INDEPENDENT DIRECTOR
Khusbu Agrawal
Khusbu Agrawal (the “Valuer”) is a Fellow Member of the Institute of Company Secretaries of India (ÏCSI) having membership No. F11833. The Valuer is registered with the Insolvency and Bankruptcy Board of India (Registration No. IBBI/RV/03/2021/14393) to undertake the Valuation of Securities and Financial Assets of the Companies. She has more than 8 years of experience in Corporate law, merger & acquisitions. She has also done LLB, Master’s in Commerce and Master’s in journalism & Mass Communication. Further, Ms. Khusbu Agrawal has done post qualification course i.e. Certificate Course on Intellectual Property Rights conducted by ICSI. She is a qualified Independent Director and Social Auditor.
Independent Director
An independent director should preferably possess appropriate skills, experience, and knowledge in one or more domains of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations, or other disciplines that are related to the company’s business. Generally, one who wishes to qualify as an Independent Director has to possess the following qualities:
- Impartiality
- Loyalty
- Decision-making (judgment)
- Professional repute
An independent director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. They also ensure that there is no dominance of one individual or special interest group. They act as a coach, mentor, and sounding board for their full-time colleagues.
Independent Director Data Bank
The Ministry of Corporate Affairs (MCA) notified the Companies (Creation and Maintenance of Databank of Independent Directors) Rules, 2019, and amended the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019.
The Companies (Creation and Maintenance of Databank of Independent Directors) Rules, 2019, effective from 1st December 2019, authorized the Indian Institute of Corporate Affairs (IICA) to act as the institute or association responsible for the creation and maintenance of the online databank containing names, addresses, and qualifications of existing Independent Directors and persons who are eligible and willing to act as Independent Directors.
The databank is created, and Independent Directors can register themselves at https://www.independentdirectorsdatabank.in/.
Compliances by a Person Eligible and Willing to be Appointed as Independent Director
1. Every individual –
a. Who has been appointed as an independent director (ID) in a company; or
b. Who intends to get appointed as an ID in a company, shall before such appointment,
c. Apply online to the institute (‘Indian Institute of Corporate Affairs at Manesar’ notified as the institute for the creation and maintenance of data bank of IDs) for inclusion of his name in the data bank for a period of:
– 1 year,
– 5 years, or
– For his life-time.
2. Any individual, including an individual not having DIN, may voluntarily apply to the institute for inclusion of his name in the data bank.
3. Every individual whose name has been so included in the data bank shall file an application for renewal for a further period of 1 year or 5 years, within a period of 30 days from the date of expiry of the period, failing which, the name of such individual shall stand removed from the data bank of the institute.
4. No application for renewal shall be filed by an individual who has paid life-time fees for inclusion of his name in the data bank.
5. Every individual whose name is included in the data bank shall pass an online proficiency self-assessment test conducted by the institute within a period of two years from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the data bank of the institute.
Exemption from Online Proficiency Self-Assessment Test
As on the date of inclusion of name as a director or key managerial personnel in the data bank, he/she has served for a total period of not less than 3 years in:
a. A listed public company; or
b. An unlisted public company having a paid-up share capital of rupees ten crore or more; or
c. A body corporate listed on any recognized stock exchange or in a country which is a member State of the Financial Action Task Force on Money Laundering and the regulator of the securities market in such member State is a member of the International Organization of Securities Commissions; or
d. Bodies corporate incorporated outside India having a paid-up share capital of US$ 2 million or more; or
e. Statutory corporations set up under an Act of Parliament or any State Legislature carrying on commercial activities.In the pay scale of Director or equivalent or above in any Ministry or Department of the Central Government or any State Government, and having experience in handling:
a. The matters relating to commerce, corporate affairs, finance, industry or public enterprises; or
b. The affairs related to Government companies or statutory corporations set up under an Act of Parliament or any State Act and carrying on commercial activities; or
c. In the pay scale of Chief General Manager or above in the Securities and Exchange Board, the Reserve Bank of India, the Insurance Regulatory and Development Authority of India, or the Pension Fund Regulatory and Development Authority, and having experience in handling matters relating to corporate laws, securities laws, or economic laws.For the calculation of the period of 3 years, any period during which an individual was acting as a director or as a key managerial personnel in two or more companies or bodies corporate or statutory corporations at the same time shall be counted only once.
