Role of Independent Directors and their Appointment

The role of an independent director includes the task of improving the corporate credibility and governance standards of a company by acting as a watchdog and helping the company manage risk effectively.

INTRODUCTION

The Companies Act 1956 doesn’t provide a definition for independent directors, but independent directors are a subject of limelight in the Companies Act 2013. Therefore, a separate criterion has been established in the act for the independent directors. Schedule IV of the Companies Act 2013 mentions the Code of Independent Directors. The process of appointment of independent directors is independent of the company management and during the selection process, the board ensures that there is appropriate balance of skills, experience and knowledge in the board, so as to ensure that the board is able to discharge its functions and duties effectively.
 
The appointment of an independent director is approved by the meeting of the shareholders of the company. The board ensures that the independent director proposed to be appointed fulfils all the conditions and criteria that are specified in the Act and the Rules made therein, and that the proposed director remains independent of the management and a statement to that effect is also issued and included in the explanatory statement attached to the notice of the meeting.
 
DEFINTION OF AN INDEPENDENT DIRECTOR

An independent director is a person appointed by the company as a director. Such a person functions as a director, other than a managing director or a whole-time director or a nominee director. The person appointed as an independent director should fulfil all the criteria given under Section 149(6) of the Companies Act along with Rule 4 and 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014.
In general, an independent director is a non-executive director who helps the company in enhancing its governance standards and corporate credibility. The independent director should not have any form of relationship with the company, which may affect the judgement of such an independent director.
 
WHICH COMPANIES REQUIRE INDEPENDENT DIRECTORS?

As per the Companies Act, every listed public company shall have at least one-third of the total number of its directors as independent directors. If the number comes out to be a fraction, it should be rounded off as one.

For an unlisted company, as per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following classes of the companies shall have at least 2 directors as independent directors:

  • Public companies having a paid-up share capital of Rs. 10 crores or more
  • Public Companies with turnover of Rs. 100 crore or more
  • Public Companies with aggregate outstanding loans, debentures and deposits exceeding Rs. 50 crores.

The companies that are exempt from appointing an independent director are as follows:-
  1. Private Companies
  2. Companies ceasing to fulfil the conditions as mentioned above and given under the Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 for a consecutive of 3 years. Such a company need not appoint an independent director until the conditions are met. It must be further explained that the amount existing on the last date of latest audited financial statements shall be taken into consideration while calculating the paid-up share capital or turnover or outstanding loans, debentures and deposits, as per the Third Proviso to Rule 4 of the Companies (Appointment and Qualifications of Directors) Rules, 2014.
  3. A joint venture, a wholly owned subsidiary and a dormant company, if they fulfil the eligibility criteria.
 
ROLE OF AN INDEPENDENT DIRECTOR

An independent director is a person acting as a guide, mentor and a coach for the company which appoints him. The role of an independent director includes the task of improving the corporate credibility and governance standards of a company by acting as a watchdog and helping the company manage risk effectively.

An independent director is a person is responsible for ensuring better governance of a company in which it is involved, by ensuring that he is actively involved in the various committees setup by the company.

The following functions are expected to be performed by an independent director:
  1. facilitating withstanding and countering pressures from owners;
  2. Helping the company in bringing an independent judgement to the board for deliberations, especially on the issues related to strategy, performance, risk management, resources, key appointments and standards of conduct;
  3. Bringing an objective view to the company in evaluation of the performance of the board and of the management.
  4. Scrutinizing the performance of management in meeting agreed goals and objectives and monitoring the report of the performance.
  5. Monitoring the integrity of financial information and ensuring that financial control and system of risk management are defensible and robust in nature.
  6. Safeguarding the interests of all the stakeholders, with special emphasis on minority shareholders.
  7. Balancing any conflict in interest of the shareholders
  8. Determining appropriate remuneration for executive directors, key managerial personnel and senior management members along with having a prime role in appointing and recommending removal of executive directors, key managerial personnel and senior management members.
  9. Moderating and arbitrating in the interest of the company as a whole, in a situation of conflict between the shareholders and the management of the company.
 
