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Independent Director Under Companies Act,2013

Need of Independent director: Independent Board is an essential requirement of sound


corporate Governance and by appointing sufficient number of Independent directors this goal of sound
corporate Governance can be achieved .with the help of Independent Directors Transparency,
Independence In decision making, appropriate executive compensation policy, credibility of decisions
and Fairness in competing Interest can be achieved.

Meaning of Independent Director as per Companies Act, 2013:


As Per 2(47) Independent Director means an independent director referred to in sub-section (5) of
section 149
However as per section 149(6) Companies Act, {Note: There is some clerical mistake in section 2(47)
because Independent Director has been defined in 149(6) not in 149(5)}
An independent director in relation to a company, means a director other than a
managing director or a whole-time director or a nominee director,
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate
company;
(c) who has or 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;
(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its
holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent.
or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be
prescribed, whichever is lower, during the two immediately preceding financial years or during
the current financial year;
(e) who, neither himself nor any of his relatives
(i) 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;
(ii) 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

(B) 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;
(iii) holds together with his relatives two per cent. or more of the total voting power of the company;
or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organization 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; or
(f) who possesses such other qualifications as may be prescribed
S.No
.
1
2

Should be

Should not be

Person of Integrity
Promoter of specified companies*
Having appropriate balance of Relative of director/promoter of specified companies
skills, experience and knowledge in
one or more fields of finance, law,
management, sales, marketing,
administration, research, corporate
governance, technical operations or
other disciplines related to the
companys business(from rules)
In any kind of pecuniary relationship with specified
companies in previous two financial years and in
current financial year
Relative of any person who is having pecuniary
relationship more the prescribed limit ** with the
director/promoter of specified companies previous two
financial years and in current financial year
KMP or employee of prescribed companies in any of
the previous three financial years
Relative of KMP or employee of prescribed companies
in any of the previous three financial years
Employee or Proprietor or a Partner in any of the three
financial years in
firm of auditors or company secretaries in practice or
cost auditors of specified companies
Any legal or a consulting firm of specified companies
having transactions more than specified limit***
Relative of Employee or Proprietor or a Partner in any
of the three financial years in
firm of auditors or company secretaries in practice or

cost auditors of specified companies


Any legal or a consulting firm of specified companies
having transactions more than specified limit***
Holder of voting Right of 2% or more along with his
relative
Related by way of Director or CEO to any non profit
organization which is
Receiving at least 25% of receipts from the specified
companies or promoters and directors of company.
Having at least 2% of holding in the company
Procedural Requirement to be done by Board:
1) The Board of Director in its First report after appointment of Independent director shall furnish a
statement to the effect that in its opinion the independent director possesses appropriate balance of skills,
experience and knowledge, as required (Statement in Board Report) (from rules).
2) If a company is going to appoint a person as a Independent Director from the databank provided by
recognized institute then It should not only Rely on the information provided by the institution however
Should conduct their own due diligence (from rules).
3) Board report should consist a statement on declaration given by independent directors. (sec.134)
4) Notice for the general meeting for appointment of Independent director shall include a statement that in
the opinion of the Board, he fulfills the conditions specified in this Act for such an appointment.

Companies Which are required to appoint an Independent director as per


Companies Act, 2013:
Direct Criteria:
1) All Listed Companies{Sec 149(4)}
2) Public Companies having paid up share capital of one hundred crore rupees or more(Rule)
3) Public Companies which have, in aggregate, outstanding loans or borrowings or debentures or
deposits, exceeding two hundred crore rupees.(Rule)
Point to be noted:
The criteria specified under point 2 & 3 shall be applicable for the first year and shall continue to
apply to that company in subsequent years during the tenure of the Independent Director even if the
paid up share capital or net worth or borrowings/deposits, as the case may be, fall below the limits
specified therein.
Indirect Criteria:
Every company having
A. Net worth of rupees five hundred crore or more, or

B. Turnover of rupees one thousand crore or more or


C. Net profit of rupees five crore or more.
during any financial Year shall form a Corporate Social Responsibility Committee in which one
director should be independent director .
Number of Independent Director:
At least one-third of the total number of its directors as independent directors
Time Limit with in which existing company has to make changes in the Board for Independent
director as per New law:
Every company existing on or before the date of commencement of this Act shall, within one year
from such commencement or from the date of notification of the rules in this regard as may be
applicable, comply with the requirements of the provisions. {Sec 149(5)}
Duty of Independent Director:
Declaration for meeting the criteria of Independency:
A. At First Meeting of the Board after his appointment
B. Every Financial Year.
C. In between the year if there is some change in the circumstances which can effect his
Independency.
Independent Director shall abide the provision specified in Schedule (iv) of Companies Act,
2013
Appointment:
Independent director shall be appointed by the company in General meeting.
Appointment at first time: By passing OR
Reappointment: By passing SR {Sec 149(10)}
Term:
1) An independent director shall hold office for a term up to five consecutive years.
2) No independent director shall hold office for more than two consecutive terms, but such
independent director shall be eligible for appointment after the expiration of three years of
ceasing to become an independent director:
Provided that an independent director shall not, during the said period of three years, be
appointed in or be associated with the company in any other capacity, either directly or
indirectly.
Point to be noted: Any tenure of an independent director on the date of commencement of this Act
shall not be counted as a term. (So in case of MES Existing Term of Mr. Surrender Kumar Tuteja is
not required to be considered for calculating 10 years)
Remuneration to Independent Director:

1. Remuneration by way of fees


2. Reimbursement of expenses for participation in the Board and other meetings
3. Profit related commission as may be approved by the members.
Point to be noted: Stock Option is prohibited for Independent director (Reason: after exercise of
stock option independent director will become the member which can effect his independency and
purpose will be defeated)
As per draft rule under chapter (xiii) The amount of sitting fees payable to a director for attending
meetings of the Board or committees thereof may be such as may be decided by the Board of
directors or the Remuneration Committee thereof which shall not exceed the sum of rupees One
Lakh per meeting of the Board or committee thereof:
Provided that the Board may decide different sitting fee payable to independent and nonindependent directors other than whole-time directors.
Miscelleneous:
Independent Director shall be always Non Rotational Director
Independent director can be selected by databank maintained by prescribed authority
Every person who has been appointed to hold the office of a director shall on or before the
appointment furnish to the company a consent in writing to act as such in Form No. 11.2.
Company shall, within thirty days of the appointment of a director, file such consent with the
Registrar in Form No. 11.8 along with the fee as provided in Annexure B