Independent Director under Companies Act, 2013- Detailed Analysis

Vidhi Gosar 17 Aug 2020 48,579 Views 2 comments Print Company Law | Articles

WHO CAN BE AN INDEPENDENT DIRECTOR / ELIGIBILITY CRITERIA: [Section 149(6)]

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, 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;

d. none of whose relatives—

(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year:

Provided that the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;

(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, for an amount of fifty lakh rupees during the two immediately preceding financial years or during the current financial year;

(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for an amount of fifty lakh rupees during the two immediately preceding financial years or during the current financial year; or

(iv) 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 the transactions referred to in sub-clause (i), (ii) or (iii);

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;

Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years.

(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 non-profit 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.

TOTAL NUMBER OF INDEPENDENT DIRECTORS TO BE APPOINTED: [Section 149(4)]

Every listed public company shall have at least one-third of the total number of directors as independent directors (Any fraction contained in that one-third shall be rounded off as one)

The Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following classes of companies shall have at least 2 directors as independent directors–

I. Public Companies having paid-up share capital of Rs. 10 crores or more; or

II. Public Companies having in aggregate outstanding loans, debentures, and deposits, exceeding Rs. 50 crore.

III. Public Companies having turnover of Rs. 100 crore or more; or

Note 1– The amount existing on the last date of latest audited financial statements shall be taken into account for calculating the paid-up share capital or turnover or outstanding loans, debentures and deposits.

Note 2– In case a company covered under this rule is required to appoint higher number of Independent Directors due to composition of its Audit Committee, such higher number of independent Directors shall be applicable to it.

NON APPLICABILITY:

The provisions of independent director are not applicable to private company. Also, where a public company ceases to fulfil any of three conditions (as prescribed in the above point) for 3 consecutive years, it shall not be required to appoint independent directors until such time as it meets any of such conditions.

Further the provisions of independent directors are not applicable to the following classes of unlisted public companies:

(a) joint venture company;

(b) wholly-owned subsidiary;

DECLARATION OF INDEPENDENCE: [Section 149(7)]

Every independent director shall give a declaration that he meets the criteria of independence as provided in sub-section (6)-

(a) at the first meeting of the Board in which he participates as a director, and

(b) thereafter at the first meeting of the Board in every financial year, or

Below mentioned is the Format of independent director’s Declaration of Independence under the Companies Act, 2013 and SEBI (LODR) Regulations, 2015.

Declaration of Independence

To,

The Board of Directors

[Name of the Company]

[Address}

Sub: Declaration under sub-section (6) of section 149 of the Companies Act 2013 and Regulation 16 (1)(b) of SEBI (LODR) Regulations, 2015:

I, [Name of the independent director], [Son of], [Resident of], hereby certify that I am a Non-executive Director of [Name of the Company] and comply with all the criteria of independent director envisaged under Section 149(6) of the Companies Act, 2013 and the provisions of Regulation 16(1)(b) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 as & when it may be notified. I hereby certify that:

1. I am/was not a promoter of the company or its holding, subsidiary or associate company;

2. I am/was not related to promoters or directors in the company, its holding, subsidiary or associate company;

3. I have/had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income 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.

4. None of my relatives—

(i) is holding any security of or interest in the company, its holding, subsidiary or associate company of face value exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company during the two immediately preceding financial years or during the current financial year:

(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors in excess of 50 lakhs rupees at any time during the two immediately preceding financial years or during the current financial year;

(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company in excess of 50 lacs rupees at any time during the two immediately preceding financial years or during the current financial year; or

5. Neither me nor any of my relatives 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

6. is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year 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 10% or more of the gross turnover of such firm;

7. holds together with his relatives 2% or more of the total voting power of the company; or

8. is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company; or

9. I possess appropriate skills, experience and knowledge in one or more fields of finance / law/ management / sales / marketing / administration / research / corporate governance / technical operations/other disciplines related to Power Exchange business (please specify) (strike out whichever is not applicable)

Thanking you,

Yours faithfully,

[Name of the independent director]

Director

[DIN]

Date:

Place:

REMUNERATION OF INDEPENDENT DIRECTOR: [Section 149(9)]

As per sub section 9 of Section 149 of the Companies Act 2013, an independent director shall not at any time be entitled to any stock option and may only receive remuneration by way of-

I. Fee provided under sub-section (5) of section 197;

II. Reimbursement of expenses for participation in the Board and other meetings; and

III. Profit related commission as may be approved by the members.

TENURE OF INDEPENDENT DIRECTOR: [Section 149(10) & (11)]

As per provisions of Section 149(10) and General circular no. 14/2014, 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 the same is required to be made in the Board’s report.

Further Section 149(11) states that 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 and during the said relaxation period, no independent director shall be appointed in or be associated with the company in any other capacity, either directly or indirectly.

LIABILITY OF INDEPENDENT DIRECTOR: [Section 149(12)}

Section 149(12) states that—

I. an independent director

II. a non-executive director, not being promoter or key managerial personnel,

shall be held liable, only in respect of such 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.

RETIRE BY ROTATION: [Section 149(13)]

The provisions of sub-sections (6) and (7) of Section 152 in respect of retirement of directors by rotation shall not be applicable to appointment of independent directors.

Manner of Appointment:

As per Schedule IV, the code for independent directors states about the manner of appointment of independent directors-

(1) Appointment process of independent directors shall be independent of the company management; while selecting independent directors the Board shall ensure that there is appropriate balance of skills, experience and knowledge in the Board so as to enable the Board to discharge its functions and duties effectively.

(2) The appointment of independent director(s) of the company shall be approved at the meeting of the shareholders.

(3) The explanatory statement attached to the notice of the meeting for approving the appointment of independent director shall include a statement that in the opinion of the Board, the independent director proposed to be appointed fulfils the conditions specified in the Act and the rules made thereunder and that the proposed director is independent of the management.

(4) The appointment of independent directors shall be formalised through a letter of appointment, which shall set out:

(a) the term of appointment;

(b) the expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to serve and its tasks;

(d) provision for Directors and Officers (D and O) insurance, if any;

(e) the Code of Business Ethics that the company expects its directors and employees to follow;

(f) the list of actions that a director should not do while functioning as such in the company; and

(g) the remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any.

(5) The terms and conditions of appointment of independent directors shall be open for inspection at the registered office of the company by any member during normal business hours.

(6) The terms and conditions of appointment of independent directors shall also be posted on the company’s website.

Re-appointment:

The re-appointment of independent director shall be on the basis of report of performance evaluation.

Resignation or removal:

(1) The resignation or removal of an independent director shall be in the same manner as is provided in sections 168 and 169 of the Act.

(2) An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within three months from the date of such resignation or removal, as the case may be.

(3) Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.

Separate Meetings:

(1) The independent directors of the company shall hold at least one meeting, without the attendance of non-independent directors and members of management;

(2) All the independent directors of the company shall strive to be present at such meeting;

(3) The meeting shall:

(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.

Note:- In view of COVID-19 Outbreak, a general circular no. 11/2020 dated 24th March, 2020 has been issued by Ministry of Corporate Affairs stating that the independent Directors of a company who have not been able to hold a meeting for the financial year 2019-20, the same shall not be viewed as a violation. However, the Independent Directors may share their views amongst themselves through telephone or e-mail or any other mode of communication, if they deem it to be necessary.

Evaluation Mechanism:

(1) The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.

(2) On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.

Conclusion: With reference to the provisions of Section 149 of Companies Act, 2013 and recent amendments, above mentioned information is-in depth analysis of the independent directors.