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Independent Director

Independent Director

The Companies Act,2013 confers greater role in the Corporate Governance of Independent Director. There is a huge demand for capable, qualified Independent Directors to give right direction in managing the affairs of the company. The object of having Independent Directors is to bring an element of objectivity to board process in the general interests of the company and thereby for the benefit of minority interests and smaller shareholders. 1

Requirement of Independent Directors under the following:

S. No

Listed Companies

Unlisted Companies

1.

Public:

i) 1/3rd of total number of directors.

ii) In case of Regulation 17 of SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015

• 1/3rd of total number of directors where the Chairman of the Board is Non- Executive Director.
or
• 1/2 of total number of directors where the Chairman of the Board is Executive Director.

Public:

The Companies Act, 2013 empowers the Central Government to prescribe minimum number of independent directors for any class or classes of public companies.  The rules 2prescribe that the following classes of public companies shall have at least two Independent Directors:

• Paid up share capital of Rs.10 crore or more; or

• Turnover of Rs.100 Crore or more; or

• Outstanding loans or borrowings or debentures or deposits, exceeding Rs.50 crores in aggregate.

2.

Private:

No requirement to appoint Independent Director.

Private:

No requirement to appoint Independent Director.


Appointment:

The appointment of Independent Directors should be made by the company from amongst persons, who in the opinion of the company, are persons with integrity, possessing relevant expertise and experience 3 and who satisfy the criteria for independence 4. The appointment of Independent Director(s) of the company shall be approved at the meeting of shareholders by passing an ordinary resolution. However, the appointment of Independent Director(s) for the second tenure shall be through passing a special resolution.

 

Qualifications & Disqualifications:

An Independent Director must 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 5. Persons falling under sub clauses (b) to (e) of Section 149(6) of the Companies Act,2013 shall be Independent Director.

 

Casual vacancy:

  • If an Independent Director resigns before completion of his tenure and on the date of resignation if the company does not meet the parameters prescribed in Section 149(4) of the Act, then the company is required to appoint another Independent Director in his place.
  • Such director who is appointed in the casual vacancy caused by resignation or removal shall hold office till such time the tenure of the original independent director would have run.
  • Any vacancy caused due to resignation or removal shall be filled within 180 days 6.

 

Resignation and removal 7 :

The resignation and removal of an Independent Director shall be in the same manner as provided in sections 168 and 169 of the Act.

 

FAQs:

 

Whether an Independent Director can be appointed as a Managing director?

No. By the very understanding, an Independent Director means a director other than a Managing director or a Whole time director or a Nominee director 8.

 

Whether Alternate director of an Independent Director should be an Independent Director?

Yes. The Board can appoint an alternate director if the articles so authorize or by passing a special resolution in the general meeting.

 

Whether an Independent Director can be appointed as an Additional director?

In case of Independent Directors, the appointment has to be approved by shareholders only, which means that the appointment as an Independent Director is effective from the date on which shareholders approve. Therefore, an Independent Director cannot be appointed in the capacity of an additional director.

 

Independent Director as an Executive director

Executive Director means a Whole Time Director as defined in section 2(94) of the Act 9. Since an Independent Director is a director other than a Whole Time Director or a Managing Director or a Nominee Director, therefore an Independent Director cannot be an Executive Director.

 

Independent Director as a Non-Executive Director

Independent directors are not employees of the company. Therefore, Independent Directors are Non-Executive Directors. However, it must be noted that every non-executive director is not necessarily ’independent’. A Non-Executive Director should fulfil certain criteria to qualify as an Independent Director. 10

 

If an Independent Director ceases to be independent will he be required to step down from his directorship?

Yes, if an Independent Director ceases to be independent he will be required to step down from his directorship. However, he may be re- designated as a director at the discretion of the Board.

Notes:

  1. Ramaiya, Guide to Companies Act,2839(18th Edition,2015)
  2. Rule 4 of Companies (Appointment & Qualification of Directors) Rules,2014
  3. Section 149(6)(a) of the Companies Act,2013
  4. Section 149(7) of the Companies Act,2013
  5. Rule 5 of Companies (Appointment & Qualification of Directors) Rules,2014
  6. Section 149(8) Schedule IV of the Companies Act ,2013
  7. Section 149(8) Schedule IV of the Companies Act ,2013
  8. Section 149(6) of the Companies Act,2013
  9. Rule 2(k)of Companies (Specification of Definitions Details) Rules, 2014
  10. Vinod Kothari, Sikha Bansal, Taxmann’s Guide to Independent Directors, 37

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