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In and Out of Independent Directors

By Bhavneet Vohra July 29, 2016


Introduction

In the Companies Act, 1956, Independent Directors were not mentioned so specifically and expressly as mentioned and described under the Companies Act, 2013. In a layman’s language, Independent Directors refers to that classification of directors who are expected to have an impartial and objective judgement for the proper and smooth functioning of the company.

The term “Independent Directors” is defined under sub-section 6 of the Section 149 of the Companies Act, 2013. As per the Companies Act, 2013, now it is mandatory for every listed company to have at least one-third of directors as Independent Directors.

In this Article we will cover all the aspects related to the Independent Directors which include their functions, duties, role etc.

In and Out of the Independent Directors

How to appoint an Independent Director?

The following steps must be followed for the appointment of the Independent Director:

Step 1: To identify on the basis of independent criteria

From a databank containing names, addresses and qualifications of persons, an Independent Director can be selected. It must be ensured by the Board that the person selected is experienced, knowledgeable and with an appropriate balance of skills.

Step 2: Approval of the shareholders must be taken

During the meeting of the shareholders, the appointment of Independent Directors can take place and not without their consent and approval.

Step 3: Appointment and declaration letter must be obtained from the Board and Director.

Step 4:  To publish the terms of the appointment of Independent Directors

The fourth step involves the publication of the terms of the appointment of the Independent Directors.

How the remuneration of Independent Directors is decided?

The Companies Act, 2013 contains many provisions and sections which can be applied for deciding the amount of remuneration that is to be paid to the Independent Directors. The term “remuneration” is defined in the Section 2(78) which means money received by any person for his services rendered. To ensure that there is no financial disparity between the independent directors and other directors, the fees of the independent directors was also fixed equivalent to the other directors of the company.

How does the removal and resignation of the Independent Director take place?

As per the Section 168 (Resignation of Directors) and Section 169 (Removal of Directors), the procedure followed is same as for the other directors of the company. If for a continuous period of 12 months, an Independent Director remains absent from the board meetings, it will be assumed that seat of the director is vacant.

What are the liabilities of the Independent Directors?

Companies duly ensure that Independent Directors work honestly without any inconvenience and hindrance and without any threat of being trapped. So for this as per  Section 149 (12), Independent Directors can only be held liable for the acts or omissions that were carried out with their full knowledge and approval and also in those cases where it was found that they were negligent in their work and did not perform it diligently.

What should be the composition of various committees as per the Companies Act, 2013, so as to include Independent Directors also?

The following table can be used as a reference to identify the composition of the various committees as per the Companies Act, 2013.

Name of the Committee

Composition and Number of Independent Directors

Section governing the Committee in the Companies Act, 2013

Corporate Social Responsibility Committee

3 or more Directors where one should be an Independent Director

Section 135

Nomination and Remuneration Committee

3 or more non- executive directors with at least  half independent directors

Section 178

Audit Committee

3 directors where at least one should be an independent director

Section 177

 

As specified in the Section 149 (8) of the Companies Act, 2013 Schedule 4 of the Act which mentions the Code for Independent Directors. This Code specifically includes the detailed description of the following:

  1. Guidelines of Professional Conduct
  2. Roles and Functions
  3. Duties
  4. Manner of Appointment
  5. Re- Appointment
  6. Resignation or Removal
  7. Separate Meetings
  8. Evaluation Mechanism

Conclusion

Introduction of the concept of Independent Directors in the Companies Act, 2013 paves the way for smooth corporate governance in the company. As specified in the Section 149(6) the Independent Directors have been conferred many powers. Apart from this many provisions have also been included to ensure that there is no disparity between other directors and Independent Directors. One thing which needs to be noted, that every director, whether independent/non- independent, executive/non-executive has a distinct and pivotal role in the functioning of the company which contributes to its growth and expansion.

Sources-

http://www.lexology.com/library/detail.aspx?g=45f2cd2e-88a0-46bf-ba56-5b404c2e4681

Author- Bhavneet Singh Vohra

Vivekananda Institute of Professional Studies

Tags: independent , directors , companies , Companies Act 2013 , companies act 1956 , Section 149 of Companies Act 2013


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