DIRECTORS, BOARD

DECISIONS AND RELATED

PARTY TRANSACTIONS
Independent directors
Directors, Board Decisions and Related Party Transactions
Independent directors

Introduction
Independent directors play a pivotal role in maintaining a transparent working environment
in the corporate regime. They constitute such a category of directors who are expected to
have impartial and objective judgment for the proper functioning of the company. The
Companies Act, 1956 did not expressly provide for independent directors The Companies
Act, 2013 aims to strengthen the position of independent directors by giving them greater
powers and responsibilities in the governance of the company.

Impact of new Companies Act, 2013

The new Companies Act makes it obligatory for every listed public company to have at
least one-third of the total number of directors as independent directors. This will include
companies listed on the SME segment of the stock exchange.

Unlisted public companies must appoint at least two independent directors in the following
circumstances:

i. If the paid up share capital exceeds Rs. 10 crores.

ii. If the turnover exceeds Rs. 100 crores.
iii. If the aggregate of all the outstanding loans, debentures and deposits exceeds Rs 50
crores.

However, if a company is required to have a higher number of independent directors due

to its higher composition of its audit committee, or is required under any other law, the
company must appoint such higher number of independent directors. Companies which
fail to meet the above mentioned criteria for three consecutive years, will not be required
to appoint independent directors till the time they meet the required conditions again.

Existing companies must comply with the requirements within a year. Earlier, in listed
companies, the number of independent directors could vary from 1/3rd to 1/2nd of total
directors (depending upon executive/non-executive nature of chairman) which was fixed
under the listing agreement with the board.

The tenure term of the independent directors must not be more than 5 years and they can
be re-elected for a second term. Companies are allowed to appoint an independent
director for a period less than 5 years, however, a person cannot be appointed for more
than two terms, even if he has been appointed for a period less than 10 years. A cooling
period of three years is mandatory after expiry of the second term.

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Directors, Board Decisions and Related Party Transactions
Independent directors

Confirmation procedure for independent directors

appointed under earlier Companies Act
The independent directors appointed under the Companies Act, 1956 cannot automatically
continue their post. Existing independent directors need to be expressly re-appointed in
accordance with the rules under Companies Act, 2013 (including re-issuing appointment
letter), within 1 year from 1 April 2014. However, such re-appointment is subject to
compliance with the eligibility and other prescribed conditions under the Companies Act,
2013.

Role and functions of independent directors

In order for the independent directors to efficiently perform their role, the companies
appointing them have been placed under an obligation to familiarise the independent
directors with different aspects of the listed entity including:

- nature of the industry in which the listed entity operates;

- business model of the listed entity;
- his roles, rights, and responsibilities as an independent director;
- other relevant information - which can include material ongoing projects,
significant investments etc. (Regulation 25 of the SEBI (LODR) Regulations, 2015.

● It is mandatory for all independent directors of the company to meet at least once
annually (without the presence of non-independent directors and members of the
management) - they are required to evaluate the performance of the company’s
chairperson, non-independent directors and the board as a whole at these special
meetings. This provides the independent directors freedom to assess the company’s
performance and take impartial decisions based on it.

● Independent directors need to be appointed as a member in the CSR committee,

Nomination and Remuneration Committee and the Audit Committee of the board.
Use the table below to identify the composition of the board committees:

Name of Which companies are required to Size of committee

committee constitute these committees and no. of
independent
directors required

Corporate A company which meets the 3 or more directors- at

Social following conditions: least one should be an
Responsibility independent director.
Committee ○ Net-worth of INR 500 crores There is no restriction
or more on the remaining

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Directors, Board Decisions and Related Party Transactions
Independent directors

○ Turnover of INR 1000 crores directors being

or more full-time directors.
○ Net profit of INR 5 crores or
more

Nomination Listed companies +unlisted public 3 or more

and companies which satisfy any of the non-executive
Remuneration following conditions: directors (with at least
Committee half, i.e. 2 or more
○ paid up capital of INR 10 independent directors)
crores or more.
○ turnover of INR 100 crores
or more
○ outstanding loans,
borrowings, debentures or
deposits of INR 50 crores or
more

Audit Same as above. 3 directors - at least

Committee one should be an
independent director.
There is no prohibition
on the remaining
directors being
full-time directors.

