Independent Directors in Public NBFC: Chairman’s Status Matters Only for Listed Entities

Independent Directors in a Public Limited NBFC: Does a Non-Independent Chairman Increase the Number Required?

Summary: The supplied material examines the independent-director requirements applicable to public companies carrying on NBFC business under three regulatory regimes: the Companies Act, 2013, the RBI (Non-Banking Financial Companies – Governance) Directions, 2025, and, for listed entities, the SEBI LODR Regulations, 2015. It states that Section 149(4) requires listed public companies to have at least one-third independent directors, while Rule 4(1) requires at least two independent directors for specified unlisted public companies crossing the prescribed ₹10 crore paid-up capital, ₹100 crore turnover or ₹50 crore aggregate loans, debentures and deposits thresholds. The RBI Governance Directions, 2025 impose a one-third floor for Middle and Upper Layer NBFCs. For listed entities, Regulation 17(1)(b) links the requirement to the chairman’s executive/non-executive and promoter-related status. Rule 4(2) exempts specified unlisted public companies, including joint ventures, wholly owned subsidiaries and dormant companies, from Rule 4(1). The material concludes that the chairman’s status is irrelevant to the ID count for an unlisted NBFC, while the chairman’s profile becomes relevant for a listed NBFC under Regulation 17(1)(b). No reported judicial precedent addressing this precise regulatory interplay is identified in the supplied material.

Short Answer

For an unlisted public company — including an unlisted NBFC — the ID count is fixed by objective triggers only: Rule 4(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014 (financial thresholds) and, where the NBFC sits in the Middle or Upper Layer, the RBI (Non-Banking Financial Companies – Governance) Directions, 2025 (a flat one-third floor). A non-independent chairman changes neither number. The position changes only once the company is listed: Regulation 17(1)(b) of the SEBI LODR Regulations, 2015 then scales the ID requirement up to one-half, or beyond one-half, but the scaling is driven by the chairman being executive, or a promoter/promoter-related non-executive — not merely by the chairman failing to qualify as independent.

Applicable Legal Provisions

• Section 149(4), Companies Act, 2013 — mandates at least one-third of total directors as independent directors, applicable only to a listed public company.
• Explanation to Section 149(4) — any fraction in the one-third computation is rounded off to the next whole number.
• Section 149(6), Companies Act, 2013 — lays down the eligibility and independence criteria that a person must satisfy to be appointed as an independent director.
• Rule 4(1), Companies (Appointment and Qualification of Directors) Rules, 2014 — requires at least two independent directors for specified classes of unlisted public companies that cross prescribed financial thresholds.
• Proviso to Rule 4(1) — where any other law in force prescribes a higher number of independent directors for a class of companies, that higher number must be complied with instead of the Rule 4(1) minimum.
• Rule 4(2), Companies (Appointment and Qualification of Directors) Rules, 2014 — excludes certain classes of unlisted public companies (including joint ventures, wholly owned subsidiaries, and dormant companies under Section 455) from the Rule 4(1) requirement.
• Reserve Bank of India (Non-Banking Financial Companies – Governance) Directions, 2025, effective 28 November 2025 — the consolidated governance framework for NBFCs, applicable in a layered manner, which has withdrawn and replaced the governance chapter of the erstwhile Scale Based Regulation Master Direction of 19 October 2023. RBI (Non-Banking Financial Companies – Governance) Directions, 2025
• Regulation 17(1)(b), SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”) — applicable only where the NBFC’s securities are listed, and links the required proportion of independent directors to the chairman’s executive/non-executive and promoter-linked status. Regulation 17

Relevant Extracts

Section 149(4) requires a listed public company to maintain at least one-third of its total directors as independent directors, with any resulting fraction rounded upward.

