INDEPENDENT DIRECTOR

An Independent Director is a non-executive director who is not affiliated with the company in
any other manner than serving on its board. It helps the company in developing its governance
standards and corporate credibility. The Independent Director is expected to provide an
independent and objective perspective on the board’s decision-making process. They are
responsible for monitoring the performance of the company, providing guidance to the
management team, identifying and mitigating risks, ensuring compliance with legal and
regulatory requirements, and safeguarding the interests of all stakeholders. This article will
discuss about the Independent Director, its appointment criteria, process, roles and duties.
An Independent Director is a member of the board of directors of a company who does not have
any personal or financial interest in the organization, apart from their remuneration as directors.
Independent Directors are appointed to bring an unbiased perspective to the board’s decision-
making process, and they are expected to act in the best interest of the company and its
stakeholders.

They are not affiliated with the company’s management or the owners of the company. The
Independent Director is expected to provide an objective and impartial perspective on the
board’s decision-making process and act as a safeguard against conflicts of interest.

The provisions relating to the appointment of Independent directors are contained in Section 149
of the Companies Act, 2013 should be read along with Rule 4 and Rule 5 of the Companies
(Appointment and Qualification of Directors) Rules, 2014:

 Section 149(6):

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— 99 (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 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 (f) who possesses such other
qualifications as may be prescribed.

 Rule 4

Number of Independent director. - [(1)] The following class or classes of companies shall
have at least two directors as independent directors -

(i) the Public Companies having paid up share capital of ten crore rupees or more; or

(ii) the Public Companies having turnover of one hundred crore rupees or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and
deposits, exceeding fifty crore rupees:

Provided that in case a company covered under this rule is required to appoint a higher
number of independent directors due to composition of its audit committee, such higher
number of independent directors shall be applicable to it:

Provided further that any intermittent vacancy of an independent director 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:

Provided also that where a company ceases to fulfil any of three conditions laid down in
sub-rule (1) for three consecutive years, it shall not be required to comply with these
provisions until such time as it meets any of such conditions;

Explanation. - For the purposes of this rule, it is here by clarified that, the paid up share
capital or turnover or out standing loans, debentures and deposits, as the case may be, as
existing on the last date of latest audited financial statements shall be taken into account:
 Provided that a company belonging to any class of companies for which a higher number
of independent directors has been specified in the law for the time being in force shall
comply with the requirements specified in such law.

[(2) The following classes of unlisted public company shall not be covered under sub-rule
(1), namely: -

(a) a joint venture; (b) a wholly owned subsidiary; and (c) a dormant company as defined
under section 455 of the Act.]

 Rule 5

Qualification of Independent director. - (1) An independent director shall possess

appropriate skills, experience and knowledge in one or more fields of finance, law,
management, sales, marking, administration, research, corporate governance, technical
operations or other disciplines related to the company's business.

[(2) None of the relatives of an independent director, for the purposes of sub-clauses (ii)
and (iii) of clause (d) of sub-section (6) of section 149,-

(i) is indebted to the company, its holding, subsidiary or associate company or their
promoters, or directors; or

(ii) 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 fifty lakhs rupees, at any time during the two immediately preceding
financial years or during the current financial year.]

Number of Independent Directors

 Every listed public company shall have at least one-third of the total number of directors
as independent directors. (Any fraction contained in such one-third number shall be
rounded off as one).
 The following class or classes of companies shall have at least two directors as
independent directors – The Public Companies having paid up share capital of ten crore
rupees or more; or The Public Companies having turnover of one hundred crore rupees or
more; or The Public Companies which have, in aggregate, outstanding loans, debentures
and deposits, exceeding fifty crore rupees.

Eligibility Criteria for Appointment of Independent Director

The eligibility criteria for appointing an Independent Director are governed by the Companies
Act, 2013 and the Securities and Exchange Board of India (SEBI) regulations. The following are
the eligibility criteria for appointing an Independent Director:
  Independence: The Independent Director should not have any material pecuniary
relationships with the company, its promoters, or its management team. They should not
be a substantial shareholder or a relative of any of the company’s directors or employees.
 Expertise and experience: The Independent Director should have relevant expertise,
experience, and skills in the areas of business, finance, management, law, or other
relevant fields. They should have a good understanding of the company’s business and
industry.
 Age: The Independent Director should not be more than 75 years of age. However, this
criterion can be relaxed with the approval of the shareholders.
 Qualifications: The Independent Director should have a minimum qualification of a
graduate degree from a recognized university. They should have a good track record and
reputation.
 No other disqualifications: The Independent Director should not have been convicted of
any offense involving moral turpitude or economic offenses. They should not have been
declared bankrupt or been involved in any other disqualifying event.
These eligibility criteria may vary depending on the company’s size, nature, and complexity of
its operations. Companies should also comply with the additional eligibility criteria,
qualifications, and procedures laid down by SEBI regulations while appointing Independent
Directors.

