Guide to Independent Directors Under Comapnies Act, 2013 By CS Tanuj Saxena


ITS ALL ABOUT CORPORATE DESK- Independent Director

The Companies Act,1956 did not provide us the specific definition of an Independent Director. But Independent Directors are in the limelight as per the Companies Act, 2013. A separate criterion has been established for the companies to have an Independent Director.

Basically, we can say that an independent director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. He/ She does not have any kind of relationship with the company that may affect the independence of his/ her judgment.

The term “Independent Director” has been defined in the Act, along with several new requirements relating to new requirements relating to their appointment, duties, role, and responsibilities. The provisions relating to the appointment of Independent directors are contained in Section 149 of the Companies Act, 2013 should be read along with Rule 4 and Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014
 
Applicability on Appointing An Independent Director

Listed Public Company

Every listed public company shall have

  • at least one-third of the total number of directors as independent directors.
Any fraction contained in that one-third shall be rounded off as one.
 
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 a turnover of  Rs. 100 crore or more.
  • Public Companies with aggregate outstanding loans, debentures, and deposits, exceeding  Rs. 50 crore
Points to remember:
 
  1. The amount existing on the  last date of latest audited financial statements shall be taken into account for calculating the paid-up share capital or turnover or outstanding loans, debentures and deposits
  1. The company must appoint a higher number of directors if a higher number of independent directors ir required to compose audit committee
  1. A joint venture, wholly owned subsidiary and dormant company are not required to appoint an independent director even if they meet the criteria
Every independent director shall, at 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 when a situation arises which affects his status of independence.

The terms and conditions of the appointment of independent directors shall also be posted on the company’s website.

Role of an Independent Director

Independent Director acts as a guide, coach, and mentor to the Company. The role includes improving corporate credibility and governance standards by working as a watchdog and help in managing risk. Independent directors are responsible for ensuring better governance by actively involving in various committees set up by the company.

The independent directors are required because they perform the following important role:

  1. facilitate withstanding and countering pressures from owners;
  2. fulfill a useful role in succession planning;
  3. on issues such as strategy, performance, risk management, resources, key appointments and standards of conduct he must support in gaining independent judgment to bear on the board’s deliberations
  4. while evaluating the performance of board and management of the company bring an objective view
  5. scrutinizing, monitoring and reporting management’s performance regarding goals and objectives agreed in the board meetings
  6. safeguard the interests of all stakeholders, particularly the minority shareholders;
  7. balance the conflicting interest of the stakeholders;
  8. satisfying themselves that financial controls and systems of risk management are in operation and check on the integrity of financial information
  9. in situations of conflict between management and shareholder’s interest, aim towards the solutions which are in the best interest of the company
  10. establishing the suitable levels of remuneration of
              • executive directors,
              • key managerial personnel
              • senior management

Duties of an Independent Director

The Independent Directors shall:

  1. undertake appropriate induction and regularly update and refresh their skills, knowledge, and familiarity with the company
  2. attempt to attend the company’s  general meetings
  3. attempt to attend BOD’s meetings and board committees meeting being a member
  4. have adequate knowledge about the company and the external environment in which it operates
  5. report matters concerning the unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy
  6. acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees
  7. not to unfairly obstruct the functioning of the company or committee of the Board
  8. participate in the Board’s committee being chairpersons or members of that committee
  9. not to disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law
  10. 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 a mechanism are not prejudicially affected on account of such use.
Other Provisions related to Independent Directors under Companies Act, 2013:

  1. Companies that trigger the conditions of the Corporate Social Responsibility Committee of the Board to formulate and monitor the CSR policy of a Company. The Companies Act, 2013 requires the CSR Committee to consist of at least three directors, including at least one independent director.
  2. Where a company is not required to appoint an independent director, it shall have in its Corporate Social Responsibility Committee two or more directors.
  3. The Independent director’s appointment process must be independent of the company’s management. Databank may be used to appoint an independent director
  4. Every independent director shall give a declaration that he meets the criteria of independence when:
              • he attends the first board meeting as a director;
              • in every financial year, at the first meeting of the board of directors
              • when a situation arises which affects his status of independence being an independent director
  1. The independent director shall be appointed for a maximum term of 5 years. The term shall not be more than 2 consecutive terms. He shall be re-appointed only by special resolution by the company.
  2. Any vacancy in the office of independent director shall be filled in the very next Board Meeting or within 3 months of such vacancy, whichever is later.
  3. A person must be an independent director in not more than seven  listed companies at a time
  4. An independent director shall not retire by rotation and shall not be included in the “total number of directors’ for the purpose of the computation of rotational directors.
  5. A person can be appointed as an alternate director. But he must be qualified to be appointed as an independent director.
  6. A small shareholder director shall be considered as an independent director, if-
                    • he is eligible for appointment as an independent director u/s 149 (6), 
                    • he gives a declaration of his independent u/s 149(7).

