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Independent Director: Role, Eligibility, Advantages & Procedure

In every corporate organization, the role of Independent Directors is very significant. The Independent Directors assist in dealing with the management of the firm in a way that is for the best of the firm and the stockholders of the firm.

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independent director

Independent Director

An independent director is a board member who has no material connection to the organization does not belong to the executive team of the organization, and is not active in the everyday management of the organization. 

An independent director is a non-executive director of a firm who assists the corporation in enhancing its reputation for good governance practices.

In every corporate organization, the role of Independent Directors is very significant. The Independent Directors assist in dealing with the management of the firm in a way that is for the best of the firm and the stockholders of the firm.

Having an Independent Director in India deters inefficient resource exploitation, corruption, disparity, and unjustified decision-making.

In this article, you will get a brief on Independent Directors in India. Along with that, this article focuses on the role of Independent Directors and the procedure for the appointment and dismissal of Independent Directors.

Eligibility criteria for an Independent Director in India

  1. An independent director must have the necessary training, expertise, and education in at least one of the following areas: governance practices, finance, legal, administration, sales, marketing, administration, research, technological operations, or other business-related disciplines.
  2. In general, any individual who wishes to be eligible to serve as an independent director in India must have the essential underlying attributes:
  • Impartiality
  • Fidelity
  • Judgment-making
  • Professional reputation

The procedure of appointing an Independent Director in India

In order to enhance the situation of the Independent Directors with regard to their election, it is crucial for the non-controlling stockholders to make an honest and unbiased decision regarding the confirmation of Independent Directors.

The procedure for appointing an independent director in India is as follows:

  1. Independent directors must be appointed through a procedure that is separate from that of the management of the corporation, and the board must also choose independent directors by assuring that they have an adequate balance of expertise, skills, knowledge, and abilities to carry out the role of the Independent Director and also fulfill their obligations.
  2. At the meeting of the stockholders, the decision regarding the employment of the independent director of the corporation must be decided and authorized.
  3. A statement that the independent director recommended being nominated satisfies the requirements set forth in the Act and the guidelines issued thereunder, and that the proposed director is independent of management must be listed in the explanatory statement accompanying the letter of the meeting to accept the employment of the independent director.
  4. The policies and terms of the selection of independent directors must be available for examination during regular working hours at the registered office of the organization.
  5. Additionally, the terms and conditions for independent director appointments must be published on the official site of the corporate portal.

Criteria while appointing an Independent Director

In order to appoint an Independent Director, the following criteria have to be followed by the various company:

  • Listed Public Company

All the listed public companies must comprise almost one-third of their directors as Independent Directors in India. The fractional part of that one-third must be rounded up to one.

  • Unlisted Public Company

The Central Government can stipulate the minimal number of independent directors for any class or classes of public firms. The following circumstances necessitate the appointment of a minimum of two independent directors by unlisted public companies:

  • Public corporations with a minimum paid-up share capital of 10 crore rupees.
  • Public enterprises with annual revenues of at least Rs. 100 crore.
  • Public enterprises with more than Rs. 50 crore in outstanding debt, debentures, and deposits.

Businesses must ensure the following by appointing independent directors:

  • Minority stockholders’ interests are safeguarded
  • Additionally, keep a check on a business to make sure it doesn’t engage in fraud.

At the time of choosing an independent director in India, the board of directors must make sure that there is proper maintenance of the balance of abilities, expertise, and understanding on the board in order for the Independent Director to properly carry out the role of the Independent Director. 

At the stockholder’s meeting, the nomination for the organization’s independent director in India must be accepted.

