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
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
Applicability On Appointing An Independent Director
Listed Public Company
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.
Unlisted Public Company
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.
- Public companies with paid-up share capital of Rs. 10 crore or more.
- Public companies with a turnover of Rs. 100 crore or more.
- Public companies with aggregate outstanding loans, debentures, and deposits, exceeding Rs. 50 crore.
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.
Role of an Independent Director
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:
- Facilitate withstanding and countering pressures from owners.
- Fulfil a useful role in succession planning.
- On issues such as strategy, performance, risk management, resources, key appointments and standards of conduct he or she must support in gaining independent judgment to bear the board’s deliberations.
- While evaluating the performance of the board and management of the company, he or she needs to bring an objective view.
- Scrutinizing, monitoring and reporting management’s performance regarding goals and objectives agreed in the board meetings.
- Safeguard the interests of all stakeholders, particularly the minority shareholders.
- Balance the conflicting interest of the stakeholders.
- Check on the integrity of financial information and ensure financial controls and systems of risk management are in operation.
- In situations of conflict between management and shareholder’s interest, aim towards the solutions which are in the best interest of the company.
- Establishing suitable levels of remuneration of executive directors, key managerial personnel, and senior management.
Duties of an Independent Director
- Undertake appropriate induction and regularly update and refresh their skills, knowledge, and familiarity with the company.
- Attempt to attend company’s general meetings.
- Attempt to attend BOD’s meetings and board committees meeting being a member.
- Have adequate knowledge about the company and the external environment in which it operates.
- Report matters concerning unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.
- Acting within his or her authority, assist in protecting the legitimate interests of the company, shareholders and its employees.
- Not to unfairly obstruct the functioning of the company or committee of the Board.
- Participate in the Board’s committee being chairpersons or members of that committee.
- Not to disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.
- 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.
Other Provisions Related to Independent Directors Under Companies Act, 2013:
- Companies that trigger the conditions of Corporate Social Responsibility Committee of the Board to formulate and monitor the CSR policy of a Company. The Companies Act, 2013 requires the CSR Committee to consist of at least three directors, including at least one independent director.
- Where a company is not required to appoint an independent director, it shall have in its Corporate Social Responsibility Committee two or more directors.
- The Independent director’s appointment process must be independent of the company’s management. Databank may be used to appoint an independent director
- Every independent director shall give a declaration that he meets the criteria of independence when :
- He or she attends the first board meeting as a director.
- In every financial year, at the first meeting of the board of directors.
- When a situation arises which affects his or her status of independence being an independent director.
- The independent director shall be appointed for a maximum term of 5 years. The term shall not be more than 2 consecutive terms. He or she shall be re-appointed only by special resolution by the company.
- Any vacancy in the office of independent director shall be filled in the very next Board Meeting or within 3 months of such vacancy, whichever is later.
- A person must be an independent director in not more than seven listed companies at a time.
- An independent director shall not retire by rotation and shall not be included in the ‘total number of directors’ for the purpose of computation of rotational directors.
- A person can be appointed as an alternate director. But he or she must be qualified to be appointed as an independent director.
- A small shareholder director shall be considered as an independent director, if:
- He or she is eligible for appointment as independent director u/s 149 (6).
- He or she gives a declaration that he or she meets the criteria of Independence as specified u/s 149(7).
- If the Board meeting is called at shorter notice so as to transact some urgent business, then the presence of at least 1 independent director is mandatory. In absence of any independent director, a decision shall be circulated to all the directors and later approved by at least 1 independent director.
Appointment Letter for Non-Executive Independent Director
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