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Independent Directors- Applicability, Roles And Duties

By Mayashree Acharya

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Updated on: Oct 19th, 2023

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17 min read

The Board of Directors manage the operations of a company. The Board of Directors consists of individual directors of a company. As per the Companies Act, 2013 ('Act'), certain companies must have independent directors on their Board of Directors.

The Companies Act, 1956 did not provide a specific definition of an Independent Director. But Independent Directors are in the limelight as per the Companies Act, 2013. The term “Independent Director” has been defined in the Act, along with several new requirements relating to their appointment, duties, role, and responsibilities.

Independent Director

An independent director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. The independent director should not be a managing director, a whole-time director or a nominee director.

He or she does not have any kind of relationship with the company that may affect the independence of his/her judgment. 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 must 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

As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following classes of companies must 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. These unlisted public companies - 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 should give a declaration that he/she meets the criteria of independence 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 should also be posted on the company’s website.

Qualifications of an Independent Director

  • The person should possess appropriate experience, skills and knowledge in one or more fields of law, finance, management, marketing, sales, research, administration, technical operations, corporate governance, or other disciplines related to the company’s business.
  • The relatives of an independent director should not -
    • be indebted to the company, its subsidiary, holding or associate company or their director or promoters.
    • have given a guarantee or security in connection with the indebtedness of a third person to the company, its subsidiary, holding or associate company or their directors or promoters of such holding company, for an amount of Rs.50 lakhs, at any time during the two immediately preceding financial years or during the current financial year.
  • The person is not:
    • A promoter of the company or its subsidiary, holding or associate companies.
    • Related to the directors or promoters in the company, or any of its subsidiary, holding or associate companies.
  • The person should not have any financial relationship (other than remuneration as a director or having
    transaction not exceeding 10% of the total income) with company or any of its subsidiary, holding or associate companies or their directors or promoters, during the current financial year or the last two immediately preceding financial years.
  • The person or his/her relatives should not:
    • Held or holds the position of Key Managerial Personnel (KMP) or has been the employee of the company or any of its subsidiary, holding or associate companies in any of three financial years immediately preceding the financial year in which such person is proposed to be appointed.
    • Be or has been and employee, proprietor or a partner in any three financial years immediately preceding the financial year in which such person is proposed to be appointed – as an auditor firm, cost auditor, legal consultant or company secretary of the company or any of its subsidiary, holding or associate companies.
    • Holds together with relatives a total voting power exceeding 2% in the company.
    • Be a Chief Executive or director of any non-profit organisation that receives 25% or more of its receipts from the company, any of its promoters or directors or its subsidiary, holding or associate companies or that holds 2% or more of the total voting power of the company.

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.
  • Scrutinising, 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.

Conduct of an Independent Director

The independent directors must adhere to the code of conduct and fulfil their responsibilities in a professional and faithful manner. Such conduct in discharging their duties and fulfilling responsibilities will promote confidence in the investment community, especially minority shareholders and regulators. The Act provides the following guidelines for professional conduct for independent directors:

  • Uphold ethical standards of probity and integrity.
  • Act constructively and objectively while exercising duties.
  • Exercise powers in a bona fide manner in the interest of the company.
  • Devote sufficient attention and time towards professional obligations for balanced and informed decision making.
  • Not allow any extraneous considerations to interfere in exercising objective, independent judgment in the company's best interest while concurring in or dissenting from the collective judgment of the Board in its decision-making.
  • Not take advantage of the position to the detriment of the company and its shareholders or to gain direct or indirect personal advantage or advantage for an associated person.
  • Refrain from an action that would lead to loss of independent decision-making.
  • Where circumstances make an independent director lose his independence, the independent director must immediately inform the Board.
  • Assist the company in implementing the best corporate governance practices.

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 Board of Director'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/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:

  • Certain companies are required to form a Corporate Social Responsibility (CSR) Committee to formulate and monitor the CSR policy. The CSR committee should 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 CSR Committee two or more directors.
  • The Independent director’s appointment process must be independent of the company’s management. An   independent director can be selected from a data bank containing names, qualifications and addresses of persons who are eligible and willing to act as independent directors, maintained by an institute, body or association notified by the Central Government.
  • The appointment of the independent director must be approved by the company in a general meeting, and the explanatory statement annexed to the general meeting notice should indicate the justification for choosing the proposed person for appointment as 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 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.

Frequently Asked Questions

Can a practising company secretary be appointed as an independent director?

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.

Can a company secretary working in a company get appointed as an independent director in the same 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.

What is the minimum age to get appointed as an independent director?

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 70.

Whether an independent director is liable for non-compliance with any provision under the Companies Act, 2013?

An independent director 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.

Does an independent director need to get enrolled with Data Bank and pass an exam for getting appointed as an Independent Director in a company?

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.

What is the consequence if an individual fails to pass the online proficiency self-assessment test within one year of addition of his/her name in the data bank? 

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.

What is the tenure of appointment of independent directors? 

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. 

Can an independent director be appointed simultaneously as an independent director in another company? 

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.
 

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

Related articles:

Appointment Letter for Non-Executive Independent Director

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The article explains the role and requirements of Independent Directors as per the Companies Act, 2013. Topics covered include the definition, qualifications, duties, and conduct of independent directors. Applicability criteria for appointing independent directors in listed and unlisted public companies are also detailed. The significance of independent directors in improving governance standards is emphasized along with their responsibilities. The article also addresses some FAQs related to the appointment and responsibilities of independent directors.

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