Meaning, Duties, appointment of Independent Directors
- Kajol Mathur
- Apr 1
- 6 min read
An independent director is a non-executive director who does not have any kind of relationship with the company that may affect the independence of his/her judgment. An independent director should not have been a partner or executive director of the auditors/lawyers/consultants of the company in preceding three years or should not hold 2% or more of shares of the company. In this article, we look at the process for appointment of an independent director in a company.
Legal Provisions relating to Independent Directors
Sec 149 (4) : Companies to mandatorily appoint Independent Director
As per Sec 149 (4) of Companies Act 2013, all Listed Public Limited Companies are mandatorily required to have at least one-third of the total number of directors as an independent directors. Unlisted public companies should appoint at least two independent directors in the following situations:
1. If the paid up share capital is in excess of Rs.10 crores;
2. If the turnover is in excess of Rs.100 crores;
3. If the total of all the outstanding loans, debentures and deposits is in excess of Rs.50 crores.
Sec 149 (6) : Qualification of Independent Director
Section 149(6) defines the qualifications of an Independent Director in an Indian company. Here’s a simplified breakdown of the key points:
Who is an Independent Director?
A director who does not have a material or financial relationship with the company that could affect their independence.
Eligibility Criteria:An independent director must:
Not be a promoter of the company, its holding, subsidiary, or associate company.
Not be related (i.e., a close family member) to any promoter or director of these companies.
Financial Independence:
Must not have had any pecuniary (financial) relationship exceeding ₹50 lakh or 2% of company’s turnover, whichever is lower, with the company (or related companies) in the two immediately preceding financial years or the current year. Must not hold more than 2% of the total voting power of the company.
Employment Restrictions:
Must not have been an employee or key managerial personnel (KMP) of the company (or its related companies) in any of the last three financial years.
Must not have been an employee, partner, or proprietor of the company’s auditors, consultants, legal or financial advisory firms, in any of the three preceding financial years.
Other Directorships:
Must not be a director in more than two other listed companies.
Sec 149(7) : Independence Declaration
Every Independent Director must declare that they meet the independence criteria as per Section 149(6) :
• At the first Board meeting they attend as a director.
• At the first Board meeting of every financial year. • Whenever there is a change in circumstances that may affect their independence.
Sec 149(8) : Code of Independent Directors
Independent Directors must adhere to professional ethics and corporate governance principles as laid down in Schedule IV of the Act as ‘Code for Independent Directors’.
Sec 149(9) : Remuneration of Independent Director
Remuneration of Independent Directors
• Independent Directors are not entitled to stock options (ESOPs).
• They can receive remuneration in the form of:
1. Sitting fees as per Section 197(5).
2. Reimbursement of expenses for attending Board and other meetings.
3. Profit-related commission, subject to approval by members. Exception in Case of No or Inadequate Profits
• If a company has no profits or inadequate profits, an Independent Director may still receive remuneration.
• This remuneration must comply with the provisions of Schedule V of the Act. This ensures that Independent Directors are fairly compensated while maintaining their independence.
Sec 149(10) & (11) : Tenure & Re-appointment
•Independent Directors shall hold office for a term of five consecutive years but eligible for re-appointment by passing a Special Resolution & disclosure in Board’s Report.
•The ID can serve for a maximum of two consecutive terms of five years each. After two terms, a director can be reappointed only after a cooling-off period of three years.
Sec 149(12) : Liability
Independent Directors are not personally liable for company acts unless:
• The act was committed with their knowledge and consent attributable through Board processes.
• They failed to act diligently to prevent misconduct.
Sec 149(13) : Retirement by rotation not applicable to ID
• Independent Directors are not subject to retirement by rotation, unlike other directors.
• The provisions of Section 152(6) and (7), which require directors to retire by rotation, do not apply to their appointment. This ensures stability and continuity in corporate governance by allowing Independent Directors to serve fixed terms without periodic reappointment pressures.
Sec 150 : Independent Director databank
Section 150 of the Companies Act, 2013 provides that “an independent director can be selected from a data bank maintained by any-body, institute or association, as may be notified by the Central Government. The data bank would contain names, addresses and qualifications of persons who are eligible and willing to act as independent directors. The company needs to ensure exercise of due diligence before selecting an independent director from the data bank”.
Sec 151 : Small Shareholders Director
A Listed Company upon Notice or suo motu have a small shareholders’ director elected by the small shareholders (one thousand small shareholders or one-tenth of the total number of such shareholders) Such director shall be considered as an independent director.
Sec 152 : Appointment of Directors
2. Every Director should have been alloted DIN and shall furnish the same and a declaration that he is not disqualified to become a director under this Act.
3. He gives his consent to hold the office as director and such consent has been filed with the Registrar within thirty days of his appointment.
4. Appointment of an independent director in the general meeting, an explanatory statement for such appointment shall be annexed to the notice for the general meeting which shall include a statement that in the opinion of the Board, he fulfils the conditions specified in this Act for such an appointment.
5. Independent Directors shall not be liable to retire by rotation.
Sec 166 : Duties of Directors
(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.
(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
(6) A director of a company shall not assign his office and any assignment so made shall be void. (7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
Sec 173 : Meetings of Board
A meeting of the Board shall be called by giving not less than seven days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means: Provided that a meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting: Provided further that in case of absence of independent Directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the Directors and shall be final only on ratification thereof by at least one independent director, if any.
Sec 177 : Audit Committee
Every Listed company and certain public companies must form an Audit Committee.The committee must have a majority of independent directors.Independent directors play a key role in financial oversight, internal audits, and fraud investigations.
Section 178 : Nomination & Remuneration Committee
Every Listed company and certain public companies must form a Nomination & Remuneration Committee, which must include at least 50% independent directors.This committee is responsible for: • Evaluating the performance of directors. • Deciding on remuneration policies.
Section 197 : Remuneration of Independent Directors
Independent directors cannot receive stock options.They are entitled only to sitting fees, profit-based commission, and reimbursement of expenses.
Sec 447 : Punishment for Fraud
If an independent director is found guilty of fraudulent activities, they can be penalized under Section 447, including imprisonment and fines.However, if they were not involved in day-to-day affairs and acted diligently, they may not be held liable.
Independent directors play a crucial role in ensuring good corporate governance. Sections 149 to 197 primarily govern their appointment, duties, remuneration, and liabilities. Compliance with Schedule IV ensures they act with integrity and independence.