Introduction
The Companies Act, 2013 as well as the new Clause 49 of the Listing Agreement (applicable from 1st October, 2014) have brought about immense additions in the concept, requirements, roles, duties and liabilities of Independent Directors. In the wake of recent corporate scams that India has witnessed and the subsequent increase in the number of resignations by Independent Directors from the boards of companies, the revamp of the existing corporate regime’s concept of independent Director is a welcome change. This article is a 360⁰ guide on all provisions relating to Independent Directors under the Companies Act, 2013 and Clause 49 of the Listing Agreement.
Which companies shall appoint Independent Directors
- Every listed public company (at least 1/3rd of Total Directors)
- Following class of public companies (at least 2 Independent Directors)
- Paid-up share capital >= Rs 10 crore, or
- Annual Turnover >= Rs 100 crore,
- Aggregate outstanding loans, debentures and deposits > Rs 50 crore
Requirements of clause 49 of the Listing Agreement with reference to number of Independent Directors to be appointed
- In listed public company, where the Chairman of the Board is a Non-executive Director, at least 1/3rd of the Board should comprise Independent Directors.
- If the company does not have a regular Non-executive Chairman, at least ½ of the Board should be Independent Directors.
- If the Non-executive Chairman is a promoter of the company or is related to the promoter or a person occupying the management positions at the Board level or one level below the board, atleast ½ of the Board should comprise of Independent Directors.
Role of Independent Director
The Independent Director shall –
- Help in bringing impartial judgement on Board’s deliberations,
- Evaluate the performance of board and management,
- Satisfy themselves about the integrity of financial information, financial controls and systems of risk management,
- Safeguard interests of shareholders (particularly minority shareholders),
- Have a prime role in appointment, remuneration and removal of directors, key managerial personnel and senior management,
- Moderate and arbitrate in interest of the company, in case of conflicts between management and shareholder interest.
Criteria for a person to be an Independent Director
- Person with age of 21 years or more,
- Person of integrity who possesses relevant experience and expertise,
- Independent from Management,
- Independent from Promoter Group,
- Apart from receiving Director’s remuneration, no material pecuniary relationship exists with the company, its subsidiary, holding or associate, promoter group or management during 2 immediately preceding financial years or during the current year –
- Of the Independent Director, or,
- Of his relatives, amounting to 2% or more of its gross turnover or Rs 50 lakhs, whichever is lower, and
- Neither he, nor his relatives –
- hold Key Managerial position or is/ has been an employee of the company, its subsidiary, holding or associate during 3 immediately preceding financial years,
- is or has been an employee, partner or proprietor, during 3 immediately preceding financial years, of
- the firm of CA, CS or Cost Accountants of the Company, its subsidiary, holding or associate,
- Legal or consulting firm that has had a transaction, with the Company, its subsidiary, holding or associate, amounting to 10% or more of the gross turnover of such firm,
- Hold, together with his relatives, 2% or more of the total voting power of the company,
- Is Chief executive or director of any Non Profit Organization that receives 25% or more of its receipts from company, its holding, subsidiary or associate, promoter group or management or that holds 2% or more of the total voting power of the company, or
- Is a material supplier, service provider, customer, lessor or lessee of the company
Appointment
Independent Director shall be appointed by the company in general meeting. Terms and conditions of appointment shall be disclosed on the website.
Tenure of Independent Directors
- First term: 5 years.
- Re-appointment for another term of 5 years on passing a special resolution.
- Reappointment (after 2 terms) will be only after completion of a cool off period of 3 years. During the cool off period, he/ she should not be associated with the company in any other capacity, directly or indirectly.
Training to Independent Directors
The Company shall provide suitable training to the Independent Directors to familiarize them with the company, their roles, rights and responsibilities, etc. The details of such training shall be disclosed on the Company’s website, a link to which will be provided in the Annual Report.
