Independent
Directors :
Criteria
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Companies Act
1956
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Regulation 17 to 27 of SEBI LODR 2015
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Companies Act
2013
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Number of Independent Directors
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No requirement
for companies to appoint an independent director on its board. Provisions
related to independent directors were set out in Clause 49 of the Listing
Agreement ("Listing Agreement").
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As per SEBI LODR 2015, only listed entities were required
to appoint independent directors to be equal to (i) one third of the board,
where the chairman of the board is a non-executive director; or (ii) one half
of the board, where the chairman is an executive director.
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However, under CA 2013, the following
companies are required to appoint independent directors:
Public
listed company: At least one third of the board to be comprised
of independent directors; and
Certain
specified companies that meet the criteria listed below
are required to have at least 2 (two) independent directors:
1)
Public
companies which have paid
up share capital of INR 100,000,000 (Rupees one hundred million only);
2)
Public
companies which have a turnover
of 1,000,000,000 (Rupees one billion only); and
3)
Public
companies which have, in the aggregate, outstanding loans, debentures and deposits exceeding INR
500,000,000 (Rupees five hundred million only)
Qualification
criteria:
Detailed qualifications for the
appointment of an independent director on the board of a company. Some
important qualifications include:
a. he
/ she should be a person of integrity, relevant expertise and experience;
b.he
/ she is not or was not a promoter of, or related to the promoter or director
of the company or its holding, subsidiary or associate company;
c. he
/ she has or had no pecuniary relationship with the company, its holding,
subsidiary or associate company, or their promoters, or directors during the
2 (two) immediately preceding financial years or during the current financial
year;
d.
a person, none of whose relatives have
or had pecuniary relationship or transaction with the company, its holding,
subsidiary or associate company.
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Maximum Limit of Directorship
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Companies Act 1956 permitted a company
to determine the maximum number of directors on its board by way of its
articles of association. Companies Act 1956 required public companies to
obtain Central Government's approval for increasing the number of its
directors above the limit prescribed in its articles or if such increase
would lead to the total number of directors on the board exceeding 12
(twelve) directors.
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A person shall not serve as
an independent director in more than 7 listed companies. Further, any person
who is serving as a whole time director in any listed company, shall serve as
an independent director in not more than 3 listed companies.
SEBI LODR also provides the maximum limit of 7 listed companies, while the
Companies Act, 2013 provides the maximum limit of 10 public companies.
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According
to Section 165(1) of the Act, no person, after the commencement of this Act,
(i.e. w. e. f. 01st April, 2014) shall hold office as a director, including
any alternate directorship, in more than 20 companies at the same time.
Provided
that the maximum number of public companies in which a person can be
appointed as a director shall not exceed 10.
The
Companies Act, 2013 does not provide any separate limit on the number of
persons in which a person can be appointed as Independent Director but the
general limit provided in Section 165(1) of the act shall be applicable in
case of Independent Director also
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Retire by rotation
The
Independent Directors under Companies Act, 2013 will not be liable to retire by
rotation nor will their strength be considered for determining the total number
of director liable to retire by rotation.
Maximum
tenure of Independent Directors
Reg 17 to 27 of SEBI LODR 2015: An independent director shall hold
office, for a term up to five consecutive years, on the Board of a company and
shall be eligible for reappointment for another term of up to five consecutive
years on passing of a special resolution by the company.
Provided
that a person who has already served as an independent director for five years
or more in a company as on October 1, 2014 shall be eligible for appointment,
on completion of his present term, for one more term of up to five years only.
Provided
further that an independent director, who completes his above mentioned term,
shall be eligible for appointment as independent director in the company only
after the expiration of three years of ceasing to be an independent director in
the company
Companies Act, 2013: An
independent director shall hold office for a term up to five consecutive years
on the Board of a company, but shall be eligible for reappointment on passing
of a special resolution by the company and disclosure of such appointment in
the Board's report.
Notwithstanding
anything to above, no independent director shall hold office for more than two
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.
Manner of Appointment
SEBI LODR 2015 prescribes the manner of appointment of
Independent Director in the manner prescribed under Companies Act, 2013. The letter of appointment
along with the detailed profile of independent director shall be disclosed on the
websites of the company and the Stock Exchanges not later than one working day
from the date of such appointment. While under Companies Act, 2013 the terms
and conditions of appointment of independent directors shall also be posted on
the company’s website.
Performance
Evaluation of Independent Directors
SEBI LODR 2015: The provisions in respect of the
performance evaluation of Independent Directors are as follows:
1.
The
Nomination Committee shall lay down the evaluation criteria for performance
evaluation of independent directors.
2.
The
company shall disclose the criteria for performance evaluation, as laid down by
the Nomination Committee, in its Annual Report.
3.
The
performance evaluation of independent directors shall be done by the entire
Board of Directors (excluding the director being evaluated).
4.
On the
basis of the report of performance evaluation, it shall be determined whether
to extend or continue the term of appointment of the independent director.
Companies Act, 2013: According
to Section 149(8) of the Act, the company and independent directors shall abide
by the provisions specified in Schedule IV. According to Schedule IV of the
Act, the performance evaluation of independent directors shall be done by the
entire Board of Directors, excluding the director being evaluated. On the basis
of the report of performance evaluation, it shall be determined whether to
extend or continue the term of appointment of the independent director.
