An Independent Director, as the name suggests, is a director on the Board of a company, who is an independent individual not having any other relationship or transaction with the company except sitting fees.
Companies in which independent director appointment is mandatory:
It is mandatory for following class of companies to appoint independent directors:
a) Listed Companies
b) Public Companies that have a turnover of minimum hundred crore rupees, or
c) Public Companies that have paid-up share capital of minimum ten crore rupees, or
d) Public Companies that have borrowings or outstanding loans or deposits or debentures exceeding fifty crore rupees.
For more information on which companies should have independent directors, please
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Qualification of an independent director:
- Not promoter or related with company’s promoter or its holding, associate or subsidiary company.
- No relationship in terms of money with the company, its holding, associate or subsidiary company.
- Do not hold the position of key managerial personnel.
- Shall possess an appropriate balance of skills, knowledge, and experience in field of law, management, finance, corporate governance, sales, administration, research, marketing, technical operations or any other discipline relevant to company’s business.
Term of office of independent directors:
a) An independent director is responsible for holding office for consecutive five years on the Board of a company. He/She is also eligible for reappointment on declaration by the company along with appointment disclosure in the report prepared by the Board.
b) An independent director is responsible for holding office for not more than 2 consecutive terms. Nevertheless, such independent director is entitled to appointment after three years from ceasing to be an independent director, provided that he is not appointed or has any direct or indirect connection with the company, during the said three years.
c) An independent director's tenure on the date of the Act's commencement does not count as a term under the provisions listed above.
Other important provisions concerning independent director:
a) An independent director’s appointment must be approved by the company in general meeting, and the explanatory statement attached to the general meeting notice called to decide the said appointment must indicate why the appointee was chosen as an independent director.
b) It is vital for the independent directors and the company to adhere to the provisions mentioned under Schedule IV of the Act.
c) Every independent director must give a declaration that he meets the criteria of independence at the first meeting of the Board wherein he participates as a a director, at the first meeting of the Board in each fiscal year or whenever there is any modification in the circumstances that may impact his status as an independent director.
d) They are not given stock options, however, may be compensated in way of fees, reimbursement for participation in Board meetings or profit-related commissions as agreed upon by the members.
e) An independent director are only liable for acts of omission or commission committed by a company that occurred with his knowledge, linked through Board processes, and with his consent or where he had not acted expeditiously.
f) The laws or provisions pertaining to the retirement of directors by rotation are not applicable during the appointment of independent directors.
Manner of selection of independent directors
- From the data bank maintained by anybody, association, etc., notified by the central government.
- Appointment process independent of company management.
- Appointment to be approved at the shareholders meeting.
- Appointment is formalized through a letter of appointment setting out its terms of appointment, the fiduciary duties along with accompanying liabilities, the code of business ethics, the remuneration etc.
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