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Dear students

,

“The material has been pasted from various sources for convenient reading and is a
compilation and is not originally mine. The sources have been provided for your reference
in the footnote including extract from Wikipedia”

Independent director

An Independent director (also sometimes known as an outside director) is a director
(member) of a board of directors who does not have a material or pecuniary relationship with
company or related persons, except sitting fees.1

India
In India as of 2004, a majority of the minimum seven directors of public companies having share
capital in excess of Rs. 50 million (Rs 50,000,000) should be independent. Clause 49 of the
listing agreements defines independent directors as follows:
"For the purpose of this clause the expression 'independent directors' means directors who apart
from receiving director's remuneration, do not have any other material pecuniary relationship or
transactions with the company, its promoters, its management or its subsidiaries, which in
judgment of the board may affect independence of judgment of the directors."[5]

The Companies Act, 2013, most sections of which got implemented from 1st April 2014, has
mandated all listed public companies to have at least one-third of the total Directors to be
independent. Whereas in the case of unlisted public companies, the following class of companies
shall have at least two directors as independent directors:
(i) Public Companies having paid up share capital of Ten Crore rupees or more; or (ii) Public
Companies having turnover of One Hundred Crore rupees or more; or (iii) Public Companies
which have, in aggregate, outstanding loans, debentures and deposits exceeding 50 Crore
rupees or more.
The Companies Act, 2013 is drafted taking into consideration the noteworthy inputs and
contribution that an Independent Director can bring in to the business. Section 149(6) of the act
stipulates the criteria for a candidate that ensures highest standards of integrity, while also
preventing any conflict of interest. The provisions seek to ensure the autonomy of the appointee
to facilitate effective discharge of duties such as upholding shareholders' interest, upholding
corporate governance standards, among others.[6] The compensation offered to such
Independent Directors in the form of "sitting fee" has also been increased from Rs. 20,000
(prescribed by Companies Act, 1956) to a maximum of Rs. 1,00,000/- per meeting.

1
https://en.wikipedia.org/wiki/Independent_director

in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed. subsidiary or associate company. (iii) holds together with his relatives two per cent. or (iv) is a Chief Executive or director. “independent director” means an independent director referred to in sub- section (5) of section 149.Article 1 Independent directors as the name suggests are directors on Board of a company who are independent individuals. subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed. or their promoters. or (B) any legal or a consulting firm that has or had any transaction with the company. (d) none of whose relatives has or had pecuniary relationship or transaction with the company. its holding. or their promoters. subsidiary or associate company amounting to ten per cent. its holding. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed. (b) (i) who is or was not a promoter of the company or its holding. (e) who. In India. amounting to two per cent. Meaning/Definition of Independent Director As per Section 2(47). Section 149 (6) contains that – An independent director in relation to a company. or more of the total voting power of the company.— (a) who. we have focused on the various provisions relating to independent directors as contained in the Companies Act. subsidiary or associate company. or directors. of— (A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding. is a person of integrity and possesses relevant expertise and experience. or more of its receipts from the company. With the passage of the new Companies Act of 2013. subsidiary or associate company. in the opinion of the Board. 2013. during the two immediately preceding financial years or during the current financial year. . whichever is lower. means a director other than a managing director or a whole-time director or a nominee director. (ii) is or has been an employee or proprietor or a partner. of any nonprofit organisation that receives twenty-five per cent. by whatever name called. the concept of independent directors has found place in the Companies Act itself. The requirements prescribed under the Companies Act 2013 seem to be much more stringent than that of the listing agreement. or more of the gross turnover of such firm. (ii) who is not related to promoters or directors in the company. its holding. subsidiary or associate company. not having any other relationship or transaction with the company. (c) who has or had no pecuniary relationship with the company. In the present write up. during the two immediately preceding financial years or during the current financial year. or directors. subsidiary or associate company. Clause 49 of the listing agreement mandates appointment of independent directors on Board of a listed company. neither himself nor any of his relatives— (i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding. any of its promoters. The concept of Independent directors gained momentum in the late 1980s and early 1990s due to the uncovering of various corporate frauds and misfeasance. its holding.

