Independent Director under Companies Act 2013

Overview

Independent director is a non-executive director who helps in adding on to the credibility of the company and good corporate governance standards. An independent director is a member of the board of directors who’s contribution impact on the profitability, growth and sustainability of the company’s better growth.

Definition

According to the Companies Act 2013, 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,

1. who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

2. who

is or was not a promoter of the company or its holding, subsidiary or associate company;
is not related to promoters or directors in the company, its holding, subsidiary or associate company;

3. who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount, 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

4. None of whose relatives:

is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year, however, the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;
is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;
has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or
has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii);

5.who, neither himself nor any of his relatives—

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; however, in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years.
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—
- 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; or

6. Who possesses such other qualifications such as appropriate 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 company’s business.

Applicability on Appointing an Independent Director:

1. Listed companies shall have at least 1/3rd of total number of directors as Independent Directors. (fractions can be rounded off)

2. The following class or classes of companies shall have at least two directors as independent directors –

Public Companies having paid-up capital of Rupees ten crore or more; or.
Public Companies having turnover of Rupees one hundred crore or more; or.
Public Companies having aggregate outstanding loans, debentures and deposits, exceeding Rupees fifty crore.

Applicability For Databank Registration For An Independent Director

As per the new norms, the Government has introduced the new facility with the help of India Institute of Corporate Affairs for creating and operating an online databank for existing and aspiring Independent Directors.

This databank registration is applicable for the following:

Existing Independent Director
Individuals who want to get appointed in any company as an Independent director.

Procedure For Databank Registration

1. Log in to MCA website mca.gov.in and log in using the MCA credentials;
2. Go to MCA services and click on ID databank service- Individual registration;
3. Enter DIN/Pan number;
4. Send OTP to mobile number;
5. After entering OTP, you will receive your ID and password;
6. Go to http://www.independentdirectorsdatabank.in and login with the id and password received in your mobile number;
7. Fill up all the mandatory details and click on submit;
8. Pay the prescribed fees.

Note: Currently the fees for 1-year subscription is Rs. 5000 plus 18% GST. Fee plan for 5 years is yet to be notified.

Important Timelines:

End Date for empanelment of existing Independent Directors – February 29, 2020
Start date for Mock (Practice) Test – December 2nd, 2019 onwards
Start date for online proficiency self-assessment test – March 01, 2020
Start date for corporate access and search facility – March 01, 2020.

Online Proficiency Test For Independent Director-.

Any person who wanted to be an Independent Director must give an online exam i.e. ‘online proficiency self-assessment test’ conducted by the institute IICA within a period of one year from the date of inclusion of names. The individual should obtain 60% in aggregate in order to pass the examination. Individuals can give multiple attempts to clear the examination. It covers subjects like Company law, Securities law, basic accounts etc.

Exemption:

the individuals who have been served as Independent Director for more than 10 years as KEY MANAGERIAL PERSON like CEO, CFO, CS etc. or in listed or unlisted companies having share capital 10 cr or more, are exempted from examination.

Appointment Of Independent Directors

Appointment of Independent directors has to be approved by the members in General Meeting and also the explanatory statement annexed to the notice should indicate the justification for such appointment and a brief resume of proposed Independent director.
Documents Required For An Independent Director
- DIR-2- Independent Director has to submit the consent to act as Director in form DIR-2 to the company upon his appointment.
- DIR-8- Independent Director has to submit a declaration stating that they are not disqualified to be appointed as a Director in form DIR-8 (For new Directors)
- MBP1- Disclosure of interest of directors
is a general notice of disclosure given by every director about his interest in any companies, bodies corporate, firms or other association of individuals, along with shareholding. This form needs to be filed in the case of a new Director.
Independent Director must possess DIN (Director’s Identification Number) and in case he does not have one, he must apply for the same by filing DIR-3 before his appointment.
The company will conduct Board Meeting and File DIR-3 for getting DIN then DIR-12 which has to be filed within 30 days is from appointment /resignation of directors.

