In order to maintain transparency within the system and withhold anstructured pursuit and enterprise in the company in 2013, The Companies Actformulated the position and appointed the post of an Independent director and it further goes intodepth to explain its role.
The terminology ‘Independent director’ was first coinedand disclosed in Section 2(47) and can be found in sub-section (6) of Section149 of the Companies Act, 2013. Therefore in my papers I have dwelled into theintricate details to bring about and showcase the significance for the basis ofwhat makes a potential candidate eligible for the role of an IndependentDirector, and the procedures for their appointment and affixture for theirgiven post and the responsibilities and duties which they must uphold andperform at given situations and if they fail to the process through which theycan be removed. Introduction:The significance and importance of the Indepenedent Director wasfirst emphasized by the Corporate Governance in India. However the terminology ofthe wordings ‘Independent Director’ nor any provisions for the compulsoryelections of the Independent Director can be found in the Companies Act, 1956.Regardless of this clause 491 in the listing agreementcan be identified on all the listed companies and firms and has passed a decreefor the appointment of Independent Directors on boardThe Companies Act, 2013 which is also popularly known as ‘the Act,2013’ first came into picture on the 29th August, 2013 as Act no. 18of 2012.
The Act’s 98 sectionswere first applied or implemented into it in the year 2013 through anotification by The Ministry of the Company.Section 149 of the Companies Act, 2013 is one of section of the Actwhich has been imposed and is essentially concerned with the appointment andqualification of the Independent Directors and their importance to establish andincorporate a sturdy and able corporate governance in the company. However it hasnot been put into force since the time it was created but when it does thegazette shall be informed the moment it is implemented.The Act goes greatly into details to establish and elaborate theroles, liabilities, duties, etiquettes, and the means of selection of potentialcandidates for the post of the independent directors in Boards and otherinnumerable committees of the company. Independent Directors- An Overview:The role and importance of an Independent Director was first boughtinto picture when the need of such a post arose in the corporate governance toestablish a sturdy, strong foundation, the relevance and significance of theirjob and structured responsibility has been expanding ever since. The CompaniesAct, 2013 has formulated the executive director’s role to be exteremelydivergent when compared to that of Independent Director’s. Although theIndependent Director’s job is diverse and quite intricate as he has theresponsibility of of innumerous roles, liabilities, duties for the advancementof the company.
One of these many duties is to highlight the opinions of theminority shareholders and to recognize their voice as an attempt to make surethat the institutes of discrimination and prejudice aren’t built in favor of a certain category of shareholdersand stakeholder thus to insure that a healthy and welfare oriented structure ispersists amongst the shareholders.The primary and vital role of the Independent Director’s job includeupholding the repute of the government standards, improvising the corporatereliability, and maintaining the risk management of the company. IndependentDirectors must look into and keep a check on the decisions and implementscreated by the management and shareholders, they must also uphold theirintegrity and be impartial in the decision and resolutions which they make ontheir own.
The Independent Directors gare also responsible to bring aboutreliability and accountability to the board affairsWho can be an Independent Director under the statue: The potential and the capacity inorder to be an Independent Director is identified and determined in Section149(6) of the Companies Act, 2013:· A director who works occasionally or at part time throughprofessional basis or a director who is not an executive.· With significant insight alongside with integrity and experience whoalso happens to have the approval of the Board of Directors. It is but thenthat these Board of Directors shall pass their resolution.
The usage of theword ‘significant’ is not meant to limit the credentials to choose a potentialindependent director. · Subsection (6) of Section 2 of the Companies Act, 2013 describes anassociate company, and an individual who has no ties to it as a promotor in thecurrent scenario or in the past of that company and therefore can be enlistedfor the role of an Independent director. · An individual who has no links to the company through financial tiesnor any monetary relations to its promotors or their directors or itssubsidiary or associate companies during the previous two financial fiscalyears or during the recent two financial year. · A family member who doesn’t have any financial links in the past norin the present with the company itsholding, partnered or subsidiary company or any of their promoters or theirrespective directors, and if the worth of such a transaction or busniness dealhas not surpassed its gross revenue nor has it transcended 2% of its aggregateturn over or a sum of Rs. 55,00,000 oran amount which can be determined to be high during that current financial yearor the previous two financial or fiscal years.· An individual or his kin who hasn’t had any intermitted orcontinuous links to the company as an employee of it through its holding or itsassociate or subsidiary company duringthe previous three financial/ fiscalyears or in the recent three financial years or is presently occupying or hasoccupied in the past the post of a KMP · An individual or his kin who hasn’t had any intermitted orcontinuous links to the company:-1.