  1. If the Board meeting is called at shorter notice so as to transact some urgent business, then the presence of at least 1 independent director is mandatory. In absence of any independent director, a decision shall be circulated to all the directors and later approved by at least 1 independent director.
Independent Director Data Bank

The Companies Appointment and Qualification of Directors Rules 2014 has authorized for anybody or institute or association, authorized by the Central Government to set up and maintain a data bank of Independent Directors who are willing and eligible to be appointed as an independent director. The databank is created, and the Independent Directors can register themselves in https://www.independentdirectorsdatabank.in/

This data bank was created by MCA along with Indian Institute of Corporate Affairs (IICA) in accordance with the provisions of Section 150 of the Companies Act, 2013.
 
Objectives of Independent Director Data Bank

  • Developing a databank of Independent directors by empanelling the existing Independent Directors as well as the professionals aspiring to become independent directors.
  • Providing a platform to individuals to help them to acquire knowledge, assess their understanding, develop new skills, and apply best practices.
  • Building capacities of Individuals by providing online learning courses on topics related to corporate governance, regulatory framework, financial prudence, and other important aspects.
  • Creating an eco-system of individuals looking for opportunities and corporate requiring to appoint independent directors.
Information of Independent Directors

Accordingly, the independent director data bank contains the below information:

  • DIN (Director Identification Number)
  • Name and surname in full
  • Father’s name
  • Date of Birth
  • Gender
  • Nationality
  • Occupation
  • Full Address with PIN code (present and permanent)
  • Phone number
  • E-mail id
  • Educational and professional qualifications
  • Experience or expertise, if any
  • Legal proceedings initiated or pending against such person
  • List of limited liability partnerships in which he is or was a designated partner along with:
    • Name of the company
    • Nature of industry
    • Nature of directorship – Executive or Non-executive or Managing Director or Independent Director or Nominee Director;
    • Duration of appointment as Director with dates;
    • Name of the limited liability partnership (LLP)
    • Nature of industry; and
    • Duration of appointment as Partner with dates
    • List of companies in which he is or was director along with
While using the data bank, the company must carry out its due diligence before appointing any person as an independent director as the agency maintaining the databank or the Central Government cannot be held responsible for the accuracy of the information or lack of suitability of the person  – whose particulars form part of the databank.

Empanelling of Independent Directors

As per the notifications, the Ministry of Corporate Affairs and Indian Institute of Corporate Affairs (IICA) have introduced a comprehensive online databank for all existing and aspiring Independent Directors. This databank draws its origin from Companies (Appointment and Qualification) Rules, 2019. As per the rules, all existing Independent Directors need to empanel with this databank within 3 months of commencement of these rules. The empanelling of Independent Directors in the MCA portal can be done from 2nd December 2019. The companies can also access the databank after registration for researching and appointing directors to their companies. There are 3 basic steps to be followed, as mentioned below:

Step-1: Access MCA portal

Individuals who wish to empanel with the Independent Director’s Databanks has to start the empanelment process by accessing the website of MCA, www.mca.gov.in. Existing directors can access through their DIN; other professionals can access through PAN or Passport. Foreign nationals without DIN/PAN can also visit MCA21 and empanel with the databank through their Passport Number and by providing basic contact information, such as email, mobile number, etc.

Step-2: Redirected to Databank portal

  • On verification by the MCA21 portal, the user will be automatically redirected to the Independent Director’s Databank. The user can log in to the databank by using the credentials sent to the registered email.
  • The MCA21 data will be auto-populated in the ‘Profile’ page of the databank. The user had to fill the details of personal, professional, and educational. Also, we need to mention the KMP positions held by the independent director.
  • The director can opt to display the personal details on the databank.
Step-3: Choose Subscription Plan

  • The user can choose the subscription plan of their choice. There are three different subscription plans available – 1 Year, 5 Years, and Lifetime. The fee for 1 Year plan is Rs. 5,000 + 18% GST. The fee plan for 5 Years and Life Time will be notified later.
  • Once the plan is selected, the user will be directed to payment gateway where the payment can be made through online banking, debit/credit card, payment apps, etc.
  • An invoice will be issued once the payment process is complete.
Similarly, companies can be empanelled for selecting resources. The fee structure for companies will be notified later.

