Independent Directors and his Role

Definition of Independent Director:

An independent director means a director other than a managing director or a whole-time director or a nominee director who does not have any material or pecuniary relationship with the company/directors. Section 149(6) of the Companies Act, 2013 prescribes the criteria for independent director which are as follows:

• Who in the opinion of the Board, is a person of integrity and possess relevant industrial expertise and experience.
• Such individual shall not be a promoter or related to promoter of the company or its holding, subsidiary or associate company.
• Such individuals must not have any material or pecuniary relationship during the two immediately preceding financial years or during the current financial year with the company or its promoters/directors/holding/subsidiary/ associate company.
• The relatives of such person should not have had any pecuniary relationship with the company or its subsidiaries, amounting to 2% or more of its gross turnover or total income or Rs. 50 lacs or such higher amount as may be prescribed, whichever is less, during the two immediately preceding financial years or in the current financial year.
• who possesses such other qualifications as prescribed in Rule 5 as 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 related to the company’s business.

Which Companies needs to appoint Independent Director?

Every listed public company shall have at least one-third of the total number of directors as independent directors (fraction is to be rounded off to one). Central Government has prescribed under Rule 4, public companies with specified limits as on the last date of latest audited financial statements mentioned below shall also have at least 2 directors as independent directors:-

1. paid up share capital of Rs. 10 crore or more; or
2. turnover of Rs. 100 crore or more; or
3. in aggregate, outstanding loans/borrowings/ debentures/deposits/ exceeding Rs. 50 crore or more.
4. In case a company covered under this rule is required appoint higher number of independents directors due to composition of its audit committee and then they shall appoint such higher number of independent directors.

 Code of Conduct for an Independent Director:

• The Independent Director shall abide by the rules and regulations laid by the provisions specified in Schedule IV regarding code of conduct.    
• Adherence to these standards by independent directors and fulfillment of their responsibilities in a professional and faithful manner will promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors.
• Code of Conduct includes guidelines of professional conduct, role and functions, duties, manner of appointment, re-appointment, resignation or removal, separate meetings, evaluation mechanism.

Appointment of Independent Director:

• Independent director can be appointed for a term of up to five consecutive years on the Board as per Section 152 of the Companies Act, 2013.
• However, in case of his reappointment for further five year then special resolution passed in general meeting and disclosure of such appointment is made in the Board’s report shall be required.
• Further independent director can be considered for re-appointment after expiration of three years of ceasing to become an independent director but he must not be appointed/associated with the company directly or indirectly in any other capacity during the said period of three years.
• Any tenure of an independent director on the date of commencement of this Act is not considered for the above term.
• Further, in case of independent directors, the explanatory statement relating to their appointment should contain a declaration from the Board that in their opinion, the independent directors satisfy the conditions provided in the Act for such appointment.

Liability of Independent Director:

An independent director and a non-executive director except the promoter or key managerial personnel, shall be held liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes and with his consent or connivance or where he had not acted diligently.