Independent Directors – Companies Act, 2013 & SEBI (LODR) Regulations, 2015

Independent Directors – Companies Act, 2013 and SEBI (LODR) Regulations, 2015

Independent Directors are non-executive Directors who do not have any material or pecuniary relationship with the Company. The Provisions pertaining to Independent Directors as specified under the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 are elaborated below:

Applicability of Independent Directors :

Non Applicability [Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014]

• Where a company ceases to fulfil any of three conditions as specified above for three consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions
• Private Companies
• Unlisted Public Companies
  • Joint Venture Company
  • Wholly Owned Subsidiary
  • Dormant Company

Eligibility

• A person to be appointed as an Independent Director shall satisfy the conditions as prescribed under Section 149(6) of the Companies Act, 2013 and Regulation 16(1)(b) of the SEBI (LODR) Regulations, 2015.
• Pursuant to Rule 6 of the Companies (Appointment and Qualifications of Directors) Rules, 2014, a person who has been appointed as an Independent Director and who intends to get appointed as an Independent Director shall before such appointment apply to the Indian Institute of Corporate Affairs for inclusion of his name in the Databank. Such individual is also required to pass an Online Proficiency Self-Assessment Test as conducted by the Institute within a period of one year from the date of inclusion of his name in the databank.
• The following individuals are exempted from the passing the Test:
• • An Individual who has served for a period not less than 10 years as a Director or Key Managerial Personnel (KMP) in a listed public company
  • An Individual who has served for a period of minimum 10 years as a Director or Key Managerial Personnel (KMP) in an unlisted public company having a paid-up share capital of Rs. 10 crore or more or in a body corporate listed in a stock exchange.

Number of Independent Directors:

Appointment of Independent Director

• The appointment of Independent Director shall be approved at the General Meeting of the Shareholders and the explanatory statement annexed to the notice of the Meeting called to consider the said appointment shall indicate the justification for choosing the appointee for appointment as Independent Director.
• The following information shall be stated in the explanatory statement annexed to the notice of the General Meeting on the appointment of a director for shareholder’s approval: [Regulation 36(3) of LODR Regulations and SS – 2 – 1.2.5]
  • Director Identification Number
  • Date of Appointment
  • Qualification
  • Expertise in functional areas
  • Number of meetings of the Board attended during the year
  • Directorships in other companies
  • Memberships in Board committees of other companies
  • of shares held in the company
  • Inter-se relationship with other directors or KMP of the company
  • Details of remuneration sought to be paid
  • Remuneration last drawn (if applicable)

• The explanatory statement attached to the notice shall include a statement that in the opinion of the Board, the Independent Director proposed to be appointed fulfils the specified conditions.

• In case of re-appointment of Independent Director, the performance evaluation report of such director or a summary shall be included in the explanatory statement.

• 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 and shall also be posted on the website of the Company.

Letter of Appointment

The appointment of independent directors shall be formalized through a letter of appointment, which shall set out the following (the information mentioned is indicative and not exhaustive)

• The expectation of the Board from the appointed director; the committee(s) in which the director is expected to serve and its tasks;
• The fiduciary duties and accompanying liabilities;
• The Code of Business Ethics;
• The remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any;
• Provision for Directors and Officers (D and O) insurance;
• The term of appointment etc.

Liability

Section 149(12), Companies Act, 2013	Regulation 25(5), SEBI (LODR) Regulations, 2015
An Independent Director and 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.	An Independent Director shall be held liable, only in respect of such acts of omission or commission by the listed entity which had occurred with his knowledge, attributable through processes of board of directors, and with his consent or connivance or where he had not acted diligently with respect to the provisions contained in SEBI (LODR) Regulations, 2015.

