Who is an Independent Director?
An Independent director in relation to a company is a director who is not a managing director, whole time director or a nominee director. The independent director does not have any kind of relationship with the company which affects the independence of judgement.
Applicability of Appointment of Independent Directors
The following is the applicability criteria of appointment of Independent Directors-
- Listed Public Companies- Every listed public company shall have at least ⅓ of its directors as independent directors.
- Unlisted Public Companies- The following unlisted public companies shall have at least 2 directors as independent directors
- Having paid up share capital of Rs. 10 crores or more
- Having a turnover of Rs. 100 crores or more
- Having aggregate outstanding loans, debentures, and deposits, exceeding 50 crore
In case of a company that is required to constitute an audit committee, it shall appoint such a higher number of the directors as may be required.
Eligibility criteria for being appointed as an Independent Director
To be appointed as an independent director, an individual must be a person-
(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, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed, 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-
(i) 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:
Provided that 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;
(ii) 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;
(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 such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or
(iv) 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);
(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;
Provided that 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
(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-
(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.
Declaration by the Independent Director
Every independent director shall at the first meeting of the board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or when a situation arises which affects his status of independence shall give a declaration that he meets the criteria of independence.
Tenure of Independent Director
An independent director appointed shall hold the office for a period of 5 consecutive years. He shall be eligible for reappointment on the passing of a special resolution by the company and disclosure of such appointment in the board’s report. However, no independent director shall hold the office for a period of more than 2 consecutive terms. But such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.
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