Independent Director: Applicability, Roles, And Responsibilities
A company's activities are overseen by the Board of Directors. A company's individual directors make up the Board of Directors. Certain corporations are required to have independent directors on their board of directors in accordance with the Companies Act, 2013 (the "Act"). There was no precise definition of an independent director in the Companies Act of 1956. But according to the Companies Act of 2013, independent directors are in the spotlight. The Act defines the term "Independent Director" and adds a number of additional regulations for their appointment, position, responsibilities, and duties.
Table of content
Who is an Independent Director?
A non-executive director who assists a corporation in raising governance standards and corporate credibility is known as an independent director. A managing director, a full-time director, or a nominee director should not be the independent director. He or she has no connection to the business that could compromise the objectivity of their judgement. Rule 4 and Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014 should be read in conjunction with the rules pertaining to the appointment of independent directors found in Section 149 of the Companies Act, 2013.
Number of Independent Directors
In accordance with the 2013 Companies Act, the following businesses must select independent directors with the following makeup:
Type of Company | Number of Independent Directors to be Appointed |
Listed Public Companies | At least one-third of the total number of directors |
Unlisted Public Companies with
| At least 2 directors |
The paid-up share capital, turnover, or outstanding loans, debentures, and deposits will be calculated using the amount that existed on the last date of the most recent audited financial statements. If a larger number of independent directors is needed to form the audit committee, the firm must designate more directors. Even if they fit the requirements, these unlisted public companies—joint ventures, totally owned subsidiaries, and dormant companies—are exempt from the requirement to designate an independent director.
At the first board meeting in which he serves as a director and then at the first board meeting in each fiscal year, or whenever a circumstance occurs that impacts his independence, each independent director should declare that he or she satisfies the requirements for independence. The company's website should also list the terms and conditions of independent director appointments.
Applicability of Independent Directors under the Companies Act
Some important things to keep in mind about independent directors under the Companies Act of 2013 are as follows:
The appointment procedure for the independent director must be separate from the management of the business. An institute, body, or association that has been notified by the central government may maintain a data bank with the names, credentials, and addresses of individuals who are qualified and willing to serve as independent directors. From this database, an independent director may be chosen.
The company must ratify the independent director's appointment in a general meeting, and the rationale behind selecting the candidate for the position should be explained in the explanatory statement attached to the notice of the general meeting.
When an independent director attends their first board meeting in their capacity as such, they must declare their independence.
As the independent director, he or she attends the first board meeting.
At each fiscal year's first board meeting
Every time an event occurs that compromises his or her level of independence
The appointment of the independent director may last no more than five years. Only by passing a specific resolution at the company's general meeting can they be reappointed. Additionally, he or she is not eligible to serve more than two terms in a row.
A person may serve as an independent director of up to seven publicly traded businesses concurrently.
It is not permitted for an independent director to retire by rotation.
If a small shareholder director certifies that they meet the independence requirements outlined in section 149(7) and is qualified for appointment as an independent director under section 149(6), they may be regarded as independent directors.
At least one independent director should be present at any meeting called by the board of directors on short notice in order to conduct urgent business. The board's decision should be distributed to all directors and approved by at least one independent director in the event that the independent director is not present.
A Corporate Social Responsibility (CSR) Committee must be established by some businesses in order to develop and oversee their CSR policy. At least three directors, including one independent director, should make up the CSR committee. A corporation must have two or more directors on its CSR Committee even if it is not required to nominate an independent director.
Essential Qualifications of an Independent Director
In one or more of the following areas—law, finance, management, marketing, sales, research, administration, technical operations, corporate governance, or other business-related disciplines—the individual should have the necessary experience, abilities, and knowledge.
An independent director's family members
Shouldn't owe money to the business, its affiliates, subsidiaries, holding companies, directors, or promoters.
Should not have provided a guarantee or security for Rs. 50 lakhs at any point during the two fiscal years prior or the current fiscal year in relation to a third party's debt to the company, its subsidiary, holding or associate company, or their directors or promoters of such holding company.
The individual is not:
A promoter of the business or any of its affiliate, holding, or subsidiary firms.
Connected to the company's promoters or directors, or any of its holding, subsidiary, or affiliated businesses.
During the current fiscal year or the two fiscal years immediately prior, the individual should not have any financial ties to the company, any of its subsidiaries, holding companies, or associate companies, or their directors or promoters, with the exception of compensation as a director or transactions that do not exceed 10% of the total income.
The individual or their family members should not:
Hold or hold the position of Key Managerial Personnel (KMP); or have worked for the company or any of its subsidiaries, holding companies, or associate companies during any of the three fiscal years prior to the fiscal year in which they are being proposed for appointment.
Be or has been a partner, owner, or employee of the company or any of its subsidiary, holding, or associate companies during any of the three fiscal years prior to the fiscal year in which the individual is being proposed for appointment as an auditor firm, cost auditor, legal consultant, or company secretary.
Possesses more than 2% of the company's voting power when combined with family members.
Own 2% or more of the company's voting power or serve as the CEO or director of a non-profit organisation that obtains 25% or more of its revenue from the business, any of its promoters, directors, subsidiaries, holding companies, or associate firms.
Role of an Independent Director
An independent director serves as the company's mentor, coach, and advisor. By acting as a watchdog and assisting in risk management, the position entails enhancing business credibility and governance standards. By actively participating in the numerous committees the company has established, independent directors are in charge of guaranteeing improved governance. The following crucial functions are carried out by the independent directors, which makes them necessary:
Assist in resisting and overcoming owner pressure.
