All you Need to Know About the Appointment of Independent Director

Tanya Verma

15 Jan, 2020

An Independent director is a part of the board of directors of a company that does not have any relation to the company related to material, or pecuniary matters of the Company. They charge their sitting fees and are those who are not in the whole-time employment of the Company. However, the management seeks guidance in a professional capacity for making decisions from the Independent Director.

They are appointed in the Board to evaluate the performance of the non-independent Director of the Company, to share their knowledge in the respective areas of their expertise, and they are responsible for the better compliance. They act as a trustee of Shareholders and sometimes they also work between the Board and other stakeholders.

Who can be an Independent Director?

Any individual can become an Independent Director, if he meets the criteria prescribed under section 149(6) of the Companies Act, 2013^[1].

Which Class of Companies are Required to Appoint the Independent Director of the Company?

Every listed public company shall have at least one-third of the total number of directors as Independent Director of the Company and the following classes of the Companies are required to appoint at least two directors as an Independent Director

• Public Companies having paid-up capital of Rs. 10 crores or more.
• Public Companies are having a turnover of Rs. 100 crore or more.
• Public Companies are having aggregate outstanding loans, debentures, deposits exceeding Rs. 50 crore

The provisions of the appointment of the Independent Director do not apply to private companies. However, if companies to safeguard the interest of their shareholders and to attract the investors, they can appoint the Independent Director on Board.

Tenure of an Independent Director

The mandate of an Independent Director is as follows;

• An Independent Director shall hold the office up to five years, but it shall be eligible for reappointment by passing a special resolution in the Company.
• The Independent Director shall not hold the office for more than two consecutive terms further such independent director shall be eligible for appointment after the gap of three years of ceasing to become an Independent Director

Role and Functions of Independent Director

The Independent Director shall:

• Bring an Independent Judgment, especially on issues of strategy, performance, risk management, resources, and critical appointment.
• Safeguard the interest of the stakeholders.
• To evaluate the performance of Board and Management.
• Analyze the performance of the management in meeting the objectives and monitor the reporting of performance.
• To evaluate the performance of Board and Management.

Duties of Independent Director

The Independent Director Shall:

• To take the induction, regularly update and refresh their skills, knowledge, and familiarity with the Company.
• To attend all the meetings of the Board of Directors and committee of which he is a member.
• To keep informed the management of the Company regarding the external environment in which it operates.
• Attend the General Meeting of the Company.
• Ascertain and assure that the Company has an adequate and functional vigil mechanism. And to ensure that the interests of a person are not prejudicially affected on account of such use.
•  Reporting about unethical behavior, actual or suspected fraud, or violation of the Company’s code of conduct or ethics policy.

Procedure for Appointment of Independent Director

1. The Independent Director need to submit the consent to act as Director in DIR-2 Form
2. The Independent Director has to provide the declaration of independence as per section 149(6) of the Companies Act, 2013.
3. The Director will be appointed as an Additional Director of the Company in the Board, and his/her term is up to the ensuing general meeting of the Company.
4. Hold the General Meeting and pass the resolution for the appointment of independent Director of the Company for a term of up to five years.

Separate Meetings

• The Independent Director of the Company shall hold at least one meeting in a year, without the presence of the executive director.
• All the Independent directors shall remain present in the Meeting.
• The Independent Director in its meeting shall:
• Review the performance of non-independent directors and Board as a whole
• Review the performance of the chairperson of the Company and taking into account the views of executive and Non-Executive directors.
• To assess the quality, quantity of flow of information between the Company Management and the Board that is necessary for the board to effectively and reasonably perform their duties.

Liability of Independent Director

The Liability of Independent Director will only be in respect of acts or omission or commission by a Company which had occurred with his consent or where he had not acted diligently.

Conclusion:

It plays a vital role in the management, appointing an Independent Director helps the Company in improving the policies which apply to the Company, transparency, credibility of the Company, and many more factors. They decide on an independent basis; Independent Director does not have any relationship with the Company that may affect the independence of judgment.