Legal Reference.
The Author
has also injected the relevant and important picture of Schedule IV that specifically deals with Code for Independent
Directors.
Every
company shall have a board of directors consisting of individuals as director
and shall have –
In case of
Public Company – Minimum 3 directors
In case of
Private Company- Minimum 2 directors and
In case of
One Person Company – Minimum 1 director.
The
companies act has further limits the maximum number of directors to 15 in any
case, however a company may appoint more than 15 directors after passing
special resolution in a general meeting.
Every listed public company shall have at least one-third of the total number
of director as independent director and
Every
unlisted public company having;-
· * Paid
up capital more than or equals to 10 crores (or)
· * Turnover
more than or equals to 100 crores (or)
· * Aggregate
Borrowings more than 50 crores
Shall
appoint at least 2 Independent Directors.
Legal reference
of the said limits in case of unlisted public company has given in Rule 4 of Companies
(Appointment and Qualification of Directors Rules), 2014.
Exemption
from the requirement of Independent director to certain unlisted companies, if
it will fall under following class of companies.
· * A
Joint Venture.
· * A
Wholly owned subsidiary company
· * A
dormant company.
Provided
that if a company covered under this rule is required to appoint a higher
number of independent director due to composition of its audit committee (
section 177) and such higher number of independent director shall be applicable
to it.
Section 177 (Relevant parts only)
Section
177(1) provides that the Board of Directors of every listed company listed public company and
such other class of companies (same as Rule 4 discussed above), shall
constitute an Audit Committee.
Section
177(2) provides that audit committee
shall consist of at least 3 directors, and the majority of them shall be
independent directors.
SEBI LODR (Relevant parts only)
Regulation
17.
The Board of
Directors shall have optimum composition of executive and non-executive
director.
Every listed entity shall have at least 1 women director and
at least 50% of Board of directors shall compromise of non-executive director.
The simplified composition is stated here below.
Who can Independent Director? Section
149(6)
As per section 149(6) of 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;-
(Thus in a
layman language only a Part-time director is eligible to act as ID)
A) who is in the opinion of Board, is a person of integrity and possesses relevant
expertise and experience ( Qualification of ID to be discussed later)
B) (i) who is or was not a promoter of the company or its holding, subsidiary or
associate company (reader may learn CASH
for brevity where C is its own COMPANY and subsequently A is ASSOCIATE, S
is its SUBSIDIARY and H is its HOLDING)
(ii) who is
not related to promoters or directors in the CASH.
C) who has or had no pecuniary relationship,
other than remuneration as such director
or having transaction not exceeding 10% of his total income or such amount as
may be prescribed, with the company, its holding, subsidiary or associate
company (CASH), or their promoters or
directors (i.e. PROMOTERS OR DIRECTORS OF CASH), during the 2
immediately preceding financial years or during the current financial
year.
(Amended by the Companies Amendment Act 2017)
However this sub-clause in not applicable to Government and Section 8
companies.
MCA has also issued a circular in this regard that the transaction
entered by company in its ordinary course of business and on an arm’s length
basis then such person can also appoint as ID. (A type of relaxation given by
ministry)
The Companies (Amendment)
Act, 2017 has elaborated the criteria of independence, it significantly strict
the criteria of independence.
D) none of whose relatives-
(i) holding
any security of or interest in the company, its holding, subsidiary or
associate company (CASH) during 2 immediately preceding two financial years or
during current year.
(Provided that relative may hold security or interest in the company of face value not exceeding
rupees 50,00,000 or two percent (2%) of the paid-up-capital of the CASH)
Author’s Analysis – The same criteria has given
for auditor as well but the limit is 1lakh instead of 50 lakh.
(ii) is indebted
to the Company, its holding, subsidiary or associate company (CASH) or their promoter or directors in excess
of 50lakh during the 2 immediately preceding financial years or during current
financial year.
Author’s
Analysis- In chapter of auditor the criteria of the promoter or director of
CASH is missing however the chapter has exclusively included subsidiary of such
holding company.
(iii) has given
guarantee or provided any security in connection with the indebtedness of any
third person to the company, its holding, subsidiary or associate company
(CASH) or their promoters or director of such holding company for an
amount of 50lakh or more during the two (2) immediately preceding financial years or
during current financial year.
Author’s
Analysis –this sub-clause has only cover the director of its holding company
however in case promoter it cover promoter of CASH in its ambit.