Note: Companies Act also mentions the Stakeholders Relationship Committee – this
must be constituted by all companies which have more than 1000 holders of
securities (shares, debentures or other securities). The size of the committee can be
determined by the board – however, it is essential that the chairperson is a
non-executive director (that is, someone who is not involved in day-to-day
operations of the company and is not an employee of the company).

● An independent director must comply with other functions and duties mentioned
under Code of Conduct provided under Schedule IV of the Companies Act, 2013.

Remuneration of independent directors

It is essential that an independent director continues to remain ‘independent’, and hence
remuneration is inconsistent with independence, barring certain conditions. An
independent director shall not receive any stock option or remuneration except for
attending meetings, reimbursement of expenses for participation in the meeting and may
receive profits subject to the approval of shareholders. The sitting fee for independent
directors shall not be less than the sitting fee payable to other directors. This was to ensure

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Directors, Board Decisions and Related Party Transactions
Independent directors

that there is no financial nexus between independent directors and the company. Equating
the fee of independent directors and other directors will ensure that they do not feel they
are at a disadvantage.

(See Sections 12, 149 and 197 of the Companies Act, 2013)
What are the liabilities of an independent director?
Independent directors shall be held liable only for acts or omissions by a company which
occurred with their knowledge, with their consent or connivance or where they did not act
diligently. This will ensure that the independent directors can work honestly, and take
decisions without the fear of being trapped in a false case.

Removal and resignation of independent director

An independent director shall be replaced within a period of 180 days from the date of
resignation or removal. The procedure is identical to removal of other directors – refer to
Sections 168 (Resignation of Directors) and 169 (Removal of Directors by the Board).

If an independent director remains absent from any board meeting for 12 months period
with or without the permission from the board or violates any of the provisions of Section
167, it will be deemed that the seat of director is vacant.

Steps to be followed for appointing an independent

director
Step 1: Identification based on independence criteria

An independent director may be selected from a databank containing names, addresses

and qualifications of persons who are eligible for this purpose. This databank is to be
maintained by any entity authorized by the Central Government and will be uploaded on
the Ministry of Corporate Affairs website. This is only for a facilitative purpose - a company
is allowed to select any other person as independent director, provided the person meets
all the eligibility criteria (see the checklist below). The board must ensure that there is
appropriate balance of skills, experience and knowledge in the Board for proper and
effective discharge of its functions.

Step 2: Shareholder approval

The appointment of independent Directors shall be approved at the meeting of the

shareholders. The explanatory statement attached to the notice of the meeting shall
include a statement that the independent Director proposed to be appointed fulfills the
conditions mentioned in the Act.

Step 3: Issue of appointment letter by board and obtaining declaration from director

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Independent directors

The appointment of independent directors shall be formalized through a letter of

appointment which states the term of appointment, expectation of the board from the
director and fiduciary duties and liabilities accompanying it, code of business ethics that the
company expects its directors and employees to follow, list of actions that the directors
should not do while functioning as such, the remuneration, periodic fees, reimbursements
of expenses for participating in the board meetings etc.

Every independent director shall provide a declaration confirming that he/she has satisfied
the entire criteria of independence. The necessary forms for the appointment shall be filed
with the registrar of companies and the details entered in the register of directors and key
managerial personnel.

Step 4: Publication of terms of appointment of the independent director

The terms and conditions for appointment of independent director shall be posted in the
company’s website.

Checklist of eligibility conditions for independent directors

(downloadable)
This checklist is downloadable. You can take a print out and use it to assist a company in
appointing independent directors.

1. An independent director should possess appropriate skills, experience and

knowledge in one or more fields of finance, law, management, sales, marketing,
administration, research, corporate governance, technical operations and other
disciplines related to company’s business.

