Questions relating to Independent Directors – Notes

FAQ 1  : Before Joining board – Role of Independent Director 

FAQ 2  : Independent Director Commitment to the board 

FAQ 3  : Advantages an Independent Director

FAQ 4  : Disadvantages of independent directors

FAQ 5  :  Appointment & Compliance  & Role of  Audit Committee

FAQ 6  : Appointment & Compliance  & Role of Nomination and Remuneration

FAQ 7  :  Appointment & Compliance  & Role of Stakeholders’ Relationship Committee

FAQ 8  : Appointment & Compliance  & Role of Corporate Social Responsibility 

FAQ 9  : Remuneration of Independent Directors

FAQ 10 : Limit on the number of Independent Directorships 

FAQ 11  : Selection Process of Independent Directors

Qualifications 

Importance of DIN 

Ministry of Company affairs , Government of India databank 

How Indian Institute of Corporate Affairs Certifies Independent Directors 

Tenure

Manner and selection

Approval

Appointment letter  

Consent 

Re-appointment 

Resignation 

Removal 

FAQ 12  : Separate board meeting by Independent directors 

FAQ 13  : Evaluation of the performance of an independent director

FAQ 14  : Code of Conduct for independent  Directors

FAQ 15  : Professional conduct for independent  Directors

FAQ 16  : Duties of the independent directors

Before joining board – Role of Independent Director 

To check below features : 

• Company age 
• Company Business ( Products / Projects and Services ) 
• Company Market Positioning 
• Company  Competitors 
• Company  Customer / Assets / facilities locations 
• Did the auditor provide any other Services to the company  
• Internal auditor reports to which authority of company 
• Any penalties  for non compliances  of company 
• Any other legal / arbitrations claims  by the company  
• Study Financial statements and notes and disclosures 

Commitment to the board 

• Cater to the Time and energy the board demands  
• Quarterly based commitment required by the effective Independent Director and chairman as Committee member and other member in committee
• Add value to the board & work out evolution of board performance  on half yearly basics 
• Equip himself / herself the knowledge  that the board  expect 
• Can offset management flaws, ensure legal and ethical behaviour, strengthen accounting controls, and increase the company’s popularity through their contacts and expertise. 
• Contribute to long-term decision-making and assist with succession planning through membership in the nomination committee, ultimately helping the company to survive, grow, and prosper over time.
• Primary duties and responsibilities of independent directors are outlined in Schedule IV of the Companies Act, 2013. 

The code emphasises significant functions such as protecting the interests of all stakeholders, including minority holders, balancing conflicting interests, evaluating management performance, mediating between management and shareholder conflicts, and more. Independent directors are also expected to attend company general meetings and stay informed about company matters.

Advantages an Independent Director..

• Overseeing KMP effectively 
• External counsel and knowledge
• Zero material link to the corporate
• Networking and effective advisory role on Environmental and social governance  

Disadvantages of independent directors..

• know less about the firm than the management team. 
• Does not guarantee with complete impartiality and or susceptible to management pressure. 

Board to appoint Audit Committee 

Compliances   –  Under Sections 177(1) & (8)

• The board to constitute an Audit Committee.

• The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority

• Provided that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement

• The terms of reference of the Audit Committee to specified in writing by the board.

• Board’s Report to disclose the composition of an Audit Committee.

• Board’s Report to disclose where the board had not accepted any recommendation of the Audit Committee, along with the reasons for not accepting the recommendations.

Board to appoint Nomination and Remuneration Committee 

Compliances   –  Under Sections 178(1) & (4)

• The board to constitute the Nomination and Remuneration Committee.

• The Committee to comprise three or more non-executive directors out of which not less than one-half shall be Independent Directors.

• Chairperson of the company shall not to be the chairperson of the committee, he can be the member of the committee.

• The policies of the committee relating to the remuneration for the directors, key managerial personnel and other employees to be disclosed in the Board’s Report.

Board to appoint Stakeholders’ Relationship Committee

Compliances   –  Under Sections Section  178(5) & (6)

• The board of a company which consists of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year to constitute a Stakeholders’ Relationship Committee consisting of a chairperson who shall be a non-executive director and other members as decided by the board.

• The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company.

Committee for Corporate Social Responsibility 

Compliances   –  Under Sections Section Section 135 

• Every company having net worth of rupees 500 crore or more, or turnover of rupees 1,000 crore or more or a net profit of rupees 5 crore or more during the immediately preceding financial year to constitute a Corporate Social Responsibility (CSR) Committee of the board.