Services of Independent Director Data Bank

Once the individual registered with the data bank, the following services can be availed:

  • Online Courses
  • Self-assessment
  • Corporate Access to Data Bank
Online Courses

The online courses aim to refresh the basic knowledge base and enhance the efficiency of Non-Executive Directors. Participants will be trained more focused in their pursuit of knowledge. Through online courses, the MCA trying to build an effective company board by providing awareness of corporate governance. Courses are divided into 2 categories – Board Essentials Courses and Board Practice Courses.

Self-Assessment Tests

  • Every individual who is included in the databank should undergo an Online Proficiency Self-Assessment test which will be conducted by IICA. The individual should clear the assessment within one year from the date of inclusion of his name in the databank. If the director failed in the assessment, the name of the director shall be removed from this databank.
  • If an individual served as director for a minimum of ten years as on the date of inclusion of name in the databank as director or key managerial personnel (KMP) in a listed or an unlisted public company with a paid-up share capital of Rs.10 crore or more shall not be required to pass the online proficiency self-assessment test:
  • The purpose of calculation of the period of ten years referred to in the first proviso, a period during which an individual was acting as a director or as a KMP in two or more companies at the same time period shall be counted only once.
  • An individual has to score a minimum of 60% in the online proficiency self-assessment test to declare as PASS.
  • There is no limit for the number of attempts to clear the online proficiency self-assessment test.
Corporate Access to Data Bank

The databank of independent directors contains names, addresses, and qualifications of persons who are eligible and willing to act as Independent Directors. This Databank aims to provide single-point access to the companies to search Independent Directors as per their needs.

The companies can download the profiles of Independent Directors by the below steps:

  • Viewing the Summarised profiles
  • Add Shortlisted profile to the cart
  • Click checkout option
  • Paying the fee through the payment gateway
  • Detailed profile of Independent Directors can be downloaded
However, as per the latest notification on 28th February 2020, the directors does not need to undergo proficient self-assessment test for directors who serve a minimum of 10 years as on the date of inclusion in the database for a listed public company or unlisted company with a paid-up capital of minimum of ten crore or the corporate body listed in any of the stock exchange in India.
 
THE TERMS AND CONDITIONS OF APPOINTMENT OF THE INDEPENDENT DIRECTORS OF THE COMPANY IN ACCORDANCE WITH THE REQUIREMENTS OF SCHEDULE IV TO THE COMPANIES ACT, 2013

Date : ________________

Name of Director
Address
Dear Sir/Madam,

We are pleased to inform you that upon the recommendation of the Nomination Committee, the  Board of Directors of the Company has approved your appointment as Non-Executive Independent Director of the Company with effect from _______ 20__. Your appointment is subject to the approval of shareholders at the ensuing  Annual General Meeting of the Company scheduled to be held on ___________20_.

This letter of appointment setting the terms and conditions thereof is being issued to you, in terms of Clause IV (4) of Schedule IV to the said Act.

The aforesaid  Schedule  IV  inter alia covers the guidelines of professional conduct, roles, functions,  duties,etc., of the  Independent  Directors.  Further,  Section  166  of the  Companies  Act,  2013  provides for the  Duties of Directors of a  company.  The extracts of the relevant provisions of the Companies Act, 2013 along with the Schedule is enclosed as Annexure A for information.

Further, you shall also endeavor to provide the necessary disclosure under all applicable laws and adhere to the various Codes and Policies formulated and adopted by the Company, from time to time.

Please note that for all the functions discharged by you, the Company will be paying sitting fees for meetings of the Board and its Committees as may be decided by the Board from time to time.

In addition to the remuneration as mentioned above, the Company shall reimburse you for all reasonable out-of-pocket expenses necessarily incurred for attending the various meetings of the Board/Committee/Members and for discharging the fiduciary obligations towards the Company.

Kindly note that the Company shall purchase a Directors’ and Officers’ (D and O) liability insurance and it is intended to maintain such cover for the full term of your appointment.

By accepting this appointment, you are deemed to have confirmed that, any other position you hold including your directorships in other organizations,  will not give rise to any ‘conflicts of interest’ in relation to your appointment as an Independent Director of the Company. Should you become aware of any conflict or potential conflict during the period of your appointment, you are expected to notify the same to the Board.