Tenure and re-appointment [Section 149]

• An Independent Director shall hold office for a term up to 5 consecutive years on the Board of a company.
• He shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.
• An Independent Director shall not hold office for more than two consecutive terms.
• Such Independent Director shall be eligible for appointment after the expiration of 3 years of ceasing to become an Independent Director.
• During the period of 3 years, he shall not be appointed in or be associated with the company in any other capacity, either directly or indirectly.
• The maximum tenure of Independent Directors shall be in accordance with the Companies Act, 2013 and rules made thereunder. [Regulation 25 SEBI(LODR) Regulations, 2015]

Small Shareholder Director [Rule 7 – Companies (Appointment and Qualification of Directors) Rules, 2014]

• A small shareholder director shall be considered as an independent director if
  • he is eligible for appointment as an independent director u/s 149 (6),
  • he gives a declaration of his independence u/s 149(7).
• His tenure as a small shareholder director shall not exceed 3 consecutive years.
• On the expiry of the tenure, he shall not be eligible for re-appointment.

Resignation, removal and intermittent vacancy

• In case an Independent Director of the listed entity resigns, within seven days from the date of resignation, the following disclosures shall be made to the stock exchanges by the listed entities:
  • Detailed reasons for the resignation as given by the said director shall be disclosed by the listed entities to the stock exchanges;
  • The independent director shall, along with the detailed reasons, also provide a confirmation that there are no other material reasons other than those provided;
  • The confirmation as provided above shall also be disclosed by the listed entities to the stock exchanges along with the detailed reasons. [Schedule III Part A SEBI (LODR) Regulations, 2015]

• A Director may be removed by an Ordinary Resolution before the expiry of the period of his office after giving him a reasonable opportunity of being heard.

• An independent director re-appointed for second term under sub-section (10) of section 149 shall be removed by the company only by passing a special resolution and after giving him a reasonable opportunity of being heard. [Section 169]

• Any Intermittent Vacancy shall be filled up 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.” [Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 and Regulation 25(6) of SEBI (LODR) Regulations, 2015]

Maximum number of Directorships of Independent Directors [Regulation 17A SEBI (LODR) Regulations, 2015]

• A person shall not serve as an Independent Director in more than seven listed entities.
• Any 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.

Alternate Directorship

Companies Act, 2013 –Section 161	SEBI (LODR) Regulations, 2015 – Regulation 25(1)
No person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act. He is permitted to act as an alternate director for a director during his absence for a period of not less than three months from India.	No person shall be appointed or continue as an alternate director for an Independent Director of a listed entity.

Appointment on Board of Subsidiary [Regulation 24(1) – SEBI (LODR) Regulations, 2015]

“At least one Independent Director on the Board of Directors of the holding company shall be a director on the Board of Directors of an unlisted material subsidiary company, whether incorporated in India or not.”

As per Regulation 16(1)(c) of the SEBI (LODR) Regulations, 2015,

“Material subsidiary” shall mean a subsidiary, whose income or net worth exceeds 10% of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

Disclosures

A. Initial Disclosures

Companies Act, 2013

• • DIR – 2: Consent to act as a Director u/s 152(5)
  • MBP-1: General disclosure of concern/interest
  • DIR-8: Declaration confirming their qualification for appointment u/s 164(2)
  • Section 149(7): Declaration by independent director confirming status of independence.
  • Rule 6: Declaration confirming inclusion of name in Databank

SEBI (LODR) Regulations, 2015

• • Regulation 25(8)-Declaration by independent director confirming status of independence
  • Regulation 26(2) – Disclosure of committee membership

B. Annual Disclosures

Companies Act, 2013

• • MBP-1: General disclosure of concern/interest
  • DIR-8: Declaration confirming their qualification for appointment u/s 164(2)
  • Section 149(7): Declaration by independent director confirming status of independence.
  • Rule 6: Declaration confirming inclusion of name in Databank and any renewal thereof

SEBI (LODR) Regulations, 2015

• • Regulation 25(8)- Declaration by independent director confirming status of independence
  • Regulation 26(2) – Disclosure of committee membership
  • Regulation 26(3) – Compliance with code of conduct of Board of Directors

The declaration shall state that he/she meets the criteria of independence and he/she is not aware of any situation, that could impact/impair his/her ability to discharge his/her duties with an objective independent judgement and without any external influence.

