Procedure for Appointment of Independent Director Companies Act, 2013

Procedure for Appointment of Independent Director Companies Act, 2013

Procedure for Appointment of Independent Director Companies Act, 2013

Independent directors have remained in the limelight of the Companies Act, 2013. They are distinct from ordinary directors in the sense that the latter is involved in the day-to-day operations and management of the company while the Independent Directors acts as a non-executive director. But who are independent directors under companies act 2013 and what function do they perform? Also, is every company required to appoint independent director? Let’s dive deeper into the appointment of independent directors under Companies Act, 2013.

Who is Independent Director?

The Independent directors are mandatory to be appointed by the prescribed companies as per the provisions of the Companies Act, 2013. They serve as non-executive directors of the Company that help companies in improving the credibility, accountability and governing standards. They possess integrity and credibility and do not form part of the promoter or founder group of the Company. As the name suggests, they are independent from the management of the company and the company law lays down explicit guidelines for the independence of the independent directors as well.

Applicability for Appointment of Independent Directors Companies Act, 2013

As per the provisions of the Companies Act, 2013, the following companies are required to appointment of independent directors in the following composition:

Type of Company

Number of Independent Directors to be Appointed

Listed Public Companies

At least 1/3rd of the total number of directors should be independent directors.

Unlisted Public Companies with

  • Paid-up capital of Rs. 10 crores or more
  • Turnover of Rs. 100 crores or more
  • The aggregate of outstanding loans, debentures and deposits exceeding Rs. 50 crores.

At least 2 directors as independent directors.

The following are the applicability for appointing Independent Directors. However, we need to keep the following points in mind while appointing independent directors:

  • For calculating the amount of paid-up capital - the turnover or outstanding loans, debentures/ deposits, the amount as of the last date of the latest audited financial statements should be considered.
  • The companies should appoint more Independent Directors under Companies Act, 2013 if it is required to compose the audit committee.

Key Points Relating to Independent Directors under Companies Act, 2013

Following are some of the key points to remember in relation to independent directors under Companies Act, 2013:

  • Every independent director shall give a declaration of his/her independence when:
    • He or she attends the first board meeting as the independent director
    • At the first board meeting of every financial year
    • Whenever a situation arises that affects his or her status of independence
  • The independent director can be appointed for a maximum period of 5 years. They can be reappointed only by passing a special resolution in the general meeting of the company. Further, he or she cannot be appointed for more than 2 consecutive terms.
  • A person can be an independent director in a maximum of 7 listed companies at a time.
  • An independent director shall not retire by rotation.
  • A small shareholder director can be considered an independent director if:
    • He or she is eligible for appointment as an independent director as per section 149(6) and
    • He or she gives a declaration that s/he meets the criteria of independence as specified u/s 149(7).
  • In case the board of directors calls a meeting at a shorter notice to transact some urgent business, then at least 1 independent director should be present in such a meeting. In case of the absence of the independent director, the decision of the board should be circulated to all the directors and it should be approved by at least 1 independent director.

Criteria to Become Independent Director under Companies Act, 2013

The company act and rules made thereunder explicitly lays down the criteria for appointment of independent directors, including the criteria for independence. For instance, the independent director should be a person of integrity and possess relevant experience and expertise. He should not be the promoter of the Company, its holding, subsidiary or associate company. Further, he should not be related to any promoter(s) or director(s) of the company, its holding, subsidiary or associate company in which he has been appointed as an independent director under Companies Act, 2013. Apart from these, there are explicit provisions relating to the shareholding and guarantees given. You can consult the ASC Group for more information.

Roles and Responsibilities of Independent Directors under Companies Act, 2013

Following are some key roles and responsibilities of the independent directors:

  • Independent directors should try to attempt to attend all the board meetings and general meetings of the company.
  • They should possess adequate knowledge of the company and the external environment in which the company operates.
  • They should oversee that the operations of the company are conducted in line with its overall goals and objectives and that corporate governance is adequately followed within the company.
  • They should report any matter concerning the actual or suspected fraud, violation of any law, rule or regulation or unethical behaviour.
  • To act as moderators and arbitrators in the interest of the company in case of any conflict between the shareholders and management.
  • Form part of the audit committee and deliberate on the financial matters of the company like loans, key findings, financial statements, performance of the company etc.

In a Nutshell

The appointment of Independent Director under the Companies Act, 2013 ensures that there is a need for an independent watch on the operations and performance of the company. The Independent directors act as a guide and advisors to the board of directors of the company. The company law lays down strict and explicit provisions to ensure that the independence of the independent directors is maintained and they act with integrity and transparency. In case you need more information on appointment of Independent Directors,  feel free to contact the ASC Group.

 

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