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Independent Director in Public Limited Company

Narendra Kumar

| Updated: Sep 25, 2017 | Category: Startup

independent director

The Companies Act, 2013 has taken the concept Board independent director to another level. Considering the governance factors into mind the role and duty of the independent directors as defined under the Act. In this article, we will understand the details of Independent Director.

Who is Independent Director?

As per Section 149 of the Companies Act[1], Independent Director means a director who is not managing director or whole-time director or nominee director of the Company. Also, an Independent Director shall fulfill the following conditions:

  • Shall be a person of integrity and shall possess relevant expertise and experience;
  • Shall not be a promoter of the company or its holding, subsidiary or associate company;
  • Shall not related to promoters or directors in the company, its holding, subsidiary or associate company;
  • Shall not have any pecuniary relationship with the company, it’s holding, subsidiary or associate company or with their promoters or directors during the last preceding two years from the current year;
  • Shall not have either himself or relative any pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, which may be lower from below:
  • 2% of gross turnover or
  • Fifty lakh rupee income in the preceding two years and during the year;
  • Shall not hold either himself or relative any position as KMP or employee of the company or its holding, subsidiary or associate company in preceding three years
  • Shall not be 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.
  • Shall not possess any other qualifications as may be prescribed.

Who shall Appoint an Independent Director in its Board?

The following company is mandatory to appoint an Independent Director to its Board:

All listed Company

All public limited company who fulfill the below requirement:

  • A company who has paid up capital 10 crores or more;
  • The company who has turnover 100 crores or more;
  • The company whose total outstanding loans, debentures, and deposits is 50 crore or more.

MCA vide its notification in companies ((Appointment and Qualification of Directors) Amendment Rules, 2017) dated 5th July 2017 gave some public company an exemption. The following class of unlisted public Company is exempted to have mandatory Independent Directors to its Board:

  • A Joint Venture;
  • A wholly-owned subsidiary;
  • A dormant company as defined under section 455 of the Act.

The number of an Independent Director:

Every listed Company shall have at least 1/3rd of total Director as an independent director. Central Government may ask such a higher number of Independent Director as he thinks fit

In the above prescribed public company shall have at least 2 independent directors on its Board.

Separate Meeting of an Independent Director:

One meeting of independent directors shall be held in each financial year. The meeting shall only have independent director presence. In the meeting of the Company shall review the performance of the non-independent director or board as a whole or review the performance of the chairperson of the company.

Role and function of an independent Director:

The independent director shall:

  • Bring an independent judgment to bear on the board’s deliberation;
  • Bring an objective view in the evaluation of the performance of the board and management;
  • Safeguard the interests of all stakeholders, particularly the minority shareholders;
  • Scrutinize the performance of management in meeting agreed on goals and objectives and monitor the reporting of performance;
  • Always balance the conflict of interest of the stakeholders;
  • Determine and evaluate the performance of KMP and non-executive director. Shall play a vital role in its appointment also.

Duties of an Independent Director:

The independent directors shall—

  • Shall seek the clarification from an expert or professional whenever required the expense of the Company
  • Shall attend and participate all the Meeting of Board and Committees where he is appointed as a member;
  • Deliberate his duties in the decisions where he is appointed as chairperson;
  • Shall attend all the general meetings of the Company;
  • Their concerns shall always be recorded in the meeting and shall take into the account;
  • Always informed about the company activities and the environment outside the company;
  • Shall play a vital role in related party transaction and shall pay attention and deliver independence decision and confirm the transaction is in the interest of the Company ;
  • Shall ensure the function of vigil mechanism of the Company;
  • Report any unethical activity or transaction of the Company;
  • Not disclose any confidential information unless disclosure is expressly approved by the Board of Directors.

Tenure of an Independent Director:

An Independent Directors shall hold office for the term of five (5) consecutive years. After termination of a term, he/she can re-appoint by the board by passing a special resolution on the basis of his/her performance. Kindly note that independent director can appoint for the 2 terms then after the expiry of 3 years he can reappoint in the Company.

Declaration by Independent Directors:

An independent director shall give declaration before the appointment or at the first meeting of a board about his status as independent under the format prescribed. Whenever there is any change in the status of director he shall intimate such change to the Board of the Company.

Provisions related to Remuneration:

Any director will not be entitled to receive any kind of remuneration from the Company except the sitting fees for attending meetings of the Company. Director will also not entitled to any stock option.

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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