Code For Independent Director

code is a guide to professional conduct for independent directors. These standards by independent directors and fulfilment of their responsibility in professional and in a faithful manner which actually promotes –confidence in shareholders and investment communities.
are code of conduct for Independent Director.
Ethical standards
Objectively and constructively- while exercising his duties.
Responsibilities in a bona fide manner –to the companies interest
Should devote sufficient time and attention- for informed and balanced decision making.
Extraneous consideration should not be allowed.
Never abuse position for personal gain.

Role And Function Of Independent Directors

Helps in bringing an independent judgment to bear the Board’s deliberations on issues of strategy, performance, risk management, standards of conduct etc.
Objective view of the performance of the board and management
Scrutinising the performance of management in meeting and also monitoring the report of their performance.
Safeguard the interest of all stakeholders, particularly the minority shareholders.

Duties Of Independent Directors

Regularly update and refresh their skills, knowledge and Familiarity with the company.
Seek appropriate clarifications and also professional advice and opinions from experts outside.
Strive to attend all the meetings.
Keep well informed about the company and its external environment in which it operates.

Removal and Resignation

An independent director, who resigns or is removed from the Board of the company, should be replaced by a new director within 3 months from the date of such removal or resignation.

Separate Meeting
Independent directors shall hold at least one meeting in a financial year, without any attendance of non-independent directors and members of management.
Independent directors strive to be present at such meetings:

They review the performance of non-independent director and Board as a whole.
They review the performance of Chairperson of the company, and then take into account the views of executive and non-executive directors.
Access the quality, quantity and also the timeless flow of information’s.

Evaluation Mechanism

The performance evaluation of all the independent directors shall be done by the entire Board of Directors, except the director who is being evaluated.

Term of Office of Independent Director

Independent Director shall hold office for a term of at least 5 consecutive years, and shall be eligible for reappointment by passing a special resolution by the company and also disclosure of such appointment in the Boards report.
No independent director can hold office for more than two consecutive years, such directors shall be eligible for a re-appointment only after the expiration of three years.

Retirement By Rotation:

Retirement by rotation shall not be applicable to the appointment of independent directors.

FAQ’S

Whether Practicing Company Secretary gets appointment as Independent Director?

Ans. Independent Director is Non-executive Director and a Practicing Company Secretary can be appointed as Independent Director.

Whether Company Secretary in employment gets appointment as Independent Director in another Company?

Ans. Independent Director is Non-executive Director of the Company. An employee company Secretary even can appoint as ID in any other Company.

What is the Minimum and Maximum age to get appointment as Independent Director?

A. According Company Law:

Minimum Age to get appointment as Independent Director is 18 Years. There is no maximum Age to get appointment as Independent Director

According to SEBI (LODR) – Listed Companies:

Minimum Age to get appointment as Independent Director is 21 Years. Maximum Age to get appointment as Independent Director 75. If want to appoint even after attainment of age of 75 year then need to pass Special Resolution

Whether a Company can pay registration fees for Data bank on behalf of ID?

Ans. ID are non-executive directors of the Company and not eligible to get remuneration from the Company. He can only get Sitting fees from the Company. Therefore, Company having two options:

Let the ID pay fees for registration in Data Bank.
If Company paying registration fees on behalf of ID then Company shall adjust same with sitting fees.

A foreign national don’t have DIN and PAN. How can he get empanel for the same?

He can get empanel by passport no and providing basic contact information, such as email, mobile No. etc.

Whether there is any limit on no. of attempt of proficiency test?

There is no limit on the number of attempts an individual may make for passing the online proficiency self-assessment test.

If Individual fails to pass the test within 1 year of the addition of his name in the data bank. What shall be consequences?

In case the above test is not passed by such an individual, his/her name shall stand removed from the data bank by the Institute. It means after removal they should not continue as Independent Director until unless they pass the test.

Independent Director under Companies Act 2013