All about Independent Director under Companies Act 2013 with FAQs

Section 149 and Section 150 of Companies Act, 2013 read with Chapter XI The Companies (Appointment and Qualifications of Directors) Rules, 2014

Independent Director: ‘independent director’ means an independent director referred to in sub-section (6) of section 149 (Annexure A of this Article).

Applicability: 

1. Listed Company.

2. the Public Companies having paid up share capital of ten crore rupees or more; or

(ii) the Public Companies having turnover of one hundred crore rupees or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

Exemption for Appointment:

Unlisted public companies which are in a joint venture, a wholly owned subsidiary or a dormant company as defined under section 455 of the Act and fulfilling the above requirements are not required to appoint Independent Directors.

Number of Independent Directors Required:

• Listed Company shall have at least one-third of the total number of directors as independent directors.
• Unlisted Public Companies shall have at least two directors as independent directors.

Code for Independent Directors:

The Code(Schedule IV) is a guide to professional conduct for independent directors, which is mandatory to abide by the Company and Independent Directors.(http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17920). The Code Includes Guidelines of Professional Misconduct, Role, Functions and Duties of Independent Directors and Manner of Appointment, Re-Appointment, Resignation or Removal of Independent Directors.

Disclosure Required:

Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence.

Separate Meetings:

The independent directors of the company shall hold at least one meeting in a financial year, without the attendance of non-independent directors and members of management, All the independent directors of the company shall strive to be present at such meeting.

Mandatory Agenda of Meeting:

• 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.

Remuneration:

An independent director shall not be entitled to any stock option and may receive remuneration by way of sitting fee (as per sub-section (5) of section 197), reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

Note:-

Remuneration shall be subject to the Provisions of Section 197 and 198 of Companies Act, 2013.

Sitting Fees

• As per Rule 4 of Companies(Appointment and Remuneration of Managerial Personnel Rules), 2014 shall not be more than 1 lakh Rupees per meeting of Board or Committee to directors.
• Sitting Fees paid to independent directors and Women Director shall not be less than to other Directors.

Term of Appointment:

Appointment shall be as per the provisions of Section 152 of Companies Act, 2013 and shall be for a term of upto 5 consecutive years. MCA circular no. 14/2014 dated 9^th June, 2014 clarifies that Independent Director can be Appointed for less than 5 consecutive years.

Re-appointment:

Independent Director shall be eligible for re-appointment on passing of a special resolution and disclosure of such appointment in the Board’s report.

However no independent director shall hold office for more than two consecutive terms.

Term:  MCA circular no. 14/2014 dated 9^th June, 2014 clarifies that one term of appointment can be of less than 5 years but appointment shall not be for more than two consecutive terms.

Cooling Period: Independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director.However independent director shall not, during the cooling period shall be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Vacancy:

In case of Vacancy arise of Independent Director, it shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy.

Retirement of Directors by Rotation:

These provisions shall not be applicable to Independent Directors.

Compliances for Independent Directors Eligibility: As per the provisions of Rule 6 of Chapter XI The Companies (Appointment and Qualification of Directors)Rules, 2014 Every Individual who has been appointed as an independent director in a company, on 01.12.2019, shall within a period of three months and who wants to get appoint as an Independent Director shall apply online to the institute for inclusion of his name in the data bank. Online proficiency self-assessment test An individual whose name is included in the data bank shall pass by obtaining a score of not less than sixty percent. in aggregate in online proficiency self-assessment test conducted by the institute within a period of one year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the databank of the institute. However an individual who has served for a period of not less than ten years as on the date of inclusion of his name in the databank as director or key managerial personnel in a listed public company or in an unlisted public company having a paid-up share capital of rupees ten crore or more shall not be required to pass the online proficiency self-assessment test. Note: For Calculation of 10 Years any period during which an individual was acting as a director or as a key managerial personnel in two or more companies at the same time shall be counted only once. Disclosure Required: Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6) and fulfills inclusion of his name in Data Bank as per Rule 6 of Chapter XI The Companies(Appointment and Qualification of Directors)Rules, 2014. Liability: Independent Director 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.

FREQUENTLY ASKED QUESTIONS:

Q 1. How to find Independent Directors?

Ans: An independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors maintained by Indian Institute of Corporate Affairs at Manesar.

Q 2. Which topics will be part of online proficiency self-assessment test?

Ans: This test will be based on all relevant topics on functioning of an individual acting as an Independent Director, such as, Companies Law, Securities Law, Basic Accountancy and Corporate Governance.

Q 3. Who approve the Appointment of Independent Directors?

Ans: The appointment of independent director shall be approved by the company in general meeting.

Q 4. What if Company failed to fulfill the Conditions of Appointment in later date?

Ans: A company ceases to fulfil any of the conditions laid down above for three consecutive years, it shall not be required to comply with the provisions until it meets the Conditions again.

Note: The paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account.

Q 5. For How much time name can be include in Data Bank?

Ans: Inclusion of name in the data bank can be for a period of one year or five years or for life-time by paying accordingly.

Q 6. How to apply for Renewal of Application?

Ans: Application for renewal shall be filed within a period of thirty days from the date of expiry of the period.

Q 7. How many attempts are allowed for appear in online proficiency self-assessment test?

Ans: There is no limit.

Q 8. Is DIN Required for Inclusion of name in Data Bank?

Ans: Any individual not having DIN, may voluntarily apply to the institute for inclusion of his name in the data bank.

Annexure A:

Who are Considered as Independent Directors:

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, in excess of such amount as may be prescribed 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 such amount as may be prescribed 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 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.