Independent Directors under Companies Act, 2013 & SEBI LODR Regulations

Lakshmi Sekhar 02 Dec 2022 29,496 Views 0 comment Print SEBI | Articles

INDEPENDENT DIRECTORS – UNDER THE COMPANIES ACT, 2013 AND SEBI LODR, REGULATIONS 2015

An Independent Director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. We can also say that; an Independent director is a director who is not connected or associated with the company in any manner.

Definition:

Companies Act, 2013 [Section 149(6)]

Sebi LODR, Regulations 2015 [Regulation 16 (1)(b)]

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, –

who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
who is or was not a promoter of the company or its holding, subsidiary or associate company;
who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed,] 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;

None of his relatives: –

is holding any security of or interest in Company or /holding /subsidiary /associate company (Provided: Relatives may hold up to face value not exceeding Rs 50 Lakhs or 2% of paid up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;)
is indebted, given guarantee or provided any security in connection with the indebtedness of any third person to the company/holding /subsidiary /associate

2 immediately preceding financial years or during the current financial year

has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. or more of its gross turnover or total income singly or in combination with above transactions.

Neither the Director nor his Relative:

Holds/held position of KMP/employee of the company, holding, associate – for preceding 3 financial years from proposed appointment.

(exception: a relative who is an employee)

is or has been an employee or proprietor or a partner in for preceding 3 Financial years in which he is proposed to be appointed of: –

i. a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

ii. 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;

holds together with his relatives two per cent. or more of the total voting power of the company; or
CEO or Director of any Non-profit organisation 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
who possesses such other qualification as may be prescribed.

Independent director means a non-executive director, other than a nominee director of the listed entity –

Note : the sub points are almost similar to Companies Act , 2013

Additional point:

Neither the Director nor his Relative:

· is a material supplier, service provider or customer or a lessor or lessee of the listed entity;

Independent Directors under Companies Act, 2013 & SEBI LODR Regulations

Applicability and No. of IDs

Class of Companies	Number of Independent Directors
Listed Companies :
Case 1: Chairperson – Non executive Director	Atleast 1/3^rd Director shall be Independent
Case 2: Chairperson – Not a Regular Non- Executive Director	Atleast 1/2^rd Director shall be Independent
Case 3: Chairperson – Regular non-executive chairperson or is a promoter of the listed entity or is related to any promoter or person occupying management positions at the level of board of director or at one level below the board of directors	Atleast 1/2^rd Director shall be Independent
Top 1000 listed entities	Atleast 1 Woman Independent Director
Other Public Companies
Paid up Capital – Rs 10 crores or more, Turnover – Rs 100 Crores or more, Aggregate, outstanding loans, debentures and deposits –exceeds Rs 50 Crore or more	At least 2 independent Directors

Note : –

In case a company is required to appoint higher number of independents directors due to composition of its audit committee and then they shall appoint such higher number of independent directors.

Tenure:

Companies Act, 2013

[Section 149(10) & (11)]

Sebi LODR, Regulations 2015 [Regulation (25(2)]

Appointment of ID – consecutive 5 years
Further Re appointment – Pass Special Resolution
No Independent Director shall hold office for more than two consecutive terms.
After reappointment of two consecutive terms, further appointment after cooling-off period of 3 years.

The maximum tenure of Independent Directors shall be in accordance with the Companies Act, 2013 and rules made thereunder, in this regard, from time to time.

Maximum Directorship:

Person shall not serve as an independent director in more than seven listed entities.
Person who is serving as a whole time director / managing director in any listed entity shall serve as an independent director in not more than three listed entities

Note: –

The count for the number of listed entities on which a person is a director / independent director shall be only those whose equity shares are listed on a stock exchange.

Other Important Points under Companies Act, 2013

Independent Director shall not be eligible for stock option.
The provisions of retirement by rotation will not be applicable.

Other Important Points under Sebi LODR, Regulations 2015

Minimum age 21 years.
Meeting: Atleast 1 meeting in a year.
An independent director who resigns or is removed from the board of directors of the listed entity shall be replaced by a new independent director by listed entity at the earliest but not later than the immediate next meeting of the board of directors or three months from the date of such vacancy, whichever is later.

Recent Amendment:

Insertion of new proviso to Regulation 25 (2A) w.e.f 14.11.2022.

Current Regulation

Amended Regulation

The appointment, re-appointment or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution.

The appointment, re-appointment or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution

Insertion of new proviso to Regulation 25 (2A)

Where a special resolution for the appointment of an independent director fails to get the requisite majority of votes but the votes cast in favour of the resolution exceed the votes cast against the resolution and
the votes cast by the public shareholders in favour of the resolution exceed the votes cast against the resolution
then the appointment of such an independent director shall be deemed to have been made under sub-regulation (2A)
an independent director appointed under the first proviso shall be removed only if the votes cast in favour of the resolution proposing the removal exceed the votes cast against the resolution and the votes cast by the public shareholders in favour of the resolution exceed the votes cast against the resolution.

DISCLAIMER: The content has been prepared according to relevant provisions and information that exist at the time of preparation of this document. The Readers are requested to refer the relevant existing provisions of applicable Laws.