As we know that with the enactment of The Companies Act 2013 (“the Act”), the profundity of the appointment of Independent Director was recognized towards a Good Corporate Governance, which was not there in the Companies Act 1956. The Section 149 and Schedule IV prescribed under the Act deal with all the Appointment Criteria, Qualification and Manners of appointment etc.
Applicability on Companies:
Every Listed Company shall have minimum 1/3rd Independent Directors and the following class or classes shall have at least 2 minimum IDs on the Board of Directors:
Public Companies having paid up 10 crores or more.
Public Companies having Turnover 100 crores Or more
Public companies having aggregate of outstanding loans, debentures and deposits, exceeding 50crores.
In case of committees demands for appointment of more IDs then that composition shall prevail.
Who can be an Independent Director ?
According to Section 149 (6) an independent director means a director other than a managing director or a whole-time director or a nominee director—
(a) who is a person of integrity and possesses relevant expertise and experience in the opinion of the Board;
(b) who is or was not a promoter of the company or its holding, subsidiary or associate company and is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) 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;
(d) none 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 two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
(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;
(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,
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 organization 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
(f) who possesses such other qualifications as per Rule 5 of the appointment and qualification of Directors Rules, 2014.
Role of Independent Directors in companies (Pros & Cons):
The independent director are the individuals who are not associated with the Company which means they are independent in terms of their responsibility towards protection of the rights of shareholders and creditors which in turn leads to the path of Good Corporate Governance. The Independent Director has a very crucial role in maintaining Corporate Governance. Presence of one ID is mandated in case of the Board meeting has been held at a shorter notice i.e. less than seven days and if he is not present then the decision shall be final only after the ratification of the same by at least one Independent Director.
On the other hand, appointment of Independent Director does not always work as a method to deter companies from malpractices. In recent case of Ratan Tata, Chairman Emeritus of Tata Sons, and Cyrus Mistry, former chairman of Tata Sons, exposed the passiveness of Independent Directors and Nusli Wadia, one of the most vocal Independent Directors of the Tata Group, was removed from Tata Firms after he publicly backed Mistry, who complained of mismanagement and corporate governance failures within the group’s companies.
Manner of Appointment:
The appointment process of ID’s shall be independent from the company management where the Board ensures that there is appropriate balance of skills, experience and knowledge in the Board for proper and effective discharge of its functions.
2) The appointment of ID’s shall be approved at the meeting of the shareholders.
3) The explanatory statement attached to the notice of the meeting shall include a statement that the ID proposed to be appointed fulfills the conditions mentioned in the Act.
4) The appointment of ID’s shall be formalized through a letter of appointment which states the following:
The term of appointment,
Expectation of the Board from the Director and fiduciary duties and liabilities accompanying it,
Code of business ethics that the company expects its Directors and employees to follow,
List of actions that the directors should not do while functioning as such in the company,
Remuneration, periodic fees, reimbursements of expenses for participating in the Board meetings etc.
5) The terms and conditions for appointment of ID’s shall be posted in the company’s website.
The IDs are required to give a declaration that he fulfills the Criteria of Independence as per the law at the first Board Meeting in which he participates as a Director and thereafter at every first BM of the Company or wherever there is any change in the circumstances which may affect his status as an ID.
Separate Meetings of IDs:
The Act mandates that all independent directors must meet at least once annually without the presence of non-independent directors and members of the management. Such meetings are termed as separate meetings, where they are required to evaluate the performance of the company’s chairperson, non-independent directors and the board as whole.
Tenure of IDs and Cooling Period:
An Independent Director shall hold office for a period of 5 years consecutively on the Board of a company and is eligible for reappointment on passing of a special resolution by the company (Section 152). In case of appointment for less than 5 years then the appointment to be treated as a one term as per MCA circular. No ID shall hold office for more than 2 consecutive terms. Provided he shall be eligible for reappointment after the expiration of 3 years of ceasing to be an ID.
Such an ID shall not be appointed or associated with the company in any capacity either directly or indirectly in those three years.
An ID shall not be entitled to any stock option and may receive remuneration by way of fee, reimbursement of expenses for participation in Board and other meetings and profit related commission as approved by the board of members.
Liability of IDs:
An ID shall be liable for such acts of omission or commission by his consent or connivance or where he had acted diligently.
Retirement by Rotation:
No IDs are liable to retire by Rotation.
Appointment Procedure Summary:
Call a Board Meeting to recommend an ID and approval of notice of General Meeting.
The explanatory statement must contain a statement that the person recommended to be appointed as an ID.
Call EGM pass OR in case of appointment and SR in case of re-appointment and thereafter file DIR-12.
The entire contents of this article are solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation by the Author. Compliance Calendar LLP and the Author of this Article do not constitute any sort of professional advice or a formal recommendation. The author has undertaken utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions. You are kindly requested to verify and confirm the updates from the genuine sources before acting on any of the information’s provided hereinabove. Compliance Calendar LLP shall not be responsible for any loss or damage in any circumstances whatsoever.