An independent director is a third party who is a member of the board of directors, having an impartial

position with a company. The independent director does not participate in the daily functioning of the
company neither he is a part of the executive team of the company.

Who can be an Independent Director?

Chapter XI of the Companies Act 2013, deals with the appointment and qualifications of directors.
Provisions pertaining to who can be an independent director under the Companies Act 2013 are set forth
under section 149 subsection (6) of the Act. The section provides that an independent director in regard to a
company means a person other than the managing director, or a whole-time director, or a nominee director:

 Is a person of integrity and a person who has the relevant expertise and experience, in the opinion
of the board.
 The person should not be the promoter of the company or any of its subsidiaries or any of its
holding or, any of its associate companies.
 The person should neither be related to the promoters of the company nor the directors in the
company. Including the directors of its holdings, any of its subsidiaries, or any of its associate
companies.
 The person should not have or had any pecuniary relationship with the company (including its
holdings, subsidiaries, or associate companies) during the previous two financial years. However,
the pecuniary relationship mentioned in this clause means the monetary relationship should be
other than the remuneration as director or transaction not going beyond ten percent of his total
income.
 None of whose relative must have had or has any relationship with the company (including its
holdings, subsidiaries, or associate companies) that is in the nature of pecuniary or transactional.
 None of whose relative during the current or two immediately previous financial years is:
o Holding any security or interest. Provided it must not exceed fifty lakhs or two percent
of the paid-up capital;
o Is indebted; or
o has provided for a guarantee, or security for the indebtedness of a third party.
 The person neither himself nor any of his relatives:
o Holds any managerial position of importance or is employed in the company
(including its holdings, subsidiaries, or associate companies) during three immediately
previous financial years.
o For the three immediately previous financial years has been an employee or, proprietor
or a partner in the:

1. Firm of auditors,
2. The firm of company secretaries,
3. Cost auditors of the company (its holdings, subsidiaries, or associate companies),
4. The legal firm carrying transactions on behalf of the company (its holdings, subsidiaries, or
associate companies) amounting to ten percent or more of gross turnover.

 The person having the hold of two percent or more voting power in the company along with his
relatives.
 Is the head of the Non-profit organization that receives twenty-five percent or more from the
company (its holdings, subsidiaries, or associate companies).
 A person having the prescribed qualifications.
Which companies must or can appoint independent directors?
It is obligatory for certain companies to appoint an independent director. Sub-section (4) of Section 149 of
the companies Act 2013 provides that:

 Every Public listed company must have at least 1/3rd of the total number of directors.
 The Union government to prescribe for the minimum number of independent directors for other
classes or classes of public companies.
Rule 4 of the Companies (Appointment & Qualification of Directors) Rules, 2014 provides for the number
of independent directors. It states that the public companies falling under the below-mentioned criteria shall
have at least two independent directors:-

 Having paid-up share capital of INR 10 crores or more.

 Having a turnover of INR 100 crores or more.
 Having in the aggregate, outstanding loans, debentures, borrowings, and deposits, more than INR
50 crores.
Exceptions to the following clauses:

 Joint venture.
 Wholly owned subsidy.
 A dormant company as defined under the Act.

Limit on the number of Independent Directorships?

According to section 165 of the Companies Act 2013, the maximum number of companies wherein a person
can be appointed as a director shall not be more than 20 companies (including the alternate directors). For
calculating the limit wherein a person can be appointed as a director in a public company, the directorship of
that person in private companies (holdings, subsidiary company) shall be included.

In the case of a public company in which a person can be appointed as a director shall not be more than 10
companies. However, the Companies Act, 2013 is silent regarding any specific limit on the number of
companies where a person can be appointed as an independent director.

