Section 149(5) of the Companies Act, 2013 (the Act) defines an Independent Director as 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 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 has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of its gross turnover or total income or Rs. 50 lakh or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
(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;
(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 10% or more of the gross turnover of such firm;
(iii) holds together with his relatives 2% 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 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
(f) who possesses appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or disciplines related to company’s business.
Nominee Directors appointed either as lending institutions’ representative or as shareholders’ representative shall not be considered as Independent Directors.
A. Section 149 of the Act read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides the following in relation to appointment of Independent Directors :
|1.||Listed public companies||Atleast 1/3 of Board to be IndependentSEBI Regulations – Where the Chairman of the Board of directors is a non-executive director, at least 1/3 of the Board shall comprise independent directors and in case the company does not have a regular non-executive Chairman, at least 1/2 of the Board shall comprise independent directors.
Provided that where the regular non-executive Chairman is a promoter of the listed entity or is related to any promoter or person occupying management positions at the level of Board of Director or at one level below the Board of directors, at least 1/2 of the Board shall consist of independent directors.
|2.||Other public companies havinga) paid-up capital of Rs. 10 crore or more or
b) turnover of Rs. 100 crore or more or
c) outstanding loans / debentures / deposits of Rs. 50 crore or more.
(Paid-up share capital / turnover will be reckoned as per the last date of the latest audited financial statements)
Where a company ceases to fulfill any of aforesaid conditions for 3 consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions.
|Atleast 2 Independent DirectorsIn case the company is required to appoint a higher number of Independent Directors, due to the composition of Audit Committee, such higher number shall be applicable to it.
Transition Period – Companies have been given 1 year from commencement of the Act (i.e. by 31.03.2015) to comply with this requirement.
♣ What is the term of appointment?
a. In terms of the Act, Independent Director may be appointed for a maximum of two terms of upto five consecutive years each. The second term of appointment shall require approval by way of a special resolution. The fact of appointment for second term shall need to be disclosed in the Board’s Report.
A cooling off period of 3 years has been stipulated before the Director can again be appointed as Independent Director; during such period, the concerned person should not be associated with the Company in any manner.
b. Any tenure of existing Independent Directors as on the date of commencement of the Act will not be counted for the aforesaid purpose.
♣ Declaration of Independence
Every independent director shall at the first Board meeting in which he participates as a director and thereafter at the first Board meeting 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 detailed above.
Such declaration of independence shall form part of the Board’s Report as laid down in Section 134(3) of the Act.
♣ What is the manner of appointment of Independent Directors?·
(a) The appointment process of Independent Directors shall be independent of the company management.
(b) 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.
(c) The appointment of Independent Directors shall be approved at a meeting of shareholders. The explanatory statement attached to the notice of the meeting for approving the appointment of Independent Director shall include –
(d) The company would need to issue letters of appointment to Independent Directors containing the following:
(e) The terms & conditions of appointment of Independent Directors shall be
a) kept open for inspection at the registered office by any member during business hours;
b) posted on the company’s website, if any.
♣ Compliance with Schedule IV to the Act – Code for Independent Directors
The company and Independent Directors shall comply with Schedule IV which contains the following –
a) Guidelines of professional conduct, role, functions and duties of Independent Directors
b) Manner of appointment of Independent Directors (as discussed in detail above) – Re-appointment of Independent Directors shall be done on the basis of report of performance evaluation. The performance evaluation of Independent Directors shall be done by the entire Board excluding the Director being evaluated.
In terms of SEBI Regulations, the Nomination and Remuneration Committee shall lay down the evaluation criteria for performance evaluation of Independent Directors. Such criteria shall also be disclosed in the Annual Report.
c) An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within a period of not more than 180 days from the date of such resignation or removal, as the case may be [Schedule IV to the Act and SEBI Regulations]. In case the listed entity fulfills the requirement of Independent Directors in its Board of Directors even without filling the vacancy created by such resignation or removal, the requirement of replacement by a new Independent Director shall not apply.
