Appointment of Independent Directors - Recent Developments
An “Independent Director”, as the name suggests is a non-executive director who has no material relationship with the company. An independent director, being an impartial and independent entity is a gatekeeper in the governance of the company.
The Companies Act of 1956 provides no precise definition of an “Independent Director”. However, the Companies Act, 2013, in Sub-section (6) provides a comprehensive meaning of independent directors in relation to a company.
RELEVANT PROVISIONS RELATING TO “INDEPENDENT DIRECTORS”
Section 149 of the Companies Act, 2013 read with Rule 4 & 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provide for the manner of appointment, number and qualifications of the independent directors.
A recent amendment, i.e. the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 provides for the compliances which are required by any person who is willing and is eligible to be appointed as an independent director.
THE NUMBER OF INDEPENDENT DIRECTORS
Listed Public Company: According to Sub-section 4 of Section 149 of the Companies Act, 2013 every listed public company is required to have at least one-third of the total number of directors as independent directors. In case there is any fraction in the calculation of the one-third, it will be rounded off as one.
Unlisted Public Company: Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides that the following classes of public companies are required to have at least two independent directors:
The companies which have paid-up share capital of ten crores or more;
The companies having turnover of one hundred crore rupees or more;
The companies which have an aggregate of more than fifty crore rupees as outstanding loans, debentures, and deposits.
ROLES AND DUTIES OF AN INDEPENDENT DIRECTOR
The role of an independent director is to act as a watchdog in the management of the company and improving its credibility. Being independent of the company, the director has to be impartial in the conduct of the affairs of the company. The role of independent directors includes evaluating and reporting the overall performance of the board. They play an active role in safeguarding the interests of the stakeholders, especially the minority shareholders.
The duties of independent directors include attending the company's general meetings. They are supposed to possess integrity, expertise, and experience in the management of the company, to uphold the interest of the company. An independent director is an integral part of the company to ensure good governance.
RECENT DEVELOPMENT IN THE RULES FOR INDEPENDENT DIRECTORS
The Ministry of Corporate Affairs has introduced a new set of rules namely, the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019. These rules require any person who intends to be appointed as an independent director to apply online to the Indian Institute of Corporate Affairs (IICA) to include their name in the data-bank of independent directors. The IICA maintains the data-bank which includes the Permanent Account Number (PAN), Director Identification Number, past directorship of individuals, past criminal proceedings records, etc.
The independent directors are required to pass a self-assessment test within one year of inclusion of their name to the list, which is conducted by the Indian Institute of Corporate Affairs (IICA), the failure of which the name shall be removed from the list. This test evaluates the director’s knowledge of the Companies Act, Securities Law, basic accountancy, and other subjects crucial in the management of a company. The rules also require a disclosure of compliance to be submitted by such a person to the Board.
The Companies (Appointment and Qualification of Directors) Amendment Rules, 2020 provides that an individual is not required to pass the self-proficiency test if he has served as a director or key managerial personnel for a total period of ten years in a listed public company, an unlisted public company which has a paid-up share capital of rupees ten crores or more or any body corporate listed on a recognized stock exchange.
Independent directors in a company are integral in the management of the company to ensure good governance. Being unrelated and independent, they are expected to be impartial in dispensing their duties. Holding such a crucial managerial position, it is important that these directors possess the knowledge and experience required to manage the company. The self-proficiency test, which is now mandatory, ensures that the person intending to hold such a position has the necessary qualifications and skill-set required for such responsibility. Meanwhile, by exempting a person holding the position of a director or key-managerial personnel for at least ten years from taking the test, the Ministry of Corporate Affairs has given credibility to the experience of such a person, thus making sure the position is given to a competent individual.
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Arushi Gupta is currently a 5th-year law student at DES Law College, Pune University.
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