Independent Director

Who is an Independent director?

The Independent director is a non-executive director of a company, who helps to improve corporate governance and credibility of the company. They do not have any interest or any kind of relationship with the company. They are free from any interest in the company so that they can make better decisions without getting influenced by the company. They are appointed to ensure the company is doing work in ethical and credible ways.

Qualification of an Independent Director:

  • An independent director shall have appropriate skills, experience, and knowledge in one or more fields of finance, law, management, technical operations, sales, marketing, research, corporate governance, administration, or other related to the company’s business.
  • None of the relatives of an independent director is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors for an amount of Rs. 50 lakh, at any time during the 2 immediately preceding Financial year or during the current financial year.
  • None of the relatives of an independent director has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors for an amount of Rs. 50 lakh, at any time during the 2 immediately preceding Financial year or during the current financial year.

Which companies should have to appoint an Independent Director?

  • Every Listed Public company shall have at least 1/3rd of the total number of directors as independent directors.
  • For Unlisted public companies if they fall under the following class or classes of companies shall have at least 2 directors as independent directors:
    1. Public companies having paid-up share capital of Rs.10 crore or more; or
    2. Public companies having turnover of Rs.100 crore or more; or
    3. Public companies who have, in the aggregate, outstanding loans, debentures, and deposits, exceeding Rs.50 crore.

The company covered in this rule required to appoint a higher number of independent directors due to the composition of its audit committee.

The following class of unlisted public company shall not be covered under this rule even they are fulfilling the given criteria are as follows:

  1. Joint venture 
  2. Wholly owned subsidiary
  3. Dormant company

Tenure of Independent Director:

An independent director shall hold office for a term up to 5 years, but shall be eligible for reappointment on passing a special resolution by the company and have to give the disclosure of such an appointment in the board’s report. But he should only hold office not more than 2 Consecutive terms of 5 years only after that he is not allowed to appoint or reappoint for the next 3 years. And he is also not allowed to join the company for any other matter in anyways.

Some conditions to be followed to become an Independent Director:

To the company he wants to become independent director, It should be a director other than a Managing Director (MD) or Whole Time Director (WTD) or a nominee director-

  • A person in the opinion of the board is a person of integrity and having relevant expertise and experience.
  • A person not a promoter of the company, its holding, subsidiary, or associate company.
  • The person not related to promoters or directors of the company, its holding, subsidiary, or associate company.
  • The person has or had no monetary relationship with the company other than remuneration as such director or having transaction not exceeding 10% of his total income with the company, its holding, subsidiary or associate company during the 2 immediately preceding Financial year or during the current financial year.
  • A person none of whose relative is holding any security of or interest in the company, its holding, subsidiary or associate company during the 2 immediately preceding Financial year or during the current financial year. It can hold only in the company the security not exceeding Rs. 50 Lakh or 2% of the paid-up capital of the company, its holding, subsidiary, or associate company.
  • A person none of whose relative is indebted to the company, its holding, subsidiary or associate company or their promoters or directors more than Rs.50 lakh during the 2 immediately preceding Financial year or during the current financial year.
  • A person none of whose relative has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company for an amount of Rs. 50 lakh, at any time during the 2 immediately preceding Financial year or during the current financial year.
  • A person none of whose relative has any other monetary relationship with the company, its holding, subsidiary or associate company amounting to 2% or more of its gross sales or total income.
  • The person neither himself nor any of his relatives hold or held the position of a Key Managerial Personnel ( which is managing director, whole-time director, and managers) or is or has been an employee of the company, its holding, subsidiary or associate company in any 3 financial years immediately preceding the financial year in which he is proposed to be appointed.  But in the case of a relative who is employed, the restriction specified at this point does not apply.
  • The person neither himself nor any of his relatives is or has been an employee or proprietor or a partner, in any 3 financial years immediately preceding the financial year in which he is proposed to be appointed of a firm of the auditor, cs in practice or cost auditor of the company, its holding, subsidiary or associate company.
  • The person neither himself nor any of his relatives is or has been an employee or proprietor or a partner, in any 3 financial years immediately preceding the financial year in which he is proposed to be appointed as a legal or consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross sales of such firm.
  • The person neither himself nor any of his relatives holds together with his relative  2% or more of the total voting power of the company
  • The person neither himself nor any of his relatives is a Chief executive or director of any NPO that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company.
  • And such a person must fulfill the criteria of qualifications of the independent director which is mentioned above.

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