the said period of 3 years, be appointed in or be associated with the company in any other capacity either directly or indirectly. The retirement of directors by rotation shall not be applicable to appointment of independent directors.
Section 149(12) provides that an independent director 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 process and with his consent or connivance or where he had not act diligently.
Evaluation of performance of independent directors
The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated. On the basis of the report of the performance evaluation, it shall be determined as to whether to extend or continue the term of appointment of the independent director.
Resignation of independent director
The independent director may resign in accordance with the provisions of Section 168 of theAct. An independent director may resign his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same. The company shall intimate the same to the Registrar and place the fact of such resignation in the report of directors laid in the immediately following general meeting of the company.
The independent director shall also forward a copy of his resignation letter along with detailed reasons for the resignation to the Registrar within 30 days of resignation.
The resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later. The independent director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure.
Removal of independent director
A company, according to Sec. 169 may remove the independent director before the expiry of the period of his office after giving a reasonable opportunity of being heard. A special notice shall be required of any resolution to remove a director or to appoint somebody in his place of a director so removed at the meeting at which he is removed. On receipt of notice of a resolution to remove a director the company shall forthwith send a copy thereof to the director and the director shall be entitled to be heard on the resolution at the meeting. The said director may makes his representation in writing to the company and requests notification to members of the company, the company shall, if the time permits it to do so-
in any notice of the resolution given to members of the company, state the fact of the representation having been made; and
send a copy of the representation to every member of the company to whom notice of the meeting is sent
and if a copy of the representation is not sent due to insufficient time or for the company’s default, the director may without prejudice to his right to be heard orally require the representation shall be read out at the meeting.
The copy of the representation need not be sent out and the representation need not read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the Tribunal is satisfied that the rights conferred are being abused to secure needless publicity for defamatory matter and the Tribunal may order the company’s costs on the application to be paid in whole or in part by the director notwithstanding that he is not a party to it.