Rule 4(1) applies to public companies with paid-up share capital of ten crore rupees or more, or turnover of one hundred crore rupees or more, or aggregate outstanding loans, debentures and deposits exceeding fifty crore rupees, and requires at least two independent directors on the board of such companies. Rule 4

The RBI’s Governance Directions, 2025 apply Chapter III to all NBFCs, Chapters II to IV additionally to Middle Layer NBFCs, and Chapters II to V additionally to Upper Layer NBFCs — the independent-director composition floor and the related restrictions sit within the chapters applicable to the Middle and Upper Layers. Divesh should verify the exact paragraph numbering against the notified text before citing it in an opinion, since the Directions are recent and secondary commentary on them is still settling.

Regulation 17(1)(b) of the SEBI LODR ties board composition to the chairman’s profile: one-third where the chairman is a non-executive director unconnected to the promoter group; one-half where the company has no regular non-executive chairperson (which includes an executive chairman); and more than one-half where the non-executive chairman is the promoter or is related to the promoter or to management at the board level or one level below.

Legal Position

Two separate statutory tracks operate on an NBFC that is a public company, and a third — the SEBI LODR — joins only once the company is listed.

Companies Act Track

First, the Companies Act track. Section 149(4) applies exclusively to listed public companies and fixes a one-third floor. Rule 4(1) applies to unlisted public companies once they cross any one of the three financial thresholds — paid-up capital, turnover, or aggregate borrowings — and fixes a flat floor of two independent directors, regardless of board size. Neither provision so much as mentions the chairman. The composition is entirely a function of listing status and balance-sheet size.

RBI Track

Second, the RBI track. The Governance Directions, 2025 impose an additional, parallel floor of one-third of the board for NBFCs in the Middle and Upper Layers — again without reference to the chairman’s profile. Where an NBFC is simultaneously covered by Rule 4(1) and by the RBI’s one-third requirement, the proviso to Rule 4(1) resolves the overlap: the higher of the two numbers governs, since the RBI Directions constitute “law for the time being in force” prescribing a higher requirement for that class of company. A Base Layer NBFC sits outside the RBI composition floor altogether and falls back on the Companies Act position alone.

SEBI LODR Track

Third, the SEBI LODR track — relevant only if the NBFC’s shares are listed. Here, and only here, does the chairman’s profile change the arithmetic. But the trigger is more precise than “chairman is not independent.” A chairman can be non-executive, unrelated to the promoter group, and still not carry the independent-director tag (for instance, a former whole-time director serving a cooling-off period, or a nominee director) — in that case Regulation 17(1)(b) still asks for only one-third, because the relevant test is executive/non-executive and promoter-linkage, not the ID label itself. The requirement escalates to one-half only where there is no regular non-executive chairperson at all, and beyond one-half only where the non-executive chairman is a promoter or promoter-linked person.

Independent Director Requirement by Scenario

For a listed NBFC specifically, the escalation under Regulation 17(1)(b) works as follows:

Exemptions/Relaxations

Rule 4(2) exempts a joint venture company, a wholly owned subsidiary, and a dormant company under Section 455 from the Rule 4(1) requirement even if they cross the financial thresholds. An NBFC structured as a wholly owned subsidiary of a bank, foreign parent, or holding company would fall outside Rule 4(1) on this ground — but this Companies Act exemption does not extend to the RBI’s Governance Directions, 2025, which do not carry an equivalent carve-out for wholly owned subsidiaries in the Middle or Upper Layer. A wholly owned subsidiary NBFC that is Middle or Upper Layer classified must still meet the RBI’s one-third floor even though it is outside Rule 4(1).

Case Laws / Professional Interpretation

No reported NCLT, NCLAT, or High Court ruling addresses this precise interplay between the Companies Act’s listing-linked and threshold-linked ID requirements, the RBI’s layer-linked floor, and the SEBI LODR’s chairman-linked escalation. The position taken above rests on a plain reading of the three regimes rather than on settled case law, and should be treated as the firm’s considered view rather than a judicially confirmed one.

