All you need to know about Appointment of Independent Director in a Company

Currently, the structure of corporates in India seems to be disturbed by a number of scams starting from the decade old Satyam Computer Services Scandal to Nirav Modi Scam happened recently. After the Satyam Computer Scandal, Indian Government revamped the framework of corporate regulatory up to a certain level by enforcing Companies Act, 2013. This Act helps in bringing clarity on the liabilities, duties, functions and appointment of Independent Director.

Before Companies Act, 2013, there was no clarity on the definition and role of Independent Directors in Companies Act, 1956 or in SEBI (Securities Exchange Board of India) listing agreement.

Concept of Independent Director

An Independent Director is a non-executive director of a company who helps in increasing the credibility of corporate and governance standards of a company. He/she apart from receiving remuneration, does not have any direct relationship with the company which may affect independence of his/her judgement. Independent Directors possess relevant expertise and experience and act as a watch dog for several committees constituted by the company.

Definition of Independent Director as per Companies Act, 2013

An Independent Director to a Company means a director other than a Managing Director or a whole-time Director or nominee director who fulfills the criteria as provided under section 149(6) of the Companies Act, 2013

Companies eligible to make appointment of Independent Director

The companies which are eligible to make appointment of Independent Director in India are:

• Listed Public Company: In Listed public company, out of all the directors, at least 1/3^rd must be independent directors

• Unlisted Public Company: As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2020, the following classes of companies must have at least 2 Independent Directors:
  • Public Companies having paid-up share capital of Rs. 10 crores or more
  • Public Companies having turnover of Rs. 100 crore or more
  • Public Companies having aggregate outstanding loans, debentures, and deposits, exceeding Rs. 50 crore.

Companies exempted from making Appointment of Independent Director

The following companies are exempted from making the appointment of Independent Directors in India:

• Private Limited Companies
• Companies ceases to fulfill the criteria of Rule 4
• Joint Venture Company
• Dormant Company

Qualification of Independent Director : Who can be an Independent Director?

Rule 5(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014 describes the qualification of the Independent Directors

An Independent Director shall possess appropriate skills, experience, and knowledge in One or more fields i.e.

• Finance
• Law
• Management
• Sales
• Marketing and administration
• Corporate Governance
• And technical assistance and operations.

Section 149(6) of the Companies Act, 2013 provides that:

• An independent director must
• Not be a promoter of the company or its holding, subsidiary or associate company;
• Not be related to promoters or directors in the company, its holding, subsidiary or associate company;
• Had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;
• none of his/her relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of its gross turnover or total income or Rs. 50 lakh or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

Further, an independent director must not

• holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;
• is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of (A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
• any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;
• holds together with his relatives two per cent. or more of the total voting power of the company; or
• is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company.

Manner and selection process of Independent Director

• According to Section 150(1) of the Companies Act 2013, Independent Director may be selected from a data bank of the eligible and willing person maintained by a designated agency. The agency shall put data bank of the potential independent directors on the website of the Ministry of Corporate Affairs or any other notified website.
• Before selecting the candidate as an Director, proper Due diligence process must be exercised
• Appointment of Independent Directors has to be approved by the members of the company in the general meeting.
• The agency may charge a reasonable amount of fee from the applicant to include his name in the data bank.

Tenure of Independent Director

• As per section 152 of the Companies Act, 2013, an independent director shall hold office for a period of five successive years on the Board of a company. However, an independent director is eligible for reappointment after passing an SR (Special Resolution) and disclosing the same in the Board Report.
• As per section 149 (11) of the Companies Act, 2013, an independent director shall not hold office for more than two consecutive periods. However, such director is eligible for appointment after the expiry of three consecutive years of ceasing to become an independent director. Provided such director shall not, during the tenure of three years, be associated or appointed in the company in any capacity, either directly or indirectly.

Manner of Appointment of Independent Director

• The process of appointment of independent directors may differ from company to company and shall be independent of the company management. Board of Directors generally considers the facts, like skills, knowledge and experience, while selecting independent directors. Such facts assure the Board that the proposed independent director will discharge its duties and functions effectively and efficiently;
• Company’s shareholders has to approve the process of appointment of independent directors;
• Notice of the Board meeting must include an explanatory statement for approving the appointment of independent director. They need to declare that the board is of the opinion that the proposed independent director fulfills the prescribed conditions as required under Companies Act, 2013
• The directors of the company must formally provide an appointment letter to the independent director
• All the members or shareholders of the company are eligible to inspect the terms and conditions of appointment of independent directors kept at the registered office of the company during business hours
• The terms and conditions of appointment of independent must be posted by company on its website.

Procedure for Appointment of Independent Director

• Firstly, DIN (Director’s Identification Number) needs to be furnished by independent director along with a declaration in Form DIR-8 stating that he is not disqualified for becoming an independent director.
• The Independent Director has to submit his consent to act as Director in DIR-2 Form
• The Independent Director has to provide the declaration of independence as per section 149(6) of the Companies Act, 2013.
• Company needs to issue notice for Board Meeting for which company will send notice and agenda of the Board meeting in writing to every director at his registered address with the company.
• The Director will be appointed as an Additional Director of the Company in the Board, and his/her term is up to the ensuing general meeting of the Company.
• A General Meeting will be held and a resolution for the appointment of independent Director of the Company will be passed. The proposed director will be appointed for a term of up to five years.
• Company will now issue a formal appointment letter to the Independent Director.
• Obtain Declaration of the Independent Director in Form MBP-1 within thirty days of appointment or at the first BM (Board Meeting) in which he participates as an independent director.
• The company needs to file Form DIR- 12 with the ROC (Registrar of Companies) containing all the details of the appointment of Independent Director within thirty days of his appointment.

Conclusion

Independent Director plays a vital role in the management of the company. Appointing an Independent Director helps the Company in improving the policies which results in transparency, credibility of the Company, along with many other benefits. An independent director acts as a link between the management and the shareholders, thereby bringing an independent judgement. Hence, to avail the best corporate practices, a Independent Director is essentially required.