Individuals who have been in practice for at least ten years as:
o An advocate of a court; or
o In practice as a chartered accountant; or
o In practice as a cost accountant; or
o In practice as a company secretary.
Note:
An individual who has obtained a score of not less than 50% in aggregate in the online proficiency self-assessment test shall be deemed to have passed such test. There shall be no limit on the number of attempts an individual may take for passing the online proficiency self-assessment test.
Which Companies Are Required to Appoint Independent Directors?
Section 149(4) read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 prescribes the companies that are required to appoint independent directors:
Every Listed Company shall have at least 1/3 of the total number of directors as independent directors.
The following class or classes of companies shall have at least two directors as independent directors:
- Public Companies having:
- Paid-up share capital of Rs. 10 crore or more; or
- Turnover of Rs. 100 crore or more; or
- Aggregate outstanding loans, debentures, and deposits exceeding Rs. 50 crore.
- Public Companies having:
Note:
The amount existing on the last date of the latest audited financial statements shall be taken into account for calculating the paid-up share capital or turnover or outstanding loans, debentures, and deposits. The company must appoint a higher number of directors if a higher number of independent directors are required to compose the audit committee.
Exceptions
The provision of independent directors shall not apply to:
- (a) Section 8 companies,
- (b) Specified IFSC public companies,
- (c) Unlisted public companies which are joint ventures, wholly-owned subsidiaries, or dormant companies.
Meaning of independent Director as per Section 149(6)
Section 149 -Company to have a board of Directors
Section 149(6)
An independent director in relation to a company. “Independent Director” means a director, ([other than a managing director or a whole-time director or a nominee director,]
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;]
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or Directors in the company, its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed,] with the company, its holding, subsidiary or associate company, or their promoters, or Directors, during the two immediately preceding financial years or during the current financial year;]
[(d)none of whose relatives—
(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year:
Provided that the relative may hold security or interest in the company of face value not exceeding 50 lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or Directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or Directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii);]
(e) who, 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, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;
Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years.]
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;
(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, Directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.
What is the Minimum Age to Get Appointed as an Independent Director?
As per company law, the minimum age to get appointed as an independent director is 18 years. There is no maximum age to get appointed as an independent director.
Manner of Appointment
The appointment of independent director(s) of the company shall be approved at the meeting of the shareholders. The appointment of independent directors shall be formalized through a letter of appointment, which shall set out the terms and other specified details of the appointment.
Tenure of Independent Director
As per Section 149(10), an independent director shall hold office for a term of up to five consecutive years on the Board of a company 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.
However, no independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director.
How to appoint an independent director?
1.Obtain Written Consent and Declaration from the Proposed Independent Director
2. Obtain Form MBP-1 from the Proposed Independent Director
3. Obtaining DIN and Digital Signature Certificate [Section 153]
4. Documents for DIR-3
5. Meeting of Nomination and Remuneration Committee
6. Convene a Meeting of Board of Directors [As per section 173 & SS-1]
7. Filing of Form DIR-12 with the ROC
8. Convene General Meeting [Section 96, 100 and SS-2]
9. File Form MGT-14 with ROC
10. Making Necessary entries in Register of Directors
11. Regularize the appointment of Additional Independent Director at Annual General Meeting
12. File Form DIR-12 with ROC
13. Undertake Directors and Officers insurance
14. File Necessary Amendment Application under following Acts
Why Do Independent Directors Play a Significant Role?
- Balance the often-conflicting interests of the stakeholders.
- Facilitate withstanding and countering pressures from owners.
- Fulfill a useful role in succession planning.
- Act as a coach, mentor, and sounding board for their full-time colleagues.
- Provide independent judgment and wider perspectives.
An independent director (non-executive director) constitutes the category of directors who help the company in improving corporate credibility and governance standards. They play an important role in bringing transparency, accountability, and credibility to the firms.