Understanding Independent Directors under the Companies Act, 2013

Independent directors are instrumental in upholding the principles of good corporate governance, especially in listed and large public companies. Section 149 of the Companies Act, 2013 lays down the framework governing their appointment, role, and responsibilities to ensure transparency, accountability, and unbiased oversight.

Minimum Requirement for Independent Directors:

Every listed public company is mandated to have at least one-third of the total number of its directors as independent directors. Additionally, the central government may prescribe minimum numbers for independent directors in specific classes of public companies, depending on regulatory and sectoral requirements.

Company Type	Independent Director Requirement
Listed company	≥ 1/3 of directors must be Independent directors (rounding any fraction up to the next whole)
Public company (not listed) with (₹10cr equity or ₹100cr turnover or ₹50cr loans)	At least 2 Independent Directors
Other public/private companies	No mandatory IDs (optional)
Section 8 companies (in compliance)	Exempt from ID requirements
Audit Committee (listed/public eligible)	At least 50% of members must be IDs, with the Chair an ID (per LODR)

Appointment Process of Independent Directors:

To be eligible for appointment as an independent director, individuals must first register with the Independent Directors Databank maintained by the Indian Institute of Corporate Affairs (IICA). The basic qualifications for registration include:

• Minimum age of 21 years

• Indian citizenship (or a foreign national intending to serve as an Independent Director in an Indian company)

• Possession of a valid PAN (Permanent Account Number)

• A professional background or substantial experience in areas such as business, management, law, finance, or corporate governance

Once registered, the Nomination and Remuneration Committee (where applicable) or the Board of Directors evaluates suitable candidates. Based on this evaluation, a recommendation is made to the shareholders, and upon receiving their approval in a general meeting, the individual is formally appointed as an independent director.

Who Qualifies as an Independent Director?

An independent director is a non-executive director who is not a managing director, whole-time director, or nominee director and fulfills the following conditions:

• Integrity and Expertise: Must, in the opinion of the Board, be a person of integrity and possess relevant expertise and experience.

• No Promoter Connection: Should not be or have been a promoter or related to promoters/directors of the company or its group entities.

• No Significant Pecuniary Relationship: Must not have any pecuniary relationship (except permissible remuneration) with the company or its associates during the current or previous two financial years.

• Restrictions on Relatives: Relatives of the director should not have financial dealings, substantial shareholdings, or be indebted to the company beyond prescribed limits.

• No Past Association with Key Roles or Firms: The individual and their relatives should not have held key managerial roles or have been partners/employees of audit, consulting, or legal firms having major transactions with the company in the last three financial years.

• No Voting Power or Control: Should not hold 2% or more of the total voting power, or be associated with nonprofit organizations receiving significant contributions from the company or its promoters.

Declaration of Independence

Every independent director must give a declaration confirming that they meet the criteria of independence at:

• Their first Board meeting

• The first meeting of every financial year

• Any time there is a change affecting their independent status

Duties and Code of Conduct

Independent directors must adhere to the code of conduct and roles outlined in Schedule IV of the Companies Act, which focuses on objectivity, oversight functions, and active participation in Board and committee meetings.

 

Remuneration of Independent Directors

Independent directors are not entitled to stock options. However, they may receive:

• Sitting fees under Section 197(5)

• Reimbursement of expenses for attending Board/committee meetings

• Profit-related commissions, as approved by shareholders

  If the company has no or inadequate profits, they may receive remuneration as per Schedule V, excluding sitting fees.

Tenure and Reappointment:

An independent director can hold office for a term of up to five consecutive years and can be reappointed for another term through a special resolution. However, after two consecutive terms, they must observe a cooling-off period of three years, during which they cannot be associated with the company in any other capacity, directly or indirectly.

Limited Liability

The Act provides limited liability to independent directors and non-executive directors (not being promoters or KMPs). They are liable only for acts committed with their knowledge, consent, or due to lack of due diligence.

Conclusion:

The role ofindependent directors is crucial in promoting transparency, accountability, and sound corporate governance. Their appointment is not only a statutory requirement but also a strategic step that adds independent judgment and expertise to the board. By following the prescribed process—starting with registration in the IICA databank, ensuring eligibility, and securing shareholder approval—companies can appoint qualified individuals who align with governance best practices.

However, the appointment process and post-appointment compliances can often be daunting for companies, especially given the evolving regulatory landscape. At Prolead, we assist companies in navigating the entire process and ensuring full compliance with all statutory requirements, enabling them to focus on building effective and compliant boards.