Appointment and Re-appointment of Independent Directors

Qualifications
Independent directors are directors of a company. Independent directors are subject to the same general
requirements and disqualifications as any other director. The 2013 Act specifies specific qualification
standards for independent directors in addition to those outlined in the Listing Agreement. An independent
director must be a subject matter expert with the necessary qualifications in the domains of finance, law,
management, research, and corporate governance. He must be a person of moral character, faith, honesty,
and appropriate experience. Additionally, he should not be a promoter of the business or any affiliated
businesses, or even a relative of any promoters or board members. In addition, he must not have any
financial ties to the corporation, its holdings, subsidiaries, or promoters. He must, thus, be a person in order
to be selected as an independent director. He must be qualified to serve as a director and provide assurance
that he is not ineligible. In order to serve as a director, he must also submit his written approval, which must
be filed with the Registrar, and declare his director identification number (DIN).

The New Act prohibits the appointee from being associated with the promoter or directors of the company,
its holding, subsidiary, or associate company, whereas, the listing agreement prohibited the appointment of a
person in relation to the promoters or persons possessing management positions at the board level or one
level below.

The new Act does not require the appointment to be unrelated to someone holding managerial positions at
the board level or one below the board, unlike the listing agreement, and it can be deduced from this.
Companies must adhere to the standards under both until the regulations developed in this respect give
further clarity since the new Act does not supplant or replace the listing agreement. While the Listing
Agreement does not contain any strict rules about the potential appointee’s family, the new Act stipulates
that neither the independent director nor any of his kin may:

1. Hold a significant managerial role or had worked for the business during any of the three
financial years;
2. Has participated in any of the three financial years as an employee, proprietor, or partner;
3. Holds 2% or more of the company’s total voting power;
4. Belongs to any non-profit organisation whose chief executive officer or director obtains 25% or
more of its revenues.
While the new Act stipulates that an independent director must possess honesty, the necessary knowledge,
and the necessary experience, it does not specify the criteria to be used in deciding whether a person satisfies
these requirements. The ultimate effect is that listed corporations eventually nominate independent directors
after using their own discretion. It is important to note that, in contrast to the 2013 Act, the listing agreement
does not define the term “a person with integrity and holding the necessary skills and experience” when
describing the individuals eligible to be selected as independent directors. This provision is not present in
the Listing Agreement. These constraints aim to ensure that independent directors do not act against the
financial or pecuniary interests of the firm. There may be a need to review the selection criteria for
independent directors at many listed companies.

Tenure of Independent Directors

The duration of the term of office for independent directors has been set forth under subsection (10) and
subsection (11) of section 149 of the Companies Act,2013.

According to section 149(10), an independent director can be appointed for a term up to 5 consecutive years.
This was clarified by the Ministry of Corporate Affairs via its General Circular 14/ 2014, stating that the
appointment of an independent director for the term of 5 years or less is permissible. Whether the
appointment is for five years or less, it will be considered as one term.
The independent director under this section shall be eligible for reappointment through the passing of a
special resolution and the disclosure of such information has to be made in the board report.

Furthermore, section 149(11) states that no person shall be appointed as an independent director for more
than two consecutive terms. Although such independent directors shall be eligible for reappointment after
the expiration of 3 years.
The person shall have to resign from the office on completion of two consecutive terms even if the aggregate
number of years is less than 10, as clarified by the Ministry of Corporate Affairs via its General Circular
14/2014.

Remuneration of Independent Directors.

Subsection (9) of section 149 of the Companies Act 2013, expressly prohibits independent directors from
gaining any stock options.
However, the independent director may receive remuneration in the form of a fee. The said fee shall be
decided by the board of directors, and it shall be in the form of a sitting fee to an independent director for
attending meetings of the Board or committees. The amount of the said fee shall however not exceed INR 1
lakh per meeting.

Retirement by Rotation

Unlike other directors, the independent directors shall not be liable to retire on rotation as provided by
subsection (13) of section 149.

Alternate Director

Section 161 of the Act provides for the appointment of alternate directors, nominee directors, and additional
directors. The section states that a person shall be appointed as an alternate director for an independent
director only if he has the said qualifications required to be appointed as an alternate director.

