Introduction: The role of independent directors in corporate governance is pivotal, governed by various provisions under the Companies Act 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Understanding these provisions is crucial for companies, especially those listed on the stock exchange. This article delves into the essential aspects, applicability, exemptions, and restrictions associated with independent directors.
Applicable Acts, Rules or Regulations: Section 149, Schedule IV and V of Companies Act 2013, Companies (Appointment and Qualification of Directors) Rules, 2014 and Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019.
Regulation 16, 17, 17A, 24 and 25 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
Applicability On Appointing Independent Director:
- Listed Public Company
- Unlisted Public companies with paid-up share capital of Rs.10 crore or more.
- Unlisted Public companies with a turnover of Rs.100 crore or more.
- Unlisted Public companies with aggregate outstanding loans, debentures, and deposits, exceeding Rs.50 crore.
shall have at least one-third of the total number of directors as independent directors [Section149(4)]
Exemption: In these unlisted public companies – joint venture, wholly owned subsidiary and dormant company are not required to appoint an independent director even if they meet the criteria.
Where the chairperson of the board of directors is a non-executive director, at least one-third of the board of directors shall comprise of independent directors and where the listed entity does not have a regular non-executive chairperson, at least half of the board of directors shall comprise of independent directors. [Regulation 17(1)(a)]
Provided that where the regular non-executive chairperson 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 half of the board of directors of the listed entity shall consist of independent directors. [Regulation 17(1)(a)]
Directors proposing to be independent directors and the existing Independent directors are required to empanel themselves for data bank and need to pass the examination, i.e. online proficiency self-assessment test. Exemption from test are provided in Rule 6(4) of Companies (Appointment and Qualification of Directors) Rules, 2014.
Term of Appointment
1. No independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director. Provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.
The independent director shall be appointed for a maximum term of 5 years. [Section 149 (10) & (11)]
No independent director, who resigns from a listed entity, shall be appointed as an executive / whole time director on the board of the listed entity, its holding, subsidiary or associate company or on the board of a company belonging to its promoter group, unless a period of one year has elapsed from the date of resignation as an independent director. [Regulation 25(11)]
2. Any vacancy in the office of independent director shall be filled in the very next Board Meeting or within 3 months of such vacancy, whichever is later. [Section 161(4), Regulation 17(1E), 25(6)]
Restriction on Number of Independent Directorship:
A person cannot be an independent director in more than seven Listed Companies at a time and any person who is serving as a Whole-time Director/Managing Director in any Listed Entity shall serve as Independent Director in not more than three Listed Entities. [Regulation 17A]
Remuneration of Independent Directors
Subject to the provisions of sections 197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration by way of fee provided under subsection (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. [Section 149(9)]
Provided that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 197, in accordance with the provisions of Schedule V. [Section 149(9)]
The Board of Directors shall recommend all fees or compensation, if any, paid to non-executive directors, including independent directors and shall require approval of shareholders in general meeting [Regulation 17(6)]
The approval of Shareholders by Special Resolution shall be obtained every year, in which the annual remuneration payable to single NED exceeds 50% of total remuneration payable to all NED, in any financial year in aggregate. [Regulation 17(6)(ca)]
Other provisions
1. An independent director shall not retire by rotation and shall not be included in the total number of directors for the purpose of computation of rotational directors. [Section 149(13)]
2. The performance evaluation of ID shall be done by entire BOD [Regulation 17(10), Schedule IV of the Act].
The independent directors in the meeting referred in sub-regulation (3) shall, interalia-
(a) review the performance of non-independent directors and the board of directors as a whole;
(b) review the performance of the chairperson of the listed entity, taking into account the views of executive directors and non-executive directors; [Regulation 25(4)]
3. Independent Directors of a company to hold atleast one separate meeting in a year without the presence of non-independent directors and members of management [Schedule IV of the Act]
The independent directors of the listed entity shall hold at least one meeting in a financial year, without the presence of non-independent directors and members of the management and all the independent directors shall strive to be present at such meeting. [Regulation 25(3)]
4. If the Board meeting is called at shorter notice to transact some urgent business, then the presence of at least 1 independent director is mandatory. In the absence of any independent director, a decision shall be circulated to all the directors and later approved by at least 1 independent director.
