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Independent Directors Under Companies Act, 2013 And SEBI Regulations

November 16, 2019
Independent Directors

Independent Directors

INTRODUCTION

The Board of Directors are responsible for the Company's management and for ensuring good corporate governance. The Board should run the affairs in a transparent manner and the decisions should not be prejudicial to the interest of all its stakeholders. The Company must not be run for the material benefit of a few. Therefore, the concept of Independent Directors on the Board has arised in order to adopt fair and transparent business practices. The Board’s autonomy must be supported by the principle of the Independent Director to reduce fraud & mismanagement.

Section 149, 150 of Companies Act, 2013 and Schedule IV read with Rule 4, 5 & 6 of the Companies  (Appointment and Qualification of Directors) rules, 2014 deal with Independent Directors. Independent Director is viewed as a solution to various Corporate governance problems.

ESSENCE

The Companies Act, 2013 ("Act") aims to overhaul the provisions relating to Independent Directors completely by conferring greater power and responsibility on them in the governance of a company. The Ministry of Corporate Affairs carried out corresponding changes to the provisions of 1956 Act, so as to include the requirement of having an independent director on the board to oversee corporate governance. However, such attempts proved to be futile as the changes failed to explain the roles, duties or liabilities of independent directors lucidly. The Board's independence from external influences is critical for effective corporate governance. Thus, the need for comprehensive and strong legislation relating to independent directors became vital and eventually lead to amendments to Companies Act, 2013 (Act).

DEFINITION OF INDEPENDENT DIRECTOR

An independent director, is a director on the Board who does not have any material or pecuniary relationship with company or related persons, except sitting fees.

As per Reg 16(1)(b)(ii) of Securities Exchange Board of India(SEBI) Listing Obligations and Disclosure Regulations (LODR) A non – executive director who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity.

WHO CAN BE AN INDEPENDENT DIRECTOR?

Section 149 (6) of the Act deals with “Independent Director” which means a person:

  1. who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience.
  2. who is or was not a promoter of the company, or its holding, subsidiary or associate company
  3. who is not related to promoters or directors of the company or any of its associate companies.
  4. who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten percent of his total income or such amount as may be prescribed with any of the above persons/companies during the current or two immediately preceding financial years.
  5. None of his relatives

(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the 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 the 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 their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;

(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to 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 the current financial year; or

(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. 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);]

  1. who, neither by himself or his relatives –
    1. holds or has held the position of key managerial personnel or as employee of the company or any of its associate companies in any of the 3 financial years immediately preceding the year of his appointment.
    2. is or has been an employee, proprietor or partner of the following during any of the 3 preceding financial years.
      • A firm of Auditors, Company Secretaries or Cost Auditors of the company or any of its associate companies.
      • Any legal or consulting firm which has or had transaction with the company in or any of its associate companies amounting to 10% or more of the gross turnover of the firm.
    3. Holds, together with his relatives, 2% or more of the Voting power of the company.
    4. Is a Chief Executive or director of any non-profit organization that receives 25% or more of its receipts from the company, any of its promoters, directors or its associate companies or that hold 2% or more of the total voting power of the company.
  2. who is not a Managing/Whole Time/Nominee Director.
  3. He shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the Company’s business.

WHICH COMPANIES MUST APPOINT AN INDEPENDENT DIRECTOR?

Every listed Company is required to have at least 1/3rd of the total number of directors as Independent Directors subject to certain conditions as prescribed in Regulation 17 of SEBI LODR

Further, Rule 4 (Appointment and Qualification of Directors) Rules, 2014 of Act provides that every Public Company having

  1. Paid up capital of Rs.10 crores or more, or
  2. Turnover of Rs.100 crores or more or
  3. Which has, in the aggregate, outstanding loans, debentures and deposits exceeding Rs.50 crores shall have at least 2 Independent Directors.

Explanation:  Paid up Capital/ turnover or Outstanding loan, debenture and deposit as the case may be as existing on the last date of latest audited financial statements shall be taken into account.

where a company ceases to fulfil any of above three conditions for three consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions.

in case a company covered under this rule(4) is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it.

Thus, small public unlisted companies including Joint Venture, wholly owned Subsidiaries & Dormant Company and private companies are not required to appoint Independent Directors.

SEBI REGULATIONS : It may be noted under Regulation 17 of SEBI LODR has provided as under.

  1. The Board of Directors of a listed company shall have an optimum combination of executive and non-executive directors with at least one woman Director and not less than 50% of the Board comprising of non-executive directors.

Uday Kotak Committee proposed that the Board of directors of the top 500 listed entities shall have at  least  one  independent  woman  director  by  April  1,  2019  and  the  Board  of directors of  the  top 1000  listed  entities  shall  have  at  least  one  independent woman director by April 1, 2020

  1. Where the Chairman of the Board is a non-executive director, at least one-third of the Board shall comprise of Independent Directors.
  2. If the company does not have a regular non-executive Chairman, at least 50% of the Board should comprise of Independent Directors.

As per SEBI LODR regulation 25(1) No person shall be appointed or continue as an alternate director for an independent director of a listed entity.

A person may serve as an Independent Director in maximum seven (7) listed companies. (b) Any person serving as a Whole-time Director in any listed company shall serve as an Independent Director in maximum three (3) listed companies.

MANNER OF APPOINTMENT

  1. As per Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 which shall come into force from 1st December 2019 any individual who has been appointed as an independent director in a company shall within a period of three months from such commencement or who intends to get appointed as an independent director in a company after such commencement, apply online to the institute (Indian Institute of Corporate Affairs at Manesar) for inclusion of his name in the data bank for a period of one year or five years or for his life-time till he continues to hold the office of an independent director in any company and the same can be within a period of thirty days from the date of expiry of the period.
  2. Every individual whose name is so included in the data bank under sub-rule (1) shall pass an online proficiency self-assessment test conducted by the institute within a period of one year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the databank of the institute.