comply with these requirements.  Every company existing on or before the date of commencement of this Act shall.  Public Companies which have.  An independent director shall not be entitled to any stock option and may receive remuneration by way of fee. during the said period of 3 years. Other Provisions relating to Independent Directors  The appointment of independent director shall be approved by the company in general meeting and the explanatory statement annexed to the notice of the general meeting called to consider the said appointment shall indicate the justification for choosing the appointee for appointment as independent director. exceeding two hundred crore rupees. within one year from such commencement or from the date of notification of the rules in this regard as may be applicable.  The criteria specified for unlisted public companies shall be applicable for the first year and shall continue to apply to that company in subsequent years during the tenure of the Independent Director even if the paid up share capital or turnover. Explanation:  Any fraction contained in the 1/3rd number shall be rounded off as one. or more of the total voting power of the company.  The company and independent directors are required to abide by the provisions specified in Schedule IV of the Act. .  Any tenure of an independent director on the date of commencement of this Act shall not be counted as a term under the above provisions.  Public Companies having paid up share capital of one hundred crore rupees or more. subsidiary or associate company or that holds two per cent. give a declaration that he meets the criteria of independence. or  Public Companies having turnover of three hundred crore rupees or more.  No independent director shall hold office for more than 2 consecutive terms. research. as the case may be. or borrowings/deposits. shall comply with the requirements specified in such law/regulation. fall below the limits specified therein. or (f) who possesses such other qualifications as prescribed below: An independent director shall possess appropriate balance of skills. either directly or indirectly. reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members. corporate governance. sales.  A company belonging to any class of companies for which a higher number of independent directors has been prescribed in or under the law/regulations governing such class of companies. but such independent director shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director provided that he shall not. management. technical operations or other disciplines related to the company’s business. but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report. Term of Office of Independent Director  An independent director shall hold office for a term up to 5 consecutive years on the Board of a company. directors or its holding. outstanding loans or borrowings or debentures or deposits. law. in aggregate. Applicability to Companies Following class of companies are required to appoint at least 1/3 of total number of directors on their Board of Directors as independent directors:  Listed Companies. be appointed in or be associated with the company in any other capacity. marketing. administration. experience and knowledge in one or more fields of finance.  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 whenever there is any change in the circumstances which may affect his status as an independent director.

2013") came into force as Act no.html#sthash. 18 of 2013 after obtaining the assent of the President on August 29. and with his consent or connivance or where he had not acted diligently. However.See more at: http://taxguru. institute or association for this purpose having expertise in creation and maintenance of such data bank. responsibility of exercising due diligence before selecting a person from the data bank referred to above. One of the sections of the Act. 2013 is section 149 which also deals with the appointment and qualification of ID's on the board of the Company and their importance in good corporate governance in the Company. The data bank will contain all the basic details about the proposed appointee. The Companies Act.in/company-law/independent-directors-companies-act- 2013.xpR67klf. However the same section has not been implemented till date and will come into force as may be notified in the Gazette.dpuf Article 2 Also read from : https://www. The Act. 1956 (referred as "the Act. However. as an independent director shall lie with the company making such appointment. only in respect of such acts of omission or commission by a company which had occurred with his knowledge. Clause 492 of the listing agreement which is applicable on all listed companies mandates the appointment of ID's on the Board.edu/WebModules/CompaniesAct2013/Annexure-E.icsi. attributable through Board processes.pdf Article 3 http://www. as no such provision exists regarding the compulsory appointment of ID's on the Board. the Act provides that the Central Government shall create and maintain a data bank of persons willing and eligible to be appointed as independent director and such data bank shall be placed on the website of the Ministry of Corporate Affairs or on any other website as may be approved or notified by the Central Government.  The provisions relating to retirement of directors by rotation shall not be applicable to appointment of independent directors. 1956") do not directly talks about ID's. 2013 has specifically .mondaq. The Central Government or such body. The Ministry of Company Affairs (referred as "MCA") enforced the 98 sections of the Act through the notification dated September 12. institute or association shall neither be responsible for any contravention of any law committed by any company or its directors by the reason of the fact that the person appointed by the company as an independent director was selected from the databank nor it will be a defense in any court of law. 2013 (referred as "the Act. 2013. The Central Government will authorise anybody. A need has been felt to update the Act and make it globally compliant and more meaningful in the context of investor protection and customer interest. An independent director shall be held liable. the gravity of Independent Directors (referred as "ID's") was recognized with the introduction of corporate governance. Manner of selection of independent directors and maintenance of databank of independent directors To ease the process of selection of independent directors. . 2013.com/india/x/295386/Contract+Law/Independent+Directors+Under+The +Companies+Act+2013 In India. The Companies Act.