as either an employee, associate or proprietor of it in the timeperiod of the previous three financial/fiscal years or in the recent three financial years with posts in the firmvarying from (a) auditors to (b)cost accountants alongside with (c) workingcompany secretaries whose jobs are in effect in its holding or its partnered orsubsidiary company.2. An individual alongside withhis kin and kind who withholds more than 2% of the voting power in the company.3. If an Non-profit Organizationis established which gets its revenue from the company which is holding or its partnered or subsidiarycompanies tends to make 25% more than the company’s revenue or withholds 2% ormore of the voting power amongst the shareholders of the company.4.
Or the individual or his kin has ever had any relations with a firmwhich provides legal or consulting services, and has had any links through transactionsand business agreements with the company its holding or subsidiary or partneredcompany which adds up to an estimate of 10% or more of the gross turnover. · An individual who possess any such qualifications or attributes whichpossibly may be sanctioned.The most inclined uncertainty that arises is aboutthe prospect and background of an individual for the position of theIndependent director in a company which imparts legal services, as to weitherhe has legal professional insight as an advocate, or sole holder of a consultationor legal firm.
However as long as such a lawyer or his legal consulting firm iselevating and increasing its revenue which do not surpass 10% or more of itsgross annual turnover there is no such legal barrier or restriction. Althoughthe concept of legal is applied regardless of total turnover in professionssuch as (i) the firm of auditors or (ii) working company secretaries in effector (iii) cost accountant. The terminologies ‘legal’ or ‘consulting firm’ wouldhave been noticeable if not identified in Section 149(6)(ii) (A) instead ofbeing linked to its gross annual turnover if the motive of the legislature wasto put a baricate upon a lawyer or his consulting or legal firm. And to add onto it a contract that deals with professional services that doesn’t breach orcontravene Section 297 of Companies Act, 1956 as according to the establishmentmade in the circular No 1375 on 5th June, 1975 by the Ministry ofCorperate affairs. There has been quite a change of detectable nature in law aslong as the services which have the professional attributes showcased by anadvocate does not hinder his possibility of becoming an Independent Director bysurpassing the limit. Strength of Independent Directors:The minimum number of directors for the position of an IndependentDirector is mentioned in Section 149(4) which states that not more than 1/3 ofthe directors can enlist themselves for the role of Independent directors. Rule4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 areissued that the below mentioned category of public companies will have theprivilege of having the minimum number of 2 person as independent directors.
a) Companies which are public who have pending loans or deposits orunsecure bonds(debentures) which surfeit more that Rs. 50 Crores.b) Companies which are public in nature and have a turn over of morethan Rupees 100 Crores c) Public Companies which have funded by paying the share capital ofmore than Rs 10 Crore. Approach for Appointment:It is not a necessity for an independent director to be appointedthrough a data bank as its not its only resort for appointment, as per section150(i) which states that, “an Independent director ‘may’ be appointed from outof the data bank maintained by any association, body, institute and may benotified by Central Government”. However, this method creates its own streak ofprocedures as according to Section 152(2) the potential candidate for the roleof independent director shall first be assessed by Board of Directors toanalyse whether he is eligible enough or not after which he would have to bebacked up by the company through a general meet by ways of ordinary resolution.The second tenure of the five consecutive years shall be determined through aspecial resolution passed in a general meeting. The judgment and the point ofview of the Board of Directors is recorded in a statement which is insertedwithin the Explanatory Statement which provides reasons for the approval of thepotential candidate to be eligible enough to take on the role of theIndependent Director and whether he fulfills the conditions emphasized in theAct.
A formal letter of appointment, where such terms as per Section-IV (Appendix1) are mentioned, shall be provided to such an incumbent.Rolesand Duties of Independent Director The code in schedule IV of the Companies Act, 2013 clearly definesand elaborates the role, function, principles, and duties of an IndependentDirector thus further emphasizing on its relevant position. Several other vitalfactors can be found in this code which are varying an of diverse in nature,the few highlighted ones include protecting and identifying the opinions andrights of the shareholders, diplomatically handing any controversial orconflict oriented decisions of the stakeholders whilst maintaining the evercrucial conflict management within the company. It has the authority to examineand constructively criticize the performance of the management. As per the codean Independent Director is required to keep himself aware and informed of theactivities that occur withing the company and the ones that are practiced in the external environment but has itsinfluence on the company or maintaining the confidentiality of significant information unless its authorized notto do so by the law or the company. It is also advised for the IndependentDirector as according to the code to engage in as many ventures which have beenundertaken by the various committees of which they are a part of as eithermembers or chairperson or advancing and gaining deeper insight and knowledge inthe functioning and the duties to mainting within the company Meetingsand Committees:The Independent Directors are required to every year on one or moreoccasions are according to Companies Act, 2013.
