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Key Takeaways

  • The independent directors have been enlisted to improve the objectivity of corporate governance throughout the country.
  • According to Section 149(6), an independent director is defined as "a director other than a managing director, a whole-time director, or a nominee director."
  • The Companies Act, 2013 gives independent directors the necessary checks and balances to ensure that such broad powers are used responsibly and rationally rather than unjustly

The 1950s in the US was when the idea of independent directors first emerged. At this time, certain individuals who were neither company workers nor affiliated with the company were chosen to serve on the board of directors. The evolution of corporate governance and the subsequent adoption of the idea of independent directors were both influenced by liberalisation in India. The idea of independent directors was established in India with the hope that they would greatly contribute to raising the bar for corporate governance and successfully ensure that businesses are conducted with more transparency.

Section 2(47) of the Companies Act of 2013, an "independent director" is defined as a person who satisfies the requirements of the Companies act Section 149 (6).

According to Section 149(6), an independent director is defined as "a director other than a managing director, a whole-time director, or a nominee director."

Some provisions covered under the Companies Act, 2013 regarding independent directors:

  • Section 2(47) deals with the definition of independent directors.
  • Section 134(3)(d) deals with the declaration of the independent directors' status that will be included in the company's directors' report.
  • Section 135(1) deals with how a corporate social responsibility committee should be set up, with an independent director serving as one of its members.
  • Section 149 deals with the selection and requirements for independent directors.
  • Section 150 deals with the process of choosing independent directors and keeping an independent directors' database.
  • Section 152 deals with the overall number of directors, excluding independent directors from the total number of directors for the firm.
  • Section 161 says that a person must meet the requirements of this Act to be eligible to serve as an independent director before being appointed as the independent director's replacement.
  • Section 173(3) discusses the need for a shorter notice board meeting at which at least one independent director must be present.
  • Section 177 discusses the company's audit committee, which must include a minimum of three independent directors.
  • Section 197 deals with the different types of fees given to Independent Directors.
  • Schedule IV deal with the “Code for Independent Directors”

Manner of selection of Independent Directors

According to the Companies Act, the Central Government must establish and maintain a database of individuals who are willing and qualified to be appointed as independent directors. This database must be posted on the Ministry of Corporate Affairs website or any other website that the Central Government may approve or notify. The Central Government shall provide permission to any organisation, institute, or group for this purpose that has experience in the development and upkeep of such data banks.

All of the necessary information about the potential nomination will be in the data bank. However, it is the firm appointing the individual who is responsible for carrying out due diligence before choosing a candidate from the data bank mentioned above to serve as an independent director. Because the individual chosen by the company as an independent director was chosen from the databank, neither the Central Government nor such body, institute, or association shall be held liable for any violations of any law committed by any company or its directors, nor will it serve as a legal defence in any court of law.

Term of appointment for Independent Director

An independent director may serve on the Board of a corporation for up to five years in a row, although they may be reappointed with the passage of a special resolution by the company and notification of such appointment in the board's report. According to MCA Clarification published in General Circular 14/2014, an Independent Director appointed for a term that is less than 5 years will be held as a director appointed for one term.

No independent director may serve for more than two terms in a row, but he may be appointed after three years have passed since he ceased to be an independent director, provided that he does not serve the company in another capacity during that time or have any other direct or indirect relationship with it.

The rotational retirement of directors shall not apply to the nomination of independent directors.

Remuneration to Independent Directors

As required by Section 197 of the Companies Act, 2013, such fees cannot exceed Rs. 1 lakh for every Board or Committee meeting. He will also be eligible to collect any profit-related commissions that the members may decide to authorise. An independent director, however, would not be eligible to collect the stock option incentive.

Duties of an Independent Director

The fundamental rules that independent directors must follow when they are appointed are outlined in the Code of Independent Directors.

  • To undertake appropriate induction and routinely update and refresh their expertise, abilities, and familiarity with the organisation;
  • To make an effort to attend all board meetings and board committee meetings that he or she is a member of;
  • To be well-informed about the business and the environment in which it works;
  • To make sure that related party transactions are approved after careful consideration and with the company's best interests in mind;
  • To voice concerns on unethical behaviour, real or alleged violations of the company's code of conduct or ethics policy;
  • Not to divulge sensitive information, such as trade secrets, technology, plans for advertising and sales promotion, etc., unless the Board has authorised the disclosure or it is required by law;
  • request the relevant clarification or explanation of information, and, where required, pay for and acknowledge the best expertise of outside specialists;
  • actively and productively contribute to the Board committees they head or are members of;
  • If they have issues about how the firm is being managed or planned action, they should make sure that the Board addresses those concerns and, if they are not resolved, they should require that their complaints be noted in the meeting's minutes;
  • should refrain from unduly obstructing a Board or committee of the Board's functioning;
  • determine if the business has a sufficient and effective vigil mechanism and make sure that the usage of the mechanism will not adversely impact a person's interests;
  • aid in defending the legal interests of the company, its shareholders, and its workers by acting within his or her power.

Liability of an Independent Director

The liabilities that an independent director will take on since being appointed might be used to determine his or her level of liability. The conditions under which a director takes any action determine his or her liability. The court has found that the process of assessing the liability cannot be done mechanically without paying thought to the circumstances of the case and the legal requirement in a case where the court interpreted what an "officer in default" meant.

The court has also ruled in several cases that the accused cannot be prosecuted for the offences committed by the company unless it can be demonstrated that specific matters were brought to the director's attention. This is true even if a complaint does not disclose a prima facie case against the accused of their liability and obligation as principal officers in the day-to-day operations of the company as directors.

The court had to decide whether a director who signed the company's balance statement may be considered to know the loan's distribution and that the disbursement was without sanction in a situation where the loan was disbursed without getting a sanction. The court determined that the aforementioned director could only serve as a non-executive director because he was a practising lawyer and advocate. Therefore, a principal or active director cannot be held personally liable.

Resignation of Independent Director

  1. An Independent Director may resign from their position by providing written notice to the company
  2. The Board must submit the notification with the Registrar of Companies in Form DIR-12 within 30 days of the date it was received.
  3. Within 30 days after resigning, the director must also provide the Registrar of Companies a copy of their resignation letter and a full explanation of their decision.

Conclusion

For corporate governance, the idea of the independent director institution is essential. Because they are the trustees of stakeholders, independent directors are expected to take action. As a result, the Companies Act, 2013 tried to strike a balance between the many tasks, roles, and duties placed on Independent Directors. The Act gives independent directors the necessary checks and balances to ensure that such broad powers are used responsibly and rationally rather than unjustly. They need to make sure that the management and operations of the businesses are run for the benefit of stakeholders. It is anticipated that these reforms would protect shareholders' interests and prevent corporate scandals.

Learn the practical aspects of CrPC HERE, CPC HERE, IPC HERE, Evidence Act HERE, Family Laws HERE, DV Act HERE


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