Provisions And Process Of Appointment Of Independent Director under Section 149(6) of Companies Act, 2013 read with relevant Rules
Summary: The appointment of independent directors is crucial for corporate governance, governed by Section 149 of the Companies Act 2013, along with related rules and regulations. Applicable to listed companies and certain unlisted public companies, the process ensures transparency and compliance. Eligibility requires registration in the Independent Directors’ Databank and passing a proficiency test, with exemptions for experienced professionals. The tenure is limited to two consecutive five-year terms, followed by a three-year cooling-off period. The appointment process involves board approval, shareholder approval through ordinary resolution, and filing Form DIR-12. Companies must also issue appointment letters and maintain necessary registers. Reappointment follows a similar process, requiring a special resolution. The regulations address various queries, including the permissibility of shorter terms, limits on directorships, and handling casual vacancies, emphasizing adherence to legal requirements.
❖ Legal Framework:
√ Section 149: Defines the concept, eligibility, and tenure of Independent Directors.
√ Section 150: Requires IDs to register with the Independent Directors’ Databank and clear the proficiency test
√ Section 164: Non-Disqualification
√ Section 170: Register of Directors and KMP
√ Section 184: Disclosure of Interest by Director i.e. MBP-1
√ Rules 4 to 9 of Companies (Appointment and Qualification of Directors) Rules, 2014
❖ Applicability:
i. Every Listed Company (whether Public or Private)
ii. Every Unlisted Public Company with
-
- A Paid-Up Capital of Rs. 10 Crores or more
- Turnover of Rs. 100 Crores or more
- Outstanding loans of an amount in aggregate exceeding Rs. 50 Crores or more.
❖ No. of Independent Director:
- Every listed public company shall have at least one-third of the total number of directors as independent directors.
- Every unlisted Public Company shall have at least two independent Directors.
Note: If a Public Unlisted Company is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it:
Eligibility Criteria:
i. The proposed ID must register with the Independent Directors’ Databank maintained by the Indian Institute of Corporate Affairs (IICA).
ii. The individual must clear up the proficiency self-assessment at the time of appointment.
Question 1: Without clearance of proficiency self-assessment test, whether the name can be added to the databank? (DG)
Ans 1: Yes, a person’s name can be added to the Independent Directors’ Databank without clearing the proficiency self-assessment test.
Question 2: Once the name of the person is added to the data bank, the exam is due, as there is a two-year time frame. Within those two years, can such a person be appointed as an independent director? (DG)
Ans 2: No, a person who has registered in the Independent Directors’ Databank but has not yet cleared the Proficiency Self-Assessment Test CANNOT be appointed as an Independent Director until they pass the test or qualify for an exemption.
√ Registration in the databank alone is NOT enough to be appointed as an Independent Director.
× The person must first clear the test (or qualify for an exemption) before appointment.
Exemptions from the Test
Certain individuals are exempted from clearing the test if they have served as a director or key managerial personnel (KMP) for at least 10 years in:
- A listed company
- An unlisted public company with a paid-up share capital of ₹10 crore or more
- A body corporate incorporated under any Act
Ensure that the proposed candidate meets the eligibility requirements as per Section 149(6) some are mentioned below
- Must possess relevant expertise and experience.
- Should not have any pecuniary relationship with the company (except director’s fees and expenses).
- Should not be a promoter or related to promoters/directors.
- Should not hold more than 2% voting power in the company
Tenure of Independent Director:
As per Section 149(10) of the Companies Act, 2013, an Independent Director can be appointed for a term of up to 5 consecutive years.
- They are eligible for re-appointment by passing a special resolution in the general meeting.
- However, as per Section 149(11), an Independent Director cannot hold office for more than two consecutive terms (i.e., 10 years total).
- After completing two terms, they must take a cooling-off period of 3 years before being eligible for reappointment. During this period, they cannot be associated with the company in any other capacity.
STEPS FOR Steps for appointment of Independent Director:
Step 1: Select an Independent Director
The company should choose someone with the right skills, experience, and Integrity from Data Bank.
Step 2: Obtain Declaration from the proposed ID
- Obtain Form DIR-2 (Consent to act as a director).
- Obtain Declaration of Independence as per Section 149(7).
- Obtain declaration of Non disqualification of Director in form DIR 8
Step 3: Convey Board Meeting of Directors: (As per section 173 and SS-1)
- Issue Notice of Board Meeting to all the directors of the company at least 7 days before the date of Board Meeting.
