An independent director is a non-executive director of a company who brings in objectivity and independence in the decision making by the Board of Directors of the company. As an independent director, he should not be related to the promoters of the company. He should not have any pecuniary interest in the company, its holding company, subsidiary company and associate company. The intention of having such kind of provisions is to ensure that such director remains completely independent and does not have any economic dependency on the company. Pursuant to the provisions of Section 149 of the Companies Act, 2013 and the Rules made thereunder, an independent director 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. An independent director shall help in bringing an independent judgment to bear on the board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct. An independent director shall safeguard the interests of all stakeholders, particularly the minority shareholders.
This article is a compilation and analysis of the relevant provisions for appointment and reappointment of independent directors. The article concludes with the checklist on such appointment and reappointment of independent directors. For listed companies, in addition to the Companies Act, 2013, the company shall also comply with the Securities and Exchange Board of India (SEBI) (Listing Obligation and Disclosure Requirement) Regulations, 2015 as well.
(a) every listed public company shall have at least 1/3rd of the total number of directors as independent directors; (b) following class or classes of companies shall have at least 2 independent directors; (i) public companies having paid-up share capital of Rs 10 crores or more; or (ii) public companies having turnover of Rs 100 crores or more; or (iii) public companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs 50 crores. The paid-up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account.
The provisions of independent director are not applicable to private company. Also, where a public company ceases to fulfil any of three conditions (as prescribed in the above point) for 3 consecutive years, it shall not be required to appoint independent directors until such time as it meets any of such conditions. The provisions of independent directors are not applicable to the following classes of unlisted public companies: (a) joint venture company; (b) wholly-owned subsidiary; and (c) dormant company (as defined under Section 455 of the Act).
Role and functions of independent director
The independent directors shall:
(i) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;
(ii) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
(iii) balance the conflicting interest of the stakeholders;
(iv) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management; and
(v) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.
The independent directors have a prime role in appointing and where necessary recommend the removal of executive directors, key managerial personnel and senior management.
Criteria of independence
Sub-section (6) of Section 149 of the Companies Act, 2013, prescribed the criteria for independence w.r.t. relation with promoters, holding company, subsidiary company, associate company, transactions through relatives, shareholding in the company, appointment of firm of auditors or company secretaries in practice or cost auditors or any legal or a consulting firm, etc. The independent director shall ensure that the said criteria of independence are complied with during the tenure as independent director in the company.
Manner of appointment
While selecting independent directors, the Board shall ensure that there is appropriate balance of skills, experience and knowledge so as to enable the Board to discharge its functions and duties effectively. The appointment process of independent directors shall be independent of the company management.
The appointment of independent director(s) of the company shall be approved at the meeting of the shareholders. 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 specified conditions. The explanatory statement shall mention that the proposed director is independent of the management.
Issuance of appointment letter
The appointment of independent directors shall be formalised through a letter of appointment, which shall set out prescribed content.
Terms and conditions of the appointment of independent director
The terms and conditions of appointment of independent directors shall be open for inspection at the registered office of the company by any member during normal business hours. The terms and conditions of appointment of independent directors shall also be posted on the company’s website.
Declaration meeting the criteria of independence
Every independent director shall give a declaration that he meets the criteria of independence at three occasions: (i) at the first meeting of the Board in which he participates as a director; (ii) at the first meeting of the Board in every financial year; and (iii) whenever there is any change in the circumstances which may affect his status as an “independent director”.
Compliance of Code for independent directors
The company and independent directors shall abide by the provisions specified in the Code for independent directors. The Code is a guide to professional conduct for independent directors. Adherence to these standards by independent directors and fulfilment of their responsibilities in a professional and faithful manner will promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors.
Remuneration to independent directors
An independent director shall not be entitled to any stock option. An independent director may receive remuneration by way of sitting fees. The independent director shall be entitled to the reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.
Term of independent director and reappointment
An independent director shall hold office for a term up to 5 consecutive years on the Board of a company. He shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report. An independent director shall not hold office for more than two consecutive terms. Such independent director shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director. During the period of 3 years, an independent director shall not be appointed in or be associated with the company in any other capacity, either directly or indirectly.
With reference the appointment of independent director in the company, below are 25 important points that are to be taken into consideration:
(i) maximum number of directors as per the articles of association of the company;
(ii) proposed appointee is not disqualified to be director of the company under Section 164 of the Companies Act, 2013;
(iii) declaration from the proposed appointee about his disqualification under Section 164. The declaration shall be in prescribed form. The declaration shall be obtained before a person is either appointed or reappointed as a director in a company;
(iv) the proposed appointee has given his consent (as prescribed under Section 152(5) of Companies Act, 2013) to hold the office as a director of the company;
(v) compliance relating to the approval of Nomination and Remuneration Committee (as prescribed under Section 179 of the Companies Act, 2013);
(vi) explanatory statement shall make requisite disclosures and opinion of the Board of Directors;
(vii) the company/Board of Directors shall confirm whether the independent director possesses requisite skills and experience;
(viii) declaration from independent director at three occasions (as discussed above);
(ix) disclosure of interest of independent director under Section 184 of the Companies Act, 2013;
(x) confirm that the independent directorships of independent director does not exceed the prescribed number of companies (as required under SEBI Listing Regulations);
(xi) confirm that the Managing Director or whole-time director of the company does not serve as independent director in more than prescribed number of companies (as required under SEBI Listing Regulations);
(xii) disclosure of information to the shareholders before appointment and reappointment of director about the disclosure of relationships between directors inter se;
(xiii) disclosure of information to the shareholders before appointment and reappointment of director about the profile, expertise, other directorships, etc.;
(xiv) compliance of Schedule IV of the Companies Act, 2013 by the company and independent director;
(xv) company shall issue appointment letter to the independent director. The appointment letter shall include prescribed content;
(xvi) company shall not grant employee stock options to the independent directors;
(xvii) remuneration to independent directors shall not exceed the limits prescribed under Section 197 of the Companies Act, 2013;
(xviii) remuneration to independent directors shall be approved by the shareholders of the company under Section 197 of the Companies Act, 2013;
(xix) in case of intermittent vacancy of independent director, the same shall be filled up at the earliest but not later than at the immediate board meeting or 3 months from the date of such vacancy, whichever is later;
(xx) in case of independent director’s reappointment, the company shall pass a special resolution at the shareholders meeting;
(xxi) requisite disclosures shall be made in Board’s report regarding the appointment/reappointment/remuneration to independent directors;
(xxii) confirm that independent directors is not appointed for more than two consecutive terms;
(xxiii) confirm whether requisite particulars have been entered in the register of directors and key managerial personnel and their shareholding (maintained under Section 170 of the Companies Act, 2013);
(xxiv) confirm whether requisite particulars have been entered in the register of contracts or arrangements in which directors are interested, if any (maintained under Section 189 of the Companies Act, 2013); and
(xxv) confirm whether the company has filed a return (Form DIR-12) with the registrar of Companies for the appointment and reappointment of independent directors.
Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at firstname.lastname@example.org.