Independent Directors

An independent director is a non-executive director of a company.

A person who 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

1. Section 149 (4) provides that every listed company is required to appoint at least one third of the total number of directors as independent director. Any fraction contained in such one third numbers shall be rounded off as one.
2. The Central Government may prescribe minimum number of independent directors in case of any class or other classes of public companies. Rule 4 provides that the following class or classes of companies shall have at least 2 directors as independent directors-

• The Public companies having paid up share capital of Rs. 10 crores or more; or

• The Public companies having turnover of Rs. 100 crores or more; or

• The Public companies which have, in aggregate, outstanding loans, debentures and deposits exceeding Rs. 50 crores.

Exceptions to the following clauses:

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

Every listed company existing on or before the commencement of the Act shall comply with the provisions for appointing independent director within one year from such commencement of the Act.

Qualification

Rule 5 prescribes the qualification of independent directors. An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines to the company’s business.

Tenure of Independent Directors:

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.

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.

Resignation and Removal 

An independent director may resign or be removed from the position in the same manner in which any other director resigns or is removed. In case an independent director has resigned or is removed from the position the company should appoint a new replacement within 3 months.

However, if a company fulfills the necessary requirement of an independent director without appointing a new replacement, the company may not appoint a new independent director

Data Bank of Independent Directors

In order to strengthen good corporate governance, the ministry of corporate affairs launched Databank for independent directors. The databank maintains a database of the independent directors that are willing to take up the post of an independent director and is also eligible for the post. The data bank facilities the selection process of independent directors by the company as can select the per their requirements.

Indian Institute of Corporate Affairs has been authorized by the central government to create and to maintain a data bank for independent directors. The data bank is an online data bank displayed on the website of the institute.

The provision relating to the details required by the databank is provided under  Rules 2019. Accordingly, the following details of individual are required by the databank:

• Director identification number (DIN)
• Full name 
• Income tax PAN
• Fathers name 
• Date of birth 
• Gender 
• Nationality 
• Occupation
• Present and permanent full address along with PIN code
• Phone number 
• Email id
• The educational qualifications and professional qualifications 
• Details of experience or expertise (if any)
• If any pending criminal proceedings 
• Details of the limited liability partnership which he is a part of:
  • List of the limited liability partnerships,
  • The names,
  • Nature of the industry of the limited liability partnership,
  • The duration along with the dates,
• Details of the companies he is part of:
  • The Name of the companies.
  • The nature of the industry.
  • The duration along with dates.
  • The nature of directorship i.e whether he serves as an independent director or an executive director, or nominee director, or a managing director.

The data shall be provided by the institute on payment of a prescribed fee by the company. Indian Institute of Corporate Affairs shall not be held responsible for the lack of accuracy of any information. As mentioned earlier it is the responsibility of the company to conduct due diligence on the prospective independent directors. The individual whose name has been included in the databank in the event of any change must inform the institute within 15 days.