Independent Director in Cos Act 2013 - How far it is different from Listing Agreement?

1. Does a private Limited Company need to appoint Independent Director under Companies Act 2013, if so when?

2. Does the Independent Director liable to retire by rotation?

3. How long a Director can be in the Board of a Company? 

4. If a Director has already served 10 years in the Board of the Company, shall he resign immediately?

5. Which are the Companies that are mandatorily required to appoint  Independent Director?

6. How independent Directors can be remunerated under the new Act?

7. Is Independent Directors office liable to retire by rotation?

To know the answers.. Read on.....

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Sec. 149 deals with the appointment of Directors and it includes provisions for Resident Director, Independent Director, etc.

Sub sections 3 to 13 of Sec. 149 deals only about Independent Directors. It is interesting to note that the concept of Independent Director is introduced for the first time in the Companies Act; earlier it was dealt in Listing Agreement only.

As per Sec. 149 (4), every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

The Draft Rules prescribe that following clause of Companies to have one third of its Board as independent Director:

i) Public Companies having paid up share capital of Rs. 100 crores

ii) Public Companies having turnover of Rs. 300 crores or more

iii) Public Companies having loans, borrowings, debentures or deposits exceeding Rs. 200 crores

Explanation: 1. Even if the limit mentioned above is reduced, the provision shall apply for the rest of the tenure of Independent Director.

Comment: This is really a good proviso, as the turnover or loans may tend to fluctuate.

2. If some other Statutory provision requires higher percentage of Independent Director, then the Company needs to fulfill the requirement of that provision.

(Clear case of reference to listed Companies – where the listing agreement requires one half of Directors to be Independent Director when the Chairman is an Executive Director).

3. Companies Act 2013 has a similar Section as to Women Director, which prescribes a similar slab. The only difference being, it prescribes mandatory appointment of women Director for Public Companies with paid up capital of more than 100 crores or turnover of Rs. 300 crores or more. The third point  i-e : Loans, borrowings, debentures of deposits exceeding Rs. 200 crores is not included for Women Director.

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Independent Director - How selected?

A detailed provision has been given regarding Creation and maintenance of database of Independent Director. However it is not made compulsory to select Independent Director from this Database and consequently, the Companies will continue their practice of selecting the Independent Directors from their known circle, of course in compliance with the criteria for Independent Directors. (Broadly, relatives or persons having pecuniary relationship with the Company cannot be an Independent Director. But professional friends, who do not have any pecuniary relationship in the Company will continue to be selected as Independent Director by the promoters, so that there will not be unnecessary interference or disturbance in the management of the Company).

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First time and Annual Declaration by Independent Director:

As per Sec. 149 (7), every independent director shall at the first meeting of the Board in which he participates as a director  

and thereafter

at the first meeting of the Board in every financial year or

whenever there is any change in the circumstances which may affect his status as an independent director,

give a declaration that he meets the criteria of independence

Fees/ Remuneration for Independent Directors:

Following points must be kept in mind while paying remuneration to Independent Director:

1. An independent director shall not be entitled to any stock option

2. He can receive remuneration by way of fee provided under sub-section (5) of Section 197,

3. Reimbursement of expenses for participation in the Board and other meetings

4. and profit related commission as may be approved by the members.

This part is almost similar to the earlier procedure prescribed under Listing agreement, except that as per the new Act, Independent Directors are not eligible for Stock Options. There is a section of professionals who feel that this may adversely affect from attracting talented Independent Directors.

It must be mentioned here that the sitting fees for Board meeting or other committee meetings have been increased to Rs. 1,00,000. So the Government's thinking could be " since the sitting fees is increased substantially, the Directors should not receive Stock Options ; by this way, they will remain neutral and not interested in any transactions of the Company".

The definition of Independent Director is given in sub section 6 of Sec. 149; It is by and large reproduction from the Listing Agreement only. "Not to have Material pecuniary relationship with the Company" is the underlying theme in the definition of Independent Director.

TERM OF OFFICE

As per Sec. 149 (10) , An independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report.

As per Sec. 149 (11), no independent director shall 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.

Further the same sub section provides that an independent director 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.

Comment: It comes as a sigh of relief that the period of service by Independent Directors is not taken into account and the time limit starts afresh.

However during the cooling of period of 3 years, the Director shall not directly or indirectly involve in the activities of the Company may give practical issues.

It is better if the words " Indirectly" is dropped in this section/ area.

Immunity to Independent Directors :

Notwithstanding anything contained in this Act,—

(i) an independent director;

(ii) a non-executive director not being promoter or key managerial personnel,

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 with his consent or connivance or where he had not acted diligently.

Comment : This sub section is similar to the Circular released by MCA an year back. It is a step in the right direction to give immunity to Independent Directors for the wrong doing by the management. It is certainly right to punish the Director who are managing the affairs of the Company for such offences. However while implementing the section the words " which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently" may give difficulties to the Independent Directors, as the words used here are very much subjective in nature.

Sec. 149 (13) says that the Independent Directors shall not retire by rotation. While this clause may be appreciated that Independent Director once appointed will hold office for a longer term i-e 5 years or 10 years as the case may be, which will in turn give Independent Director to be objective in his approach, the practical difficulty is " Who will retire by rotation?" . The promoters are being appointed for a particular period (Mostly 5 years); so if we remove both the promoter Director and Independent Director, mostly there will not be any other Director to retire by rotation !!!!

Independent Director in CSR Committee :

As per Sec. 135 (1), every company having net worth of rupees five hundred crore or more, or
turnover of rupees one thousand crore or more or a net profit of rupees five crore or more
during any financial year shall constitute a Corporate Social Responsibility Committee of the
Board consisting of three or more directors, out of which at least one director shall be an
independent director.

Sec. 135 does not exempt Private Limited Companies. So the question that is asked by many quarters is: If a private Limited Company makes Rs 5 crore profit, should it appoint an Independent Director in CSR committee?

The answer to the question is : Yes - as on today; Unless Central Government exempts later with a notification.

ACTION POINTS ON INDEPENDENT DIRECTORS FOR PROFESSIONALS:

1. Listed Companies - Not much change, except that the Company cannot give Stock Options to Independent Directors any more. Need to get declaration from the Independent Director - at the time of appointment and annually. This declaration needs to be disclosed in the Directors report.

2. Public Limited Companies - If the criteria given in this section is attracted, they need to appoint an Independent Director. Professionals need to apprise their Management in advance. ( There were many Unlisted Public Limited Companies which had Audit committee and hence it had some Independent Directors earlier also).

3. Private Limited - CSR committee is the only place where such Company may have to have an Independent Director. Let us wait and see the Rules in its Final Form to know whether Private Limited Companies will be exempt. !