Applicability of Independent Director in a Company

An Independent director is a director or a member of board of directors who does not have any material or pecuniary relationship with the company or persons related to the company, except sitting fees. He is also known as an outside director. In this article, we are discussing the role & Applicability of Independent Director.

Legal Definition of the Independent Director as per Companies Act 2013

Independent director means an independent director referred to in section 149 of the Companies Act 2013^[1]. Independent director is a director other than a:

1. Managing director
2. Whole-time director
3. Nominee director; and

who, in the opinion of the Board of Directors of the company, is a

• person of integrity and possesses relevant expertise and experience;
• a person who is and was never been in 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, its holding, subsidiary or associate company;
• 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;
• 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 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.

Applicability of Independent Director: The Role of Independent Director

The role of an Independent Director can be gauged by the following points:

1. Helps the company in improving corporate credibility & governance standards.
2. It helps in the growth of the company.
3. They act as a guide to the company.
4. Function as a watchdog, play a vital role in risk management.
5. Ensures company’s good governance.
6. Oversee the financial reporting process and disclosure of the company’s financial information.
7. Ensure compliance with listing and another legal requirement.

How many Independent Director should Board have?

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

At least 50% of the Board should be having non-executive directors. In case if the chairman of the board is a non-executive director then at least 1/3^rd 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.

Applicability of Independent Director: Points to know regarding an Independent Director

Essential points to know about Independent director are mentioned below:

Appointment

The Act imposes a specific obligation on listed companies to have at least one-third of the total number of directors as independent directors and also empowers the central government to include other class of companies within the scope of this requirement.

This ease this process of selecting the central government and organization authorized by 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 for the position.

An independent director can be selected from a data bank containing names and qualifications of people who are eligible and are willing to be independent directors, maintained by any body, association or institute that have expertise in creation and maintenance of such data bank.

It may be noted that the appointment of an independent director will be approved by the company 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 independent director.

Statutory Criteria

1. 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.
2. The person should possess integrity and relevant industrial expertise.
3. 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.
4. The person must not be holding more than 2% voting rights in the company either by themselves or together with their relatives.

Responsibility

1. To ensure transparency in corporate governance.
2. Act also specifies that if any decision is taken and at that time 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.
3. Independent directors can be removed if they fail to attend any board meeting for 12 months period with or without permission from the board.
4. Even when an alternative independent director is appointed he should also comply with the prescribed criteria for the position.

Tenure

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

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

Liability

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

Remuneration

According to the companies act, 2013 independent directors are debarred obtaining any employee stock options plans and remuneration other than sitting fees.

Profit-related commission may be paid to them but subject to the approval of the shareholders.

Meeting

The act mandates that all independent directors must 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 to express freely in an open environment as well as allows them to take suitable and impartial decisions.

Committees

Independent directors should compulsorily form part of following committees:

1. Corporate Social Responsibility:

Every company having:

   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 in an effective manner.

2. Nomination & Remuneration Committee

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

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

3. Audit Committee

The act specifically stipulates that every listed company must constitute an audit committee of at least 3 directors with a majority of independent directors.

Applicability of Independent Director: Other provisions

Vacancy-

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

Disclosure-

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

Conclusion

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

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