Independent Directors: Position Under Companies Act

DEFINITION:

According to sub-section (6) of section 149 of the businesses Act, 2013 AN freelance director in relevance a corporation, means that a director however a manager or a whole-time director or a candidate director, —

(a) who, within the opinion of the Board, may be a person of integrity and possesses relevant experience and experience;

(b) (i) United Nations agency is or wasn’t a promoter of the corporate or its holding, subsidiary or associate company;

(ii) United Nations agency isn’t concerning promoters or administrators within the company, its holding, subsidiary or associate company;

(c) United Nations agency has or had no monetary relationship with the corporate, its holding, subsidiary or associate company, or their promoters, or administrators, throughout the 2 straightaway preceding monetary years or during the present financial year;

(d) none of whose relatives has or had monetary relationship or dealing with the corporate, its holding, subsidiary or associate company, or their promoters, or administrators, amounting to 2 per cent. or additional of its gross turnover or total financial gain or fifty large integer rupees or such higher quantity as is also prescribed, whichever is lower, throughout the 2 straightaway preceding monetary years or during the present financial year;

(e) who, neither himself nor any of his relatives—

(i) holds or has command the position of a key social control personnel or is or has been worker of the corporate or its holding, subsidiary or associate company in any of the 3 fiscal years straightaway preceding the monetary year within which he’s projected to be appointed;

(ii) is or has been AN worker or man of affairs or a partner, in any of the 3 fiscal years straightaway preceding the monetary year within which he’s projected to be appointed, of—

(A) a firm of auditors or company secretaries in apply or value auditors of the corporate or its holding, subsidiary or associate company; or

(B) any legal or a business firm that has or had any dealing with the corporate, its holding, subsidiary or associate company amounting to 10 per cent. or additional of the gross turnover of such firm;

(iii) holds along with his relatives 2 per cent. or additional of the full option power of the company; or

(iv) may be a Chief govt or director, by no matter name known as, of any non-commercial organisation that receives twenty-five per cent. or additional of its receipts from the corporate, any of its promoters, administrators or its holding, subsidiary or associate company or that holds 2 per cent. or additional of the full option power of the company; or

(f) United Nations agency possesses such alternative qualifications as is also prescribed.

The definition of freelance Director as per firms Act, 2013 provides quantitative threshold for analysis of significance of the link and considers all monetary relationship (both material and immaterial).

POSITION OF “INDEPENDENT DIRECTOR” IN BOARD COMPOSITION:

As per sub section 4 of Section 149 of the businesses Act 2013, every listed public company is mandatorily required to possess a minimum of one-third of the entire number of directors as independent directors.

Unlisted public companies must appoint a minimum of two independent directors within the following circumstances:

i. if the paid-up share capital exceeds Rs.10 crores;

ii. if the turnover exceeds Rs.100 crores;

iii. if the mixture of all the outstanding loans, debentures and deposits exceeds Rs 50 crores.

QUALITIES OF INDEPENDENT DIRECTOR

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 associated with the company’s business.

Broadly one who wishes to qualify as an Independent Director has got to possess following unwritten qualities:

1. Impartiality

2. Loyalty

3. Decision- making (judgment)

4. Professional repute

Manner of selection and other procedural requirement has been provided under Section 150 of Companies (Appointment and Qualification of Directors) Rules, 2014 which is to be read alongside Companies (Appointment and Qualification of Directors) Amendment Rules 2015.

ROLE AND DUTIES OF INDEPENDENT DIRECTORS:

The role of independent directors is taken into account to be of an excellent significance. the rules, role, functions and duties are broadly began under Code of conduct under Schedule IV of the businesses Act, 2013. The code of conduct lays down the rules of professional conduct also as role, functions and duties of independent director.

Role and functions listed under Schedule IV of the businesses Act, 2013 are as under:

The independent directors shall:

(1) help in bringing an independent judgment in touch on the Board’s deliberations especially on problems with strategy, performance, risk management, resources, key appointments and standards of conduct;

(2) bring an objective view within the evaluation of the performance of board and management;

(3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;

(4) satisfy themselves on the integrity of monetary information which financial controls and therefore the systems of risk management are robust and defensible;

(5) safeguard the interests of all stakeholders, particularly the minority shareholders;

(6) balance the conflicting interest of the stakeholders;

(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a major role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;

(8) moderate and arbitrate within the interest of the corporate as an entire, in situations of conflict between management and shareholder’s interest.

POSITION OF INDEPENDENT DIRECTORS IN COMMITTEES:

As a neighborhood of Corporate Governance, the businesses meeting some threshold criteria are required to constitute/ reconstitute board. the businesses Act 2013 has also emphasized on the appointment of an Independent Director as a member and as a chairperson in various committees.

Section 177(2): The Audit Committee shall consist of a minimum of three directors with Section 178(1): The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors:

Section 135: Corporate Social Responsibility Committee shall consist of three or more non-executive directors out of which at least one should be an independent director.

In case of Stakeholders Committee, the Board of Directors of the corporate which contains quite one thousand shareholders, debenture-holders, deposit-holders and the other security holders at any time during a fiscal year shall constitute a Stakeholders-relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as could also be decided by the board. As an honest Corporate Governance practice the businesses Act, 2013 raised got to establish Vigil (Whistle Blower) Mechanism which aims to supply a channel to the administrators and employees to report genuine concerns about disreputable behaviour, actual or suspected fraud or violation of the Codes of Conduct or policy.

