Procedure for Appointment of Independent Director
Procedure for Appointment of Independent Director
According to the Companies Act 2013, an independent director is a non-executive director of the specified company. He or she will not have any financial ties with the company, which allows them to be impartial and carry out objective decision-making. They aren’t involved in the day-to-day operations and management of the company like other directors. The procedure to appoint an independent director involves board nomination and shareholder approval. In this article, you can learn about the independent directors and the procedure for appointment of independent director as outlined in the Companies Act 2013.
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The Companies Act 2013 mandates certain firms to appoint independent directors. Independent directors are non-executive experts who provide objective oversight, enhancing transparency and accountability. They are chosen for their integrity and industry experience, completely independent of the company’s management or founders. Strict regulations ensure their independence: no significant financial ties to the company or its associates within the past two years and no recent employment with the company or its affiliates. Their professional network is also evaluated to avoid conflicts. Ultimately, these independent directors bring valuable expertise to the board, safeguarding stakeholder interests through responsible decision-making.
Criteria for Independent Director, Companies Act 2013
Following criteria required to be a independent director under Companies Act 2013.
- Active DIN (Director Identification Number): The individual must possess a valid and active DIN to be appointed (Section 152(3)).
- Disqualification: Anyone disqualified under Section 164 for being a company director cannot be appointed as an independent director (Section 164).
- Schedule IV Compliance: Both the company and the independent director must adhere to the regulations outlined in Schedule IV of the Act.
- Director Limit: The total number of directorships held by the independent director cannot exceed the maximum limit specified in Section 165(1).
- Data Bank Selection: Listed companies can choose independent directors from a databank maintained by a government-authorized body (Section 150).
- Shareholder Approval: Appointment of an independent director in a listed entity requires shareholder approval through a special resolution (SEBI Regulations).
- Information for Shareholders: Upon appointment, the company must provide shareholders with specific details about the independent director, including:
- Director’s Resume: A brief professional background highlighting their expertise.
- Director Relationships: Information on relationships between the independent director and other company directors.
- Board Positions: Details on current and past (within 3 years) directorships and board committee memberships held in other listed entities.
- Shareholding: Non-executive director shareholding details in the listed entity, including any beneficial ownership.
- Skills & Match (Independent Directors): For independent directors, the details should explain the skills and capabilities required for the role and how the proposed candidate meets those requirements (SEBI Regulations).
Roles and Functions of Independent Director, Companies Act 2013
Below, we have given the roles and functions carried out by the independent director in a company.
- Independent Judgment: Bringing an objective perspective to board discussions, particularly on critical issues like strategy, performance, risk management, resource allocation, key appointments, and ethical conduct.
- Performance Evaluation: Providing an unbiased assessment of the board’s and management’s performance.
- Monitoring & Scrutiny: Oversee management’s execution of agreed-upon goals and objectives and monitor performance reporting.
- Financial Oversight: Ensuring the integrity of financial information, the robustness of financial controls, and the effectiveness of risk management systems.
- Stakeholder Advocacy: Safeguarding the interests of all stakeholders, with a specific focus on protecting minority shareholders.
- Balancing Interests: Identifying and mediating conflicting interests among various stakeholders for the company’s overall benefit.
- Compensation & Appointments: Playing a lead role in determining appropriate compensation for executives and senior management and participating in key appointments and removals of these personnel.
- Conflict Resolution: Acting as a neutral party to moderate and resolve conflict between management and shareholder interests.
Companies Mandated to Appoint Independent Directors
The Companies Act 2013 mandates that certain companies appoint independent directors in India.
Listed Public Companies:
- All listed public companies, regardless of size or financial performance, must have at least one-third of their directors as independent directors.
Unlisted Public Companies:
- Specific unlisted public companies must have at least two independent directors on their boards. These companies are identified by meeting at least one of the following criteria:
- Possess a paid-up share capital exceeding Rs. 10 crore.
- More than Rs. 100 crore of annual turnover
- Maintain an aggregate outstanding amount of loans, debentures, and deposits exceeding Rs. 50 crore.
Step-by-Step Procedure to Appoint an Independent Director for a Company
Follow this step by step process to appoint a independent director for a company.