5. With effect from January 1, 2022 the top 1000 listed entities by market capitalization calculated as on March 31 of the preceding financial year, shall undertake Directors and Officers insurance (‘D and O insurance’) for all their independent directors of such quantum and for such risks as may be determined by its board of directors. [Regulation 25(10)]
6. The listed entity shall familiarise the independent directors through various programmes about the listed entity and publish the same on website of the Company and web link of the same shall be given in the Annual Report, including the following:
(a) nature of the industry in which the listed entity operates;
(b) business model of the listed entity;
(c) roles, rights, responsibilities of independent directors; and any other relevant information. [Regulation 25(7), Regulation 46]
7. Declaration of Independence under Section 149(7)- The IDs while submitting declaration of Independence to the Company on yearly basis, shall mention compliance of inclusion of their names in the aforesaid data bank.
Test of Independence as per Section 149 of the Companies Act, 2013 & SEBI (Listing Regulations), 2015
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Sl. No. |
Particulars | Check |
| A) | Is a person of integrity and possesses relevant expertise and experience; | |
| B) | (i) Who is or was not a Promoter of the Listed Company or its holding, subsidiary or associate Company; or member of the Promoter group of the listed company.(shall come into force with effect from October 1, 2018) | |
| (ii) Is not related to Promoter/Director of the Listed Company, its holding, subsidiary or associate Company; | ||
| C) | Apart from receiving Director’s Remuneration has or had no material pecuniary relationship with the listed Company, its holding, subsidiary or associate Company or their Promoters/Directors during the two immediately preceding financial years or during the current financial year; | |
| D) | None of whose relatives has or had relationship* or transaction with the pecuniary 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 lacs or such higher amount as may be prescribed from time to time, whichever is lower, during the two immediately preceding financial years or during the current financial year;
[*subs. for the words “pecuniary relationship”, by the company (Amendment) act, 2017 Notification No. So. 1833(E) dated 07/05/2018 w.e.f. 07.05.2018.] As per Companies (Amendment) Act, 2017 (d) none of whose relative- i)Is holding any security of or interest in the company, its holding, subsidiary, associate company during the two immediately preceding financial years or during 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 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 the promoter, or director, in excess of such amount as may be prescribed during the immediately preceding financial years or during the current financial year; III) has given a guarantee or provided a security in connection with the indebtedness of any third person of 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 current financial year. Iv) has any pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two percent, 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), |
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| E) | Who neither himself nor whose relative(s) – | |
| (i) Holds or has held the position of Key Managerial Personnel or is or has been an employee of the listed 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]. |
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| (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 (1) a firm of auditors or company secretaries in practice or cost auditors of the listed entity or its holding, subsidiary or associate company; or (2) any legal or a consulting firm that has or had any transaction with the listed entity, 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 2% or more of the total voting power of the listed Company; | ||
| (iv) Is a Chief Executive or Director, by whatever name called, of any non-profit organization that receives 25% or more of its receipts or corpus from the company, its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the listed company; | ||
| (v) is a material supplier, service provider or customer or a lessor or lessee of the listed entity; | ||
| F) | Who is not less than 21 years of age and maximum age is 70 | |
| G) | “Who is not a non- independent director of another company on the board of which any non- independent director of the listed entity is an independent director.”(Shall come into force with effect from October 1, 2018). |
Conclusion: Navigating the legal landscape concerning independent directors is vital for companies aiming for robust corporate governance. The provisions outlined in the Companies Act 2013 and SEBI regulations create a framework that ensures independence, accountability, and transparency. Companies, especially those on the stock exchange, must adhere to these guidelines to foster a governance structure that stands the test of scrutiny.
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