INDEPENDENT DIRECTORS’ MEETINGS:

The Companies Act, 2013, requires all Independent Directors to satisfy a minimum of once during a year. The meeting must be convened without the attendance of non-independent directors and members of the management. actually, all the independent directors of the corporate are required to be present at such meeting to:

(a) review the performance of non-independent directors and therefore the Board as a whole;

(b) review the performance of the Chairperson of the corporate, taking under consideration the views of executive directors and non-executive directors;

(c) assess the standard, quantity and timeliness of flow of data between the corporate management and therefore the Board that’s necessary for the Board to effectively and fairly perform their duties.

REMUNERATION:

The Companies Act, 2013 expressly disallows independent directors from obtaining stock options and remuneration aside from sitting fees and reimbursement of travel expenses for attending the board and other meetings. Sitting fees to be paid to Independent Directors for attending the Board Meetings pursuant to Section 197(5) which is maximum of Rs.1,00,000/- per meeting is to be decided by the Board. Profit related commission could also be paid to independent director subject to the approval of the shareholders.

As per General Circular 14/2014, an Independent Director wouldn’t be considered to possess a pecuniary relationship under section 149(6)(c) for transactions with a corporation , its holding, subsidiary or associate company, or their promoters, or directors, provided such transactions are within the ordinary course of business and are on an arm’s length basis.

TERM OF OFFICE OF INDEPENDENT DIRECTOR

An independent director shall hold office for a term up to five consecutive years on the Board of a corporation, but shall be eligible for reappointment on passing of a special resolution by the corporate and disclosure of such appointment within the Board’s report. As per MCA Clarification vide General Circular 14/2014, an Independent Director albeit appointed for a lesser period than of 5 years are going to be held as appointed for one term.

No independent director shall hold office for quite 2 consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director as long as he shall not, during the said period of three years, be appointed in or be related to the corporate in the other capacity, either directly or indirectly.

Retirement of directors by rotation shall not be applicable to appointment of independent directors.

LIABILITY:

The Companies Act, 2013 restricts and limits the liability of Independent Directors only in respect of acts of omission or commission by a corporation which had occurred together with his knowledge, attributable through board processes, and together with his consent or connivance or where he had not acted diligently.

HOW TO OFFER CANDIDATURE AS INDEPENDENT DIRECTOR

One who wishes to supply the candidature as Independent Director may enroll the name at The Independent Directors repository. The Independent Directors repository may be a joint initiative of the three professional statutory bodies namely “The Institute of Chartered Accountants of India, The Institute of Company Secretaries of India and therefore the Institute of Cost Accountants of India” under the active encouragement of the Ministry of Corporate Affairs, Government of India. This repository has been developed to facilitate the individuals who are eligible and willing to act as Independent Directors and also to facilitate Companies to pick the persons who are eligible and willing to act as Independent Directors under section 150 of the businesses Act, 2013 and Rules made there under.

It is discretionary for the businesses to settle on suitable persons for the position as an “Independent Director” from the Independent Directors repository. The responsibility of exercising due diligence before selecting an individual from the info bank mentioned above, as an independent director lies with the corporate making such appointment.

PROCEDURAL REQUIREMENT FOR APPOINTMENT, RESIGNATION AND REMOVAL OF INDEPENDENT DIRECTOR

APPOINTMENT

1. The Independent Director has got to submit the Consent to act as Director in FormDIR-2 to the corporate.

2. The Independent Director has got to submit a declaration that he/ she isn’t disqualified to be appointed as a Director as per provisions of Section 164(1) & (2) of the businesses Act, 2013 in Form DIR-8 to the corporate.

3. The Independent Director has got to submit a declaration of independence as per Section 149(6) of the businesses Act, 2013 before his/her appointment. Such declaration has got to be placed before the first committee meeting during which he/ she participates as a director and therefore the subsequent first committee meeting in each fiscal year.

4. As per Schedule IV(IV)(4) to the businesses Act, 2013 the corporate will need to issue the appointment letter to Independent Director. Also, the terms and conditions of Independent Director’s appointment need to be posted on the company’s website.

5. Lastly the corporate has got to file the consent of Independent Director with Registrar of Companies within 30 days of his/her appointment in Form DIR-12;

RESIGNATION:

1. An Independent Director may resign from his/her office by giving a notice in writing to the corporate.

2. Within 30 days from the date of receipt of such notice the Board shall file same with Registrar of Companies in Form DIR- 12.

3. The director shall also forward a replica of resignation alongside detailed reasons for the resignation to the Registrar of Companies within 30 days of resignation.

REMOVAL:

1. a corporation may, by ordinary resolution, remove a director, before the expiry of his period after giving an inexpensive opportunity of being heard.

2. A special notice is required for any resolution, to get rid of a director under this section, or to appoint somebody in situ of a director so removed.

3. The vacancy shall be filled within a period of less than 180 days.

INTERMITTENT VACANCY OF AN INDEPENDENT DIRECTOR:

Any intermittent vacancy of an Independent director shall be filled-up by the Board of Directors at the earliest but not later than immediate next committee meeting or 3 months from the date of such vacancy, whichever is later.

Conclusion:

The concept of the institution of Independent Director is of utmost importance for Corporate Governance. Independent Director is predicted to act because the trustees of stakeholders. Thus, the businesses Act, 2013, has sought to balance the wide nature of the obligations, functions and duties imposed on Independent Directors. The Act restricts and limits the liability of Independent Directors only in respect of acts of omission or commission by a corporation which had occurred together with his knowledge, attributable through board processes, and together with his consent or connivance or where he had not acted diligently.

Author Details: Rishabh Gupta (ICFAI Law School, Hyderabad)

The views of the author are personal only. (if any)