- Attach Agenda
- Notes to Agenda
- Draft Resolution
* If selected person is not having DIN. First apply for his DIN by filing DIR 3 along with Board Resolution of Company
STEP – 4: Held Board Meeting: (As per section 173 and SS-1)
- Pass resolution for appointment as Independent Director.
As per Section 152 of the Companies Act, 2013, the Board cannot directly appoint a director. It can only appoint an Additional Director under Section 161(1), who holds office until the next AGM. For permanent appointments, shareholder approval in a general meeting is mandatory.
Therefore, companies have two options:
i. Appoint such a person as additional Independent Director and regularize in upcoming General meeting, OR
ii. Pass board resolution for appointment as Independent Director subject to approval of General Meeting.
*Below mentioned process as per option No. 2.
STEP – 5: Held General Meeting: (As per section 100 and SS-2)
- Pass Ordinary resolution for appointment as Independent Director.
Tenure of ID:
The tenure of an Independent Director is 5 years, extendable for another 5 years with the approval of shareholders by passing of Special Resolution (total max: 10 years).
STEP – 6: Held General Meeting: (As per section 100 and SS-2)
- Pass Ordinary resolution for appointment as Independent Director.
- The explanatory statement in the notice should include justification for appointing the individual as an Independent Director.
*As Ordinary Resolution passed, there no need to file any form like MGT-14.
STEP – 7: Issue of Appointment Letter
The Company should issue a letter of appointment that outlines the director’s terms, responsibilities, and remuneration.
STEP – 8: Filing of DIR 12
The company shall file from DIR 12 within 30 days of passing of Board resolution in case of additional Director or within 30 days of passing of shareholder resolution in case of normal independent Director. Attach the following documents:
- Certified True Copy of Board resolution copy.
- DIR-2 (Consent letter).
- Declaration of Independence.
STEP – 9: Make Necessary Entries in the Register of Directors
The Company must enter the necessary information in the Register of Directors and the Key Managerial Personnel and the register of contracts or arrangements in which directors are interested in Form MBP-4.
STEP – 10: Publication on Website
The terms of the appointment must be disclosed on the company’s website
PROCESS FOR REAPPOINTMENT OF AN INDEPENDENT DIRECTOR:
As per Section 149(10) & (11) of the Companies Act, 2013, an Independent Director (ID) can be reappointed for a second term, subject to the following process:
i. Board Approval
The Board holds the Board Meeting as per section 173 read with Secretarial Standard I. The Board of Directors approves the proposal for reappointment.
ii. Special Resolution in General Meeting
The reappointment must be approved by shareholders through a Special Resolution (i.e., at least 75% approval required). The company shall file MGT 14 with in 30 days of passing of such special resolution.
iii. Disclosure & Intimation
-
- The company must disclose the reappointment in the Board’s Report.
- File Form DIR-12 with the Registrar of Companies (ROC) within 30 days of reappointment.
Que: Can a Company appoint an independent director for a term of less than 5 years?
Ans: In view of the representations received by MCA asking whether an independent director can be appointed for a term of less than 5 years, the clarification circular specifies that the same is permissible. However, any appointment whether of 5 or less than 5 years will be regarded as ‘one term’. Section 149 (11) clearly stipulates that no person can hold office as an independent director for more than ‘two consecutive terms’. Thus, irrespective of the duration of each of the two terms (whether the same aggregates to 10 years or less) a person holding office for two consecutive terms shall be eligible for re-appointment only after the expiry of three years of ceasing to become an independent director.
Que: Is there any limit on the number of companies in which a person can act as an Independent Director?
Ans: As per Companies Act, 2013 there is a limit on the number of directorships prescribed under section 165 (1) of 20 companies (including any alternate directorship. There is no separate limit specified for independent directors.
Que: Can an existing independent director be treated as a non-executive, rotational director?
Ans: The existing independent directors cannot be treated as rotational directors. They will continue to act as independent directors till one year from the enforcement of this section (i.e. up to 31st March, 2015) and since the Explanation to section 152 (6) says that the for the purpose of calculating total number of rotational directors, independent directors shall not be included, hence, it is very clear that the they cannot be treated as non-executive rotational directors.
Que: How much time does the company have to appoint a new Independent Director in the event of a casual vacancy of Independent Director?
Ans: The act does not specify a time frame for the appointment of an independent director due to casual vacancy. Within a reasonable timeframe, the Board of Directors is required to appoint a new Independent Director.
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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).
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