Exception from online examination to those individuals who has served for a period of not less than ten years as on the date of inclusion of his name in the databank as director or key managerial personnel in a listed public company or in an unlisted public company having a paid-up share capital of rupees ten crore or more. Ten years is referred any period during which an individual was acting as director or as key managerial personnel in two or more companies at the same time shall be counted only once.

There is no limit to appear for exams but self-assessment test is deemed to be passed if the individual scores minimum of 60% marks in test.

  1. The appointment of independent director(s) of the company shall be approved in the meeting of the shareholders.
  2. The explanatory statement attached to the notice of the meeting for approving the appointment of independent director shall include a statement that in the opinion of the Board, the independent Director proposed to be appointed fulfils the conditions specified in the Act and rules made there under and that the proposed Director is independent of the management.
  3. The appointment of independent directors shall be formalized through a letter of appointment, which shall set out:
    1. the term of appointment;
    2. the expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to serve and its tasks;
    3. the fiduciary duties that come with such an appointment along with accompanying liabilities;
    4. provision for Directors and Officers insurance, if any;
    5. the Code of Business Ethics that the company expects its directors and employees to follow;

TERM OF APPOINTMENT

An Independent Director can, subject of provisions of section 152 of the Act, hold office for a term of 5 consecutive years. He can be appointed as such for a further term, not exceeding 5 years, if the members pass a special resolution and disclosure of such appointment is made in the Board Report. After the expiry of 10 years period he cannot be re-appointed as an Independent Director.

He can, however, be appointed as such director after expiry of 3 years provided he was not directly or indirectly associated with the company in any other capacity either directly or indirectly. It may be noted that the period during which the Independent Director has held office as such director before the commencement of the new Act shall not be counted for computing the period of 10 years, stated above.

Further, an Independent Director shall not be liable to retire by rotation as provided in section 152 (6) and (7) of the Act. The appointment of Independent Director shall be approved by the company in General Meeting as provided in section 152(2) of the Act.

REMUNERATION TO INDEPENDENT DIRECTORS

An Independent Director shall not be entitled to receive any remuneration other than a fee and reimbursement of expenses, for attending the meetings of the Board or any committee thereof or for any other purpose as decided by the Board. Such fees cannot exceed Rs. 1.00 lakh per meeting of the Board or Committee thereof as prescribed u/s. 197 (5) of the Act. He shall also be entitled to receive profit related commission as may be approved by the members. However, he shall not  be entitled to receive the benefit of stock option.

PERFORMANCE EVALUATION OF INDEPENDENT DIRECTOR

The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated as per para VIII of the code of Independent Directors of Schedule IV of the Act. On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director. The directors who are subject to evaluation shall not participate.

As per section 149(5) of the Act, 2013 an independent Director shall be held liable only in respect of the act of omission/commission which has occurred with his consent, knowledge and where he has not acted diligently. He should ensure that his dissent on any items discussed in the Board Meeting be recorded in the minutes so that he will not be held liable for those decisions.

Every independent director shall give declaration on his independence , at the first meeting of the board in which he participates as a director after his appointment and thereafter at the first meeting of the board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, submit  a declaration that he meets the criteria of independence.

SEPARATE MEETING OF INDEPENDENT DIRECTOR

The independent Directors of the Company shall hold at least one meeting in a year, without the attendance of non-independent directors and Management in which all the Independent Director must be present to review the performance of non-independent Director, Chairperson and effectiveness of Board performing its duty as stipulated under the Act and best interest of the Company.

ROLES AND DUTIES OF INDEPENDENT DIRECTORS

To seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;

  1. To strive to attend all general meetings, meetings of the Board of Directors and the Board committees of which he is a member;
  2. To keep themselves well informed about the company and the external environment in which it operates;
  3. To pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;
  4. To ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;
  5. To report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
  6. To act within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
  7. To undertake appropriate induction and regularly update their skills and knowledge.

CONCLUSION

The Act empowers independent directors to  exercise strategic oversight over business operations and they must ensure that such extensive powers are not exercised in an unbridled manner, but in a rational and accountable way.

The Independent Director will have to suggest remedial steps to be taken and also see that they are promptly implemented.  In other words, the Role of an Independent Director under the New Act will be that of a “SUPER WATCHDOG” who has to ensure that those in the day to day management (including all Directors on the Board) are functioning in the best interest of the stakeholders, minority shareholders, regulators, workers, customers and public at large. The new Act empowers the independent Directors to manage the Company  in order to strengthen Corporate Governance.

Other relevant Post related to this Article are:

  1. Roles and Responsibilities of Directors- https://www.rna-cs.com/directors/
  2. Independent Directors (Analyzing Their Role And Independence)- https://www.rna-cs.com/independence-and-performance-of-independent-directors
  3. Director’s Right of Digital Presence In Board Meetings:  https://www.rna-cs.com/directors-right-of-digital-presence-in-board-meetings
  4. Register of contracts or arrangements in which directors are interested- https://www.rna-cs.com/register-of-contracts-or-arrangements-in-which-directors-are-interested
  5. Let’s Compare – Directors-https://www.Rna-Cs.Com/Lets-Compare-Directors
  6. Position Of Independent Directors Under The Companies Act, 2013- Https://www.Rna-Cs.Com/Position-Of-Independent-Directors-Under-The-Companies-Act-2013

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