Independent Director under Companies Act, 2013: Detailed Study

Corporate Governance is one of the most important differentiators of a business that has impact on the profitability, growth and sustainability of business. It is a multi-level process that relates to organization’s culture, policies and code of conduct.

In India, after due deliberated efforts of Kumar Birla committee and consequent recommendation of Narayan Murthy Committee, Clause 49 of the Listing Agreement was revised with modifications to adopt Corporate Governance structure. Primarily all listed companies were mandatorily required to adhere to Corporate Governance structure.

Corporate Governance deals with various stakeholders as described below:

Revised Corporate Governance structure gave rise to reconstitution of board so as to include high-caliber non-executive independent directors and prevention of the concentration of power in one individual or a special influence. Now let us critically analyse the position, role, functions, duties, liabilities etc. of Independent Director as contemplated under the Companies Act, 2013.

DEFINITION:

According to sub-section (6) of section 149 of the Companies Act, 2013 an independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

(ii) who 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, of—

(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 organisation 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 may be prescribed.

The definition of Independent Director as per Companies Act, 2013 provides quantitative threshold for evaluation of significance of the relationship and considers all pecuniary relationship (both material and immaterial).

POSITION OF “INDEPENDENT DIRECTOR” IN BOARD COMPOSITION:

As per sub section 4 of Section 149 of the Companies Act 2013, every listed public company is mandatorily required to have at least one-third of the total number of directors as independent directors.

Unlisted public companies must appoint at least two independent directors in the following circumstances:

i. if the paid up share capital exceeds Rs.10 crores;

ii. if the turnover exceeds Rs.100 crores;

iii. if the aggregate of all the outstanding loans, debentures and deposits exceeds Rs 50 crores.

QUALITIES OF INDEPENDENT DIRECTOR

An independent director 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 business.

Broadly one who wishes to qualify as an Independent Director has to possess following unwritten qualities:

1. Impartiality

2. Loyalty

3. Decision- making (judgment)

4. Professional repute

Manner of selection and other procedural requirement has been provided under Section 150 of Companies (Appointment and Qualification of Directors) Rules, 2014 which is to be read along with Companies (Appointment and Qualification of Directors) Amendment Rules 2015.

ROLE AND DUTIES OF INDEPENDENT DIRECTORS :

The role of independent directors is considered to be of a great significance. The guidelines, role, functions and duties are broadly set out under Code of conduct under Schedule IV of the Companies Act, 2013. The code of conduct lays down the guidelines of professional conduct as well as role, functions and duties of independent director.

Role and functions listed under Schedule IV of the Companies Act, 2013 are as under:

The independent directors shall:

(1) 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;

(2) bring an objective view in the evaluation of the performance of board and management;

(3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;

(4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;

(5) safeguard the interests of all stakeholders, particularly the minority shareholders;

(6) balance the conflicting interest of the stakeholders;

(7) 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;

(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.

POSITION OF INDEPENDENT DIRECTORS IN COMMITTEES:

As a part of Corporate Governance, the companies meeting some threshold criteria are required to constitute/ reconstitute board. The Companies Act 2013 has also emphasized on the appointment of an Independent Director as a member and as a chairperson in various committees.

Let’s understand the same in a tabular form:

In case of Stakeholders Committee, the Board of Directors of the Company which consist of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a Stakeholders-relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the board. As a good Corporate Governance practice the Companies Act, 2013 raised need to establish Vigil (Whistle Blower) Mechanism which aims to provide a channel to the Directors and employees to report genuine concerns about disreputable behaviour, actual or suspected fraud or violation of the Codes of Conduct or policy.

INDEPENDENT DIRECTORS’ MEETINGS:

The Companies Act, 2013, requires all Independent Directors to meet at least once in a year. The meeting must be convened without the attendance of non-independent directors and members of the management. In fact all the independent directors of the company are required to be present at such meeting to:

(a) review the performance of non-independent directors and the Board as a whole;

(b) review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;

(c) assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

REMUNERATION:

The Companies Act, 2013 expressly disallows independent directors from obtaining stock options and remuneration other than sitting fees and reimbursement of travel expenses for attending the board and other meetings. Sitting fees to be paid to Independent Directors for attending the Board Meetings pursuant to Section 197(5) which is maximum of Rs.1,00,000/- per meeting is to be decided by the Board. Profit related commission may be paid to independent director subject to the approval of the shareholders.

As per General Circular 14/2014, an Independent Director would not be considered to have a pecuniary relationship under section 149(6)(c) for transactions with a company, its holding, subsidiary or associate company, or their promoters, or directors, provided such transactions are in the ordinary course of business and are on an arm’s length basis.