Role of the Independent Director in India

In accordance, with the Companies Act of 2013, the following are the role of the Independent Director in India:

  • The role of the independent director is to support the Board’s decision-making by bringing an independent perspective to bear on matters pertaining to policy, performances, risk assessment, assets, important appointments, and standards of behavior.
  • The role of the independent director is to provide an impartial perspective to the monitoring of the board’s and management’s competence.
  • Observing the management’s performance in achieving the desired objectives and ambitions and overseeing the way the performance is being reported.
  • Ensuring the reliability and effectiveness of financial data and that financial regulations and risk management programs are all solid and defended.
  • The role of the independent director is to protect the rights of all investors and stockholders involved, especially minority stockholders.
  • The role of the independent director is to keep a corporation in harmony by reconciling the competing stakeholder interests.
  • In cases where management and stockholders’ interests clash, The role of the independent director is to mediate and negotiate and resolve for the best benefit of the organization in general.
  • The company’s independent directors ensure that there is no criminal conduct taking place under their direction and supervision. Nevertheless, there isn’t any specific law that specifically holds these independent directors liable for such actions.

Duties of an Independent Director in India

In accordance, with the Companies Act of 2013, the duties of an Independent Director in India are the following:

  • An Independent Director in India must complete a suitable induction and routinely upgrade and maintain their expertise, abilities, and understanding of the business.
  • The Independent director must make an effort to be present at all board meetings as well as meetings of any board committees he serves on.
  • Ensure that they are knowledgeable about the business and the environment in which it functions.

Abilities of the Independent Director in India

There are a number of acts that an independent director of a corporation or organization may perform. 

These acts include the following:

  • Independent Directors have the power to contest the actions or judgment of the board members.
  • They serve as an independent authority that is impartial toward everyone while upholding the proper business practice.

Advantages of employing an Independent Director in India

The appointment of Independent Directors for any organization may prove to be very beneficial for the organization. 

The following are the advantages of appointing or employing an Independent Director in India:

  • Having more independent directors would help to temper disregard for the stockholders’ wishes as well as poor management of the organization.
  • Independent directors concentrate on and act in accordance with the objectives of the firm and stockholder rights.

Dismissal of independent directors in India

In accordance with the Companies Act, 2013, from the role of the Independent Director, an Independent Director in India can be dismissed by the following measures:

  1. An independent director must quit or be dismissed in accordance with the provisions describes in Sections 168 and 169 of the Act.
  2. A fresh independent director must take the position of an existing independent director who quits or is dismissed from the firm’s board of directors 3 months after the day of the resignation or dismissal, as applicable.
  3. When a firm meets the criteria for independent directors on its Board also without replacing the vacancy caused by these departures or dismissals, the necessity of substitution by a new independent director is not required.

Read More: Remove a Director from Your Company

Meetings of Independent Directors in India

All Independent Directors are required to gather at least once a year to attend the meeting for the Independent Directors, according to the Companies Act of 2013.

Non-independent directors and management personnel are not permitted to participate in the meeting. Attendance at such a meeting is a necessary condition for all of the independent directors of the corporation in order to:

  • Examine the Board’s overall effectiveness as a whole as well as that of the non-independent directors.
  • Evaluating the Chairperson’s competence while considering the opinions of both executive and non-executive directors.

In order for the Board to carry out its responsibilities in an efficient and reasonable manner, evaluate the quality, amount, and reliability of the data that is shared between the board and the corporate management.

 

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Conclusion

Independent Directors for any firm are very beneficial for the organization. The following article talks about the various roles and duties of Independent directors. Along with this, it talks about the procedure to appoint and dismiss Independent Directors in India.

For any more queries regarding Independent Directors, you can consult Odint Consultancy. We will be happy to assist you in solving your queries.

FAQ’s

The term “independent director” refers to a director who has no affiliation with the firm and merely serves to protect the interests of the members and the stockholders who are unable to act on their own.

  • Impartiality
  • Loyalty
  • Making decisions & judgments
  • Professional repute

An independent director must have the necessary training, expertise, and understanding in at least one of the following areas: governance practices, finance, legal, management, sales, marketing, administration, research, technological operations, or other sectors relevant to the company’s activities.

  • The company’s independent directors ensure that there is no criminal conduct taking place under their direction and supervision.
  • The role of the independent director is to support the Board’s decision-making by bringing an independent perspective to bear on matters pertaining to policy, performances, risk assessment, assets, important appointments, and standards of behaviour.
  • The role of the independent director is to protect the rights of all investors and stockholders involved, especially minority stockholders.

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