RECENT DEVELOPMENTS IN CASE OF INDEPENDENT DIRECTORS

[Mr. M. GOVINDARAJAN]

Independent directors

Section 149 (4) of the Companies Act, 2013 (‘Act’ for short) provides that 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.

Who is an independent director?

Section 149(6) provides that an independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,-

• who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
• who is or was not a promoter of the company or its holding, subsidiary or associate company;
• who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
• who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding 10% of his total income or such amount as may be prescribed, with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;
• none of whose relatives-

• is holding any security of or interest in the company, its holding, subsidiary or associate company during the 2 immediately preceding financial years or during the current financial year; the relative may hold security or interest in the company of face value not exceeding ₹ 50 lakhs or 2% of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;
• is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;
• has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or
•  has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to 2% or more of its gross turnover or total income singly or in combination with the transactions referred to above;

• who, neither himself nor any of his relatives-

•  holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed; in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years
• is or has been an employee or proprietor or a partner, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed, of-

•  a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
• any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm;

•  holds together with his relatives 2% or more of the total voting power of the company; or
•  is a Chief Executive or director, by whatever name called, of any non-profit organization that receives twenty-five per cent or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2%  or more of the total voting power of the company; or

• who possesses such other qualifications as may be prescribed.

Selection of independent directors

Section 150(1) of the Act provides that an independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by any body, institute or association, as may be notified by the Central Government, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors. The responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director shall lie with the company making such appointment.  The appointment of independent director shall be approved by the company in general meeting.

Vide Notification No. S.O. 3791(E), dated 22.10.2019, the Government notified the Indian Institute of Corporate Affairs at Manesar (Haryana), as an institute to create and maintain a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, for the use of the company making the appointment of such directors, with effect from 01.12.2019.

The data bank shall create and maintain data of persons willing to act as independent director in accordance with such rules as may be prescribed.

Creation and maintenance of data bank

Vide Notification No. GSR 805 (E), dated 22.10.2019, the Central Government made ‘The Companies (Creation and maintenance of databank of Independent Directors) Rules, 2019.

The Indian Institute of Corporate Affairs shall create and maintain a databank of persons willing and eligible to be appointed as independent directors. Such databank shall be an online databank which shall be placed on the website of the institute.  The databank shall contain the following details in respect of each person included in the data bank to be eligible and willing to be appointed as independent director-

• Director Identification Number, if applicable;
• Income Tax PAN;
• the name and surname in full;
•  the father’s name;
• Date of birth;
• Gender;
• Nationality;
• Occupation;
• Full address with PIN code (present and permanent)
• Phone number;
• Email id;
• Educational and professional qualifications;
• Experience of expertise, if any;
• Any pending criminal proceedings pending as specified in  section 164(1)(d);
•  the list of limited liability partnerships in which he is or was a designated partner along with –

• the name of the limited liability partnership;
•  the nature of industry; and
• the duration- with dates;

• the list of companies in which he is or was director along with-

• the name of the company;
• the nature of industry;
• the nature of directorship - Executive or Non-executive or Managing Director or Independent Director or Nominee Director; and
• duration - with dates.

The information available in the data bank shall be provided only to companies required to appoint independent director after paying a reasonable fees to the institute.   A person, whose name is included in the data bank, may restrict his personal information to the institute, to be disclosed in the data bank.  Any individual, whose name appears in the data bank, shall make changes in his particulars within 30 days of such change through web based framework made available by the institute for this purpose.

Disclaimer

A disclaimer shall be conspicuously displayed on the website hosting the data bank that a company must carry out its own due diligence before appointment of any person as an independent director.

Fees

The institute, shall with the prior approval of the Central Government, fix a reasonable fee to be charged from:

• individuals for inclusion of their names in the data bank of independent directors; and
• companies for providing the information on independent directors available on the data bank.

Duties of the Institute

The institute shall comply with the following-

• to  conduct an online proficiency self-assessment test covering companies law, securities law, basic accountancy, and such other areas relevant to the functioning of an individual acting as an independent director;
• to prepare a basic study material, online lessons, including audiovisuals for easy reference of individuals taking the online proficiency self-assessment test;
• to provide an option for individuals to take advanced tests in the areas prepare the necessary advanced study material in this respect. 

The institute shall daily, share with the Central Government, a cumulative list of all individuals-

• whose names have been included in the data bank along with the date of inclusion and their Income Tax PAN or Passport number in case of foreign director (not required to have Income-Tax PAN);
• whose applications for inclusion in the data bank have been rejected along with grounds and the dates of such rejection; and
• whose names have been removed from the data bank along with grounds and the dates of such removal.

Compliances by independent director

The Central Government, vide Notification No. GSR 804(E), dated 22.10.2019 made the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019, with effect from 01.12.2019.

Vide this amendment Rule 6 has been substituted for the existing one.  According to this Rule the existing independent director of a company shall within 3 months from 01.12.2019 apply online to the institute for inclusion of his name in the data bank.  Likewise any person who intends to get appointed as an independent director in a company after 01.12.2019, shall before such appointment, apply online to the institute for inclusion of his name in the data bank   The inclusion in the data bank may be for a period of 1 year or 5 years or for his life-time, and from time to time take renew, till he continues to hold the office of an independent director in any company.  Any individual, including an individual not having DIN, may voluntarily apply to the institute for inclusion of his name in the data bank.  The application for renewal shall be made within a period of 30 days from the date of expiry of the period.  If it is not renewed within such period the name of such individual shall stand removed from the data bank of the institute.  No application for renewal shall be filed by an individual who has paid life-time fees for inclusion of his name in the data bank.  The said person has to comply with the following-

• Every independent director shall submit a declaration to the Board, each time he submits the declaration required under sub-section (7) of section 149 of the Act.
• He  shall pass an online proficiency self-assessment test conducted by the institute within a period of 1year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the databank of the institute.  An individual who has obtained a score of not less than 60% in aggregate in the online proficiency self-assessment test shall be deemed to have passed such test.  There shall be no limit on the number of attempts an individual may take for passing the online proficiency self-assessment test.

The individual who has served for a period of not less than 10 years as on the date of inclusion of his name in the databank as director or key managerial personnel in a listed public company or in an unlisted public company having a paid-up share capital of ₹ 10 crore or more shall not be required to pass the online proficiency self-assessment test.  For the purpose of calculation of the period of 10 years referred to in the first proviso, any period during which an individual was acting as a director or as a key managerial personnel in two or more companies at the same time shall be counted only once