The Board of the listed entity shall take on record such declaration and provide a confirmation in the Corporate Governance section of the annual report, that the independent directors fulfil the conditions specified in the listing regulations and are independent of the management.

C. Board’s Report [Section 134]

• A statement on declaration given by Independent Directors.
• Company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director.
• Familiarisation Programme imparted to Independent Directors.

D. Corporate Governance Report [Schedule V, SEBI (LODR) Regulations, 2015]

• Composition and category of directors; attendance of each director at the meeting of the Board of Directors and the last annual general meeting.
• Web link where details of familiarisation programmes imparted to Independent Directors is disclosed.
• Details pertaining to the Board Committees.

E. Website Disclosures [Regulation 46, SEBI (LODR) Regulations, 2015]

• Terms and conditions of appointment of Independent Directors.
• Details of familiarization programmes imparted to Independent Directors.
  • Number of programmes attended by Independent Directors; Number of hours spent by the Independent Directors in such programmes; Other relevant details.

Remuneration

• Independent Directors are not entitled to stock options [Regulation :17(6)(d)]
• They are entitled to sitting fees and reimbursement of travel expenses for attending the board and other meetings. The sitting fees shall not exceed Rs. 1,00,000/ meeting. [Rule 4 Companies (Appointment and Remuneration of Managerial personnel) Rules, 2014]
• The sitting fees to be paid to Independent Directors and women directors shall not be less than the sitting fees paid to other directors.
• The Board of Directors shall recommend all fees/ compensation payable to Independent Directors and shall require the approval of shareholders in General Meeting. [Regulation :17(6)(a)]

Committees of the Board – Position of Independent Directors

		COMPOSITION	QUORUM
COMMITTEE	COMPANIES ACT, 2013	SEBI (LODR) REGULATIONS, 2015	SEBI (LODR) REGULATIONS, 2015
Audit Committee	S.177(2) – Should form a majority	R.18(1) – Two-thirds (2/3rd) of the members (Chairperson – ID)	Quorum with at least two Independent Directors
Nomination and Remuneration Committee	S.178(1) – One – Half shall be Independent Directors	R.19 – Fifty percent (50%) of the members (Chairperson – ID)	Quorum with at least one Independent Director
Stakeholders Relationship Committee	–	R.20 – One Independent Director	–
Corporate Social Responsibility Committee	S. 135 – At least one Independent Director	–	–

Meeting of Independent Directors [Schedule IV of the Companies Act 2013 and Regulation 25(3) of SEBI (LODR) Regulations, 2015]

• 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 and all the Independent Directors of the company shall strive to be present at such meeting to undertake following:
  • Review the performance of Non-Independent Directors and the Board as a whole;
  • Review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;
  • 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.
• The minutes may record that the meeting carried the evaluation, and the copy of the evaluation report in each of the specified matters may be communicated to the chairman of the Board.
• The findings may be shared with the Nomination and Remuneration Committee as well considering that they are to recommend the appointment or removal of the directors based on their performances evaluation.
• The sitting fees payable would be at the discretion of the Board.

Familiarisation Programme [Regulation 25(7) OF SEBI (LODR) Regulations, 2015]

The listed entity shall familiarize the Independent Directors through programs on matters including:

• Nature of the industry in which the listed entity operates;
• Business model of the listed entity;
• Roles, rights, responsibilities of independent directors; and
• Any other relevant information.

Performance Evaluation [Schedule IV, Companies Act, 2013 and Regulation 17(10) of SEBI (LODR) Regulations, 2015]

The performance evaluation of Independent Directors should be done by the entire Board of Directors, excluding the director being evaluated. 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.

Code for Independent Directors

Schedule IV of the Companies Act, 2013, lays down the following

• Guidelines of professional conduct
• Role and functions
• Duties
• Manner of appointment
• Re-appointment
• Resignation/ removal
• Separate Meetings
• Evaluation mechanism