A refresher on independent director – Eshwars
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A refresher on independent director

[The article was authored by Ms. Srividhya & Ms. Nagalakshmi]

A well – informed board is a key to the success of any organisation. This is achieved with a correct combination of skill, talent, and experience. This is where the independent directors play a vital role in the success of the organisation by sharing their experience and knowledge.

HOW AND WHEN DID THE CONCEPT OF INDEPENDENT DIRECTOR EVOLVE:

The evolution of the concept of Independent Directors can be traced back to 1998, when the Confederation of Indian Industry (CII), under the chairmanship of Mr. Rahul Bajaj framed a task force to design a voluntary corporate governance code, viz., “Desirable Corporate Governance Code”, which highlighted the importance of having independent director on the Board of the company, and over the period of years was discussed by various committees and which resulted in subsequent amendments to Companies Act and listing regulations.

WHO IS AN INDEPENDENT DIRECTOR?

The report of Kumar Mangalam Birla Committee on Corporate Governance agreed that the “material pecuniary relationship which affects independence of a director” should be the litmus test for independence.

In the Companies Act, 2013, the concept of materiality has got codified to exclude remuneration that the independent director receives from the company and his business transactions with the company that is upto 10% of his income. Also, the materiality concept is not limited to the company, but extends to the company’s promoters, its subsidiaries, associate companies or holding company.

PERMISSIBLE REMUNERATION & LIABILITY

  • i. Remuneration –
    • – sitting fees – upto Rs.1 Lakh per meeting for attending the board and committee meetings.
    • – commission – upto 1% of the net profits of the company.
    • – The Board may take Directors and Officers Insurance for all the independent directors of such quantum of risks as may be determined by the Board of Directors

    It is pertinent to note that a person can be a director / independent director of upto ten public companies and in upto 8 listed companies.

  • ii. Liability
      An Independent Director shall be held liable only in respect of such actions of the company which had occurred:

    • a. with his knowledge;
    • b. attributable through processes of board of directors;
    • c. with his consent or connivance;
    • d. where he has not acted diligently

OBLIGATIONS OF INDEPENDENT DIRECTOR:

Responsibility walks hand in hand with capacity and power. Certain obligations on being an independent director are;

  • – The independent directors are to hold a meeting amongst themselves at-least once each year, where they meet without the presence of other directors; they are required to review the performance of non-independent directors and board as a whole including chairperson of the company;
  • – Assess the quality, quantity and timeliness of flow of information between the management and the board for effective performance of the Board;

Adhere to the code of conduct, laid down by the board.

The statute lays emphasis that an independent director should be a person who possesses adequate amount of skills and knowledge and expertise related to the company’s business. Recent amendment to the Companies Act (which shall come into force with effect from 1st December 2019), is a step to ensure that an independent director is a person of requisite knowledge and skill. Brief on how an independent director has to register his name in the data bank to act as an independent director is given below.

S.No PARTICULARS TIME PERIOD COMPLIANCE REQUIRED
1 Authority to conduct the exam The Indian Institute of Corporate Affairs (“IICA”) at Manesar is designated to maintain databank of Independent Directors and conduct online proficiency examination.
2 Application by existing independent directors On or Before 28th February 2020 Make an application to IICA for inclusion of name in databank
3 Application by a person who intends to get appointed as independent director Before Appointment Make an application to IICA for inclusion of name in databank
4 Application for inclusion of name and time period At the option of the applicant One year
Five years
Life time
5 Online Proficiency Exam Within 1 year from inclusion of name in the databank. Pass an online proficiency exam conducted by IICA.
6 Pass Criteria 60 % or above
7 Number of attempts Within the period of one year from the date of inclusion of name in the databank There is no limit on the number of attempts.
8 Syllabus for the test Company Law, securities law, basic accountancy, and such other areas relevant to the functioning as independent director.
9 Consequence of not clearing the exam Name shall be removed from the databank and he cannot continue as an Independent Director.
10 Esemption from exam Any individual who has experience of 10 years or more as a Director or Key Managerial Personnel in a listed company or in an unlisted company which has paid capital of 10 crores or more.
Note: Such individual shall take steps for inclusion of his or her name in the databank.
11 Change in particulars of Directors Within 30 days of change in particulars Make changes through web-based framework.
12 Renewal of Application Within 30 days from expiry of original period of application Renewal can be made for further period one year, five years or life-time at the option of the director
13 Consequence of Non-renewal Name shall be removed from the databank and an individual cannot continue as an Independent Director.

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