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Meaning of Independent director
The dictionary meaning of Independent word is that “one is not influenced or controlled by others in matters of opinion or refusing to be under obligation to others or you can say that person possesses a competency – to be financially independent or independent in terms of knowledge”. In layman language, we believe that person is independent, if he/she is financially stable.
Let’s move towards the subject
Independent Director means who is independent and who is authorised / responsible for efficient functioning of the Company, who is supposed to look after important matters of the Company in independent way by keeping in mind the overall development of the Company along with interest of all stakeholders of the Company and the economy as whole.
As per the Companies Act, 2013, an “Independent Director” in relation to a Company, means a director other than a managing director or a whole-time director or a nominee director. An independent director is a person who is not related to the promoters or other members of the Company.
Applicability of independent director
Following class of Companies are required to appoint independent director on their board:
- Every Listed Company
- Public Companies
- Having paid up share capital of Rs. 10 crore or more;
- Having turnover of Rs. 100 crore or more;
- Which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs. 50 crore or more;
Strength of independent director in the Company depends on case to case.
Role of independent director
Independent Director has a crucial role in Corporate Governance. Independent director plays vital role in determining the levels of remuneration among executive directors, key managerial personnel and senior management and their appointment too, wherever necessary.
Independent director has a strong influence on audit committee as the composition of audit committees mainly consist of independent directors. However having independent directors on the Board haven’t proved to be a sure-shot method to deter companies from malpractices, increasing instances of institutional activism and the rise of proxy advisory firms may force greater accountability from independent directors. In a recent case, when board of major cement company ACC proposed to increase the payment of technological know-how fees to its parent firm, Holcim (Switzerland), but independent directors of both the companies, I.e., ACC & Ambuja cements, rejected such proposal on the grounds that interest of minority shareholders should not be affected due to increase in royalty payments.
Conditions to be met by independent director
- Declaration: He is required to give a declaration that he fulfils the criteria of independence provided for in the law, at the first board meeting in which he participates as an independent director and thereafter at first Board meeting in every financial year or whenever there is any change in the circumstances that may affect his independence.
- Qualification: An independent director shall possess appropriate (appropriate say CS/CA/CWA OR engineer having vast experience etc.) education, skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the Company’s business.
- Remuneration: He shall not be entitled to any remuneration, other than sitting fee, reimbursement of expenses for participation in Board meeting and profit related commission as approved by the Company. He is not entitled to any stock option.
- Tenure: He shall hold office for a term up to five consecutive years on the Board of a Company, but shall be eligible for re-appointment on passing of special resolution. He shall not hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director. However, he shall not, during the said period of three years, be appointed in or be associated with the Company in any other capacity, either directly or indirectly.
- Liability: He shall be liable, only in respect of such acts of omission or commission by a Company which had occurred with his knowledge, attributable through Board processes, and with consent or connivance or where he had not acted diligently.
- Duties: The duties include constructive attendance in all board/general meetings, reporting unethical practices, fraud and violation of law, retaining any confidential information pertaining to company as confidential, ensuring the concerns relating to management are placed before the board and be recorded in the minutes of board meeting.
Independent director needs to work as moderator and arbitrator in the best interest of the Company as a whole in situations of conflict between the management and shareholders’ interest. In short, there is a significant onus on them to assist in safeguarding the legitimate interest of the company and its stakeholders.
- Retirement by rotation: He will not be liable to retire by rotation.
- Vacancy: Any intermittent vacancy of an independent director shall be filled up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.
- Procedure for appointment: Appointment of independent director shall first be considered in the meeting of the Board of directors and later on approved by the Company by way of ordinary resolution in general meeting. However, the second tenure of five consecutive years shall be by way of special resolution passed in general meeting. The explanatory statement shall indicate the justification for choosing the appointee for appointment as independent director.
Why Company should have independent director?
Before answering above question, I would like to throw light on different forms of business – proprietorship and Company. In proprietorship, the whole business is conducted by one sole individual. So in above case there is no complexity involved in running business at all, but this is not possible in case of company. In Company there are lots of complex functions, rules and regulations which are required to be complied to avoid legal and monetary penalty. So for better functioning of the Company there should be efficient Board (efficient board means constitution of Board in such a way that affairs of the Company be easily managed)
Independent director is a highly qualified as well as experienced person of field on which a Company and its stakeholders can rely upon. It will be for sure helpful to the Company. Even if independent director have experience of different field which is altogether different from the Company’s function, then still it can prove beneficial to the Company. Example: if Company is engaged in manufacturing of synthetic while independent director have experience of international marketing field, then it will surely help the Company in exploring the new market for the Company’s product and which is ultimately helpful for boosting Company’s stability – financial as well as market.
Some Corporate appoint independent director out of compulsion merely for compliance purpose and think them as burdensome on the Company but it’s not valid at all. Corporate should have to gulp up the spirit behind the law for enacting independent director’s appointment in Company. There is one saying – “Change your attitude, change your destiny.” Keeping in mind this saying, if corporate change their mind and see the things in positive way, it will be win-win situation for them by appointing independent director on the Board.
Conclusion: It is evident that independent director is hidden diamond for the Company. Company just need to polish it as per its requirement. Company shouldn’t have to worry about cost in terms of fees of independent director but should have a faith that fees given to independent director is only penny while knowledge/services received from the independent director is in pound.
In Short, “law should prevail over attitude, not attitude prevail over law.”
About the author: Dharmesh Vankar (Swami) is a qualified Company Secretary (ACS-42284), residing in Vadodara and currently working in Company Secretary Firm as Senior Team Member. You can reach him at firstname.lastname@example.org or (M) 9558930408.
|Disclaimer: The entire content of this document is author’s own interpretation & personal view. This
Is only a knowledge sharing initiative and author do not intend to solicit any business or profession.