Intermittent vacancies in the office of Independent Directors are to be filled up at the next Board meeting or within 3 months from the vacancy, whichever is earlier. [Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014]
There seems to be an anomaly between the Act and the Rules relating to filling of vacancy in the office of Independent Director.
d) Separate meetings – The Independent Directors shall hold atleast one separate meeting in a year, without the attendance of Non-Independent Directors and members of management. All the Independent Directors shall strive to be present at such meeting. In such meeting, the Independent Directors shall :
♣ Which Board Committees?
A. Audit Committee – Section 177 of the Act requires listed companies and public companies having paid-up capital of Rs. 10 crore or more or turnover of Rs. 100 crores or more or outstanding loans / borrowings / debentures / deposits of Rs. 50 crores or more to constitute an Audit Committee comprising a minimum of 3 directors with independent directors forming majority.
The Audit Committee shall act in accordance with terms of reference specified in writing by the Board which shall inter alia include
(i) the recommendation for appointment, remuneration and terms of appointment of auditors of the company;
(ii) review and monitor the auditor’s independence and performance, and effectiveness of audit process;
(iii) examination of the financial statement and the auditors’ report thereon;
(iv) approval or any subsequent modification of transactions of the company with related parties;
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is necessary;
(vii) evaluation of internal financial controls and risk management systems;
(viii) monitoring the end use of funds raised through public offers and related matters.
Transition period – Within 1 year (i.e. by 31.03.2015)
B. Nomination and Remuneration Committee – Section 178 of the Act requires listed companies and public companies having paid-up capital of Rs. 10 crore or more or turnover of Rs. 100 crores or more or outstanding loans / borrowings / debentures / deposits of Rs. 50 crores or more to constitute a Nomination and Remuneration Committee comprising minimum 3 Non-Executive Directors with atleast one-half to be independent.
The role of this Committee will be, inter alia, to –
i. Identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down;
ii. Recommend their appointment and removal to the Board;
iii. Carry out performance evaluation of every director;
iv. Formulate criteria for determining qualifications, positive attributes and independence of a Director;
v. Recommend to the Board a policy relating to the remuneration of Directors, KMP and other employees. Such policy shall be disclosed in the Board’s Report.
Transition period – Within 1 year (i.e. by 31.03.2015) or appointment of Independent Directors, whichever earlier.
C. Corporate Social Responsibility (CSR) Committee – Section 135 of the Act requires companies having net worth of Rs. 500 crore or more or turnover of Rs. 1000 crore or more or net profit of Rs. 5 crore or more to constitute a CSR Committee comprising minimum 3 directors with atleast 1 Independent Director.
The role of this Committee will be inter alia, to
i. Formulate and recommend to the Board a CSR Policy;
ii. Recommend the amount of CSR expenditure; and
iii. Institute a transparent monitoring mechanism for implementation of CSR projects / programmes / activities.
♣ What is the limit on number of Directorships?
In terms of SEBI Regulations, Independent Directors can serve on maximum 7 listed companies. Further, if the concerned individual is serving as a whole time director in a listed company, the number shall be reduced to 3 listed companies.
♣ Other provisions
(a) Independent Directors shall not be entitled to stock options. They can however be paid sitting fees and profit related commission as may be approved by the shareholders.
Rule 4 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that companies can pay sitting fees to their Directors for attending meetings of Board / Board Committee upto Rs. 1 lakh per meeting. The sitting fees payable to Independent Directors and Woman Directors shall not be less than the sitting fees payable to other directors.
(b) The provisions with respect to retirement by rotation will not apply to Independent Directors. Further, the total number of Directors for the purpose of calculation of Directors liable to retire by rotation shall not include Independent Directors (whether appointed under this Act or any other law for the time being in force).
(c) An alternate Director to an Independent Director has to be an Independent Director.
Note : SEBI regulations are not mandatory for
a) Companies having paid up equity share capital not exceeding Rs.10 crore and net worth not exceeding Rs. 25 crore, as on the last day of the previous financial year. In case the company meets thresholds at a later date, the same shall be complied within six months
b) Companies whose equity share capital is listed exclusively on the SME and SME-ITP Platforms