(iv) any
other pecuniary transaction or
relationship with the company or its subsidiary or its holding or associate
(CASH) amounting to 2% of turnover of its gross total income singly or in combination with the transaction referred above in sub-clause (i), (ii), (iii).
Analysis on
sub-clause (iv)
If relative of proposed ID has given guarantee
to any of the company in CASH amounts to 1% of the gross turnover of the
company and has a pecuniary relationship with any of company in CASH which
amounts to 1.05% of the gross turnover of the company, then the proposed ID
shall not be eligible to get appointment in the company as the aggregate of two
case will exceed 2% of gross turnover.
E) who, neither himself nor his relatives-
(i) holds or
held the position of a KMP or is or had been employee of the company or its
holding, subsidiary or associate company (CASH) in any of the 3 financial years
immediately preceding the financial year in which he proposed to be appointed
as Independent Director.
Provided that in case of a relative
who is (was**) an employee, the
restriction under this clause shall not apply for his employment during
preceding 3 financial years.
**
As per author’s understanding of law, the intention of the lawmaker is to check
the condition of relative with respect to his employment of preceding 3
financial year, in order to ensure the criteria for independence of proposed
ID. Thus the word is should be replace with the word was.
Analysis – If the relative of proposed ID is
serving an employment in current financial year, then also the proposed ID
can’t become ID of the Company. However if Mr. Relative had been in employment
in preceding 3 financial year and not serving anymore in current financial
year, then the ID proposed can be the ID of the company subject to condition
that he satisfies other criteria as well.
(ii) is or has
been an employee or proprietor or partner, in any of the 3 financial years
immediately preceding the financial year
in which he is proposed to be appointed as ID, of –
(iii) holds together
with his relatives 2% or more of the total voting power of the Company.
( not CASH)
(iv) is a chief
executive or director, by whatever name called, of any non-profit organization-
(v) is a material supplier, service provider or customer
or lessor or lessee of the listed entity (SEBI LODR)
F) who is
not less than 21 years of age (SEBI
LODR)
G) who possesses
such other qualification as may be prescribed.
Qualification of
Independent Director-
An ID shall possesses appropriate skills, experience and
knowledge on one or more fields of finance, law, management, sales, marketing,
administration, research, corporate governance, technical operation or other
disciplines related to business of company.
Other Requirements-
· * Every
ID shall at the first meeting of the Board in which he participates as director
and thereafter at the first meeting of the board every financial year or
whenever there is any change in the circumstances which may affect his status of
an independent director, give a declaration that he satisfies the criteria of
independence (Section 149(7))
· * Remuneration
of ID shall be as per the provision of section 197 and 198 but he is not
be entitled
to any stock option (Section 149(9))
· * An
ID shall hold office for a term up to 5 consecutive year on the Board of the
company, but shall be eligible for re-appointment on passing of special
resolution by the company.
( however the provision of section 152 shall be
taken care with) Section 149(10)
· * Discloser
of such appointment to be made in Board Report.
Analysis-
Special resolution is necessary for re-appointment and not for appointment
(Schedule IV as amended
in July, 2017) – Relevant Parts only.
The independent directors of the company shall hold at least one meeting in a financial year, without the attendance of non-independent
directors and members of management.
All the ID of the company shall strive to be present at such
meeting.
The resignation or removal of an ID shall be in the same
manner as provided in section 168 and 169 of the Act.
An ID who resigns or is removed from the board of the company
shall be replaced by a new ID within 3 months from the date of such resignation
or removal as the case may be.
Section 149(10) provides that notwithstanding anything contained in sub-section (10) no ID shall hold office for more than 2 consecutive term, but shall be eligible for appointment after the expiration of 3 years of ceasing to become an ID
Provided that an ID shall not, during the said period of 3
years, be appointed in or be associated with the company in any other capacity,
either directly or indirectly.
Liabilities of ID
An ID shall be held 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 which his consent or connivance or
where has had not acted diligently.
IMPORTANT – The
provision of section 152(6) and (7) shall not apply to Independent director.
For detailed analysis
on section 152(6) Clickhere to refer my article on Rotational Director in a
simplified way.
ABOUT THE AUTHOR
Aakarshit Jai: Commerce Graduate and Company Secretary Aspirant.
You can follow me on https://unacademy.com/user/aakarshit.jai
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.
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Nicely explained
ReplyDeleteGraspingly written
Good explanation.
ReplyDelete