DUTIES OF AN INDEPENDENT DIRECTOR

The following are the duties of an independent director:-

  1. Undertaking appropriate induction and regularly updating and refreshing his skills, knowledge of the field and the familiarity with the company.
  2. Seeking clarification or amplification of information and where it is necessary, taking and following appropriate professional advice and opinion of the experts outside the firm at the expense of the company.
  3. Attending all meetings of the board of directors and the board committees of which he is a member
  4. Attending all general meetings
  5. Participating actively in the committees of the Board in which they are the chairperson or members.
  6. Keeping themselves well informed about the activities of the company and the external environment and factors affecting it.
  7. Ensuring that the concerns presented by them regarding the running of the company or any proposed action suggested is addressed by the board and insisting them to record their concerns in the minutes of the board meeting.
  8. Paying attention to and ensuring that adequate deliberations are held before approval is granted related to any third party transaction and assuring themselves that the same is in the interest of the company.
  9. Not unfairly obstructing the functioning of the company otherwise
  10. Ascertaining company’s proper financial vigil mechanism and ensuring that the interest of a person who is using such mechanism is not prejudicially affected on account of such use.
  11. Reporting his concerns towards the unethical behaviour of the members or actual or suspected fraud or any other violations of the company’s code of conduct or ethics policy assisting in protecting the legitimate rights and interests of the company, its employees and shareholders.
  12. Maintaining confidentiality in terms of sensitive information like trade and commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information etc unless the disclosures is expressly approved either by the board of the company or by law.
MANNER OF APPOINTMENT OF AN INDEPENDENT DIRECTOR AND TENURE
  1. The following is the manner of appointment of an independent director:-
  2. The process of appointment shall be independent of the company’s management and while selecting the independent director, the board shall ensure that there is balance of skill, knowledge and experience so that he is able to discharge the functions and duties of an independent director effectively.
  3. The appointment of an independent director shall be approved at the meeting of the shareholders.
  4. An explanatory statement shall be attached to the notice of the above-mentioned meeting called for approval of appointment of an independent director. The statement should include that in the opinion of the board, the independent director proposed to be appointed fulfils all the conditions specifically mentioned in the act. Also, the explanatory statement shall mention that the proposed director is independent of the management.
  5. A letter of appointment shall be issued for formalizing the appointment of the independent director.
  6. The terms and conditions of the appointment of the independent director shall be open to inspection at the registered office of the company which shall be accessible to any member during the normal business hours.
  7. The terms and conditions of appointment of an independent director shall also be posted n the website of the company. 
As for the tenure of an independent director, subject to the provisions of Section 152 of the Companies Act, Section 149(10) of the act states that an independent director shall hold office for a term 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.”

Further, under Section 149(11), the act mentions that “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: Provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.”
 
PROCEDURE FOR APPOINTMENT OF AN INDEPENDENT DIRECTOR
  1. The first is to carefully select proposed independent directors to ensure they have the right skills, experience and balance of knowledge on the board of directors. The candidate may be selected from the database of independent directors maintained by any group, institution or association authorized by CG. (Article 6 of "Company Regulations (Appointment and Qualification of Directors", 2014)
  2. Ensure that the person appointed as independent director of the company complies with Article 149, paragraph 6, and Article 5 (Company ( appointment and qualification of the company) Qualifications) Requirements) Directors) Regulations, 2014)
  3. Ensure that the proposed director is not disqualified by virtue of articles 164 and 165 of the 2013 Companies Act.
  4. Ensure that the person to be appointed As an independent director, they have delivered to the company their DIN and DIR8 declaration form indicating that they have not been disqualified from serving as a director in accordance with the provisions of this law. (Articles 152 (4) and 14 of the Companies Regulations (Appointment and Qualifications of Directors), 2014
  5. Before appointing a person as an independent director, obtain the consent to act as director on Form DIR2.
  6. The issuance notice and agenda of the board meeting or shorter notice in case of emergency shall be sent in writing to each director of the company at the company's registered office. [Sec 173 (3)]
  7. Convene a meeting of the board of directors and verify that the quorum specified in Article 174 is present and approve the following resolutions:
  • Goal for arrangement of Independent Director to hold office up to a time of 5 years, subject to endorsement of Shareholders in the regular gathering of the organization.
  • To approve the Company Secretary or Director of the organization to sign, fill the significant Form and to do such demonstrations, deeds and things as might be important to offer impact to the goal.
  • To Fix day, date time, setting for holding comprehensive gathering of investors of the organization.
  • To Approve the draft notice of the gathering along the informative Statement attached with notice according to the prerequisite set down in Sec 102 of the demonstration.
  • To approve the Director or the Company Secretary of the organization to sign and issue the notification of the comprehensive gathering.