The Nomination Committee shall lay
down the evaluation criteria for performance evaluation of independent
directors. The company shall disclose the criteria for performance evaluation,
as laid down by the Nomination Committee, in its Annual Report. While under
Companies Act, 2013 the Nomination and Remuneration Committee shall identify
persons who are qualified to become directors and who may be appointed in
senior management in accordance with the criteria laid down, recommend to the
Board their appointment and removal and shall carry out evaluation of every
director’s performance.
Separate
Meeting of Independent Directors
SEBI LODR 2015, the
provisions of the separate meeting of Independent Directors are as follows:
a)
The
independent directors of the company shall hold at least one meeting in a year,
without the attendance of non-independent directors and members of management.
All the independent directors of the company shall strive to be present at such
meeting.
b)
The
independent directors in the meeting shall, inter-alia:
i.
review
the performance of non-independent directors and the Board as a whole;
ii.
review
the performance of the Chairperson of the company, taking into account the
views of executive directors and non-executive directors;
iii.
assess
the quality, quantity and timeliness of flow of information between the company
management and the Board, that is necessary for the Board to effectively and
reasonably perform their duties.
Companies Act, 2013:
Schedule IV of the Companies Act, 2013 also contains same provisions of
separate meeting of Independent Directors. The Independent Director is entitled
for sitting fees, reimbursement of expenses for participation in the Board and
other meetings and profit related commission as may be approved by the members.
Rule 4 of The Companies (Appointment and Remuneration of Managerial Personnel)
Rules, 2014 prescribes the maximum sitting fees of Rs. 1 lakh per meeting to
the Independent Director for attending any Board meeting.
Training
of Independent Directors
SEBI LODR 2015 also contains the
provisions relating to training of Independent Directors.
a)
The
company shall provide suitable training to independent directors to familiarize
them with the company, their roles, rights, responsibilities in the company,
nature of the industry in which the company operates, business model of the
company, etc.
b)
The
details of such training imparted shall be disclosed in the Annual Report
Companies Act, 2013: The
Companies Act, 2013 does not contain such provisions. Schedule IV of the
Companies Act, 2013 prescribes the guidelines of professional conduct, roles
and functions and duties of the independent directors. According to sub section
8 of Section 149, the company and independent directors shall abide by the
provisions specified in Schedule IV.
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Remuneration
of Independent Directors
The Nomination
and Remuneration Committee is the exclusive authority to recommend to the Board
a policy, relating to remuneration to directors. All
fees/compensation, if any paid to non-executive directors, including
independent directors, shall be fixed by the Board of Directors and shall
require previous approval of shareholders in general meeting. The requirement
of obtaining prior approval of shareholders in general meeting shall not apply
to payment of sitting fees to non-executive directors, if made within the
limits prescribed under the Companies Act, 2013 for payment of sitting fees
(maximum prescribed amount is Rs. 1 lakh per meeting) without approval of the
Central Government. The Independent Directors shall not be entitled for any
stock option.
Companies Act, 2013: The
Nomination and Remuneration Committee is the exclusive authority to recommend
to the Board a policy, relating to remuneration to directors. According to
Section 197(4) of the Act, the remuneration payable to the directors of a
company, including any managing or whole-time director or manager, shall be
determined, in accordance with and subject to the provisions of this section,
either by the articles of the company, or by a resolution or, if the articles
so require, by a special resolution, passed by the company in general meeting
and the remuneration payable to a director determined aforesaid shall be
inclusive of the remuneration payable to him for the services rendered by him
in any other capacity. A director may receive remuneration by way of fee for
attending meetings of the Board or Committee thereof or for any other purpose
whatsoever as may be decided by the Board (Maximum prescribed amount is Rs.
1lakh per meeting). The Independent Directors shall not be entitled for any
stock option.
Resignation
or Removal of Independent Directors
SEBI LODR 2015 does not prescribe the manner
of resignation/removal of independent directors. It only provides that an
independent director who resigns or is removed from the Board of the Company
shall be replaced by a new independent director at the earliest but not later
than the immediate next Board meeting or three months from the date of such
vacancy, whichever is later. Where the company fulfils the requirement of
independent directors in its Board even without filling the vacancy created by
such resignation or removal, as the case may be, the requirement of replacement
by a new independent director shall not apply. The Board of the company shall
satisfy itself that plans are in place for orderly succession for appointments
to the Board and to senior management.
The Companies Act, 2013:
Section 168 and 169 of the Act prescribes the manner of resignation and removal
of directors, including Independent Directors. Further, Schedule IV of the Act
prescribes that an independent director who resigns or is removed from the
Board of the company shall be replaced by a new independent director within a
period of not more than one hundred and eighty days from the date of such
resignation or removal, as the case may be. Where the company fulfils the
requirement of independent directors in its Board even without filling the
vacancy created by such resignation or removal, as the case may be, the
requirement of replacement by a new independent director shall not apply.
For more details, contact CS Neha Seth at csnehaseth@gmail.com or call us at 9871903449
