Independent Director [section 149 r/w rule 5]

Updated: Dec 30, 2018

1. Section 149(4) i.e., Independent Director: Every Listed company shall have at least 1/3rd of the total number of directors as independent directors [Any fraction to be rounded off to one].

2. Appointment [Section 152(2)]: Appointment of Independent Directors shall be approved by the Company in General Meeting.

3. Number of Independent Directors (Rule 4)

a) The following class of companies shall have at least 2 Independent Directors: -

i. Public Company having Paid Up share capital of 10 Crores or more or

ii. Public Company having Turnover of 100 Crores or more or

iii. Public Company, which has in aggregate outstanding, loans, debentures and deposits exceeding Rs. 50 Crores.

[Capital, Turnover, Loans, Debentures and Deposits shall be as per latest audited financial statements]

b) Company need not comply with the provisions if they do not fulfill the above conditions for 3 consecutive years.

c) Such company may have to appoint higher number of independent directors due to composition of audit committee.

d) As per section 177(2) of the Companies Act, 2013, the Audit Committee shall consist of a minimum of three directors with independent directors forming a majority.

e) The Board at the immediate Board Meeting shall fill intermittent vacancy or 3 months from the date of vacancy whichever is later.

Example 1: XYZ Ltd. is having 6 directors in its Audit Committee, and then 4 directors out of 6 must be Independent Directors (4 is forming majority). Therefore, although in terms of the Companies (Appointment & Qualification) Rules 2014 the company is required to have at least 2 Independent directors, in this case the limit of 2 will increase to 4 as the company is required to appoint a higher number of independent directors due to composition of its audit committee.

Example 2: In XYZ Ltd., the vacancy of the independent director arises on 15th June. Thus, the vacancy shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy whichever is later.

If the immediate next Board meeting after the vacancy was held on 14th August, then the vacancy shall be filled-up by 14th August or by 14th September whichever is later. In this case it shall be filled up by 14th September.

If the immediate next Board meeting after the vacancy was held on 14th October, then the vacancy shall be filled-up by 14th October or by 14th September whichever is later. In this case it shall be filled up by 14th October.

4. Declaration of Independence [Section 149(7)]: Declaration from an independent director that he meets the criteria of independence at

a) First Board meeting after his appointment and

b) First Board Meeting of every financial year or

c) Whenever there is any change that affects his independence

5. Meaning of Independent Director [Section 149(6)]:

An independent director does not include:

· MD or

· A whole-time director or

· A nominee director

An independent director in relation to a company means a director:

a) Integrity and experience: who in the opinion of the “Board”, is a person of integrity and possesses relevant expertise and experience;

b) Non-promoters:

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;

No pecuniary relationship [Section 149(6)(c)]: who has or had no pecuniary relationship, with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the 2 immediately preceding financial years or during the current financial year; [This provision in not applicable to Government Company]

Pecuniary relationship does not include:

1. Transaction in ordinary course of business at arm’s length price u/s 188

2. Remuneration from one or more companies in accordance with Act

3. Remuneration as such director or having transaction not exceeding 10% of his total income or such amount as may be prescribed

Specimen Resolution: Appointment of Independent Director – Ordinary Resolution

“RESOLVED that pursuant to the provisions of Sections 149, 150, 152 and any other applicable provisions of the Companies Act, 2013 and the rules made thereunder (including any statutory modification(s) or re-enactment thereof for the time being in force) read with Schedule IV to the Companies Act, 2013, Mr. Smith (holding DIN -----), Director of the Company who retires by rotation at the Annual General Meeting and in respect of whom the Company has received a notice in writing from a member proposing his candidature for the office of Director, be and is hereby appointed as an Independent Director of the Company to hold office for five consecutive years for a term up to ___.”]

c) No transaction through relatives: None of whose relatives has or had pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors amounting to 2% or more of its gross turnover or total income or 50 Lakhs whichever is lower, during the 2 immediately preceding financial years or during the current financial year

d) Prohibited positions or relationships: who, neither himself nor any of his relatives—

i. Holds/ held the position of a KMP or is or has been employee of the company or its holding, subsidiary or associate company in any of the 3 immediate preceding financial years

Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding 3 financial years

ii. Is or has been an employee or proprietor or a partner, in any of the 3 immediate preceding financial years 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 10% or more of the gross turnover of such firm;

iii. Holds together with his relatives 2%. Or more of the total voting power of the company; or

iv. Is a Chief Executive or director, by whatever name called, of any Non-profit Organization that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2%. Or more of the total voting power of the company;

Qualifications of Independent Director

a) Appropriate Skills: As per Rule 5 an Independent Director shall possess appropriate skills, and knowledge in one or more fields such as finance, law, management, marketing, administration, research, corporate governance, technical operations and other discipline related to company business

b) No transaction through relatives: none of whose relatives:

i. Is holding any security of or interest in the company, its holding, subsidiary or associate company during the 2 immediately preceding financial years or during the current financial year

Provided that the relative may hold security or interest in the company of face value not exceeding Rs. 50 Lakhs or 2% of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed

ii. Is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors for an amount of Rs.50 Lakhs during the 2 immediately preceding financial years or during the current financial year

iii. 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 an amount of Rs.50 Lakh during the 2 immediately preceding financial years or during the current financial year

iv. Has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to 2% 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)

6. Code of Professional conduct for Independent Directors [Section 149(8)]: The Company and Independent Directors shall abide by provisions specified in schedule IV which deals with:

a. Guidelines for Professional conduct

b. Role and functions

c. Duties

d. Manner of appointment and reappointment

e. Resignation and removal

f. Separate meetings

g. Performance evaluation

7. Remuneration [Section 149(9)]: Subject to section 197 & 198, an Independent Director may receive remuneration by way of-

a. Fee provided u/s 197(5) [sitting fees]

b. Reimbursement of expenses for participation in the Board and other meeting, and

c. Profit-related commission as approved by Members.

[Stock Option: He is not entitled to any stock option]

8. Term of Office [Section 149(10) & (11)]: Independent director shall hold office for a term up to 5 consecutive years on the Board

a) An Independent director shall not hold office for more than two consecutive terms

b) Such Director shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director provided that such director shall not, during the said period of 3 years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

c) Appointment for less than 5 years is allowed but it will be counted as “One Term”. After two terms the cooling off period of 3 years will apply even if the total of two terms is less than 10 years.

d) Re-appointment: Eligible for reappointment on passing of a special resolution.

e) Disclosure: Disclosure of such appointment in the Board's report.

9. Liability [Section 149(12)]: An Independent Director or a Non-Executive Director (Not being a promoter or KMP) shall be held liable, only for such acts of omission or commission by a company which had occurred with his knowledge, consent or connivance or where he had not acted diligently.

10. Rotation of Directors [Section 149(13)]: Retirement of directors by rotation shall not be applicable to appointment of independent directors.

11. Manner of Selection [Section 150]:

a) An independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors. (Sec 150)

b) Such database to be maintained by anybody, institute or association, as may by notified by the Central Government and put on their website (www.independentdirector.in) for the use by the company making the appointment of such directors

c) The responsibility of exercising due diligence before selecting a person as an independent director from the data bank referred to above, shall lie with the company making such appointment [Proviso to section 150(1)].

d) Appointment to be approved in general meeting and the explanatory statement annexed to the notice of the general meeting shall indicate the justification for choosing the appointee for appointment as independent director [Section 150(2)].

e) Any person desirous to get his name included in the databank of Independent Directors shall make an application to the agency. (Rule 6) [Form DIR-1 is omitted vide MCA Notification dt 18.09.2014, Companies (Appointment and Qualification of Directors) Rules, 2014]

Agency: Any body, institute or association (hereinafter to be referred as "the agency"), which has been authorized in this behalf by the Central Government shall create and maintain a data bank of persons willing and eligible to be appointed as independent director and such data bank shall be placed on the website of the Ministry of Corporate Affairs or on any other website as may be approved or notified by the Central Government. (www.independentdirector.in)

The data bank shall contain the particulars in respect of each person included in the data bank to be eligible and willing to be appointed as independent director like DIN, the name and surname in full, details of LLPs in which he is or was a designated partner, the list of companies in which he is or was director, etc.

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