Process of Appointment of Independent Director

The process of appointing an Independent Director typically involves the following steps:
 Identification: The board of directors identifies potential candidates for the role of
Independent Director. The identification of candidates can be done by the Nomination
and Remuneration Committee (NRC) or the board of directors.
 Nomination: Once the potential candidates have been identified, the NRC or the board of
directors nominates the candidate to the shareholders for approval.
 Shareholder approval: The shareholders approve the appointment of the Independent
Director by passing a resolution at a general meeting. The company will send a notice of
the general meeting to all shareholders along with relevant documents such as the notice
of appointment of the Independent Director, details of the candidate’s qualifications,
experience, and other relevant information.
 Intimation to Registrar of Companies (ROC): After the appointment of the Independent
Director, the company is required to intimate the ROC within 30 days of such
appointment in the prescribed form.
In addition to the above, the Companies Act, 2013, and the SEBI regulations have laid down
certain eligibility criteria, qualifications, and procedures that companies need to follow
while appointing Independent Directors. Companies need to comply with these regulations while
appointing Independent Directors.
Roles of Independent Director
The roles and responsibilities of an Independent Director include:
 Providing an independent perspective: Independent Directors are expected to provide
an objective and impartial perspective on the board’s decision-making process. They are
expected to bring their expertise, knowledge, and experience to bear on the matters under
consideration by the board.
 Monitoring performance: Independent Directors are responsible for monitoring the
performance of the company, including the performance of the management team. They
need to ensure that the company is meeting its objectives, and that the management team
is acting in the best interests of the company and its stakeholders.
 Providing guidance: Independent Directors are expected to provide guidance and
support to the management team. They can provide advice on strategic matters, risk
management, governance, and other issues relevant to the company’s operations.
 Risk management: Independent Directors are responsible for identifying and mitigating
risks that could impact the company’s operations. They need to ensure that the company
has effective risk management systems and controls in place.
 Ensuring compliance: Independent Directors are responsible for ensuring that the
company complies with all legal and regulatory requirements. They need to ensure that
the company is adhering to applicable laws, regulations, and best practices.
 Safeguarding the interests of stakeholders: Independent Directors are responsible for
safeguarding the interests of all stakeholders, including shareholders, employees,
customers, and the community. They need to ensure that the company is acting in an
ethical and socially responsible manner.
Furthermore, the Independent Director plays a crucial role in ensuring that the company operates
in an effective, efficient, and ethical manner, and that it is acting in the best interests of all
stakeholders.
Duties of Independent Directors
The duties of Independent Directors include:
 Duty of care: Independent Directors have a duty to act with care, skill, and diligence
while performing their duties. They need to exercise the same level of care and diligence
as they would while performing their duties for any other organization.
 Duty of loyalty: Independent Directors have a duty to act in the best interests of the
company and its stakeholders. They need to avoid any conflicts of interest and disclose
any potential conflicts of interest that may arise.
 Independence: Independent Directors have a duty to act independently and objectively
while performing their duties. They should not be influenced by the management or the
owners of the company.
  Monitor and supervise: Independent Directors have a duty to monitor and supervise the
activities of the management team. They need to ensure that the management team is
acting in the best interests of the company and its stakeholders.
 To oversee financial reporting: Independent Directors have a duty to oversee the
financial reporting process of the company. They need to ensure that the financial
statements are prepared in accordance with applicable accounting standards and that they
provide a true and fair view of the company’s financial position.
 To ensure compliance: Independent Directors have a duty to ensure that the company
complies with all legal and regulatory requirements. They need to ensure that the
company is adhering to applicable laws, regulations, and best practices.
Overall, the duties of Independent Directors are to ensure that the company operates in an
effective, efficient, and ethical manner. They are responsible for overseeing the management
team and providing guidance and support while ensuring that the company is complying with all
applicable laws and regulations.