Who is an independent director?
An independent director is a director other than a managing director, a whole-time director, or a nominee director, who meets the tests in section 149(6). A listed public company must have at least one-third of its board as independent directors. A private company does not appoint one merely because it is private.
Who meets the definition?
The board must be of the opinion that the person has integrity and relevant expertise and experience. The person is not, and was not, a promoter of the company or of its holding, subsidiary, or associate company, and is not related to the promoters or directors of those companies.
The person has no pecuniary relationship with the company, its holding, subsidiary, or associate, or their promoters or directors, other than remuneration as such a director, or a transaction not exceeding ten per cent of the person’s total income, during the two immediately preceding financial years and the current financial year. Relatives are limited as well. A relative’s security in the company above the lower of ₹50 lakh and two per cent of the paid-up capital, and the other limits section 149(6)(d) sets for debt, guarantees, and transactions, take the person outside the definition. The person, and the relatives, also must not hold the key-managerial or professional roles the subsection lists for the three preceding financial years.
Which companies must appoint one?
Section 149(4) requires every listed public company to have at least one-third of the total number of directors as independent directors. A fraction is rounded up to one.
The rules also require at least two independent directors in an unlisted public company that has paid-up share capital of ₹10 crore or more, or turnover of ₹100 crore or more, or outstanding loans, debentures, and deposits exceeding ₹50 crore. A joint venture, a wholly owned subsidiary, and a dormant company are outside that unlisted-public rule even where a number is crossed. A private company is not in the list. Who a director is, apart from this category, is on the director page.
What meeting do they hold?
Where the company must appoint independent directors, Schedule IV requires them to hold at least one meeting in a financial year without the non-independent directors and the management. Separately, where the company has an independent director, a board meeting needs at least one of them present, or a later ratification by at least one of them. Notice of a board meeting is on the board-meetings page.
What is the databank?
The appointment rules require the name of a person who is to be appointed as an independent director to be included in the databank maintained for that purpose. The rules also require an online proficiency self-assessment, unless the person falls in an exemption those rules state. Passing that assessment is not the appointment. The company still appoints the director. The assessment is not a substitute for section 149(6).
Frequently asked questions
Four questions cover a private company, a pecuniary relationship, the proficiency test, and a board meeting.
Must every private company appoint an independent director?
No. The requirement applies to a listed public company and to the unlisted public companies the rules name. A private company is outside that list.
Is any pecuniary relationship still a bar?
No. Section 149(6) allows remuneration as an independent director, and a transaction that does not exceed ten per cent of the director’s total income, during the current year and the two preceding years. The older absolute ban is not the current clause.
Is the proficiency test the appointment?
No. The rules require a name in the databank, and a proficiency test unless the person is exempt. The appointment is still made by the company under the Act.
Can a board meet without an independent director?
Where the company has an independent director, section 173 requires at least one to be present, or the decision to be ratified by at least one of them. That is separate from the yearly meeting of independent directors alone.
Sources
An independent director is section 149(6) of the Companies Act, 2013. The companies that must appoint one are section 149(4) and the director rules.