Independent Directors: Appointment, Ownership and Roles

They are non-executive directors who do not have any personal relationship with the company and must have relevant experience and expertise. In a public company, at least one-third of the total number of directors are Independent Directors.

Who is an Independent Director?

Independent Director is appointed to govern the working of a company and is not related in any other role. This is done to have an unbiased judgement in case of decision making. Independent Director cannot hold more than 2% share capital of the company and in the opinion of the Board of Directors should be highly skilled and experienced.

According to the Companies Act, 2013, an independent director –

  • Is a director other than the managing, whole-time or nominee director.
  • The person should not be a promoter of the company or any of its holding, subsidiary or associate company.
  • The person should not have any monetary relationship with the company other than its remuneration.
  • The Independent director should not hold or has held the position of a key managerial personnel or been an employee of the company.

How many Independent Directors can be in a Company?

Every listed Public Company in India should have at least one-third of the total number of directors as Independent Director. Any fraction that comes in calculation of the Independent Directors will be considered as one number after rounding off.

However; The Central Government of India may decide the maximum number of independent directors in case –

  • The paid-up share capital of a public company is Rs. 10 Crore and more.
  • The paid-up share capital of a public company is Rs. 100 Crore and more.
  • Public Companies which have an aggregate outstanding loans, debentures or deposits of Rs. 50 Crore or more.
  • The audit committee shall have a minimum of three directors with independent directors in the majority.
  • The Board of Directors of every listed company shall comprise of the Nomination and Remuneration Committee consisting of 3 or more non-executive directors out of which not less than one-half should be independent directors.
Note: Appointment of independent directors is not required for joint ventures, dormat companies or wholly owned subsidiaries.

The conditions specified for the listed public companies will be applicable from the first year till the tenure of the Independent Director even in case where the paid up share capital, borrowings or deposits fall below the limits.

Corporate Social Responsibility Committee of the Board shall consist of three or more directors out of which at least one director should be an Independent Director in the companies where in any financial year –

  • Net worth of Rs. 500 Crore or more.
  • Turnover of Rs. 1000 Crore or more.
  • Net profit of Rs. 5 Crore or more.

Roles and Duties of an Independent Director

  • The person must present an unbiased judgement on issues such as risk management, strategy, standards of conduct, performance and key appointments.
  • The person needs to monitor, scrutinize and report the management’s performance regarding different goals and objectives that are decided in the board meetings of the company.
  • Balance the interests of the stakeholders and safeguard them particularly of the minority stakeholders.
  • Maintain a suitable level of payment of the key managerial personal, executive directors and senior management.
  • Being a member of the company, to attend all meetings of the Board of Directors and the Board committees.
  • Be up to date with information regarding the company and the external environment in which it operates.
  • To report concern authority about any unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethical policy.
  • The person is not supposed to disclose any confidential information related to the technologies, commercial secrets, advertising or sales unless approved by the Board of Directors or Law.

Who appoints Independent Director in a Company?

An Independent Director is appointed by the Board of Directors of the respective company. However; the person may be shortlisted from an official data bank provided by the Central Government on the Ministry of Corporate Affairs online website.

This data bank contains all the names and related information of the people who can be considered by different companies if they wish to appoint an Independent Director. The list may also be issued by any institute or concerned authority as proposed by the Government.

Note: It is better to conduct a background check of the concerned person before its appointment in the company.

Appointment of Independent Director (Detailed Process)

The Board of Directors must ensure that the person has required expertise and experience so that all the duties and roles and fulfilled in the required manner. All the stakeholders of the company must agree to the appointment of independent director.

  • A special resolution is passed in the board meeting, where shareholders give their approval for the independent director.
  • An explanatory statement is attached to the notice of the meeting approving the appointment of independent director and also that the proposed independent director fulfils the conditions specified in the Act and rules.
  • A letter of appointment is issued which is a formal document confirming the appointment of the independent director in the company.
  • The letter states the term of appointment, expectations of the Board from the appointed director, the mandatory duties that come with such an appointment along with accompanying liabilities, provision for Directors and Officers insurance and the Code of Business Ethics that a company expects its directors and employees to follow.

The terms and conditions for appointment of the independent director can be inspected any time in the registered office of the company. The terms and conditions should also be uploaded on the respective company’s website for complete transparency.

The Independent Directors can also be reappointed in case their performance is considerably good. Once appointed, the independent director shall give a declaration stating that he/she fulfills the requirements/criteria in the first board meeting after being appointed.

Note: The declaration can also be presented in the first board meeting of every financial year.

What is the term of Office for Independent Directors?

Independent directors hold an office for the tenure of 5 years but, they can be reappointed by passing a special resolution in the board meeting. No independent director can be on board for more than two consecutive years. They can be re-appointed after the ceasing period of 3 years unless; the person has been associated with the company either directly or indirectly.

Removal of the Independent Director

To remove an independent director from the company at least 75% of the shareholders must be present and require passing a special resolution in the general meeting. Also, a special notice with the motive of removing the director must be passed at least before 14 days of the general meeting.

Such a notice needs to be signed by the members holding at least 1% of the total voting power. However; the independent director has the right to be heard in the resolution of the meeting.

Important Points

  • The company shall in its Corporate Social Responsibility Committee have two or more directors if it is not required to appoint any independent director.
  • In case of any vacancy in the office of independent directors, it shall be filled in the next Board Meeting or within 3 months from the date of such vacancy.
  • An independent director shall not be included in the total number of directors for the calculation of rotational directors and neither can he/she retire by rotation.
  • The person can be appointed as an alternate director if he/she is qualified to be appointed as independent director.

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