Practical Interpretation

Before advising on the number of independent directors an NBFC must appoint, the following sequence should be run, in order:

• Confirm listing status — is the NBFC’s equity listed on a recognised stock exchange?
• If listed, compute Section 149(4)’s one-third floor and, separately, Regulation 17(1)(b)’s floor based on the actual profile of the chairman (executive/non-executive, promoter-linked or not) — and apply whichever of the two produces the higher number for that company.
• If unlisted, check whether paid-up capital, turnover, or aggregate borrowings cross the Rule 4(1) thresholds; if none is crossed, and no other class-specific law applies, there is no Companies Act-driven ID requirement.
• Independently, confirm the NBFC’s SBR layer classification (Base, Middle, or Upper). If Middle or Upper Layer, apply the RBI’s one-third floor under the Governance Directions, 2025.
• Where both Rule 4(1) and the RBI floor apply, appoint the higher number, per the proviso to Rule 4(1).
• Do not treat the chairman’s profile as a variable at any stage above unless step 2 (listed company) is actually in play.

On non-compliance: a shortfall in the mandated number of independent directors under Section 149(4) or Rule 4(1) is treated as a contravention of Section 149, attracting the general penalty prescribed under Section 172 of the Companies Act, 2013 for the company and every officer in default. The exact quantum should be verified against the current text of Section 172 before being quoted to a client, since penalty provisions of this kind have been recalibrated by subsequent amendment and are the type of figure that goes stale quickly. On the RBI side, shortfall in the Governance Directions’ composition floor is a supervisory and inspection issue rather than a criminal-penalty issue, and typically surfaces through RBI’s fit-and-proper review and continued-listing conditions for Upper Layer NBFCs.

Example

Suvidha Capital Limited is an unlisted public limited company, classified by RBI as an NBFC in the Middle Layer, with a paid-up share capital of ₹15 crore and a nine-member board. Its chairman is a non-executive director who is neither a promoter nor an independent director. Because Suvidha Capital is unlisted, Regulation 17(1)(b) does not apply and the chairman’s profile is irrelevant to the ID count. Rule 4(1) is triggered by the ₹10 crore paid-up capital threshold and requires at least 2 independent directors. Separately, the RBI’s Governance Directions, 2025 require at least one-third of the nine-member board — that is, 3 independent directors — because the company is Middle Layer. Under the proviso to Rule 4(1), the higher of the two, 3 independent directors, governs. The composition of the chairman’s role has no bearing on this outcome.

Conclusion

For a public limited NBFC, the number of independent directors required is set by listing status and financial/regulatory thresholds — not by whether the chairman happens to be an independent director. An unlisted NBFC computes its ID requirement from Rule 4(1) of the Appointment Rules and, if Middle or Upper Layer, from the RBI’s Governance Directions, 2025, taking the higher of the two; the chairman’s status is simply not a factor. Only a listed NBFC brings the chairman into the calculation, and even then, the escalation depends on whether the chairman is executive, or a promoter-linked non-executive — a materially narrower trigger than the common practitioner shorthand of “chairman not independent, so half the board must be.” The conservative and legally accurate position is to treat the chairman’s independence as irrelevant unless the company is listed and the chairman specifically falls within Regulation 17(1)(b)’s promoter-linked or no-non-executive-chairperson categories.

FAQs

Q1. Does the RBI’s one-third requirement apply to a Base Layer NBFC?

No. The Governance Directions, 2025 apply that floor only where the NBFC is classified as Middle Layer or Upper Layer. A Base Layer NBFC’s ID requirement, if any, comes solely from the Companies Act.

Q2. Our NBFC is unlisted but the chairman is a promoter-director. Does that push our ID count to more than half?

No. The promoter-linked escalation under Regulation 17(1)(b) is a SEBI LODR provision that applies only to listed entities. An unlisted NBFC is governed only by Rule 4(1) and, if applicable, the RBI’s one-third floor.

Q3. If Rule 4(1) requires 2 independent directors but the RBI floor works out to a higher number, can we appoint only 2?

No. The proviso to Rule 4(1) requires compliance with the higher number wherever another law in force prescribes one, so the RBI-derived number prevails in that situation.

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected]).