This meeting is strictly forthe Independent Directors and the company of the non-independent directors orother such members who happen to be a part of the management wouldn’t beentertained. And Independent director has the power as per Companies Act, 2013to evaluate and judge the conduct and performance of the members of themanagement, non-independent directors and most importantly chairperson and theBoard as a whole of the company. These steps were formulated in order tomaintain more structure and result oriented mechanism within the functioning ofthe Board of Directors of the company. The Independent Director has theprivilege to be a member or chairperson in several other committees, infactthem being so is given importance and stressed upon in Companies Act, 2013 andit gives them a broader idea of the functioning of the company. For instance, the independent Directors tendsto be in majority in the foundation of the Audit committee which usuallyconsists of a minmum of three directors and identical to this are thenomination and remuneration committees. Similarly, in the stakeholder committeethere are over 1000 shareholders in the Board of Directors of a Company and mayalso include the deposit holders alongside with the debenture holders and othersecurity holders in the financial/ fiscal time period and it shall consistsstakeholder committees which is composed of the members of the board and headedby a non-executive chairperson. Payment of sitting fee or commission: As perSection 149(9), an independent Director is eligible to receive:-1.
Sitting fee for being present in the Board or the Committeemeetings, which is therefore stated in the second proviso of Section.197 (5)2. Compensation for the amount spent for appearing in the board/committee meetings3.
The Independent Director isn’t given the license or the authority tolay his hands on any of the ‘stock option’ and claim it as his own, However Theshares and commission of the profits made by the company fall under theauthority of Section 197 and Section 198, where 3% of the net profit is givenif there is the absence of the Wholetime Director, Managing Director or Manager, otherwise its just 1% of the netprofits that’s given. Section 198 also deals with estimating the net profit. Tenure of Office:Anindependent director is given the privilege to be the incumbent of his post fora period of five consecutive years which can be extend further to another setof five consecutive years, if he is appointed again with the accepted extendedapproval of the shareholders, that is through special resolution in a generalmeet and the effect of this is disclosed in the report of the Director.However, an independent director cannot remain or withhold his post for morethan two back-to-back terms of five years each. Although, after three yearslapse of his expiration of being the independent director, he can he permittedand qualified to run for the post once again. In reference to the abovementioned context, the director shall not play any (professional) part or beassociated with the company overtly or covertly in that period of 3 years asaccording to Section 149(11). The sub-sections of 149 further go into detail tomention that the time period of the Director in hand is not calculated orquantified with the motive to compute or evaluate the tenure of one or twoterms of five years, as the circumstance may be.
Resignation or Removal: -For anIndependent Director to resign it is mandatory on his part to send a letter ofresignation to the Registrars of Companies (ROCs) within a time tenure of 30days specifying with detail the reason(s) for him to resign. Although inCompany’s Act, 1956, to send the ROC3 a copy of resignationisn’t a legal requirement for an independent director. However, he must pendown the letter to the company, which shall later be assessed by the board ofdirectors before being considered, and if they approve it the prescribed returnshall be intimated and then filled with the ROC. And as soon as the independent director shallresign there will be a mention of such resignation in the Director’s report. For anIndependent Director to be removed by the Company an ordinary resolution ispassed in the general meeting where his is given sufficient resources andchances in the hearing pursuant in the Special Notice which is accepted underSection 169 of Companies Act, 2013.
This Procedures’ mechanism for sendingnotice and hearing functions infect in the same manner as it did in the earlierAct. According to Appendix I to Schedule IV if there is a vacant spot it shallbe filled within 180 days from the time of resignation of removal of itsprevious holder. 1 As available on thewebsite of BSE and NSE2 Ministry of CorporateAffairs(http://www.mca.gov.in/ministry/pdf/CommencementNotificationOfCA2013.pdf)3RegistrarsOf Companies