Independent Director – Companies Act 2013
An independent director is a non-executive director who does not have any kind of relationship with the company that may affect the independence of his/her judgment. An independent director should not have been a partner or executive director of the auditors/lawyers/consultants of the company in preceding three years or should not hold 2% or more of shares of the company. In this article, we look at the process for appointment of an independent director in a company.
Requirement for Independent Director
As per the Companies Act 2013, all listed public limited companies are mandatorily required to have at least one-third of the total number of directors as an independent directors. Unlisted public companies should appoint at least two independent directors in the following situations:
- If the paid up share capital is in excess of Rs.10 crores;
- If the turnover is in excess of Rs.100 crores;
- If the total of all the outstanding loans, debentures and deposits is in excess of Rs.50 crores.
Duties of an Independent Directors
The guidelines, role, functions and duties of an Independent Director is defined in the Code of conduct under Schedule IV related to the Companies Act, 2013. The key role and functions of an Independent Director as listed under Schedule IV of the Companies Act, 2013 are described as follows:
- Aid in bringing an independent judgment to bear on the Board’s deliberations particularly on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;
- Enable an objective view in the evaluation of the performance related to board and management;
- Examine the performance of management in meeting the decided goals and objectives and examine the reporting of performance;
- Satisfy themselves on the reliability of financial information and that financial controls and the systems of risk management are considered robust and defensible;
- Protect the interests of all stakeholders, mainly the minority shareholders;
- Balance the conflict of interest of the stakeholders;
- Decide suitable levels of remuneration of executive directors, key managerial personnel and senior management and have a major role in appointing and where essential recommend removal of executive directors, important managerial personnel and senior management;
- Moderate and adjudicate in the interest of the company as a whole, in the situations of conflict between the management as well as shareholder’s interest.
Qualities of Independent Director
An independent director should preferably possess appropriate skills, experience and knowledge in one or more domains of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines that are related to the company’s business. Generally one who wishes to qualify as an Independent Director has to possess the following qualities:
- Decision- making (judgment)
- Professional repute
Appointment of Independent Director
While selecting an independent director, the board of directors must ensure that there is an appropriate balance of skills, experience, and knowledge in the Board so as to enable the Board to discharge its functions and duties effectively. The appointment of an independent director of the company must be approved at the meeting of shareholders.
Letter of Appointment
The selection of independent directors would be formalized by a letter of appointment. The components of a letter of appointment is as follows:
- The term of appointment.
- The anticipation of the Board from which the appointed director. The board level committee in which the director is expected to serve his/her tasks.
- Directors and Officers insurance.
- The code of Occupational Ethics that the company expects from its directors and employee to follow.
- Enumerated actions that a director should follow while working in a company
- The remuneration, mentioning the periodic fee, compensation of expenses for contribution in the Boards and other meetings and profit related commission.
The terms and conditions of selection of independent directors should be open for inspection at the registered office of the company by any member during normal business hours. The terms & conditions of appointment of independent directors should also be posted on the company’s website.
The independent directors are subject to their performance evaluation by other directors. Their re-appointment would be considered based on their performance appraisal report.
Resignation or Removal
The independent director could resign or could be removed just like any other director. Upon resignation or removal, the vacancy is to be filled in by the Board within a period of 180 days from the date of either resignation or removal. The vacancy caused by resignation or removal is different from intermittent vacancy. In case of an intermittent vacancy, it must be occupied by the Board of Directors within a maximum period of 3 months or at the next Board meeting, whichever is earlier.
Independent Director Data Bank
The Companies Appointment and Qualification of Directors Rules 2014 has authorised for anybody or institute or association, authorised by the Central Government to set up and maintain a data bank of Independent Directors who are willing and eligible to be appointed as an independent director. The databank is created, and the Independent Directors can register themselves in https://www.independentdirectorsdatabank.in/. This data bank was created by MCA along with Indian Institute of Corporate Affairs (IICA) in accordance with the provisions of Section 150 of the Companies Act, 2013.
The relevant notification from MCA can be accessed below:Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019
Objectives of Independent Director Data Bank
- Developing a databank of Independent directors by empanelling the existing Independent Directors as well as the professionals aspiring to become independent directors.
- Providing a platform to individuals to help them to acquire knowledge, assess their understanding, develop new skills, and apply best practices.
- Building capacities of Individuals by providing online learning courses on topics related to corporate governance, regulatory framework, financial prudence, and other important aspects.
- Creating an eco-system of individuals looking for opportunities and corporate requiring to appoint independent directors.
