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Appointment of Independent Director

Who is an “Independent Director”?

An independent director means a director other than a managing director or a whole-time director or a nominee director who does not have any material or pecuniary relationship with the company/ directors. Section 149(6) of the Act prescribes the criteria for independent directors which are as follows:

(a) Who in the opinion of the Board, is a person of integrity and possesses relevant industrial expertise and experience;

(b) Such individual shall not be a promoter or related to a promoter of the company or its holding, subsidiary or associate company;

(c) Such individuals must not have any material or pecuniary relationship during the two immediately preceding financial years or during the current financial year with the company or its promoters/directors/holding/subsidiary/ associate company;

Declaration by an Independent Director

Section 149 (7) of the Act states that every Independent Director shall give a declaration that he is eligible to meet the criteria of independence when:

  1. He attends the first Board Meeting as a director;
  2. thereafter at the first meeting of the Board in every financial year and
  3. whenever there is any change in the circumstances which may affect his status as an independent director.

Code of Conduct for an Independent Director and Company

Code of Code for an Independent Director and Company is covered under Section 149 (8) of the Act. It is expected by all the independent directors to comply with the code of conduct as it is a professional guide for Independent Director’s Code of Conduct. The code of conduct is something that will definitely promote confidence of the investment community. Code of Conduct is nothing but a guide containing some necessary guidelines, role and functions, duties to be performed, manner of appointment, reappointment, resignation or removal, separate meeting, evaluation mechanism etc.

Remuneration of an Independent Director

The Independent Directors shall not be entitled to any stock option as prescribed under Section 149 (9) of the Act. However this does not mean that the remuneration shall remain NIL. It is said under Section 197(5) of the Act, that an Independent Director may receive remuneration in the form of sitting fees or reimbursement of expense incurred for participation in the Board and other committee meetings and profit related commission as may be approved by the members.

Appointment of an Independent Director

Directors being an Independent Director can be appointed for a term of up to 5 Consecutive Years on the Board. Talking about reappointment, it can also be for a further period of 5 years for which a special resolution in the general meeting needs to be passed along with a disclosure of the appointment to be made in the Board Report.

It must be noted that the director being reappointed for an independent Director must be considered appropriate only after the expiration of three years of ceasing to become an independent director. Also, it must be checked before itself that the independent director who is reappointed must not be appointed or associated with the company directly or indirectly in any other capacity during the said period of three years.

Another necessary compliance includes the explanatory statement relating to the appointment of director filed must contain a declaration from the Board that in their opinion, the independent director satisfy all the conditions provided in the Act.

Liability of an Independent Director

An Independent Director shall be liable only in the case of such acts or omission or commission by a company which is known by the director and attributable through Board processes and with his consent or connivance or where he had not acted diligently.

Manner of selection of an Independent Director

Section 150 (1) of the Act, prescribes the manner of selection of an Independent Director. Under this section, Independent Director (ID) may be selected from a data bank of eligible and willing individuals maintained by the agency. Such agency displayed the data bank of Independent Directors on the website of MCA. The company must be fully insured and exercise due diligence before choosing an appropriate Independent Director of a Company.

Also, one must not forget that, the appointment of independent director has to be approved by the members of the company in general meeting and also an explanatory statement annexed to the notice must indicate justification of appointment.

In the data bank displayed on the Ministry of Corporate Affairs (MCA), the detailed information is given of all the information directors like:-

  1. DIN (Director Identification Number);
  2. Name and surname in full;
  3. Income-tax PAN ;
  4. Father’s/Mother;s/ Spouse’s name( if married) ;
  5. Date of Birth;
  6. Gender;
  7. Nationality;
  8. Occupation;
  9. Full Address with PIN Code (present and permanent)
  10. Phone number;
  11. E-mail id;
  12. Educational and professional qualifications;
  13. Experience / expertise, if any;
  14. Any legal proceedings initiated or pending against such person;
  15. List of limited liability partnerships in which he is or was a designated partner along with Name of the LLP, Nature of Industry; and Duration- with dates;
  16. List of companies in which he is or was director along with Name of the company; Nature of industry; Nature of directorship – Executive / Non-executive / Independent / Nominee Director; and Duration – with dates.

A disclaimer shall every time be displayed on the portal informing and warning the company before appointment any person as an independent director. Also, it there shall be mentioned that agency shall not be held responsible for accuracy of information or lack of suitability of the person whose particulars from part of the databank.

Where any director feels to give his or her name in the data bank then, he/she shall have to file an application in Form DIR-1 which is relating to “Application for inclusion of name in the databank of Independent Director. For the same, the agency may charge a nominal fee. If any of the existing applicant wants to make any changes in the details already registered on the data bank then, he or she shall intimate the same within fifteen days to the agency.

Rule 6 (7) prescribes some standards for maintaining the data bank. The standards are as follows:-

  1. The databank displayed on the website must be accessible at the specified websites;
  2. It must be substantially identical to the physical version of the data bank;
  3. be searchable on the parameters specified in rule 6 (2);
  4. be presented in a format or formats convenient for both printing and viewing online; and
  5. contain a link to obtain the software required to view / print the particulars free of charge.
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