Rules for Becoming Independent Director of a Company

Last Updated On: Nov. 19, 2020, 8:01 p.m.
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RULES FOR BECOMING INDEPENDENT DIRECTOR  OF A COMPANY

 

Introduction:

An Independent Director is a member of the board of directors. Independent directors act as a guide to the company. Their roles involve improving corporate credibility and governance standards functioning as a watchdog and playing a vital role in risk management.

Independent directors play an active role in various committees set up by the company to ensure good governance.

 

Who is an Independent Director:

According to the provisions of the Companies Act, 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:

  • 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 of the company or its holding, subsidiary or associate company or is not related to promoters or directors in the company, 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 two immediately preceding financial years or during the current financial year;
  • is a Chief Executive or director, by whatever name called, of any non-profit organization 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;
  • who possesses such other qualifications as may be prescribed;

 

Procedure for appointment of an independent director?

  • Diligently select a person proposed to be appointed as an independent director and ensure that he possesses an appropriate balance of skills, experience, and knowledge in the Board. The proposed person may be selected from the database of Independent directors maintained by anybody, institute, or association authorized by CG.
  • Ensure the proposed person to be appointed as Independent Director in the company fulfills the conditions specified in Sec 149(6) and Rule 5 (Companies (appointment and qualification of Directors) Rules, 2014)
  • Ensure that the proposed director is not disqualified under Sec 164 and Sec 165 of the Companies Act 2013.
  • Ensure the individual proposed to be appointed as Independent Director has furnished his DIN to the company and a declaration in Form DIR-8 stating he is not disqualified to become a director under the provisions of this Act. (Sec 152(4) and Rule 14 of Companies (appointment and qualification of Directors) Rules, 2014)
  • Before the appointment of an individual as Independent Director obtain consent to act as Director in Form DIR-2.
  • Issue Notice and agenda of a Board meeting or shorter notice in case of urgent business, in writing to every director of the company at his registered address with the company. [Sec 173(3)]
  • Hold a board meeting and ascertain the quorum required under Sec 174 is present and pass the following resolution:
  • To hold office up to a period of 5 years, subject to the approval of Shareholders in the general meeting of the company.
  • To authorize the Company Secretary or Director of the company to sign, fill the relevant Form and to do such acts, deeds, and things as may be necessary to give effect to the resolution.
  • To Fix a day, date time, venue for holding a general meeting of shareholders of the company.
  • To Approve the draft notice of the meeting along the explanatory Statement annexed with notice as per the requirement laid down in Sec 102 of the act.
  • To authorize the Director or the Company Secretary of the company to sign and issue the notice of the general meeting.
  • Hold the general meeting on the day fixed and pass the ordinary resolution for the appointment of the Independent director.
  • As per Schedule IV(IV)(4) to the Companies Act, 2013 the Company will have to issue the appointment letter to Independent Director. Also, the terms and conditions of the Independent Director’s appointment have to be posted on the company’s website.
  • Obtain the declaration of the appointed Director regarding his interest in other entities in Form MBP-1 within 30 days of appointment or at the first Board meeting in which he participates as a director., whichever is earlier. [Sec 182(1) read with Sec 182(2)]
  • File Form DIR-12 containing the particulars of the appointment of Director within 30 days of his/her appointment. (Sec 170 (2) and Rule 8 and 18 of the Companies (Appointment and Qualification of Directors) Rules, 2014.
  • The Independent Director has to submit a declaration of independence as per Section 149(6) of the Companies Act, 2013 before his/her appointment. Such declaration has to be placed before the 1st Board Meeting in which he/ she participates as a director and the subsequent first board meeting in each financial year.
  • In case of the resolution passed as a Special resolution for re-appointment of the Independent Director, file a certified copy of the special resolution in Form MGT-14 within 30 days of the date of the general meeting.
  • Make necessary entries in the register of Directors and key managerial personnel and their shareholding.

 

What is the role of an Independent Director?

It is the duty of the Independent Director to:

  • Gives  Independent judgment on any matter of the Board
  • prevent the management from taking decisions that are likely to affect the interest of the shareholders as large
  • ensure that there should not any unethical behavior or fraudulent practices adopted by the board
  • ensure that there should not violation of any company’s policy
  • review the performance of non-independent directors and the Board as a whole;
  • review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;
  • assess the quality, quantity, and timeliness of the flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.
  • recommend the CSR Policy to the board;
  • recommend the CSR activities and programs as per Schedule VII;
  • specify the CSR expenditure;
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