Looking forward to your continued support and commitment to the Company.

With kind regards,
For XYZ LTD
 
Managing Director & CEO
Encl: Annexure A

AGREE AND ACCEPT

I have read and understood the terms of my appointment as an Independent Director of the Company and I hereby affirm my acceptance to the same.
____________________________
Name:
Place:
Date:

Annexure A
 
Extracts of the relevant provisions of the Companies Act, 2013

Section 166- Duties of Directors

  • Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.
  • A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.
  • A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
  • A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
  • A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
  • A director of a company shall not assign his office and any assignment so made shall be void.
  • If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
CODE OF INDEPENDENT DIRECTORS

The Code is a guide to professional conduct for independent directors. Adherence to these standards by independent directors and fulfillment 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.
 
Guidelines of professional conduct:

An independent director shall:

  • uphold ethical standards of integrity and probity;
  • act objectively and constructively while exercising his duties;
  • exercise his responsibilities in a bona fide manner in the interest of the company;
  • devote sufficient time and attention to his professional obligations for informed and balanced decision making;
  • not allow any extraneous considerations that will vitiate his 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 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;
  • refrain from any action that would lead to loss of his independence;
  • where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly;
  • assist the company in implementing the best corporate governance practices.
Role and functions:

The independent directors shall:

  • 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;
  • bring an objective view in the evaluation of the performance of board and management;
  • scrutinize the performance of management in meeting agreed on goals and objectives and monitor the reporting of performance;
  • satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
  • safeguard the interests of all stakeholders, particularly the minority shareholders; balance the conflicting interest of the stakeholders;
  • balance the conflicting interest of the stakeholders;
  • 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;
  • moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.
Duties:

The independent directors shall
  • undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
  • 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;
  • strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member
  • participate constructively and actively in the committees of the Board in which they are chairpersons or members;
  • strive to attend the general meetings of the company;
  • where they have concerns about the running of the company or a proposed action, 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;
  • keep themselves well 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;
  • 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;
  • 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;
  • report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
  • acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
  • not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.
Manner of appointment:

  • The appointment process of independent directors shall be independent of the company management; while selecting independent directors the Board shall ensure that there is an 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 an independent director(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 the opinion of the Board, the independent director proposed to be appointed fulfills the conditions specified in the Act and the rules made thereunder and that the proposed director is independent of the management.
  • The appointment of independent directors shall be formalized through a letter of appointment, which shall set out: 
    • the term of appointment;
    • the expectation of the Board from the appointed director; the 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 (D and O) insurance, if any;
    • the Code of Business Ethics that the company expects its directors and employees to follow;
    • the list of actions that a director should not do while functioning as such in the company; and
    • the remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any.
  • The terms and conditions of appointment of independent directors shall be open for inspection at the registered office of the company by any member during normal business hours.
  • The terms and conditions of the appointment of independent directors shall also be posted on the company’s website.
Re-appointment:

The re-appointment of the independent director shall be on the basis of the report of performance evaluation.

Resignation or removal:

  • The resignation or removal of an independent director shall be in the same manner as is provided in sections 168 and 169 of the Act.
  • An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within a period of not more than one hundred and eighty days from the date of such resignation or removal, as the case may be.
  • Where the company fulfills the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.
Separate meetings:

  • 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;
  • All the independent directors of the company shall strive to be present at such meeting;
  • The meeting shall:
    • review the performance of non-independent directors and the Board as a whole;
    • review the performance into account the views directors; of the Chairperson of the company, taking of executive directors and non-executive
    • assess the quality, quantity, and timeliness of the flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.
Evaluation mechanism:

  • 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 performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.
According to the law, independent directors can be paid up to Rs 1 lakh as sitting fees per board meeting. Companies have the flexibility to pay more as commission. The total commission paid to independent directors in a company can be as much as 1% of its profit.
 
Conclusion:

Independent directors act as a mentor to the company. Their roles vastly include enhancing corporate credibility and governance standards, functioning as a watchdog and playing a significant role in risk management. Independent directors play an active role in various committees set up by the company to ensure good governance.

Independent directors should make up at least two-thirds of the directors in the audit committees of listed companies to oversee the financial reporting process and disclosure of the company’s financial information, ensure compliance with listing and other legal requirements, disclosure of related party transactions and qualification in the draft audit report, among other things.

From the above, we can conclude that Independent Directors have a crucial role to play in corporates.

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