Information of Independent Directors
Accordingly, the independent director data bank contains the below information:
- DIN (Director Identification Number)
- Name and surname in full
- Father’s name
- Date of Birth
- Full Address with PIN code (present and permanent)
- Phone number
- E-mail id
- Educational and professional qualifications
- Experience or expertise, if any
- Legal proceedings initiated or pending against such person
- List of limited liability partnerships in which he is or was a designated partner along with:
- Name of the limited liability partnership (LLP)
- Nature of industry; and
- Duration of appointment as Partner with dates
- List of companies in which he is or was director along with:
- Name of the company
- Nature of industry
- Nature of directorship – Executive or Non-executive or Managing Director or Independent Director or Nominee Director;
- Duration of appointment as Director with dates;
While using the data bank, the company must carry out its due diligence before appointing any person as an independent director as the agency maintaining the databank or the Central Government cannot be held responsible for the accuracy of the information or lack of suitability of the person – whose particulars form part of the databank.
Empanelling of Independent Directors
As per the notifications, the Ministry of Corporate Affairs and Indian Institute of Corporate Affairs (IICA) have introduced a comprehensive online databank for all existing and aspiring Independent Directors. This databank draws its origin from Companies (Appointment and Qualification) Rules, 2019. As per the rules, all existing Independent Directors need to empanel with this databank within 3 months of commencement of these rules. The empanelling of Independent Directors in the MCA portal can be done from 2nd December 2019. The companies can also access the databank after registration for researching and appointing directors to their companies. There are 3 basic steps to be followed, as mentioned below:
Step-1: Access MCA portal
Individuals who wish to empanel with the Independent Director’s Databanks has to start the empanelment process by accessing the website of MCA, www.mca.gov.in. Existing directors can access through their DIN; other professionals can access through PAN or Passport. Foreign nationals without DIN/PAN can also visit MCA21 and empanel with the databank through their Passport Number and by providing basic contact information, such as email, mobile number, etc.
- On verification by MCA21 portal, the user will be automatically redirected to the Independent Director’s Databank. The user can log in to the databank by using the credentials sent to the registered email.
- The MCA21 data will be auto-populated in the ‘Profile’ page of the databank. The user had to fill the details of personal, professional, and educational. Also, need to mention the KMP positions held by the independent director.
- The director can opt to display the personal details on the databank.
Step-3: Choose Subscription Plan
- The user can choose the subscription plan of their choice. There are three different subscription plans available – 1 Year, 5 Years, and Lifetime. The fee for 1 Year plan is Rs. 5,000 + 18% GST. The fee plan for 5 Years and Life Time will be notified later.
- Once the plan is selected, the user will be directed to payment gateway where the payment can be made through online banking, debit/credit card, payment apps, etc.
- An invoice will be issued once the payment process is complete.
Similarly, companies can be empanelled for selecting resources. The fee structure for companies will be notified later.
Services of Independent Director Data Bank
Once the individual registered with the data bank, the following services can be availed:
- Online Courses
- Corporate Access to Data Bank
The online courses aim to refresh the basic knowledge base and enhance the efficiency of Non-Executive Directors. Participants will be trained more focused in their pursuit of knowledge. Through online courses, the MCA trying to build an effective company board by providing awareness of corporate governance. Courses are divided into 2 categories – Board Essentials Courses and Board Practice Courses.
- Every individual who is included in the databank should undergo an Online Proficiency Self-Assessment test which will be conducted by IICA. The individual should clear the assessment within one year from the date of inclusion of his name in the databank. If the director failed in the assessment, the name of the director shall be removed from this databank.
- If an individual served as director for a minimum of ten years as on the date of inclusion of name in the databank as director or key managerial personnel (KMP) in a listed or an unlisted public company with a paid-up share capital of Rs.10 crore or more shall not be required to pass the online proficiency self-assessment test:
- The purpose of calculation of the period of ten years referred to in the first proviso, a period during which an individual was acting as a director or as a KMP in two or more companies at the same time period shall be counted only once.
- An individual has to score a minimum of 60% in the online proficiency self-assessment test to declare as PASS.
- There is no limit for the number of attempts to clear the online proficiency self-assessment test.
Corporate Access to Data Bank
The databank of independent directors contains names, addresses, and qualifications of persons who are eligible and willing to act as Independent Directors. This Databank aims to provide single-point access to the companies to search Independent Directors as per their needs.
The companies can download the profiles of Independent Directors by the below steps:
- Viewing the Summarised profiles
- Add Shortlisted profile to the cart
- Click checkout option
- Paying the fee through payment gateway
- Detailed profile of Independent Directors can be downloaded
However, as per the latest notification on 28th February 2020, the directors does not need to undergo proficient self-assessment test for directors who serve a minimum of 10 years as on the date of inclusion in the database for a listed public company or unlisted company with a paid-up capital of minimum of ten crore or the corporate body listed in any of the stock exchange in India. The relevant notification can be accessed below:Independent-Director-Notification