Procedure for Appointment of Independent Director

Introduction

Section 2(47) of Companies Act, 2013 (hereinafter referred to as CA, 2013) defines independent director as the one referred to in sub-section (6) of Section 149. Further, Section 149(4) provides that every listed company shall have at least one-third of the total number of directors as independent directors. The central government may prescribe the minimum number of independent directors in case of any class or classes of public companies.  Further, Section 149(6) elaborates that an independent director in relation to a company is a director other than a managing director (MD) or a whole-time director (WTD) or a nominee director.

Independent director is in the opinion of the board, a person of integrity and possesses relevant expertise and experience. He is not a promoter of the company or its holding, subsidiary, or associate company. He is not related to promoters or directors in the company, its holding, subsidiary, or associate company. Further, he does not have or had any pecuniary relationship 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. Also, neither himself nor any of his relatives hold or held any key managerial personnel position or been an employee of the company/holding/subsidiary/associate company in the immediately preceding three financial years.

As per Section 149(10), 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. However, 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.

Important pre-requisites to ensure before appointment of independent director

• In every listed company, where equity shares are listed, where the chairperson of the Board of Directors a non-executive director, at least one-third of Board of Directors shall comprise independent directors.
• And in case, the listed company does not have a regular non-executive chairperson, at least half of Board of Directors shall comprise independent directors.
• And if the regular non-executive chairperson is a promoter of the company, then at least half of the Board of Directors of the listed company shall consist of Independent Directors.
• In case of unlisted public company, 1) having paid up share capital of Rs 10 crore or more, 2) having turnover of Rs 100 crore or more; or 3) which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs 50 crore- shall have at least 2 directors as independent directors.
• Independent directors are not required in case of unlisted public company if they are in nature of 1) joint venture 2) wholly owned subsidiary, 3) a dormant company as defined under Sec. 455 of the Act.
• A person must possess DIN (Director Identification Number) to be appointed director per Section 152(3).
• No person shall be appointed as a director of the company who is disqualified under Section 164.
• No person shall be appointed as an alternate for independent director.
• An independent director is not entitled to any remuneration, other than sitting fee, reimbursement of expenses for participation in board meeting and profit related commission as approved by the members.
• Independent director is not entitled to any stock option.
• As per Section 150, the company may select independent director, if need be, from data bank maintained by any association, body, institute or association, as may be notified by the Central Government.
• Section 149(8) requires that the Company and independent directors shall abide by the code for independent directors specified in Schedule IV.
• Section 150 of the CA, 2013 provides the manner of selection of independent directors and maintenance of databank of independent directors.
• As per Schedule IV, terms and conditions of appointment of independent directors shall be open for inspection at the registered office of the company by any member during normal business hours.
• The proposed independent director should not be debarred from appointment by any order of SEBI or other authority.

Step- by-Step Procedure to Appoint an Independent Director

Step 1: Seek Written Consent and Declaration, etc.

• In compliance with, Section 149(6) and (7) read with Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014 and Schedule, ensure that the conditions specified in the Act and SEBI (LODR) Regulations, 2015 are fulfilled for the appointment as an independent director.
• Further, obtain written declaration in conformity with SEBI (LODR) Regulations, 2015 to ensure Independence from the proposed appointee that he is independent as required to hold the position.
• Obtain written consent from person proposed to be appointed as additional independent director in Form DIR-2.
• Then a declaration has to be obtained from the proposed additional independent director in Form- DIR-8 that he is not disqualified to be a director under the Act.
• Obtain disclosure in Form MBP-1 from the proposed additional independent director.

Step 2: Nomination and Remuneration Committee (NRC)

• If a company needs to constitute NRC under Section 178, then the committee shall recommend the appointment of independent director to the Board of Directors of the company.

Step 3: Constitute Board Meeting

• Conduct a board meeting or approve the required by way of board resolution by circulation.
• Consider appointment of independent director as an additional director subject to the approval of members of the company.
• Decide the term of ID which shall not be more than 5 years.
• Take note of the disclosure of interest received from the independent director.
• Also, authorize CS or CFO or any director of the company to file requisite form and return with ROC

Step 4: Time Bound Disclosures

• A listed company has to submit disclosure of appointment to the stock exchange where shares are listed within 24 hours from the date of board meeting.
• The same has to be posted on the company website within 2 days.

Step 5: Appointment Letter is Issued

• An appointment letter is issued to the ID informing the term of appointment, expectation of the board, fiduciary duties, code of business ethics, list of actions to be performed, remuneration, etc.
• The term and conditions of appointment of ID should also be posted on the company’s website.

Step 6: Time Bound Disclosures

• A listed company has to obtain disclosure in Form B within 7 days of appointment, from the director.

Step 7: Form and Documents Filing

• Thereafter, have to file the return of appointment of additional director in category of independent director with the ROC within 30 days from the date of appointment in Form DIR-12 along with the requisite documents and fees.

Step 8: Statutory Register

• Necessary entries have to be made in the register of the directors and KMP and register of contracts or arrangements in which directors are interested in Form MBP-4.
• Approval of shareholder in respect the appointment of the ID at the next AGM. Here the same procedure has to be followed for appointment of a director other than a retiring director at AGM.
• There should be a statement stating that the proposed independent director fulfils the conditions specified in the Act, in the opinion of the Board.

Step 9: Time Bound Disclosures

• A listed company has to submit disclosures of the proceedings of general meeting to stock exchange where shares are listed within 24 hours from conclusion of general meeting.
• The same has to be posted on the website of the company within 2 working days.
• Further, listed company has to submit to the stock exchange within 48 hours of conclusion of general meeting stating the details of the voting result in the format SEBI has provided.
• Then, file return for change of designation of independent director with Registrar of Office (ROC) within 30 days from date of AGM (Annual General Meeting) in Form DIR-12 along with requisite documents and fees.

Documents Required

• One color passport size photo
• Identity proof   
  • Indian national- Income tax- PAN is mandatory
  • Foreign national- passport is mandatory
• Proof of residence of applicant- passport, voter ID, ration card, electricity bill, etc.
  • Indian Applicant- document should not be older than 2 months from date of filing the application.
  • Foreign Applicant- address proof should not be older than 1 year from date of filing the application.
• Board resolution proposing his appointment as director in an existing company
• Declaration in Form DIR-3A, if required.
• The documents shall be either self-attested by the applicant and duly attested by either Public notary or a gazette officer of a government. The attesting authority must mention on the documents- 1) signature; 2) name in full in capital; 3) Registration No.; 4) Seal/Stamp.
• If the person is residing outside India, then the attached supporting documents must be attested by the consulate of the Indian Embassy, Foreign public notary.
• In order to file the return of appointment of independent director as an additional director in Form DIR- 12 then it requires-
  • Written consent in Form DIR-2.
  • Declaration in Form DIR-8.
  • Declaration of independence under Section 149(7).
  • Certified true copy of Board Resolution.
  • Details of interest in other entities, if any.
• For return of appointment of independent director at general meeting, a certified true copy of ordinary resolution is needed.

Conclusion

This whole process can take between 4 days to 91-95 days. Independent Directors are an essential part of the board. They recommend CSR (Corporate Social Responsibility) policy to the board. Give unbiased judgments and safeguard the interest of minority shareholders. They keep a check on the activities of the company and ensure that no unethical or fraudulent activities are happening in the company. Independent Director has to hold at least 1 meeting in a year. They hold a crucial role in meetings and also as a member of the Audit Committee, Nomination and Remuneration Committee. His presence ensures implementation of best corporate governance practices.