Who is or was not a promoter of the company. The role they play in a company broadly includes improving corporate credibility. in the opinion of the issuer's board of directors would interfere with the exercise of independent judgment in carrying out the responsibilities of a director4. The whole and sole purpose behind. b) . However one can find parameters mentioned in the Clause 49 of the listing agreement which is applicable to all listed companies in order to recognize a director as an ID.1. He helps a company to protect the interest of minority shareholders and ensure that the board does not favour any particular set of shareholders or stakeholders. promoters. As per sub-section 6 of Section 149 of the Act. and the risk management of the company. The Act. The new Act along with the definition of ID's also provides the criteria for appointing. 2013 makes the role of ID's very different from that of executive directors. 1956: The Act. duties. is a person of integrity and possesses relevant expertise and experience. An ID is vested with a variety of roles. The Act. senior management. According to NASDAQ "Independent director" means a person other than an executive officer or employee of the company or any other individual having a relationship which. An ID brings the accountability and credibility to the board process. Apart from this he will be disqualified if he is not less than 21 years of age or holds 2% or more block of voting shares or shares or if he is a partner or executive of any statutory audit firm or the internal audit firm or the legal firm(s) and consulting firm(s) that have a material association with the company. governance standards. in the opinion of the Board. holding company or subsidiary or associates which affect their independence. introducing the concept of ID is to take unbiased decisions and to checks various decisions taken by the management and majority stakeholders. duties and liabilities for good corporate governance. 1956 do not specifically give the definition of the ID. Moreover he is not related to promoters or persons occupying management positions at the board level or at one level below the board and has not been an executive of the company in the immediately preceding three financial years. .AN OVERVIEW The need for the ID's aroused due to the need of a strong framework of corporate governance in the functioning of the company. According to this clause ID's are those who apart from receiving director's remuneration do not have any material pecuniary relationships or transactions with the company. POSITION UNDER THE STATUE The Act. ID means a director other than a managing director or wholetime director or a nominee director. tenure. All provisions of clause 49 are mandatory to be followed by every listed company. liabilities and the manner of selection of ID's in board and various committees of the Company which are as follows: INDEPENDENT DIRECTORS . There is a "growing importance" of their role and responsibility. a) Who. These ID's are the trustees of good corporate governance. qualifications. 2013 has adopted many of the provisions of clause 49 of the listing agreement and has defined the term 'Independent Director' u/s 2(47) which says that 'Independent Director' means an Independent Director as referred to in sub-section (5) of section 149. 2013: The Act. remuneration and liability of ID's.defined the roles.