TERM OF OFFICE OF INDEPENDENT DIRECTOR

An independent director shall hold office for a term up to 5 consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report. As per MCA Clarification vide General Circular 14/2014, an Independent Director even if appointed for a lesser period than of 5 years will be held as appointed for one term.

No independent director shall hold office for more than 2 consecutive terms, but such independent director shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director provided that he shall not, during the said period of 3 years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Retirement of directors by rotation shall not be applicable to appointment of independent directors.

LIABILITY:

The Companies Act, 2013 restricts and limits the liability of Independent Directors only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.

HOW TO OFFER CANDIDATURE AS INDEPENDENT DIRECTOR

One who wishes to offer the candidature as Independent Director may enroll the name at The Independent Directors repository. The Independent Directors repository is a joint initiative of the three professional statutory bodies namely “The Institute of Chartered Accountants of India, The Institute of Company Secretaries of India and The Institute of Cost Accountants of India” under the active encouragement of the Ministry of Corporate Affairs, Government of India. This repository has been developed to facilitate the individuals who are eligible and willing to act as Independent Directors and also to facilitate Companies to select the persons who are eligible and willing to act as Independent Directors under section 150 of the Companies Act, 2013 and Rules made there under.

It is discretionary for the companies to choose suitable persons for the position as an “Independent Director” from the Independent Directors repository. The responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director lies with the company making such appointment.

PROCEDURAL REQUIREMENT FOR APPOINTMENT, RESIGNATION AND REMOVAL OF INDEPENDENT DIRECTOR

 APPOINTMENT

1. The Independent Director has to submit the Consent to act as Director in FormDIR-2 to the Company.

2. The Independent Director has to submit a declaration that he/ she is not disqualified to be appointed as a Director as per provisions of Section 164(1) & (2) of the Companies Act, 2013 in Form DIR-8 to the Company.

3. The Independent Director has to submit a declaration of independence as per Section 149(6) of the Companies Act, 2013 before his/her appointment. Such declaration has to be placed before the 1^st Board Meeting in which he/ she participates as a director and the subsequent first board meeting in each financial year.

4. As per Schedule IV(IV)(4) to the Companies Act, 2013 the Company will have to issue the appointment letter to Independent Director. Also the terms and conditions of Independent Director’s appointment have to be posted on the company’s website.

5. Lastly the Company has to file the consent of Independent Director with Registrar of Companies within 30 days of his/her appointment in Form DIR-12;

RESIGNATION:

1. An Independent Director may resign from his/her office by giving a notice in writing to the Company.

2. Within 30 days from the date of receipt of such notice the Board shall file same with Registrar of Companies in Form DIR- 12.

3. The director shall also forward a copy of resignation along with detailed reasons for the resignation to the Registrar of Companies within 30 days of resignation.

REMOVAL:

1. A Company may, by ordinary resolution, remove a director, before the expiry of his period after giving a reasonable opportunity of being heard.

2. A special notice is required for any resolution, to remove a director under this section, or to appoint somebody in place of a director so removed.

3. The vacancy shall be filled within a period of not more than 180 days.

INTERMITTENT VACANCY OF AN INDEPENDENT DIRECTOR:

Any intermittent vacancy of an Independent director shall be filled-up by the Board of Directors at the earliest but not later than immediate next board meeting or 3 months from the date of such vacancy, whichever is later.

Conclusion:

The concept of the institution of Independent Director is of utmost importance for Corporate Governance. Independent Director is expected to act as the trustees of stakeholders. Thus the Companies Act, 2013, has sought to balance the wide nature of the obligations, functions and duties imposed on Independent Directors. The Act restricts and limits the liability of Independent Directors only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.

For detailed study one may read articles on following links:

http://www.ey.com/in/en/services/assurance/fraud-investigation—dispute-services/corporate-governance–role-of-independent-directors

http://economictimes.indiatimes.com/news/company/corporate-trends/from-yes-man-to-coach-companies-turn-to-non-executive-chairmen-to-tide-over-difficult-times/articleshow/54454805.cms

For the global presence of Independent Director more commonly known as Non-executive Director one may read articles on following links:

https://www.bupa.com/corporate/about-us/corporate-governance/role-of-the-non-executive-director

http://www.acga-asia.org/public/files/(2003_08)%20guidelines_ined__hkiod.pdf

http://www.out-law.com/page-8215

http://www.iese.edu/research/pdfs/estudio-133-e.pdf

Source: www.mca.gov.in

(Author has written this article as a part of coursework in the startup.nujs.edu course. In case of any inconsistency or clarification/ suggestions, Author can be contacted for further details at [email protected])