• The board to approve the CSR policy of the company and ensure that in every financial year, the company spends at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR policy.

• The CSR committee to formulate the CSR policy and the board to approve the policy and place it in the company’s website.

• The CSR committee to have at least one Independent Director.

• Board’s Report to contain the composition and the policy as well as reasons for failure to spend the prescribed amount of two per cent.

Remuneration of Independent Directors.

Subsection (9) of section 149 of the Companies Act 2013, expressly prohibits independent directors from gaining any stock options.

However, the independent director may receive remuneration in the form of a fee. The said fee shall be decided by the board of directors, and it shall be in the form of a sitting fee to an independent director for attending meetings of the Board or committees. The amount of the said fee shall however not exceed INR 1 lakh per meeting.

Limit on the number of Independent Directorships 

According to section 165 of the Companies Act 2013, the maximum number of companies wherein a person can be appointed as a director shall not be more than 20 companies (including the alternate directors). For calculating the limit wherein a person can be appointed as a director in a public company, the directorship of that person in private companies (holdings, subsidiary company) shall be included.

In the case of a public company in which a person can be appointed as a director shall not be more than 10 companies. However, the Companies Act, 2013 is silent regarding any specific limit on the number of companies where a person can be appointed as an independent director.

Appointment  and Re-appointment of Independent Directors

Qualifications

Independent directors are directors of a company. 

Independent directors are subject to the same general requirements and disqualifications as any other director. 

The 2013 Act specifies specific qualification standards for independent directors in addition to those outlined in the Listing Agreement. 

An independent director must be a subject matter expert with the necessary qualifications in the domains of finance, law, management, research, and corporate governance. 

He must be a person of moral character, faith, honesty, and appropriate experience. Additionally, he should not be a promoter of the business or any affiliated businesses, or even a relative of any promoters or board members. 

In addition, he must not have any financial ties to the corporation, its holdings, subsidiaries, or promoters. 

He must, thus, be a person in order to be selected as an independent director. 

He must be qualified to serve as a director and provide assurance that he is not ineligible. In order to serve as a director, he must also submit his written approval, which must be filed with the Registrar, and declare his director identification number (DIN).

The New Act prohibits the appointee from being associated with the promoter or directors of the company, its holding, subsidiary, or associate company, whereas, the listing agreement prohibited the appointment of a person in relation to the promoters or persons possessing management positions at the board level or one level below.

The new Act does not require the appointment to be unrelated to someone holding managerial positions at the board level or one below the board, unlike the listing agreement, and it can be deduced from this. 

Companies must adhere to the standards under both until the regulations developed in this respect give further clarity since the new Act does not supplant or replace the listing agreement. 

While the Listing Agreement does not contain any strict rules about the potential appointee’s family, the new Act stipulates that neither the independent director nor any of his kin may:

1. Hold a significant managerial role or had worked for the business during any of the three financial years;
2. Has participated in any of the three financial years as an employee, proprietor, or partner;
3. Holds 2% or more of the company’s total voting power;
4. Belongs to any non-profit organisation whose chief executive officer or director obtains 25% or more of its revenues.

While the new Act stipulates that an independent director must possess honesty, the necessary knowledge, and the necessary experience, it does not specify the criteria to be used in deciding whether a person satisfies these requirements. 

The ultimate effect is that listed corporations eventually nominate independent directors after using their own discretion. 

It is important to note that, in contrast to the 2013 Act, the listing agreement does not define the term “a person with integrity and holding the necessary skills and experience” when describing the individuals eligible to be selected as independent directors. 

This provision is not present in the Listing Agreement. These constraints aim to ensure that independent directors do not act against the financial or pecuniary interests of the firm. There may be a need to review the selection criteria for independent directors at many listed companies.

Importance of DIN 

Section 152 of the companies Act makes it compulsory for the directors to obtain a unique identification number. The provisions pertaining to Director Identification Number are set forth under section 153 and rule 9 of the  Companies (Appointment and Qualifications of Directors) Rules, 2014.

Director identification numbers facilitate the government in maintaining a database. Every person intending to be a director or every person who is already a director in a company shall be allotted a single number irrespective of the number of directorships he holds.

The DIN is valid for a lifetime. After receiving the DIN, the director within a month must inform about the same, to all the companies where he holds or intends to hold the position of director. 