Intermittent director

According to Rule 4 of the Companies (Appointment & Qualification of Directors) Rules, 2014, any
company falling within the ambit of the said rule must appoint an independent director in case of an
intermittent vacancy within 3 months or before the immediate next Board meeting.

Manner and selection of independent directors

Provisions pertaining to the appointment of independent directors are set forth under section 150, section
152, part IV of Schedule IV.

Selection of independent directors

The main aim of appointing an independent director is that the appointed person should be impartial and
help with good corporate governance. The manner in which an independent director shall be appointed has
been laid down under part IV of Schedule IV of the Companies Act 2013.

Part IV clause (1) of Schedule IV states that the appointment of an independent director should be free from
any company management. The board of directors shall appoint an independent director, however, the board
while appointing must ensure that there is a balance between skills, knowledge, and experience in the board.
Doing so will facilitate the board to administer their roles and duties efficiently as provided under section
150 (1).

Therefore the board may nominate the person to be appointed as independent directors. The board has also
been given an option to select an independent director from the data bank that has been maintained. The data
bank might be anybody, associate as notified by the central government. The responsibility of conducting
due diligence before appointing an independent director shall be of the board.

Approval

The board nominates person(s) for the post of independent director. However, the appointment of the
independent director should be approved in the shareholders meeting ad provided under Part IV clause (2) of
Schedule IV.
Section 150(2) states that the appointment of an independent director must be approved in the general
meeting held by the company. Additionally, an explanatory statement must be attached to the notice of the
general meeting. The notice must provide the justification for selecting the said independent director.

Furthermore, Section 152(5) also requires the explanatory statement to specify that in the opinion of the
board, the independent director fulfills the conditions laid down under this Act and its rules.

Appointment Letter

The appointment of the independent directors must be formalized by a letter of appointment. The letter of
appointment shall mention the following things listed below (as specified by Part IV clause (4) of Schedule
IV.):

1. The tenure of the independent director.

2. Expectations of the board and the board level committee(s) in which the independent director is
expected to serve.
3. The fiduciary duties and the corresponding liabilities.
4. Provisions of director and officer insurance.
5. The code of business ethics to be followed by its directors and employees.
6. List of prohibited actions when functioning as such in the company.
7. The remuneration, periodic fees, provision for reimbursement of expenses and profit related
commissions; if any.
The terms and conditions of the appointment of independent directors must be posted on the company
website and must be made available for inspection at the company’s registered office(during business hours)
as provided under clause IV (5)(6) of Schedule IV.

Consent

Every person who has been appointed to hold an office as an independent director must give his consent to
act as an independent director and the said consent must be filed with the registrar within 30 days as
provided under Section 152 (5) of the Act.

Furthermore, the independent director must furnish the consent in writing on or before his appointment
in Form Dir 2 in conformity with rule 8 of Companies ( Appointment and Qualification of directors) rules,
2014.

Re-appointment

According to clause V of Schedule IV, the independent directors shall be re-appointed based on the
performance evaluation report.

Removal

Like any other director of the corporation, an independent director may be dismissed from the board. They
can be dismissed before their term ends by passing a regular resolution that is supported by the majority of
the members. The independent director must have a fair chance to be heard before being removed. However,
a director chosen by proportional representation cannot be dismissed before the end of his tenure. Specific
notice must be introduced at the meeting when a director is to be dismissed. The resolution voted in the
Extraordinary General Meeting (EGM) to remove the directors was deemed invalid since no particular
notice of the vote to remove the directors was given. To provide the concerned director with a chance to
voice his views, the corporation must also submit a copy of the document to him. The concerned director
may also ask for more time to send his representative or a lawyer. In the event of a time constraint, the
director may address the matter at the scheduled meeting. However, if the company or another individual
file a claim with the National Company Law Tribunal (NCLT) claiming that doing so would amount to
securing unwarranted exposure for defamatory material, such representation may not be read out at the
meeting. With a majority vote, shareholders may also dismiss a director with or without cause. However, if
two-thirds of the directors were chosen by proportional representation, this option would be unavailable. If
any compensation or damages are due to the dismissed director under the conditions of his appointment as
director, they might have to be paid.