  1. Hold the comprehensive gathering on the day fixed and pass the conventional goal for the arrangement of Independent chief.
  2. According to Schedule IV(IV)(4) to the Companies Act, 2013 the Company should give the arrangement letter to Independent Director. Additionally, the agreements of Independent Director's arrangement must be posted on the organization's site.
  3. Get the assertion of the named Director in regards to his advantage in different substances in Form MBP-1 inside 30 days of arrangement or at the main Board meeting where he partakes as a chief., whichever is prior. [Sec 182(1) read with Sec 182(2)]
  4. Record Form DIR-12 containing the specifics of the arrangement of Director inside 30 days of his/her arrangement. (Sec 170 (2) and Rule 8 and 18 of the Companies (Appointment and Qualification of Directors) Rules, 2014.
  5. The Independent Director needs to present a presentation of autonomy according to Section 149(6) of the Companies Act, 2013 preceding his/her arrangement. Such presentation must be put before the first Board Meeting in which he/she takes an interest as a chief and the ensuing first executive gathering in each monetary year.
  6. if there should arise an occurrence of goal passed as Special goal for re-arrangement of Independent Director, document a guaranteed duplicate of extraordinary goal in Form MGT-14 inside 30 days of the date of regular gathering.
  7. Make vital sections in the register of Directors and key administrative staff and their shareholding.
 
LIABILITY OF AN INDEPENDENT DIRECTOR

The Companies Act, 2013 confines and restricts the risk of Independent Directors just in regard of demonstrations of oversight or commission by an organization which had happened with his insight, inferable through board measures, and with his assent or intrigue or where he had not acted industriously.
 
RENUMERATION

An independent director will not be qualified for any investment opportunity. An independent director might get compensation via sitting expenses. Sitting expenses to be paid to Independent Directors for going to the Board Meetings as per Section 197(5) which is limit of Rs.1,00,000/ - per meeting is to be chosen by the Board. The independent chief will be qualified for the repayment of costs for support in the Board and different gatherings and benefit related commission as might be endorsed by the individuals.
 
RESIGNATION AND REMOVAL OF AN INDEPENDENT DIRECTOR

Resignation

  • An Independent Director might leave his/her office by giving a notification recorded as a hard copy to the Company.
  • Within 30 days from the date of receipt of such notification the Board will document same with Registrar of Companies in Form DIR-12.
  • The director will likewise advance a duplicate of renunciation alongside definite purposes behind the abdication to the Registrar of Companies inside 30 days of acquiescence.

Removal

  • A Company may, by standard goal, eliminate a chief, before the expiry of his period in the wake of offering a sensible chance of being heard.
  • A unique notification is needed for any goal, to eliminate a chief under this segment, or to delegate someone instead of a chief so eliminated.
  • The opportunity will be filled inside a time of not over 180 days.
 
Any irregular opportunity in the workplace of a independent director will be topped off by the Board in the quickly next executive gathering or inside 90 days from the date of such opening, whichever is prior. (Second Proviso to Rule 4 of Companies (Appointment and Qualification of Directors) Rules 2014).
 
OTHER PROVISIONS RELATED TO AN INDEPENDENT DIRECTOR

  • An individual should be an independent director in not in excess of seven recorded organizations all at once.
  • An individual director shall not resign by turn and will not be remembered for "absolute number of chiefs' with the end goal of calculation of rotational chiefs.
  • An individual can be delegated as a substitute director. Yet, he should be able to be named as an independent director.
  • A small shareholder director will be considered as an independent director, if-
  1. he is qualified for arrangement as a free chief u/s 149 (6),
  2. he gives a revelation of his free u/s 149(7).
  • On the off chance that the Board meeting is called at more limited notification in order to execute some pressing business, then, at that point the presence of no less than 1 autonomous chief is obligatory. Without any free chief, a choice will be flowed to every one of the chiefs and later supported by something like 1 autonomous chief.
  • The Nomination advisory group will comprise of at least three non-executive directors out of which at least one-half will be independent directors.
  • The Audit Committee will comprise of at least three chiefs with independent director’s framing a greater part.
  • Compensation Committee will comprise of at least three non-executive directors out of which at the very least one-half will be independent directors.
  • Corporate Social Responsibility Committee will comprise of at least three non-executive directors out of which something like one ought to be an independent director.
  • The autonomous overseers of the organization will hold somewhere around one gathering in a year, without the participation of Non-Independent chiefs and Members of the administration.
 
CONCLUSION

In the wake of examining inside and out with regards to the arrangement of Independent Director, it is completely clear that a free chief goes about as an extension between the investors and the board, likewise helps in bringing an autonomous judgment. Further, these directors likewise empower the idea of corporate administration by giving responsibility, straightforwardness, and exposures in the working and working of the organization. Thusly, their help is an absolute necessity for an organization in carrying out the prescribed procedures of corporate administration