Business Registrations

Applicability of Independent Director in a Company

Applicability of Independent Director

An independent director is a director or board member who, except for sitting fees, has no material or financial connection to the company or anyone connected to the company. He is renowned for being an outside director. We will be talking about the function and applicability of the independent director in this blog

Independent director means an independent director referred to in section 149 of the Companies Act 20131. An Independent director is a director considered to be different from a :

  • Managing director
  • Whole-time director
  • Nominee director; and who, in the opinion of the Board of Directors of the company, is a person considered of integrity and possesses relevant expertise and experience;
  • A person who is and was never in the past a promoter of the company or its holding, subsidiary and associate company.
  • A Person who is not related or was never related to promoters or directors in the company, it’s holding, subsidiary or associate company;
  • Who has or had no pecuniary relationship with the company, it’s holding, subsidiary or associate company, or their promoters or directors during the two immediately preceding financial years or the current financial year;
  • and a person, any relative, did not have or was having any pecuniary relationship or transaction with the company, or its holding, subsidiary or associate company or with the promoters or directors of the company amounting to 2% or more of the company’s gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed.

Who possesses such other qualifications as may be prescribed?

The role of an Independent Director can be described in the following points:

How Many Independent Directors Should the Board Have?

The Board of Directors of a company should have a combination of both, i.e. executive and non-executive directors.

At least 50% of the Board should have non-executive directors. In case the chairman of the board is a non-executive director, then at least 1/3rd of the Board should compromise independent directors.

If the chairman is an executive director, the independent director should make up at least half of the board.


The Act imposes a specific obligation on listed companies to have no less than one-third of the total number of directors as independent directors. Also, it empowers the central government to include other classes of companies within the scope of this requirement.

This process of selecting the central government and organization authorized by the central government will maintain a data bank of persons willing and eligible to be appointed as independent directors from which the companies choose suitable persons.

An independent director can be selected from a data bank containing names and qualifications of eligible people willing to be independent directors, maintained by anybody, association or institute with expertise in creating and maintaining such a data bank.

It may be noted that the company will approve the appointment of an independent director in the general meeting, and the explanatory statement annexed to the notice of the general meeting called to consider appointment shall indicate the justification for selecting the appointee for appointment as an independent director.

Statutory Criteria

  • The person who is to be appointed as an independent director does not have any material pecuniary relationship with the company or with any director of the company.
  • The person should possess integrity and relevant industrial expertise.
  • The person or his relative does not have any material pecuniary relationship with the company or its subsidiary amounting to 2% or more of its gross turnover or total income.
  • The person must not hold more than 2% voting rights in the company either by themselves or together with their relatives.


  • To ensure transparency in corporate governance.
  • This Act also specifies that if any decision is taken and at that time an independent director is not present, then the decision taken is to be circulated to all directors and can be final only upon receiving the ratification from at least one independent director.
  • Independent directors can be removed if they fail to attend any board meeting for 12 months with or without board permission.
  • Even when an alternative, independent director is appointed, he should also comply with the prescribed criteria for the position.


An independent director shall be appointed for a consecutive period of not more than two; after that, a gap of three years is needed before their reappointment in such a company for the same position.

Reappointment for the second term is allowed only after the cooling period of 3 years.


Independent Directors can be held liable only for those offences committed with their knowledge, connivance or negligence. This liability is limited so that it will hopefully instil confidence in the minds of such individuals for taking an honest decision.


  • According to the Companies Act 2013, independent directors are debarred from obtaining any employee stock options plans and remuneration other than sitting fees.
  • Profit-related commissions may be paid to them but are subject to the approval of the shareholders.


  • The act mandates that all independent directors meet at least once annually without the presence of non-independent directors and members of the management.
  • Such meetings are conducted to evaluate the performance of the company’s chairperson, non-independent directors and the board as a whole.
  • These meetings would help these directors express themselves freely in an open environment and allow them to make suitable and impartial decisions.


Independent directors should compulsorily form part of the following committees:

1. Corporate Social Responsibility:

Every company has:

  • Net worth- 5 billion
  • Turnover – 100 billion
  • Net profit – 50 million to constitute Corporate Social Responsibility   Committee with minimum 3 directors and should have at least one independent director.

The presence of an independent director is mandatory as it will see that CSR activities are implemented effectively.

2. Nomination & Remuneration Committee

Every listed company must constitute a nomination and remuneration committee with three or more non-executive directors, of which one-half must be independent.

The presence of an independent director will ensure the identification and appointment of skilled individuals as directors/key managerial personnel of the company.

3. Audit Committee

The act stipulates explicitly that every listed company must constitute an audit committee of at least three directors with a majority of independent directors.

Applicability of Independent Director: Other Provisions


In case of any intermittent vacancy for an independent director, it has to be filled by the board at the earliest, not later than the next board meeting or three months from the date of the vacancy.


Every independent director at the first meeting of the board shall give a declaration that he meets the criteria for independence.

Table of Contents


The act has given all these powers to the independent director to maintain proper checks and balances in the organization and that the management of the authorized person is not exercised in an uncontrolled manner but in a rational, controlled and accountable way. The main aim of appointing an independent director is to enhance corporate governance and ensure that the management and affairs of the company are conducted in the interest of shareholders.


Who is independent director applicability as per the Companies Act 2013?

A non-executive director, known as an independent director, assists a corporation in enhancing its reputation and governance practices. They also ensure that no one person or group of people with a particular interest dominates.

Who is required to have an independent director?

Every listed public business must have independent directors who comprise at least one-third of the board. Any fractional part of that third must be rounded up to one.

Who is exempted from appointing an independent director?

Unlisted public corporations in the classifications below do not require independent directors to be appointed: a partnership. An independent subsidiary. As defined by Section 455 of the Act, a dormant firm.

Who is required to have independent directors?

According to Section 149(4) of the Act, any listed public company must have at least one-third of its directors who are independent, and any other types of public companies may also be required to have a minimum number of independent directors.

Why do you need an independent board of directors?

The presence of independent directors reflects the board’s ability to decide objectively and in the organization’s best interests. An effective board requires both internal and external directors to offer the viewpoints needed to carry out their fiduciary duties.

Who is eligible for independent director in company law?

They shouldn’t be a sizable shareholder or a family of any board members or staff members. Experience and knowledge: The Independent Director should be qualified in business, finance, management, law, or other pertinent professions.

Who is eligible to be a director of a company?

The only individual who can be appointed as a company director is an Individual (live person). It is impossible to appoint a body corporate or business entity as a company director. A special resolution may be passed to increase the number of Directors in a business beyond the maximum of fifteen.

Which companies need to appoint independent directors?

The PUBLIC COMPANIES with Paid-up share capital of at least Rs. 10 crores; or have annual revenue of at least Rs. 100 crore; or  Overall outstanding loans, debt obligations, and deposits totalling over 50 crore rupees.

Which company is not required to appoint an independent director?

Even if they meet the requirements, a joint venture, wholly owned subsidiary, and dormant business is not required to designate an independent director.

Who shall be appointed independent director?

The following issues will be decided at the board meeting called by the company to authorise the appointment of an independent director: The consent of shareholders at the General Meeting is required in order for the appointment resolution to be approved for a term of up to five years.

Do private companies need to have independent directors?

Unlisted public firms and private businesses that meet the aforementioned requirements and are exempt from the Act’s (and the Rules’) section 149(4) requirement for independent directors on the board are permitted to form CSR committees without such individuals.

Read our article: MCA notifies for Appointment and Qualification of Independent Directors: Amendment Rules 2020



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