The company on receiving the DIN must inform about the DIN of the director within 15 days to the Registrar of Company.

The detailed procedure and the requirements for the application of DIN are provided under rule 9 of the  Companies (Appointment and Qualifications of Directors) Rules, 2014. While allotting and scrutinizing for DIN, Rule 10 of the Companies Rules 2014 (Appointment and Qualification of Director) is also considered.

Data Bank of Independent Directors

In order to strengthen good corporate governance, the ministry of corporate affairs launched Databank for independent directors. 

The databank maintains a database of the independent directors that are willing to take up the post of an independent director and is also eligible for the post. 

The data bank facilities the selection process of independent directors by the company as can select the per their requirements.

Indian Institute of Corporate Affairs has been authorised by the central government to create and to maintain a data bank for independent directors. The data bank is an online data bank displayed on the website of the institute.

The provision relating to the details required by the databank is provided under the companies (creation and maintenance of databank of independent directors ) Rules 2019. 

Accordingly, the following details of certified Independent director  can be seen by companies : 

• Director identification number (DIN)
• Full name
• Income tax PAN
• Fathers name
• Date of birth
• Gender
• Nationality
• Occupation
• Present and permanent full address along with PIN code
• Phone number
• Email id
• The educational qualifications and professional qualifications
• Details of experience or expertise (if any)
• If any pending criminal proceedings
• Details of the limited liability partnership which he is a part of:
  • List of the limited liability partnerships,
  • The names,
  • Nature of the industry of the limited liability partnership,
  • The duration along with the dates,

Details of the companies he is part of:

• The Name of the companies.
• The nature of the industry.
• The duration along with dates.
• The nature of directorship i.e whether he serves as an independent director or an executive director, or nominee director, or a managing director.

The data shall be provided by the institute on payment of a prescribed fee by the company. Indian Institute of Corporate Affairs shall not be held responsible for the lack of accuracy of any information. 

As mentioned earlier it is the responsibility of the company to conduct due diligence on the prospective independent directors.

How Indian Institute of Corporate Affairs Certifies Independent Directors 

Any person who has been appointed as an independent director or who intends to hold the position of an independent director, the institute shall comply with the following:

1. Conduct a competency self-assessment test with the curriculum covering subjects such as basic accountancy, company law, securities law, and other areas relevant to the functioning. The test would be conducted online.
2. Assemble the required study material for individuals appearing for the above-mentioned assessment. The study material will be in the form of online lessons or audiovisuals.
3. Provision for individuals to take an advance test for the areas specified above and prepare the study material for the same.

Tenure of Independent Directors

The duration of the term of office for independent directors has been set forth under subsection (10)  and subsection (11) of section 149 of the Companies Act,2013.

According to section 149(10), an independent director can be appointed for a term up to 5 consecutive years.

This was clarified by the Ministry of Corporate Affairs via its General Circular 14/ 2014, stating that the appointment of an independent director for the term of 5 years or less is permissible. Whether the appointment is for five years or less, it will be considered as one term.

The independent director under this section shall be eligible for reappointment through the passing of a special resolution and the disclosure of such information has to be made in the board report.

Furthermore, section 149(11) states that no person shall be appointed as an independent director for more than two consecutive terms. Although such independent directors shall be eligible for reappointment after the expiration of 3 years.

The person shall have to resign from the office on completion of two consecutive terms even if the aggregate number of years is less than 10, as clarified by the Ministry of Corporate Affairs via its General Circular 14/2014.

Retirement by Rotation : Unlike other directors, the independent directors shall not be liable to retire on rotation as provided by subsection (13) of section 149.

Manner and selection of independent directors

Provisions pertaining to the appointment of independent directors are set forth under section 150, section 152, part IV of Schedule IV.

Selection of independent directors

The main aim of appointing an independent director is that the appointed person should be impartial and help with good corporate governance. The manner in which an independent director shall be appointed has been laid down under part IV of Schedule IV of the Companies Act 2013.

Part IV clause (1) of Schedule IV states that the appointment of an independent director should be free from any company management. The board of directors shall appoint an independent director, however, the board while appointing must ensure that there is a balance between skills, knowledge, and experience in the board. Doing so will facilitate the board to administer their roles and duties efficiently as provided under section 150 (1).

