Independent director as per Companies Act

Independent director is a director who does not have any pecuniary or material relationship with the company other than the receipt of sitting fees. They act as a guide to the company. Independent directors are not part of the companies executive team and not involved in the day to day conduct of company operations. The definition and related provisions about independent director is mentioned in Section 2(47) that as mentioned under section 149 of Companies Act.

 The role of Independent director include improving corporate credibility, corporate governance standards, function as a watch dog for the stake holders. Various provisions of Companies act and other legislation made it mandatory that Independent directors should be part of various committees of the corporations. 

Corporate Social Responsibility is a management concept where companies integrate social and environmental concerns in their business operations as per established law or other wise. Section 135 (1) stipulates that any company which have a net worth of 500 crore or more or turnover of rupees one thousand crore or more or a net profit of rupees of five crore or more during any previous years shall constitute a Corporate Social Responsibility committee of the board consisting of three or more directors, out of which at least one director shall be an independent director.

In the case of listed companies, section 149 (4) says that one third of the total number of directors should be independent directors.

With regard to audit committee, section 177(2) says that the committee should consists of minimum three directors, majority should be independent directors.

In the case of listed companies or companies as prescribed, shall have a Nominations and Remuneration committee consisting three for more non- executive directors out of which not less than half shall be independent directors.

An independent director as per section 149 shall declare at the first board meeting he attends and then first boarding meeting of every year , his independence. The same section also say that independent directors are not entitled for any remuneration or stock option but section 197 says that they will, if members approve, be paid fees, reimbursement of expenses for participation of meeting and profit related commission.

The term of office of independent director will five years at once with one chance re appointment if the company pass a special resolution and matter is disclosed in board’s report. But the same person can appointed for another term after three years, and it is worth to note that the provisions related to retirement by rotation will not apply to independent directors.

The appointment of independent directors is stipulated from the data bank of independent directors maintained by any authority as advised by the Central Government. The data bank will provide persons with information related to their eligibility but the responsibility to do the final call is with the company.

At times when the company want to conduct a board meeting with short notice as per section 173, the company can do subject to a condition that minimum one independent director should be present in the meeting and if not present the decision taken at the meeting should be circulated with all directors and ratified by them with at least one independent director.

Can a company secretary be an independent director?

In compliance with the provisions of the companies act, a Practicing Company Secretary can be appointed as independent director. If we go by words of the provisions, a Company Secretary in whole time employment can be independent director of another company, if only, if the conditions of employment provides.

The companies Act provides that a person should attain18 years of age to be appointed as an independent director but not provided for the maximum age. But in the case of listed companies, SEBI ( Listing Obligation Disclosure Requirements) Regulation provides that the minimum age is 21 years and maximum is 75 years. If a company want to appoint a person as independent director and his age is more than 75, a special resolution to be passed.

As mentioned earlier independent directors are appointed from the data bank. The registration to the data bank has to be done by the person directly and the company is not supposed to pay the expenses for registration. If the company in any way paid, that has to be adjusted with the sitting fees to be paid. To become a director one need to be having Director Identification Number but to register to the data bank that is not necessary, with PAN they can register but on appointment as a director it is a pre condition.

A foreign national wishing to be appointed as independent director, if he does not have DIN or PAN, he can get registered with passport details and other basic details.

While registering in the data base the person need to mention the details of companies in which he/she is or was directors with details and also he/she was designated partner in an LLP with details. But the person have freedom to chose what details be displayed on the data bank website. The subscription to the date base have three plans. One year , five years and life time.

Existing independent directors also need to get empanelled and need to pass the examination called proficiency self assessment test. There are no number limitation on attempts. If a person fails in the test he will be appointed as normal director and not independent.

An individual who has served, in aggregate, for a period of not less than ten years as a director and/or a Key Managerial Personnel in a listed public company or in an unlisted public company having a paid-up share capital of Rs. 10 crore or more as on the date of inclusion of his name in the data bank shall not be required to clear the proficiency test.

An independent director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.