Independent Directors: An Overview & Important Provisions

According to Section 2(47) of the Companies Act 2013, an Independent Director is defined as an independent director referred to in Section 149(5). An Independent Director is a non-executive director of the company who helps improve corporate credibility and governance standards. An Independent Director is a director not directly or indirectly connected to or associated with the company and does not participate in its day-to-day functioning.

APPLICABILITY:

According to Section 149(4) of the Companies Act 2013, read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following are the companies required to appoint independent directors:

1. Every listed public company must have at least one-third of the total number of directors as independent directors (any fraction is rounded off to one).
2. Every public company meeting the following criteria must have at least two directors as independent directors:
   • Having paid-up share capital of Rs. 10 crore or more.
   • Having a turnover of Rs. 100 crore or more.
   • Having aggregate outstanding loans, debentures, and deposits of more than Rs. 50 crore.

NOTE:

The amounts existing on the last date of the latest audited financial statements are taken into account for calculating the paid-up share capital, turnover, or outstanding loans, debentures, and deposits. The company must appoint a higher number of directors if a higher number of independent directors is required to compose an audit committee. A joint venture, wholly owned subsidiary, and dormant company are not required to appoint an independent director even if they meet the criteria.

IMPORTANT PROVISIONS RELATING TO INDEPENDENT DIRECTORS:

ELIGIBILITY: According to Section 149(6) of the Companies Act 2013, an independent director is a director other than a managing director, whole-time director, or nominee director who does not have any material or pecuniary relationship with the company/directors. The section also prescribes the eligibility criteria for independent directors.

DECLARATION BY AN INDEPENDENT DIRECTOR- SECTION 149(7):

Every independent director must give a declaration that he meets the criteria of independence:

1. When he attends the first meeting of the board as a director.
2. At the first board meeting in every financial year.
3. Whenever there is a change in the circumstances that may affect his position as an independent director.

REMUNERATION OF AN INDEPENDENT DIRECTOR- SECTION 149(9):

The independent director shall not be entitled to any stock option but may receive remuneration by way of sitting fees, reimbursement of expenses for participating in board/other meetings, and profit-related commission as approved by the members under Section 197(5) of the Act.

APPOINTMENT UNDER SECTION 149(10) & TERM OF APPOINTMENT:

The company shall hold a Board Meeting to approve the appointment of an Independent Director. Subject to Section 152 of the Companies Act 2013, an Independent Director can be appointed for a term of up to five consecutive years. For reappointment for another five years, a special resolution must be passed in the general meeting, and the disclosure of such appointment must be made in the Board’s report.

Further, an independent director shall be eligible for re-appointment after three years of ceasing to become an independent director, but he must not be appointed/associated with the company in any other capacity, either directly or indirectly.

NOTE: The provisions of retirement of directors by rotation do not apply to Independent Directors [Section 149(13)].

VACANCY:

If there’s a vacancy in the office of an independent director, it must be filled by the Board within three months from the date of the vacancy or at the immediate next board meeting, whichever is later.

LIABILITY OF AN INDEPENDENT DIRECTOR- SECTION 149(12):

An independent director is held liable only for acts of omission or commission by a company which have occurred with his knowledge, attributable through board processes, and with his consent or connivance, or where he has not acted diligently.

RESIGNATION OF AN INDEPENDENT DIRECTOR:

An Independent Director might leave his/her office by giving a notice in writing to the Company. After receipt of such notice, the company must hold a Board Meeting by giving seven days’ clear notice to the Board of Directors. The board shall pass a resolution accepting the resignation of the independent director. Within 30 days from the date of passing of such resolution, the Board must file Form DIR-12 with the Registrar of Companies.

NOTE:

The director’s resignation takes effect from the date the company receives the notice or the date specified in the notice, whichever is later. The resignation must be intimated to the stock exchange as soon as possible, or within 24 hours. [Reg. 30 of LODR] The resignation must be updated on the company’s website within 2 working days. [Reg. 46 of LODR] The resignation, along with the resignation letter and detailed reasons for resignation as provided by the ID, must be intimated to the stock exchange within 7 days from the resignation date.  

REMOVAL OF AN INDEPENDENT DIRECTOR

The Board may, either on an NRC recommendation or on its own observation or on the receipt of special notice from the member, proceed to call a general meeting to seek the approval of members to remove an ID, provided the Director was not appointed by the Central Government or the Tribunal.

Upon receipt of a special notice from the members, the Board shall promptly send a copy thereof to the concerned director. [Section 169(3) of the Act] If the ID submits any written representation, it shall be notified to the members as per Section 169(4) of the Act. A notice convening a general meeting for such removal shall be issued to members according to Section 115 of the Act read with Rule 23 of the Companies (Management and Administration) Rule, 2015. If a general meeting is already scheduled: Upon receipt of a special notice from the members, the BOD shall circulate the notice to its members at least 7 clear days before the general meeting. If circulating the notice is impracticable, the company shall publish it in at least one English Newspaper and one Vernacular language Newspaper, at least 7 days before the meeting and post the notice on the company’s website. If no general meeting is already scheduled: If the BOD believes that the performance of the ID is not satisfactory, they may recommend the removal of the ID directly to the members and approve the notice for convening a general meeting along with the explanatory statement. In the meeting, the members shall vote on the matter. If the majority votes in favor of the decision, the resolution will be passed. Before the resolution is passed, an opportunity of being heard shall be provided to the director. Within 30 days from the date the resolution is passed, the Board shall file Form DIR-12 with the Registrar of Companies.

NOTE:

• Disclosure of a change in director should be intimated to the stock exchange as soon as possible or within 24 hours. [Regulation 30 of LODR]
• Disclose the proceedings of the general meeting to the stock exchange within 24 hours. [Regulation 30 r/w Part A of Schedule III of LODR]
• Submit the voting results of the general meeting within 2 working days to the stock exchange. [Regulation 44 of LODR]
• Update the removal on the company’s website within 2 working days. [Regulation 46 of LODR].

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DISCLAIMER: This Blog is intended for informational/knowledge purposes only and should not be construed as solicitation in any manner or for any other purpose whatsoever.

For further clarification, please contact the author at 9953808432 or via email at [email protected]. The author is the founder of SINGHANIA & ASSOCIATES (Practicing Company Secretaries Firm) based in Delhi.