Therefore the board may nominate the person to be appointed as independent directors. The board has also been given an option to select an independent director from the data bank that has been maintained. The data bank might be anybody, associate as notified by the central government. The responsibility of conducting due diligence before appointing an independent director shall be of the board.

Approval

The board nominates person(s) for the post of independent director. However, the appointment of the independent director should be approved in the shareholders meeting ad provided under Part IV clause (2) of Schedule IV.

Section 150(2)  states that the appointment of an independent director must be approved in the general meeting held by the company. Additionally, an explanatory statement must be attached to the notice of the general meeting. The notice must provide the justification for selecting the said independent director.

Furthermore, Section 152(5) also requires the explanatory statement to specify that in the opinion of the board, the independent director fulfills the conditions laid down under this Act and its rules.

Appointment Letter

The appointment of the independent directors must be formalized by a letter of appointment.  The letter of appointment shall mention the following things listed below (as specified by Part IV clause (4) of Schedule IV.):

1. The tenure of the independent director.
2. Expectations of the board and the board level committee(s) in which the independent director is expected to serve.
3. The fiduciary duties and the corresponding liabilities.
4. Provisions of director and officer insurance.
5. The code of business ethics to be followed by its directors and employees.
6. List of prohibited actions when functioning as such in the company.
7. The remuneration, periodic fees, provision for reimbursement of expenses and profit related commissions; if any.

The terms and conditions of the appointment of independent directors must be posted on the company website and must be made available for inspection at the company’s registered office(during business hours) as provided under clause IV (5)(6) of Schedule IV.

Consent

Every person who has been appointed to hold an office as an independent director must give his consent to act as an independent director and the said consent must be filed with the registrar within 30 days as provided under Section 152 (5) of the Act.

Furthermore, the independent director must furnish the consent in writing on or before his appointment in Form Dir 2 in conformity with rule 8 of Companies ( Appointment and Qualification of directors) rules, 2014.

Re-appointment

According to clause V of Schedule IV, the independent directors shall be re-appointed based on the performance evaluation report.

Resignation

For various reasons, an independent director may resign from the position by giving the board written notice of his intention to do so and providing a plausible explanation for why he is unable to maintain his position. As per the Companies (Registration Office and Fees) Rules, 2014, he must also give a copy of his resignation letter and an explanation of his reasons for leaving within 30 days to the Registrar of Companies. Upon receiving a resignation notice, the board is required to take note of it and notify the applicable stock exchange, as well as the Registrar of Firms in the case of listed companies. Additionally, they must provide information on the resignation in the board report that is distributed to the company’s next annual general meeting. The resignation is effective only on the day the company receives the notice of resignation—or any later date that may be specified in the resignation letter. 

When a director tenders his resignation and the Board of Directors accepts it and takes action on it, the director is no longer responsible for any liabilities the company may incur after the date of acceptance of his resignation, with the exception of the liabilities he personally incurred when he bought shares of the company. Directors who resigned and submitted their resignations to the Registrar of Companies (ROC) before the relevant time during which the alleged offences occurred should be granted relief.

However, at this time, these explanations must be specific in their resignation letter due to the increased obligations and consequent responsibilities. The resignation letter of an independent director is a public record that may be cited as prospective evidence in a lawsuit or an inquiry to establish compelling reasons for the resignation. It can serve as a useful tool for the director to reduce his exposure and justify his stance before resigning. A fresh appointment must be made as an independent director within 180 days of the resignation date.

Resignation may only be withdrawn or revoked, prior to the resignation’s effective date, which is the later of the day the firm receives the notice of resignation or the date mentioned in the resignation notice. In Union of India v. Shri Gopal Chandra Misra and Others (1978), the Supreme Court of India ruled that an incumbent’s written notification to the appropriate authority of his intention or proposal to step down from his post as of a future specified date may be withdrawn by him at any time before it becomes effective, barring any legal, contractual, or constitutional restrictions. The case of Yamaha Motors (Pvt) Ltd. v. Labour Court-II and Another (2012) also adopted a similar approach. It was emphasised that a potential resignation may always be revoked prior to going into force, although it would always be subject to the employee’s service conditions.

Since just resigning and absolving oneself of duty cannot be done, there should be some guidelines. Resignations based only on vague personal reasons cannot be accepted in order to leave one firm just to serve others.

Removal

Like any other director of the corporation, an independent director may be dismissed from the board. 

They can be dismissed before their term ends by passing a regular resolution that is supported by the majority of the members. 

The independent director must have a fair chance to be heard before being removed. 

