Which Companies need to Appoint Independent Director in India?

Directors hold the supreme executive authority in a company and act as the brain of the organization that guide other employees to work towards success and growth. The group of directors leading the company are commonly referred to as the ‘Board of Directors’ and are the core body responsible for overseeing the management’s work and their efforts towards protecting the long-term interests of the company.

Who is an Independent Director?

As per Section 149(6) of the Companies Act, 2013, an independent director is a non-executive director of a company and refers to a director who fulfils the following conditions:

• Is a person of integrity and has relevant expertise and ample experience.
• Is or was not a promoter of the company, its holding, subsidiary or associate company,
• Is not related to the promoters or directors in the company, its holding, subsidiary, or associate company,
• Has or had no pecuniary relationship, [other than remuneration as such director or having transaction not exceeding 10% of their 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 2 immediately preceding financial years or during the current financial year.

Note: This provision does not apply to government companies.

None of whose relatives fulfill the following conditions:

Hold any security of or interest in the company, its holdings, subsidiary, or associate company during the 2 immediately preceding financial years or during the current financial year: Provided that a relative may hold security or interest in (the company only) face value that does not exceed INR 50 lakh or 2% 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 [Rule 5(2)-INR 50lacs] during the 2 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 3rd 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 [Rule 5(2) - INR 50lacs during the 2 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 2% 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).

Which Companies Need to Appoint Independent Directors?

As per Section 149 Subsection 4 read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, companies that need to elect independent directors are:

Listed Companies

At least one-third of all the Directors should be independent directors.

Public Company

Public companies must have a minimum of two independent directors if they have:

• Paid up share capital of INR 10 crores or more.
• Turnover of INR 100 crores or more.
• An aggregate of outstanding loans, debentures and deposits that exceed INR 50 crores.

The following classes of unlisted public companies shall not be covered under namely:-

(a) a joint venture;

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act.”]

Penalty for Non-Appointment of Independent Directors

In a recent case in 2023 concerning Resonance Eduventures Limited's failure to appoint independent directors, a penalty of INR 5 lakh was imposed citing Sections 454(3) and 149(4) of the Companies Act, 2013.

What is the Role of Independent Directors?

As per Schedule IV of the Companies Act, 2013, independent directors shall:

• Act as strategic advisor to the organization.
• Be a watchdog for the stakeholders’ interest.
• Pass impartial judgement.
• Moderate in the company’s interest in conflicting situations.
• Review that the company adheres to a good governance policy.
• Share innovative or creative ideas for the better future of the company.

What are the Duties of Independent Directors?

• Undertake apt initiation and regularly update & refresh their skills, knowledge, and familiarity with the organization.
• Attempt to attend the company’s general meetings.
• Attempt to attend the Board of Director’s meetings and board committee’s meetings.
• To gain ample knowledge of the company and the external environment it operates in.
• Report issues related to unethical behavior, actual or potential fraud or violation of the company’s Code of Conduct or ethics policy.
• While acting within their authority, help in safeguarding the genuine interests of the company, shareholders, and its employees.
• Not to reveal any confidential information, including commercial secrets, technologies, advertising & sales promotion strategies, unpublished price sensitive data, unless the Board exclusively approves such disclosure or the same is required by law.
• To not obstruct the functioning of the company or the Board committee.
• Participate in the Board’s committee, by acting as a chairperson or a committee member.
• Determine and ensure that the company has an adequate and working vigil mechanism and to make sure that the interests of the person who uses such mechanism are not prejudicially affected on such usage.

Independent Director’s Tenure

An independent director shall hold the office for a term of five years and may do so for two consecutive terms.

Independent Director’s Remuneration

Under Section 197(5) of the Companies Act, 2013, an independent director is not really entitled to any remuneration. However, under Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a sitting fee of a maximum of INR 1 lakh per Board Meetings or Committee Meetings can be paid to such independent directors.

For Independent Directors and Women Directors, the remuneration for sitting fees must be equal to or greater than the sitting fees paid to other directors.

Age Limit for Independent Directors

An individual must be at least 18 years old to be appointed as an independent director. On the other hand, there is no maximum limit to being appointed as an independent director.

As per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the minimum age to be appointed as an independent director is 21 years and maximum stands at 75 years. The maximum age may be increased if a special resolution with an explanatory statement has been passed for the justification of the appointment.

Procedure for Appointing an Independent Director

• Get consent in DIR-2 and get disclosure in MBP-1 and DIR-8.
• Get recommendation from the Nomination and Recommendation Committee (NRC).
• Calling a Board Meeting to appoint the independent director (as additional director) and file E-form DIR-12.
• In the Annual General Meeting, get the approval of the members and file E-form DIR-12 for such regularization and regularize additional independent director.

Independent Directors’ Meetings

All the independent directors of a company shall hold at least one meeting in a financial year, without the attendance of any of the non-independent directors or management members.

How many Companies can an Independent Director serve?

An individual shall serve as an independent director in at most seven companies at a time.

Selection of Independent Directors & Maintenance of the Databank of Independent Directors

The Companies (Creation and Maintenance of Databank of Independent Directors) Rules, 2019 states the provisions with respect to creation of a databank for all the independent directors. Companies (Appointment and Qualification of Directors) Rules, 2014 states that any person that is an independent director or is proposed to become one, shall enlist themselves with the data bank (Independent Directors Databank – IICA) for a period of one year, five years or their entire lifetime.

Any person, even someone without DIN, may voluntarily apply for their name to be included in the data bank and shall have to pass the online self-assessment test for the same. There are no limitations on the number of attempts you can take for this test.

Individuals who have served as a Director or Key Managerial Personnel (KMP) for a minimum of 10 years in a listed public company or an unlisted public company with a paid-up share capital of INR 10 crores or more are exempted from the requirement of passing the online proficiency self-assessment test. Nonetheless, registration with the online databank remains obligatory for these exempted individuals.

If an individual fails to clear the online proficiency test, their name shall be struck off from the databank. This would result in such individuals becoming ineligible to act as independent directors until they have cleared the online proficiency self-assessment test.

Anyone whose name has been struck off from the databank may apply for the restoration of their name under sub-rule (4) after paying the fees of INR 1,000. The institute shall allow the restoration of the names of such individuals depending upon the following conditions:

• Their name shall be listed in a separate restored category for a one-year period from the restoration date, within which they shall be required to clear the online proficiency self-assessment test. Only after clearing the test shall their name be included in the databank and in such case, the fees by them at the time of initial registration shall continue to be valid for the period for which it was originally paid.
• If they fail to pass the online self-assessment test within one year of their name being restored, their name shall be removed from the databank, and they would have to apply again under sub-rule (1) for their name to be added to the databank.

Conclusion

Independent directors might be a vital part of the supreme executive authority in a company, but their eligibility for this position lies solely in their ability to clear the online proficiency self-assessment test. Considering they can hold this position in up to seven companies at a time, it is imperative to make sure the best person is hired for this job.


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