July 29, 2014 by Priyanka Poonia
1. Which companies are required to appointed Independent Director in the composition of its Board?
- All Listed companies shall have at least one-third of its Board as Independent Directors (IDs).
- All Unlisted public companies having paid up share capital of INR 10 Crore more or turnover of INR 100 Cr or more or borrowings exceeding INR 50 Cr, shall have at least two directors as Independent Directors (IDs).
- Where the company ceases to fulfill any of the three conditions i.e. paid up share capital, turnover or outstanding debts, FOR THREE CONSECUTIVE YEARS, then it shall not be required to appoint the independent directors..
2. By when the IDs to be appointed
As per Sec 149(5) every company falling under above mentioned category needs to appoint Independent Director within 1 year from commencement of the Act.
3. Who can be an Independent Director as per section 149 (6) of the Act, 2013?
Who possesses such other qualifications as may be prescribed:
Rule 5 of the Companies(Appointment and Qualification of Directors)Rules,2014 requires an Independent Director should possess appropriate skills, experience and knowledge in one or more fields:-
- Corporate Governance
- Technical operations
- Other disciplines related to the company’s business
He also has to abide by the code of conduct as specified in Schedule IV..
4. Declaration by the ID
Every ID must make a declaration that he meets the criteria of independence as provided in sub section (6)
- at the first board meeting in which he participates as a director;
- at the first board meeting in every financial year; &
- when there is any change in the circumstances which may affect his status as an independent director...
5. Remuneration to Independent Director
ID can be paid sitting fees, expense reimbursement and commission, but cannot be given ESOP. – Section149 (9)..
6. Tenure of Independent Directors:
The New Clause restricts the total tenure of an Independent Director to a two terms of 5 years each. However, if a person who has already served as an Independent Director for 5 years or more in a listed company as on the date on which the amendment to Listing Agreement becomes effective, i.e from 17th April, 2014 he shall be eligible for appointment for one more term of 5 years only by way of passing special resolution in general meeting (Special resolution in general meeting and disclosure in Board’s Report regarding reappointement as per section 152 of the Companies Act). Further, if an independent director has completed his total tenure, he shall be eligible for reappointment only after a period of three years (Cooling period).
For the purposes of sub-sections (10) and (11) of section 149, any tenure of an independent director on the date of commencement of this Act shall not be counted as a term under those sub-sections..
7. Restriction on the number of Boards Independent Directors can serve:
The New Clause restricts the maximum number of boards an independent director can serve on listed companies as seven (7). If such person is serving as a whole time director in a listed company, then he cannot be serve more than three (3) boards of listed companies.
The Amended Clause 49 is referred to as “New Clause” herein which provides for new definition of IDs and all other related matters viz. tenure, appointment, resignation, meeting, performance evaluation etc..
8. Separate Meeting of independent directors:
The New Clause provides that independent directors shall conduct a separate meeting at least once in year. A separate meeting without the presence of the management / executive directors provides them an opportunity to express their opinion freely and independently..
9. Performance Evaluation of Independent Directors:
The New Clause makes it mandatory to conduct the performance evaluation of the independent directors. The evaluation shall be done by the whole board except the directors being evaluated. The decision to extend / continue the terms of the independent directors are made on the basis of such performance evaluation..
10. Prohibition of Stock Option to Independent Directors:
In line with the Companies Act 2013, the New Clause makes it clear that the independent directors are not entitled to any stock option in the company. One of the main arguments against granting stock options to independent directors is the conflict interest resulting out of such options. If they are permitted to hold stock options in the company, they will have a financial interest in the company which will affect their independence. The New Clause also makes it categorically clear that the independent directors should not have any pecuniary interest in the company apart from the director’s remuneration..
11. Exclusion of Nominee Directors from the definition of Independent Director:
The New Clause excludes nominee directors from the definition of the independent directors. This is another step to avoid the inherent conflict of interest in allowing the nominee directors to act as independent directors. The nominee directors have a clear cut mandate to safeguard the constituency they represent, which are generally the lenders of the company. Hence, including them with in the pool of independent directors may not be appropriate for the overall corporate governance of the Company. Hence, the new Clause excludes them within the definition of Independent directors..
12. Resignation of Independent Director
An independent director who resigns or is removed from the Board of the Company shall be replaced by a new independent director within a period of not more than 180 days from the day ( As per Sch.IV to the Companies Act, 2013)of such resignation or removal, as the case may be: Provided that where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director within the period of 180 days shall not apply.
However, in case of a listed company, vacancy caused by resignation or removal of ID shall have to be filled within 3months from the date of vacancy or the immediate next BM, whichever is later. (as per Clause 49 of Listing Agreement).
13. Databank of independent directors
The Companies Act 2013 makes the appointment process of the independent directors, independent of the company’s management by constituting a panel or a data bank to be maintained by the MCA, out of which companies may choose their independent directors. The proposal has its origins in the report of the 21st Standing Committee on finance, wherein it was acknowledged that preparation of a databank of independent directors would vest with a regulatory body that may comprise of representatives of MCA, SEBI, Reserve Bank of India, professional institutions, Chambers of Commerce and Industry etc [section 150 of 2013 Act].
A drawback of constituting a panel of independent directors is that it may discourage people from registering with the panel and in that sense limit the options available to a company for appointment of independent directors..
14. Liability of independent directors
The Companies Act 2013 makes an attempt to distinguish between the liability of an independent director and non-executive director from the rest of the board and has accordingly inserted a provision to provide immunity from any civil or criminal action against the independent directors. The intention and effort to limit liability of independent directors is demonstrated from the section 149(12) of the 2013 Act which inter-alia provides that liability for independent directors would be as under:
“Only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, with his consent or connivance or where he had not acted diligently.”
It is amply clear that independent directors have little or no defense and their obligations continues to be treated equivalent to the other directors by holding them responsible for decisions made through board processes.