Independent Director under DPE Guidelines: Definition, Eligibility, Experience & IICA Test Exemption

Summary: The DPE Guidelines on Corporate Governance for Central Public Sector Enterprises prescribe specific conditions for determining whether a person qualifies as an Independent Director, including independence from the company, its management and material business relationships. The criteria cover pecuniary relationships, relatives in management, prior employment, professional associations, business relationships and shareholding. The guidelines also prescribe qualification and experience requirements, including the subsequent modification of experience criteria under DPE O.M. No. 18(10)/2003-GM-GL-75 dated 10.11.2005. In addition, Independent Directors are subject to disclosure requirements concerning pecuniary relationships or transactions. The framework also distinguishes the DPE-specific definitions of related party and Independent Director from corresponding concepts under the Companies Act. Separately, the framework governing the Independent Directors’ databank maintained by the Indian Institute of Corporate Affairs (IICA) provides exemptions from the online proficiency self-assessment test for individuals meeting specified experience criteria, including qualifying directorship or KMP experience and ten years of professional practice as an advocate, Chartered Accountant, Cost Accountant or Company Secretary.

I. Definition of Independent Director under DPE Guidelines

An Independent Director, per the DPE Guidelines on Corporate Governance for CPSEs, is a part-time Director who satisfies all of the following conditions:

• No pecuniary relationship: Apart from Director’s remuneration, has no material pecuniary relationship or transaction with the company, its directors, senior management, holding company, subsidiaries, or associates that may affect independence.
• Not related to persons occupying management positions at Board level or one level below the Board.
• No prior employment in the company: Has not been a senior executive/managerial personnel of the company in the immediately preceding three financial years.
• No firm/professional association (current or preceding 3 years): Is not, and was not, a partner or executive of any statutory/internal/tax/energy/management/risk/insurance audit firm associated with the company, or of any panel advocate(s), legal firm(s), consultant(s), or expert(s) having a material association with the company.
• No material business relationship: Is not a material supplier, service provider, customer, lessor, or lessee of the company that may affect independence.
• Shareholding threshold: Is not a substantial shareholder owning 2% or more of the block of voting shares.

Definitions applicable for the above

“Associate”: As defined in Accounting Standard 23 (AS-23) – Accounting for Investments in Associates in Consolidated Financial Statements, issued by the ICAI.

“Senior Management”: Members of the company’s core management team (excluding the Board), normally comprising all members one level below Functional Directors, including functional heads.

“Relative”: As defined under Section 2(41) read with Section 6 and Schedule IA of the Companies Act, 1956:

i.e. (a) members of a Hindu Undivided Family, (b) husband and wife, or (c) persons related in the manner set out in Schedule IA (22 specified relatives; no person outside this list qualifies as a ‘relative’).

II. Qualification and Experience Criteria — DPE O.M. No. 18(10)/2003-GM-GL-55 dated 11.03.2004

• Qualification: Graduate degree from a recognised university.
• Experience: As originally prescribed under GL-55, subsequently modified by DPE O.M. No. 18(10)/2003-GM-GL-75 dated 10.11.2005 (below).

III. Modified Experience Criteria — DPE O.M. No. 18(10)/2003-GM-GL-75 dated 10.11.2005

Para 3(b) of GL-55 stands modified the experience criterion as follows, not less than 10 years’ experience in any one of the below:

• Government: Joint Secretary and above in the Government.
• Corporate/Public Sector: CMD or MD in the corporate sector or a Public Sector Enterprise (PSE).
• Academia: Professor level in an academic institution, in a field relevant to the company’s area of operation.
• Professions: Professionals of repute, such as eminent Chartered Accountants or Cost Accountants, at the level of Directors of Institutes or Heads of Department.
• Industry/Agriculture: Persons of eminence with a proven track record from Industry, Business, or Agriculture.

GL-75 amends only para 3(b) (Experience) of GL-55; the Qualification (graduate degree) and Age (45–65 years, relaxable to 70 for eminent professionals) criteria under GL-55 continue to apply unchanged.

IV. Disclosure Requirement

All pecuniary relationships or transactions of Independent Directors in relation to the company shall be disclosed in the company’s Annual Report.

V. Scope of DPE Definitions

It is relevant to note that the definition of ‘related party’ for this purpose is limited to the definition given under the DPE Guidelines, and ‘Independent Director’ is likewise specifically defined under the DPE Guidelines as set out in Section I above.

VI. Exemption from IICA Online Proficiency Self-Assessment Test

Apart from the above, there is no exemption from registration in the Independent Directors’ databank maintained by the IICA. However, an individual is exempt from the online proficiency self-assessment test where either of the following two conditions is satisfied:

(1) Three years’ relevant experience

Three years’ relevant experience: An individual is exempt where he/she has served for a total period of not less than three years, as on the date of inclusion of his/her name in the databank, under either of the following:

(A) As Director or Key Managerial Personnel in:

• • A listed public company;
  • An unlisted public company having paid-up share capital of ₹10 crore or more;
  • A body corporate listed on a recognised stock exchange in India, or in a FATF member-State whose securities regulator is an IOSCO member;
  • A body corporate incorporated outside India, having paid-up share capital of US$ 2 million or more;
  • A statutory corporation set up under an Act of Parliament or State Legislature, carrying on commercial activities.

(B) Government Service:

• • Pay scale of Director (or equivalent/above) in any Ministry/Department of the Central or State Government, with experience in commerce, corporate affairs, finance, industry, public enterprises, or affairs of Government companies/statutory corporations (set up under an Act of Parliament or State Act) carrying on commercial activities; or
  • Pay scale of Chief General Manager (or above) in SEBI, RBI, IRDAI, or PFRDA, with experience in corporate laws, securities laws, or economic laws.

(2) Ten years in professional practice

Ten years in professional practice: An individual who has been in practice for at least ten years, as any one of the following, is exempt:

• Advocate of a court;
• Practising Chartered Accountant;
• Practising Cost Accountant;
• Practising Company Secretary.

Related TaxGuru reference: The IICA databank and online proficiency self-assessment framework is discussed in TaxGuru’s Self-Assessment Test – Independent Director.