Concept of Independent Director under Companies Act, 2013

Provisions under which Independent Directors (ID’s) are covered

Section 149 of

Companies Act, 2013

Schedule IV of

Companies Act, 2013

Companies (Appointmen

t & Qualification) Rules, 2014

Clause 49 of Listing

Agreement

Who are Independent Directors?

As per section 149 of Companies Act and revised clause 49 of Listing Agreement Independent Director in relation to a company, means a director other than

• a managing director or

• a whole-time director or

• a nominee director

Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and Experience

Who is or was not a promoter or related to promoters or directors of the Company:-

• Company or its holding,

• Subsidiary or

• Associate company;

Who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the 2 immediately preceding financial years or during the current financial year

Who are Independent Directors? (contd)

None of whose relatives has or had pecuniary relationship *or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower during the two immediately preceding financial years or during the current financial year; (As per section 149 of Companies Act, 2013)

• Meaning of pecuniary relationship:- As per MCA circular No 14/2014 dated June 9, 2014

• receipt of remuneration, from one or more companies, by way of fee provided under sub-section(5) of section 197 and reimbursement of expenses for participation in the Board and othermeetings and profit related commission approved by the members, in accordance with theprovision of the Act will not be said to have pecuniary relationship u/s 149(6) (c)

• Any transaction in view of the provisions of section 188 by an ID in the ordinary course ofbusiness at arm’s length price will not be said to have pecuniary relationship u/s 149(6) (c)

As per SEBI Circular No. CIR/CFD/POLICY CELL/7/2014 dated September 15 , 2014 the followingclause was substituted :- apart from receiving director's remuneration, has or had no materialpecuniary relationship with the company, its holding, subsidiary or associate company, or theirpromoters, or directors, during the two immediately preceding financial years or during the currentfinancial year. (material pecuniary relationship has not been defined)

Who are Independent Directors? (contd)

• holds or has held the position of a key managerial personnel or is or has beenemployee of the company or its holding, subsidiary or associate company in any ofthe three financial years immediately preceding the financial year in which he isproposed to be appointed

• is or has been an employee or proprietor or a partner, in any of the three financialyears immediately preceding the financial year in which he is proposed to beappointed, of —

• a) a firm of auditors or company secretaries in practice or cost auditors of thecompany or its holding, subsidiary or associate company

• b)any legal or a consulting firm that has or had any transaction with the company, itsholding, subsidiary or associate company amounting to ten per cent or more of thegross turnover of such firm

• Holds together with his relatives 2% or more of the total voting power of the company

• Is a Chief Executive or director, by whatever name called, of any non-profitorganisation that receives twenty-five per cent or more of its receipts from thecompany, any of its promoters, directors or its holding, subsidiary or associatecompany or that holds 2%or more of the total voting power of the company

• is a material supplier, service provider or customer or a lessor or lessee of thecompany (As per Revised Clause 49)

Who, neither himself nor any of his relatives—

Who are required to appoint Independent Director (ID)?

Every listed Company shall have (As per Companies Act and RC 49

of listing agreement)

•At least 1/3rd of the total no. of directors as Independent

Unlisted Public Company (As per Companies Act)

•Having a:-

• paid up share capital of Rs.10 cror more

•Turnover of Rs. 100 cr or more

•Aggregate, outstanding loans, debentures and deposits exceeding Rs. 50 cr.

•Required to appoint at least 2 Directors as independent

• In case if co. ceases to fulfill any of three conditions as prescribed above for 3 consecutive years – it is not required to appoint ID

Transition period to appoint ID :- within 1 year from the commencement of section 149 or from the date of notification of the rules

In case if company

required to appoint higher no. of ID due

to audit Committee, then such

higher number of directors

shall be applicable to it

Tenure of Independent Director

Independent Director

shall hold office for a term up to 5 consecutive years

shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board's

report

ID shall not hold office for more than 2 consecutive terms but such independent director shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director

Note:- As per MCA Circular dated June 9, 2014 Appointment of an ‘ID’ for a term of lessthan 5 years would be permissible, appointment for any term (whether for 5 years or less)is to be treated as a 1 term under section 149(10) of the Act.