2. Apart from the above qualifications, an independent director must be a director who
is not a managing/whole-time/nominee director of the company. An independent
director should also meet the thresholds as stated in the points below.

3. He should be a person of integrity and have relevant industrial expertise.

4. He is not a promoter or related to the promoters and directors of the company, its
associate, holding or subsidiary companies

5. They or their relatives must not have any material or pecuniary relationship other
than remuneration as director or transaction not exceeding 10% percent of a
person’s income (Under the Companies Act, 2013 there was no materiality threshold
of the transaction which a director could incur. This has been clarified under the
Companies Amendment Act, 2017 which states that value of transaction shall not
exceed 10% of director’s income)with the company or its associate, holding or
subsidiary company, their promoters or directors, during the past two financial years
or in the current financial year. It has been clarified that any transaction made by the

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Directors, Board Decisions and Related Party Transactions
Independent directors

independent director, which a general public person could have entered at with the
company at the same price and at “arm's length” will not come under the purview of
this provision.
6. Their relatives should not hold security or interest in the company, its holding ,
subsidiary or associate company during the past two financial years or in current
financial year. Their relatives may hold security or interest in the company, of a face
value not exceeding INR 50 lakh or 2% of the paid up capital of the company, its
holding, subsidiary or associate company or such higher sum as may be prescribed.

7. Their relatives should not be 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 past two financial years or in current financial year.

8. Their relatives should not have given guarantee or provided any security in
connection with 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 past two financial years
or in current financial year.

9. Their relatives should not have any other pecuniary transaction with the company,
or its subsidiary or its associate or its holding company amounting to 2% or more of
its gross turnover or total income singly or total income in combination with the
transactions referred to point no 6,7 and 8 above.

(The Companies Amendment Act, 2017 has clarified the transactions in details which
the relatives of a director should not incur. The details of such transactions relating
to relatives of a director were not present in the Companies Act 2013).

10. The independent director or their relatives should not hold any key managerial
position, or being an employee in the company or its subsidiary companies during
any of the past three financial years;

The Companies (Amendment) Act, 2017, has clarified that in case of a relative who is
an employee, this restriction shall not apply for his employment during the
preceding three financial years.

11. He should not hold along with his relatives more than 2 % of the total voting power
of the company

12. He or his relatives should not be an employee, partner, or proprietor in last three
financial year in a) auditor, company secretaries or cost auditors of the company or
its associates, subsidiaries and holding company b) a legal or a consulting firm which
has transaction more than 10 % of the gross turnover of the company.

13. An independent director or his relatives must not be a chief executive or director of
a nonprofit organization, which receives 25% or more of its receipts from the

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Directors, Board Decisions and Related Party Transactions
Independent directors

company or its subsidiary companies or its promoters/directors or from anyone who

holds 2% of voting rights in such companies.

14. He should not be a director of more than seven listed entities (Regulation 25 of SEBI
(LODR) Regulations, 2015).

Composition of Board Committees – Guidance list

Name of Which companies are required to Size of committee and
committee constitute these committees no. of independent
directors required
Corporate Social Any company which meets the 3 or more directors - at
Responsibility following conditions: least one should be an
Committee ○ Net-worth of INR 500 crores independent director.
or more There is no restriction on
○ Turnover of INR 1000 crores the remaining directors
or more being full-time directors.
○ Net profit of INR 5 crores or
more
Listed, unlisted and private
companies will all have to comply
with this.

Nomination and Listed companies + unlisted public 3 or more

Remuneration companies which satisfy any of the non-executive
Committee following conditions: directors (with at least
○ paid up capital of INR 10 half, i.e. 2 or more
crores or more. independent directors)
○ turnover of INR 100 crores or
more
○ outstanding loans,
borrowings, debentures or
deposits of INR 50 crores or
more
Audit Committee Same as above. 3 directors - at least one
should be an
independent director.
There is no prohibition
on the remaining
directors being full-time
directors.

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