but he may receive sitting fee and any profit related commission as approved by members. iii.2. 2013 has described the manner or procedure for selection of ID's under section 150. he himself or his relatives should not have or had any pecuniary relationship or transaction with the company or its holding or its subsidiary or its associate company during the current financial year. Who is not related to promoters or directors in the company c) Who has or had no pecuniary relationship with the company d) None of whose relative has or had pecuniary relationship or transaction with the company. or iv. He is not entitled to any stock option or any remuneration. of any nonprofit organization. or a majority shareholder. MANNER OF SELECTION AND APPOINTMENT OF INDEPENDENT DIRECTOR The process of identification and appointment of an ID itself provide hints about the likelihood of the person acting independently. Is or has been an employee or proprietor or a partner. It also says that the appointment of an ID shall be approved by the company in general meeting and the explanatory statement indicating the justification behind appointing such person. Also the appointment of ID shall be approved at the meeting of the shareholders and the explanatory statement attached to the notice of the meeting for approving the appointment of an ID shall include a statement that in the opinion of the Board. neither himself nor any of his relative--- i. as may be notified by the Central Government. do not influence the selection of ID. This will ensure that prejudice and proximity to management. strict eligibility criteria have been laid down for the appointment of an ID for example. An ID shall hold the office for a term up to five consecutive years. e) Who. attached with the notice of general meeting. or who possesses such other qualifications as may be prescribed. an ID should not be related to the company or its holding or its subsidiary or its associate company. Both the company and the ID shall abide by the provisions of the act5. the ID's proposed to be appointed fulfils the conditions specified in the Act. containing names. addresses and qualifications of persons who are eligible and willing to act as ID. . 2013 and the Rules and the proposed director is independent of the management. Under the Act. 2013. Is a Chief Executive or director. institute or association. but shall be eligible for re-appointment on passing of a special resolution by the company and disclosure of such appointment in the board's report. The Act. He also has to declare to the board that he is independent at the time of his appointment and also whenever there is a change that may affect his independence. A good way to identify and appoint an ID is to involve a nominations committee of the board. or involve the entire board. Holds or has held the position of a key managerial personnel ii. Holds together with his relative two per cent or more of the total voting power of the company. in any of the three financial years preceeding. This section says that selection of an ID shall be done from a Data Bank maintained by anybody.

requires all the ID's to meet at-least once in a year. CONCLUSION . The code also lays down certain important duties like keeping themselves updated about the company and the external environment in which it operates. The guidelines. keeping themselves update and undertaking appropriate induction and refreshing their knowledge. mediating in situations like conflict between management and the shareholder's interest and etc. particularly the minority holders. harmonizing the conflicting interest of the stakeholders. 2013. An ID would also evaluate the performance of the chairperson of the company. The code lays down certain critical functions like safeguarding the interest of all stakeholders. restricts and limits the liability of ID's to the matters which are directly relatable to them. despite not being considered as 'independent' under the new definition. In the same way. role and functions and duties and etc are broadly set out in a code described in Schedule IV of the Act. debenture-holders. has sought to balance the wide nature of the obligations. skills and familiarity with the company. The Act. 2013. The meeting must be convened without the presence of the non-independent directors and members of the management. These measures would immensely aid in ensuring the smooth and proper functioning of the Board of Directors of a company. The Act. ID's should not be less than half of the total number of members. Also. and with his consent or connivance or where he had not acted diligently".ROLE AND DUTIES OF INDEPENDENT DIRECTORS The role of an ID is considered to be of a great significance. Section 149 (12) limits the liability of an ID "only in respect of acts of omission or commission by a company which had occurred with his knowledge. the Board of Directors of the Company which consist of more than one thousand shareholders. 2013. deposit-holders and any other security holders at any time during a financial year shall constitute a Stakeholders-relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the board. For instance in the Audit committee which shall comprise of minimum three directors. functions and duties imposed on an ID. the Act. 2013 requires an ID to review the performance of the non- independent directors and the Board as a whole of the company. attributable through board processes. 2013. the Nomination and Remuneration Committees which shall consist of three or more non-executive directors. Nominee directors. not disclosing important and confidential information of the company unless approved by the board or required by law. LIABILITY The Act. ID's should form a majority. 2013 has also emphasized on the appointment of an ID as a member or as a chairperson in various committees. MEETINGS & COMMITTEES The Act. actively participating in committees of the board in which they are chairperson or members. as long as they are non-executive. would nevertheless be eligible for immunity. regularly attend the general meetings of the company and etc. For the Stakeholders Committee. analyzing the performance of management.

2013 has conferred greater empowerment upon ID's to ensure that the management & affairs of a company is being run fairly and smoothly. . Every director. It is only when the entire board functions effectively which results to good corporate governance and benefit minority as well as majority shareholder in its long term which maintains a good corporate image in the market. whether independent/nonindependent. at the same time. The Act.The new concept of having ID is a welcome step for corporate governance in India. 2013 empowers the ID's to have a definite 'say' in the management of a company. executive/non-executive has a distinct role in the functioning of the company. But. greater accountability has also been placed upon them. However it is also important to keep in mind that good corporate governance is not just the outcome of appropriate selection and effective functioning of ID's. which would thereby immensely strengthen the corporate governance. The Act.