However, a director chosen by proportional representation cannot be dismissed before the end of his tenure. 

Specific notice must be introduced at the meeting when a director is to be dismissed. 

The resolution voted in the Extraordinary General Meeting (EGM) to remove the directors was deemed invalid since no particular notice of the vote to remove the directors was given. 

To provide the concerned director with a chance to voice his views, the corporation must also submit a copy of the document to him. 

The concerned director may also ask for more time to send his representative or a lawyer. In the event of a time constraint, the director may address the matter at the scheduled meeting. 

However, if the company or another individual file a claim with the National Company Law Tribunal (NCLT) claiming that doing so would amount to securing unwarranted exposure for defamatory material, such representation may not be read out at the meeting. 

With a majority vote, shareholders may also dismiss a director with or without cause. However, if two-thirds of the directors were chosen by proportional representation, this option would be unavailable. If any compensation or damages are due to the dismissed director under the conditions of his appointment as director, they might have to be paid.

Separate meeting

The independent directors of the company shall hold an exclusive meeting at least once in the financial year. The meeting shall be without the non-independent directors. All the independent directors of the companies must be present at such meetings.

The agenda of the meeting shall be as follows:

• Reviewing the performance of the board, of the non-independent directors, and the chairperson of the company.
• Assessing the structure and the flow of information between the board and the company management is required for the efficient and effective functioning of the board.

Evaluation of the performance of an independent director

Part VIII of the Code for Independent Directors provides that based on the performance evaluation report term of an independent director may be extended or he may be reappointed. The performance evaluation of the independent director is to be conducted by the entire board of directors.

Code of Conduct for independent  Directors

The standards and professional conduct that is expected by the directors have been laid down under Schedule IV of the Companies Act,2013. 

The code for independent director includes guidelines for professional conduct, the duties of the independent directors, their roles and functions. These are discussed below:

Professional conduct

The independent director according to the part I of the schedule IV must:-

1. Sustain ethical standards.
2. To be impartial while discharging his duties.
3. Perform his responsibilities in the interest of the company.
4. Allocate the necessary time to fulfil his professional obligations so as to facilitate him in an informed decision making.
5. Not allow any unnecessary considerations that will hamper his independent judgment, while taking decisions for the benefit of the company.
6. Not to abuse his position.
7. Abstain from actions that would cause him to lose his independence.
8.  Assist the company in incorporating good corporate governance.

Duties of Directors

The independent director according to part II of schedule IV has the following roles and functions:

• In case of issues relating to strategic risk management, resources, key appointments, standard of conduct, and performance, the independent director must facilitate in bringing an independent judgment.
• The independent director must be impartial when considering the evaluation of the performance of the management and the board of the company
• He must ensure the financial controls and risk management systems are efficient and effective.
• An independent director must always make sure that he is safeguarding the interest of all stakeholders especially the minority shareholders.
• In case of conflicting interests of all stakeholders, the independent director must try to maintain a balance.
• The independent director must facilitate in determining remuneration for different levels of:
  • The Executive directors.
  • Key managerial personnel.
  • Senior management and wherever necessary.

• While adjudicating matters, the independent director must adjudicate keeping in mind the interest of the company as a whole.

Duties of the independent directors

1. Independent director must update and enhance their skills knowledge and familiarity with the company regularly.
2. An independent director must aim to attend all the board meetings and the meetings conducted by the board committee is of which he is a member.
3. The independent director must try to keep himself updated about the company the external environment under which it operates.
4. Before approving any related party transactions the independent director must ensure death the transaction is in the interest of the company and has been duly considered.
5. An independent director must report the matters concerning unethical behavior whether it is actual or suspected fraud of the companies ethics policy for code of conduct.
6. The independent director must never disclose confidential information  except if such disclosure is required by law.
7. In order to discharge his duties or in order to take any decision independent director may seek expert opinion or  clarifications of the information
8. Must be active and an impartial member of the committees of the board that they are part of.
9. In case of any concerns regarding a proposed plan of action or scheme, the independent director must convey his concern to the board and make sure that they are duly addressed and resolve.
10. Independent directors are prohibited from unjustly obstructing the functioning of the board or committee of the board.
11. Independent directors must make sure that there is a proper and efficient vigil mechanism in place in the company.
12. Independent directors should never overstep their authority. Protecting the interest of the company, its shareholders, and its employees are the primary duty of an independent director.