Evaluation of the performance of an independent director

Part VIII of the Code for Independent Directors provides that based on the performance evaluation report
term of an independent director may be extended or he may be reappointed. The performance evaluation of
the independent director is to be conducted by the entire board of directors.

Director Identification Number (DIN)

Director Identification Number is a unique 8 digit identification number that is allotted to an individual who
wishes to be a director or a company or someone who already is a director of a company. This number is
allotted by the central government.

Section 152 of the companies Act makes it compulsory for the directors to obtain a unique identification
number. The provisions pertaining to Director Identification Number are set forth under section 153 and rule
9 of the Companies (Appointment and Qualifications of Directors) Rules, 2014. Director identification
numbers facilitate the government in maintaining a database. Every person intending to be a director or
every person who is already a director in a company shall be allotted a single number irrespective of the
number of directorships he holds.

To obtain a Director identification number an individual needs to apply to the Ministry of Corporate Affairs
in the manner prescribed along with the prescribed fee. The central government shall allot the director
identification number to the individuals within a month.

The DIN is valid for a lifetime. After receiving the DIN, the director within a month must inform about the
same, to all the companies where he holds or intends to hold the position of director. The company on
receiving the DIN must inform about the DIN of the director within 15 days to the Registrar of Company.

The detailed procedure and the requirements for the application of DIN are provided under rule 9 of the
Companies (Appointment and Qualifications of Directors) Rules, 2014. While allotting and scrutinizing for
DIN, Rule 10 of the Companies Rules 2014 (Appointment and Qualification of Director) is also considered.

Code for directors

The standards and professional conduct that is expected by the directors have been laid down under
Schedule IV of the Companies Act,2013. The code for independent director includes guidelines for
professional conduct, the duties of the independent directors, their roles and functions. These are discussed
below:
Professional conduct

The independent director according to the part I of the schedule IV must:-

1. Sustain ethical standards.

2. To be impartial while discharging his duties.
3. Perform his responsibilities in the interest of the company.
4. Allocate the necessary time to fulfil his professional obligations so as to facilitate him in an
informed decision making.
5. Not allow any unnecessary considerations that will hamper his independent judgment, while
taking decisions for the benefit of the company.
6. Not to abuse his position.
7. Abstain from actions that would cause him to lose his independence.
8. Assist the company in incorporating good corporate governance.

Duties of Directors
The independent director according to part II of schedule IV has the following roles and functions:

 In case of issues relating to strategic risk management, resources, key appointments, standard of
conduct, and performance, the independent director must facilitate in bringing an independent
judgment.
 The independent director must be impartial when considering the evaluation of the performance
of the management and the board of the company
 He must ensure the financial controls and risk management systems are efficient and effective.
 An independent director must always make sure that he is safeguarding the interest of all
stakeholders especially the minority shareholders.
 In case of conflicting interests of all stakeholders, the independent director must try to maintain a
balance.
 The independent director must facilitate in determining remuneration for different levels of:
o The Executive directors.
o Key managerial personnel.
o Senior management and wherever necessary.
 While adjudicating matters, the independent director must adjudicate keeping in mind the interest
of the company as a whole.

Duties of the independent directors

1. Independent director must update and enhance their skills knowledge and familiarity with the
company regularly.
2. An independent director must aim to attend all the board meetings and the meetings conducted by
the board committee is of which he is a member.
3. The independent director must try to keep himself updated about the company the external
environment under which it operates.
 4. Before approving any related party transactions the independent director must ensure death the
transaction is in the interest of the company and has been duly considered.
5. An independent director must report the matters concerning unethical behavior whether it is
actual or suspected fraud of the companies ethics policy for code of conduct.
6. The independent director must never disclose confidential information except if such disclosure
is required by law.
7. In order to discharge his duties or in order to take any decision independent director may seek
expert opinion or clarifications of the information
8. Must be active and an impartial member of the committees of the board that they are part of.
9. In case of any concerns regarding a proposed plan of action or scheme, the independent director
must convey his concern to the board and make sure that they are duly addressed and resolve.
10. Independent directors are prohibited from unjustly obstructing the functioning of the board or
committee of the board.
11. Independent directors must make sure that there is a proper and efficient vigil mechanism in place
in the company.
12. Independent directors should never overstep their authority. Protecting the interest of the
company, its shareholders, and its employees are the primary duty of an independent director.