Play a valuable part in succession planning.
He or she must assist in acquiring impartial judgement to support the board's deliberations on matters including strategy, performance, risk management, resources, key appointments, and standards of behaviour.
He or she must present an unbiased perspective while assessing the board's and management's performance.
Evaluating, tracking, and reporting on management's performance in relation to the aims and objectives decided upon at board meetings.
Protect the interests of all parties involved, especially the smaller stockholders.
Strike a balance between the stakeholders' competing interests.
Verify the accuracy of financial data and make sure that risk management and financial control systems are functioning.
When management and shareholders' interests clash, try to find the solutions that will benefit the business the most.
Determining appropriate compensation scales for senior management, executive directors, and key managerial staff.
Responsibilities of an Independent Director
Here are the responsibilities of an independent director:
Complete the proper onboarding process and keep their knowledge, abilities, and familiarity with the business up to date.
Make an effort to attend the general meetings of the company.
As a member, make an effort to attend meetings of the board of directors and board committees.
Possess sufficient understanding of the business and the external environment in which it functions.
Report any instances of unethical activity, suspected or confirmed fraud, or infractions of the company's ethics policy or code of conduct.
Help safeguard the legitimate interests of the business, its shareholders, and its employees by acting within his or her power.
Not to unjustly interfere with the company's or the Board's committee's ability to operate.
Participate by serving as chairpersons or members of the Board's committees.
Should refrain from disclosing private information unless specifically authorised by the Board or mandated by law, such as trade secrets, technology, plans for advertising and sales promotion, and unpublished price-sensitive information.
Determine whether the company has a sufficient and effective vigil mechanism in place and make sure that its use does not negatively impact the interests of those that utilise it.
Code of Conduct for an Independent Director
The independent directors are required to follow the code of conduct and carry out their duties in a faithful and professional manner. Such behaviour in carrying out their obligations will boost trust in the investment community, particularly among regulators and minority shareholders. The following standards for independent directors' professional behaviour are provided by the Act:
Respect the moral principles of integrity and probity.
When performing your job, act impartially and constructively.
Use your authority honestly and in the company's best interests.
Give your professional responsibilities enough time and attention to enable you to make well-rounded decisions.
When agreeing or disagreeing with the Board's collective judgement in making decisions, one must not let any unrelated factors get in the way of using independent, objective judgement in the best interests of the company.
Not abuse the position for personal gain, whether direct or indirect, or to benefit a related individual at the expense of the business and its shareholders.
Avoid taking any activity that would impair your ability to make decisions on your own.
An independent director is required to notify the Board right away if circumstances cause them to lose their independence.
Conclusion
The Companies Act of 2013's requirement for an independent watchdog over the company's performance and operations is ensured by the nomination of an independent director. The company's board of directors is guided and advised by the independent directors. To guarantee that the independent directors' independence is upheld and that they behave honourably and openly, the company law establishes stringent and clear guidelines.
FAQ
Q1. What is the minimum age to get appointed as an independent director?
According to company legislation, an individual must be at least eighteen years old to be appointed as an independent director. A person can be appointed as an independent director at any age. According to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, listed businesses must have an independent director who is at least 21 years old and no older than 70.
Q2. Can a practising company secretary be appointed as an independent director in a company?
Yes. A practicing company secretary may be appointed as an independent director since they are non-executive directors. A company secretary who works for one firm as an employee may also be nominated to another company as an independent director.
Q3. Can a company secretary working in a company be appointed as an independent director in the same company?
No, a company secretary works for the company full-time. An independent director, however, is not permitted to work for a corporation full-time. As a result, a company secretary cannot be appointed as an independent director of the same organisation.
Q4. Is an independent director liable for non-compliance with any provision under the Companies Act, 2013?
An independent director will only be held accountable for actions taken by the corporation that were carried out with their knowledge, approval, or collusion, or in which they failed to act with diligence.
Q5. Does an independent director need to get enrolled with Data Bank and pass an exam?
Yes, both directors who want to become independent directors and those who are already independent directors must register for the data bank and pass the online competency self-assessment test. An individual may attempt the online proficiency self-assessment test as many times as necessary to pass.
Q6. What is the tenure of appointment of independent directors?
The appointment of an independent director may be made for a maximum of five years in a row. After approving a special resolution at the general meeting, an independent director may also be reappointed for a further five-year term. An independent director, however, is only permitted to serve two terms in a row.
Q7. Can an independent director be appointed simultaneously as an independent director in a different company?
Yes. An individual is only permitted to serve as an independent director of a maximum of seven corporations. As a result, an individual may have independent directorships in no more than seven entities concurrently. Additionally, an individual who is a full-time director of any listed business may also be an independent director of up to three listed firms.
Q8. What is the remuneration of independent directors?
While they are not eligible to receive stock options, independent directors may be paid through profit-related commissions that have been approved by the members, sitting fees, and reimbursement for meeting-related costs.
Q9. What is the resignation procedure for independent directors?
Independent directors who resign are required to notify the firm in writing. After holding a board meeting to accept the resignation, the firm has seven days to file Form DIR-12 with the Registrar of Companies.
Q10. What is the process for the removal of independent directors?
The members may be advised by the board to remove an independent director. The removal procedure includes holding a general meeting and giving the director a chance if members give special notice.
Q11. What is the liability of independent directors in corporate misconduct?
If it is established that an independent director knew about or participated in the company's wrongdoing or illegal activity, they could be held accountable. However, they have a duty to behave with good faith and with reasonable care and attention, and they could be held liable if they violate their fiduciary duties.
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