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The Companies Act,1956 does not provide us with the specific definition of an Independent Director. But Independent Directors are in the limelight as per the Companies Act, 2013. A separate criterion has been established for the companies to have an Independent Director.
An independent director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards.
He or she does not have any kind of relationship with the company that may affect the independence of his/ her judgment. The term “Independent Director” has been defined in the Act, along with several new requirements relating to their appointment, duties, role, and responsibilities.
The provisions relating to the appointment of Independent directors are contained in Section 149 of the Companies Act, 2013 should be read along with Rule 4 and Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014
Every listed public company shall have at least one-third of a total number of directors as independent directors. Any fraction contained in that one-third shall be rounded off as one.
The Central Government may prescribe the minimum number of independent directors in case of any class(es) of public companies. As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following classes of companies shall have at least 2 directors as independent directors.
Points to remember :
1. The amount existing on the last date of latest audited financial statements shall be taken into account for calculating the paid-up share capital or turnover or outstanding loans, debentures and deposits.
2. The company must appoint a higher number of directors if a higher number of independent directors ir required to compose audit committee.
3. A joint venture, wholly owned subsidiary and dormat company are not required to appoint an independent director even if they meet the criteria.
Every independent director shall, at the first meeting of the board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or when a situation arises which affects his status of independence The terms and conditions of appointment of independent directors shall also be posted on the company’s website.
Independent Director acts as a guide, coach, and mentor to the Company. The role includes improving corporate credibility and governance standards by working as a watchdog and help in managing risk. Independent directors are responsible for ensuring better governance by actively involving in various committees set up by the company. The independent directors are required because they perform the following important roles:
Yes. An independent director is a non-executive director and thus a practising company secretary can be appointed as an independent director. A company secretary working in a company as an employee can also be appointed as an independent director in any other company.
No. A company secretary is a whole-time employee of the company. However, an independent director cannot be a whole-time employee of a company. Thus, a company secretary of a company cannot be appointed as an independent director of the same company.
As per company law, the minimum age to get appointed as an independent director is 18 years. There is no maximum age to get appointed as an independent director. As per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for the listed companies the minimum age to get appointed as an independent director is 21 years and the maximum age is 75.
An independent director, who is not a promoter or key managerial personnel, will be held liable only in respect of such acts of commission or omission of a company that has occurred with his/her knowledge, consent, connivance or where he/she had not acted diligently.
Yes, directors proposing to be independent directors and the existing Independent directors are required to empanel themselves for data bank and need to pass the examination, i.e. online proficiency self-assessment test. There is no limit on the number of attempts an individual may take for passing the online proficiency self-assessment test.
In case an individual does not pass the online proficiency self-assessment test, his/her name will be removed from the data bank by the Institute. If an individual’s name is removed from the data bank, he/she cannot continue as an independent director until they pass the online proficiency self-assessment test. However, if a person fails to pass a proficiency test, he/she can be appointed as a normal director of the company.
An independent director can be appointed for a term of up to five consecutive years. An independent director can also be re-appointed for another term of five consecutive years after passing a special resolution in the general meeting. However, an independent director cannot hold office for more than two consecutive terms.
Yes. The limit on the number of companies in which a person can act as an independent director is seven companies. Thus, a person can serve as an independent director in not more than seven companies at a time. Further, any person who is serving as a whole-time director in any listed company can serve as an independent director in a maximum of three listed companies.
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