Step 1: Get Written Consent and Declaration from Independent Director
- To comply with the Companies Act, 2013 (Section 149(6) & (7)) and relevant regulations (Companies (Appointment and Qualification of Director) Rules, 2014, Rule 5 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015), confirm that the proposed independent director meets all legal requirements.
- Obtain written documents from the candidate:
- Form DIR-2: Written consent to serve as a director.
- Form DIR-8: Declaration confirming they are not disqualified under the Act.
- Declaration of Independence: Written confirmation that they meet the criteria for an independent director (as per SEBI (LODR) Regulations).
- Form MBP-1: Notice of interest by the independent director
Step 2: Nomination and Remuneration Committee (NRC)
For companies mandated to establish a Nomination and Remuneration Committee (NRC) under Section 178 of the Companies Act, 2013, the committee shall first recommend the appointment of an ID to the Board of Directors before seeking their approval.
Step 3: Conduct Board Meeting to get Approval from members
- Notice & Agenda: Issue a formal notice to all board directors at least seven days in advance (shorter notice possible with justification) outlining the agenda for the meeting. The agenda should include a proposal for the appointment of the independent director, subject to shareholder approval.
- Discussion & Decisions: During the board meeting, directors will:
- Discuss the proposed appointment and the candidate’s qualifications.
- Determine the term of the appointment, which cannot exceed five years.
- Review and document the disclosure of interest submitted by the independent director to ensure transparency and avoid conflicts.
- Authorize the Company Secretary (CS), Chief Financial Officer (CFO), or any other designated director to file the required forms or documents with the Registrar of Companies (ROC).
- Schedule a date and time for a general meeting to obtain shareholder approval for the appointment.
Step 4: Get Approval from Shareholders in a General Meeting
- Within 30 days of the board meeting, convene a general meeting of shareholders. At this meeting, shareholders will vote on a special resolution to approve the independent director’s appointment formally. (Refer to Regulation 25(2A) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, for specific details on special resolutions.)
- Following the successful shareholder vote, the company must file the necessary form (DIR-12) with the Registrar of Companies (ROC). This form serves as an official record of the appointment with the government. Ensure all required documents and the prescribed fees are included with the filing.
Step 5: Disclose about the appointment of director after the meeting
- Stock Exchange Notification: Within 24 hours of concluding the board meeting, the company must submit a disclosure regarding the independent director’s appointment to the stock exchange where their shares are listed.
- Company Website Updates: Transparency extends to the company website as well. The details of both meetings, including the proceedings (what happened) and the voting results, must be posted within two days of their conclusion.
- SEBI-Mandated Voting Results Format: The voting results for the appointment must be submitted to the stock exchange in a specific format established by the Securities and Exchange Board of India (SEBI) in two working days of the general meeting.
Step 6: Issuance of Appointment letter
An appointment letter is issued to the newly-appointed independent director outlining the terms of appointment, responsibilities, remuneration, etc.
Step 7: Disclosure in Form-B
Within seven days of appointing a new independent director, a listed company must collect a disclosure form (Form B) from them, which is related to insider trading.
Step 8: Statutory Register
As required by law, two registers need to be maintained. The first register contains details of directors and Key Managerial Personnel (KMP). The second register, in Form MBP-4, records any contracts or agreements in which directors have a specific interest.
How long does an independent director remain in his position?
An independent director’s term in India is governed by the Companies Act 2013.
- Initial Term: An independent director can be appointed for five consecutive years.
- Re-appointment: After the initial term, they can be re-appointed for another five consecutive years, but only through a special resolution passed by the company’s shareholders in a general meeting.
- Term Limit: Importantly, an independent director cannot hold office for more than two consecutive terms. This means the maximum total tenure is 10 years (two terms of five years each).
Conclusion
The Companies Act 2013 mandates the appointment of independent directors in certain companies to ensure objective considerations and enhance corporate governance. This article explained the criteria for independent directors, the step-by-step appointment process, and their term limits. By following these guidelines, companies can appoint qualified and independent individuals to contribute valuable expertise and protect stakeholder interests.
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