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INDEPENDENT DIRECTORS

UNDER

THE COMPANIES ACT, 2013

Role of Independent Directors:

• Impartial/objective judgment

• Specialized skills/strategic advisor to the company

• Watchdog for interests of shareholders (particularly minority shareholders)

• Moderate in the interest of company in conflict situations

Earlier Regime under Companies Act, 1956 :

• Not applicable to unlisted companies (whether public or private)

• Applicable only to listed companies: 1/3rd to ½ of total directors to be independent

directors (depending upon executive/non-executive nature of chairman)

New Regime under Companies Act, 2013:

• Requirement: 1/3rd of total directors to be independent directors.

• Applicability:

o listed co.s

o Companies notified by Central Govt i.e. as per draft rules:

(a) Public co.s with paid up share capital in excess of INR 100 crores or

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Independent Directors

(b) Public co.s with outstanding loans/borrowings/debentures/deposits in excess of

INR 200 crores.

• Companies Act, 2013 also requires:

o At least 1 independent director in CSR Committees (applicable to co.s with a net

profit of > 5 crores OR net worth of > 500 crores OR turnover of > 1000 crore

o Majority of directors in audit committees to be independent directors (applicable to

listed co.s and co.s prescribed by Central Govt)

o ½ of directors in Nomination & Remuneration Committee to be independent directors

(applicable to listed co.s only)

Foreign investment through CCDs (equity under FDI Policy) will be treated as debt under the

Companies Act, 2013 and INR 200 crore threshold shall apply.

200 crore threshold: Low benchmark for NBFCs/Housing Finance Companies/Infrastructure

Companies/other finance companies. Particularly due to lack of “public deposits” criteria (as

under CIC regulations).

Alternatively, thresholds may be linked to promoter shareholding or turnover of company or

linked to requirement of independent directors in various committees.

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Independent Directors (Contd.)

Factors impacting availability of independent directors:

• Large number of unlisted public co.s to now comply with independent director

requirements within 1 year from the date of notification. Also, certain co.s to constitute

committees with independent directors.

• Support from Central Govt - Database of eligible independent directors to be set up.

• Maximum no. of directorships under the Companies Act, 2013: 20 co.s out of which

maximum of 10 public co.s.

• Liability issues involved with unknown management/companies.

• Independent director liable for acts/omissions of co. unless lack of knowledge/ consent or

“acting diligently” is proved - However, no restriction on indemnification by company.

Who is an independent director under Companies Act, 2013?

• Definition of independent director under Companies Act, 2013 wider in scope than listing

agreement/SEBI ESOP guidelines.

• Criteria based on:

o Independence from Management

o Independence from Promoter Group

o No substantial shareholding

o Other significant relationship which may cause a conflict of interest.

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Independent Directors (Contd.)

Term:

• Term: 5 (original term) + 5 years (additional term subject to a special resolution). After

expiry of term individual ineligible for re appointment for 3 years.

• Tenure to be non-rotational

Code of Conduct under Companies Act:

• Schedule IV sets out a code of conduct for the role, responsibilities and functions of the

independent director.

• Guidelines to be complied by the companies on manner of appointment, re-appointment,

resignation or removal of independent directors.

• Independent directors to hold at least one meeting in a year to review performance of non

independent directors and board.

• Evaluation mechanism to be put in place by Board: to evaluate performance of each

independent director.

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Independent Directors (Contd.)

Penalty for non compliance of independent director provisions:

• Who will administer independent director compliances?

• Double penalty for non-compliance - under Companies Act and SCRA.

• Penalty under Companies Act, 2013; INR 50,000 to INR 5,00,000 v. upto imprisonment

upto 10 years or fine upto INR 25 crores under the SCRA.

Downstream investment under the FDI Policy: Min. requirement of 1/3 directors may

cause certain unlisted public companies to be categorized as company not controlled by

Indian residents. – resulting in restrictions in downstream investment.

Independent directors ineligible for ESOPs under Companies Act,2013 - a disincentive

v. entitlement under SEBI ESOP Guidelines.

Independent director requirements in other jurisdictions (USA, UK, Singapore):

Limited to listed companies.

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Independent Directors (Contd.)