Independent Director

INTRODUCTION

An Independent Director is a Non-Executive Director who does not have a material or pecuniary relationship with company, except sitting fees, but is one who is enriched with appropriate balance of skill, experience, independence and knowledge of the corporate and assigned with the task to monitor and guide the Board in risk management, thereby improving corporate credibility and accountability and also play a significant role by acting as a watchdog in various committees constituted by the company to ensure good Corporate Governance and enhancing the corporate or company image in the business world.

Independent Directors are expected to play a significant role at the Board level and be the change agents of corporate governance. Conventionally, Independent Directors have played a monitoring and advisory role. This is the starting point for their effectiveness and requires basic knowledge of statutes (e.g., Corporate Laws). However, in order to be the drivers of change in corporate boards, Independent Directors require a set of distinct skills and, most important, the attitude to make independent judgments.

Let us now understand the concept of Independent Director in detail including the concept of the Independent Director Database newly introduced by the Ministry of Corporate Affairs.

LEGAL BACKGROUND

Definition

Section 2(47) of the Companies Act, 2013 defines “Independent Director” as “an independent director referred to in sub-section (6) of section 149”.

Section 149 (6) of the Act deals with “Independent Director” which means a person:

1. who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
2. who is or was not a promoter of the company, or its holding, subsidiary or associate company;
3. who is not related to promoters or directors of the company or any of its associate companies;
4. who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten percent of his total income or such amount as may be prescribed with any of the above persons/companies during the current or two immediately preceding financial years;
5. None of his relatives

• 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;

• 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;
• 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
• 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);
  1. who, neither by himself or his relatives –
     1. holds or has held the position of key managerial personnel or as employee of the company or any of its associate companies in any of the 3 financial years immediately preceding the year of his
     2. is or has been an employee, proprietor or partner of the following during any of the 3 preceding financial
        • A firm of Auditors, Company Secretaries or Cost Auditors of the company or any of its associate
        • Any legal or consulting firm which has or had transaction with the company in or any of its associate companies amounting to 10% or more of the gross turnover of the firm.
     3. Holds, together with his relatives, 2% or more of the Voting power of the
     4. Is a Chief Executive or director of any non-profit organization that receives 25% or more of its receipts from the company, any of its promoters, directors or its associate companies or that hold 2% or more of the total voting power of the
  2. who is not a Managing/Whole Time/Nominee
  3. He 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

As per Reg 16(1)(b)(ii) of Securities Exchange Board of India (SEBI) Listing Obligations and Disclosure Regulations (LODR) A non – executive director who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity.

Appointment of Independent Director

• Applicability: Listed Public Company

Every listed public company shall 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

Unlisted Public Company

The Central Government may prescribe the minimum number of independent directors in case of any class(es) of public companies.

As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following classes of companies shall have at least 2 directors as independent directors.

• Public Companies with paid-up share capital of Rs. 10 crores or more;
• Public Companies with turnover of Rs. 100 crore or more; or
• Public Companies with aggregate outstanding loans, debentures, and deposits, exceeding Rs.50

 

• Terms and Condition of Appointment:

Schedule IV to the Companies Act, 2013 provides for the ‘Code for Independent Directors’. The appointment process of Independent Directors is independent of the company management. During the selection process, the Board ensures 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 Independent Director(s) of the Company is approved at the meeting of the shareholders. The Board always ensures that the Independent Director proposed to be appointed fulfils the conditions specified in the Act and the Rules made thereunder and that the proposed director is independent of the management and a statement to that effect is included in the explanatory statement attached to the notice of the meeting.

Independent Director Database

The Ministry of Corporate Affairs has issued the Companies (Creation and Maintenance of data bank of Independent Directors) Rules, 2019 on October 22, 2019 effective from December 01, 2019.

Under the Independent Directors Rules, any person who is willing to be appointed (or is already an) Independent Director, must apply online to the IICA for inclusion of his/her name in the data bank of independent directors, ensure compliances as required and most importantly pass an online proficiency self-assessment test to be conducted by ICAI with at least sixty percent (60 percent) marks in such test.

It is essential to note that any person who wishes to be appointed as an Independent Director (i.e. who is not already an Independent Director) is required to make such online application before his appointment as an Independent Director. Such inclusion of name in the data bank can be done for a period of one year or five years or for lifetime by payment of prescribed fees. The Independent Directors Rules also provides for renewal of such name inclusion in the data base, unless the individual has paid life-time fees for inclusion of his name in the data bank.

The online proficiency self-assessment test is required to be cleared by the individual, conducted by the IICA, 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 data bank of the IICA.

However, the MCA has granted exemption from the requirement of clearing the said online proficiency self-assessment test in case of individuals who has served for a period of not less than ten years, as on the date of inclusion of his name in the data bank, as a Director or Key Managerial Personnel (“KMP”) in a listed company or in an unlisted public company having paid-up share capital of Rupees ten crores or more. It is clarified that for the purpose of calculation of the period of ten years, any period during which an individual was acting as Director or as KMP in two or more companies at the same time shall be counted only once.

The Rules provides that every individual,

• who has been appointed as an Independent Director in a Company shall within a period of 3 (three) months which later got amended to 5 (five) months from the commencement of the said Rules, or
• an individual who intends to get appointed as an Independent Director in a company after 01/12/2019 shall before such appointment,

apply with such fees, as shall be prescribed, to the ‘Indian Institute of Corporate Affairs at Manesar’ (“the Institute”) for inclusion of his name in the data bank for a period of 1 (one) year or 5 (five) years or for his lifetime.

Conclusion

Ministry of Corporate Affairs has realised the importance of strengthening the Institution of Independent Directors and enhancing its effectiveness by way of creating a pool of skilled professionals to act as Agents of Change. MCA along with Indian Institute of Corporate Affairs (IICA) has developed a databank of Independent Directors in accordance with the provisions of Section 150 of the Companies Act, 2013.

Simultaneously, acting as a facilitator and educator, the Ministry has provisioned for the capacity building of Independent Directors through an integrated Learning Management System (LMS) to deliver interactive and engaging library of eLearning courses.