Duties of Independent Directors
The Independent Director shall-
- Undertake appropriate induction and regularly update their skills, knowledge, familiarity with the company and the external environment in which they operate,
- Seek appropriate clarification and amplification of information,
- Strive to attend and participate constructively in all Board of Directors, Board Committees of which he is a member,
- Strive to attend the general meetings of the Company,
- Ensure that the concerns of the company are addressed by the Board and to the extent they are not resolved, insist that their concerns are recorded in the minutes,
- Pay sufficient attention to Related Party Transactions and ensure that they are in the interest of the Company,
- Ensure that the company has an adequate and functional vigil mechanism and that interests of those who use such mechanism are not prejudicially affected,
- Report concerns about unethical behaviour, actual or suspected frauds or violation of company’s code of ethics,
- Assist in protecting interest of company, shareholders and its employees, and
- Not disclose confidential information,
Separate Meetings of Independent Directors
The Independent Directors have to hold at least one meeting in a year, without the attendance of Non-Independent Directors and members of management, where they shall review the performance of the Non-Independent Directors, Board as a whole, Chairman and assess the quality, quantity and timeliness of flow of information between the management and Board.
Committees and Independent Directors
- CSR Committee:
A CSR Committee needs to be formed by a company which has
- net worth >=500 crore or annual turnover>=100 crore or
- net profit >=5 crore or more
At least one Independent Director shall form part of the Corporate Social Responsibility Committee of the Board.
- Audit committee
- As per the Companies Act, 2013, all listed companies and such other companies as may be prescribed by Central Government must have an audit committee comprising of minimum three directors, such that a majority of such directors are Independent Directors. Every existing audit committee has to be reconstituted as per the above requirement within 1 year from the commencement of Companies Act, 2013
- As per Clause 49 of the Listing Agreement, 2/3rd of the members of the Audit Committee shall be Independent Directors.
The Chairman of the Audit Committee shall be an Independent Director.
The quorum of the Audit Committee meeting shall be 2 members or 1/3rd of total members of such committee, whichever is greater. However, a minimum of 2 independent members must be present in such meetings.
- Nomination and Remuneration Committee
- As per the Companies Act, 2013, the Board of Directors of every listed company and such other companies as may be prescribed by Central Government shall constitute the Nomination and Remuneration Committee consisting of 3 or more Non-executive Directors out of which not less than ½ shall be Independent Directors.
- The Clause 49 of the Listing Agreement requires that the Chairman of such a committee shall be Independent Director. Chairperson of the company may be appointed as a member of this committee but will not serve as Chairman of this committee.
Remuneration of Independent Directors
- All fees, except sitting fees, to Independent Directors shall be fixed by Board and shall require prior approval of shareholders.
- Independent Directors shall not be entitled to any stock option.
Liability of Independent Directors
Independent Director shall be liable only for such acts which had occurred with his knowledge or with his consent or connivance or where he had not acted diligently.
Evaluation
The performance of Independent Directors shall be evaluated by the entire Board Of Directors excluding the director being evaluated.
Resignation or Removal
Replacement of Independent Director on his resignation or removal shall be done within 180 days. Any intermittent vacancy is to be filled in at the earliest, but not later than immediate Board meeting or 3 months from date of such vacancy, whichever is later.
Miscellaneous provisions related to Independent Directors
- Board Meeting at Shorter Notice: A meeting of Board can be called at a shorter notice to transact urgent business, provided that at least one Independent Director is present at such meeting. In case no Independent Directors are present in such a meeting, then the decisions taken in such a meeting shall be circulated amongst all directors and should be ratified by at least one Independent Director.
- Data bank of persons offering to become Independent Directors: Any institutes or associations that are authorized by Central Government shall maintain a data bank of persons eligible and willing to be appointed as Independent Directors.
Limit on number of directorships
- As per the Companies Act, 2013, number of directorships for a person is restricted to 20 at any given point in time, out of which not more than 10 can be public companies.
- Clause 49 of the Listing Agreement adds further restrictions that a person cannot serve as Independent Director in more than 7 listed companies. However if such a person is a whole time director in any listed company than he cannot serve as an Independent Director in more than 3 listed companies.
Conclusion
With the introduction of these sections, now a large number of unlisted public companies will need to comply with the requirement of appointing Independent Directors. Also there are a lot of pre-qualifications for a person to be eligible to become an Independent Director. With this in mind, plus an increase in liability of the Independent Directors, disincentives such as non-entitlement to stock options and limit on the number of directorships by a person, it seems like it will be a difficult task to find suitable Independent Directors for the Company.