Remuneration to ID’s

Note :- Sitting Fee :- A company may pay a sitting fee to a director for attending meetings of the Board or committees thereof, such sum as may be decided by the Board of directors thereof which shall not exceed 1lakh rupees per meeting of the Board or committee thereof (Rule 4 of Companies (appointment and remuneration of Managerial Personnel Rules, 2014)

Independent Director may receive remuneration either:-

by way of fee* under the provision of section 197 or

reimbursement of expenses for participation in the Board andother meetings and profit related commission approved by themembers,

Independent Director shall not be entitled to any stock options andmay receive remuneration by way of fee (Section 149 read with197(5))

*

Status of Independent Directors appointed before commencement of Companies Act, 2013

• Existing Independent Director may continue and complete their remainingtenure, under the provisions of the Companies Act, 1956 or they shoulddemit office and be re-appointed (should the company so decide) inaccordance with the provisions of the new Act.

• Tenure of an 'ID’ on the date of commencement of the Act shall not becounted for his appointment/holding office of director under the Act.

• In view of the transitional period of 1 year provided under section 149(5), itis hereby clarified that it would be necessary that if it is intended to appointexisting ‘IDs’ under the new Act, such appointment shall be made expresslyunder section 149(10)/(11) read with Schedule IV of the Act within 1 yearfrom 1st April, 2014, subject to compliance with eligibility and otherprescribed conditions.

• As per Schedule IV of the Act appointment of IDs’ under the new Act wouldneed to be formalized through a letter of appointment.

MCA vide Circular dated June 9, 2014 issued clarification for IDs’ appointed prior to April 1, 2014 and the key points of the same are:-

Time period to fill the vacancy of an Independent Director

Intermittent Vacancy of ID

At the immediate next board meeting

3 months from the date of such vacancy

or

Shal

l be

fill

ed

up

by

the

Bo

ard

Whichever is later

As per Schedule IV, such vacancy shall be filled up within a period of not more than 180days from the date of such removal or resignation, as the case may be. (Both thestatements are contradictory)

Important Provisions relating to appointment of ID’s

The selection of ID’s may be made from the data base posted on the website of abody, institute, or association, as may be notified by the central government.(Section150 (1)).

Terms and other conditions of appointment of Independent director shall be opento inspection to any member during business hours as per Sch-IV of the Act.

The explanatory statement to be attached to the notice of Shareholders meeting(EGM or AGM) shall include a statement that in the opinion of the Board theperson proposed to be appointed as independent director fulfills the conditionsspecified in the act and rules and the proposed director is independent of themanagement. (section 152)

As per Schedule IV of the Act appointment of IDs’ under the new Act would needto be formalized through a letter of appointment

Important Provisions relating to appointment of ID’s

Independent Director shall not be entitled to any stock options and may receive remuneration by way of fee (Section 149 read with 197(5))

The person appointed as independent director shall in the first meeting of board in which he /she will participate as a director and thereafter at the first meeting of board held in each financial year shall give a declaration as provided in sub section (6) of section 149

Disclose the statement of declaration given by independent directors under sub-section (6) of section 149 in Board Report of the Company (Section 134)

Independent Director shall not be liable to retire by rotation (Section 152)

Separate Meeting of ID’s (schedule IV)

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

The meeting shall: (a) review the performance of non-independent directors and the Board

as a whole; (b)review the performance of the Chairperson of the company, taking

into account the views of executive directors and non-executive directors; (c) 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

Other Key provisions

Meeting of the Board may be called at shorter notice subject to the condition that atleast one ID shall be present at the meeting (Section 173)

• Nomination & Remuneration Committee (178)

• Corporate Social Responsibility Committee (135)

• Audit Committee (177)

ID shall be mandatory in the composition of following committees:-

Schedule IV of Companies Act, 2013

Code for independent director Professional conduct Role and functions Duties Manner of appointment Reappointment Resignation or removal Holding separate meetings Evaluation mechanism

Important Provision for listed Companies Regarding ID’s (Revised clause 49 of Listing Agreement)

A person shall not serve as an independent director in more than 7 listed

companies

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.

Familiarization program for Independent Directors and disclose the same on website of the Company and a web link thereto shall also be given in the

Annual Report. (amended Cl 49)

Thank You