Position of independent directors in various committees

The companies Act 2013, requires the independent directors to be a part of certain committees such as the:

Audit committee

According to Rule 6 of the Companies (Meetings of Board and its Powers):

Rules, 2014, the following classes of companies shall constitute an audit committee:-

 Every public listed company

 A public company having paid-up share capital of INR 10 crores or more
 A public company having a turnover of INR 100 crores or more
 A public company having in the aggregate, outstanding loans, debentures, borrowings, and
deposits, more than INR 50 crores.
Section 177 of the Companies Act,2013 provides that the audit committee would consist of at least three
directors. The majority of directors in the audit committee must be independent directors.

Nomination Committee and Remuneration committee

According to Rule 6 of the Companies (Meetings of Board and its Powers):

Rules, 2014, the following classes of companies shall constitute a remuneration committee:

 Every public listed company.,,

 A public company having paid-up share capital of INR 10 crores or more,
  A public company having a turnover of INR 100 crores or more,
 A public company having in the aggregate, outstanding loans, debentures, borrowings, and
deposits, more than INR 50 crores.
According to section 178 of the Companies Act, the nomination committee and the remuneration committee
shall consist of at least three or more non-executive directors. One half of the committee shall comprise of
independent directors.

The chairman of the company cannot chair the remuneration committee or the nomination committee,
irrespective of whether he is an executive or non-executive director. The chairman of the nomination
committee or remuneration committee must be an independent director.

Corporate social responsibility committee

According to section 135 of the Companies Act 2013, a company having a net worth of INR 500 crores or
net profit of INR 5 crore or turnover of INR 1000 crore shall constitute a Corporate Social Responsibility
Committee.

Corporate Social Responsibility Committee shall consist of three or more directors out of which one has to
be an independent director.

Advantages of appointing independent directors

Instead of a board made up of dependent directors, a board with a majority of independent directors would
be more capable of overseeing the CEO. Also, adding additional independent directors typically leads to
more outside counsel and knowledge (due to the executives’ coming from different backgrounds). The
directors are not vulnerable to excessive influence from the management group because they, by definition,
have no material link to the firm. So we can say that independent directors are essential to effective
corporate governance and are typically preferred for appointment to the Board of Directors.

Disadvantages to appointing independent directors

Appointing independent directors has a number of disadvantages as well. Some of which are:

 There is a danger of knowledge asymmetry because independent directors often know less about
the firm than the management team.
 Despite the fact that a director may be independent by definition, this does not guarantee that the
director is working with complete impartiality;
 Independent directors are susceptible to management pressure.
 Additionally, they might not possess the knowledge and abilities needed to serve as the Board of
Directors effectively.

Who has the authority to appoint independent directors?

The company’s general meeting must authorise the nomination of an independent director.

Conclusion

An independent director bridges the gap between the management and its shareholders. They promote the
principles of corporate governance by facilitating disclosures, transparency, and accountability of the
company to its stakeholders.
They help the company in inculcating the best corporate governance practices. The independent directors
make sure that the company is functioning in such a way that it keeps in mind the best interest of its
stakeholders, customers, minority shareholders, workers, its own interest, and the interest of the public at
large.

An independent director brings an impartial and independent judgment to the company. It acts as a
watchdog. The inclusion of Independent directors will ensure that the companies are not doing any fraud.
Independent directors in corporate governance will have a positive impact on the corporate environment in
India.