Independent Directors

Who is an independent director?
The Companies Act, 2013, defines an independent director of a company as a person who does not have any material or pecuniary relationship with the firm, or its directors and promoters. The independent director cannot be a managing director, a whole-time director or a promoter of the firm or its subsidiaries. It essentially means that companies cannot appoint family members or friends of promoters as independent directors.
What are the qualifications of an independent director?
An independent director is required to have appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.
How are independent directors appointed?
  • The Companies Act, 2013, says that one-third of the directors on board of every public-listed company must be independent directors.
  • The Securities and Exchange Board of India (SEBI) norms also require the same of any listed company where the chairman of the board is a non-executive director.
  • In case the company does not have a regular non-executive chairman, the SEBI norms specify, at least half of the board should comprise independent directors.
  • Independent directors are appointed by passing a resolution at the general meeting of shareholders.
  • Under the current norms, a person cannot serve as an independent director in more than seven listed companies.
  • A person who serves as a whole-time director in a listed company cannot serve as an independent director in more than three listed companies.
What is the tenure of independent directors?
The maximum tenure of an independent director can be five years. However, they can be re-appointed for another term of up to five years through a special resolution by the company.
What is the role of independent directors?
Their main role is to protect the interest of minority shareholders and improve corporate governance at the firm. They are also required to analyse the performance of the management and mediate in situations of a conflict between the management and the shareholders’ interest.
Typically, independent directors must meet once a year, without the management of the firm, to evaluate the performance of the chairperson of the company and its non-independent directors.
Latest Developments
More recently, the boardroom battle between Ratan Tata, Chairman Emeritus of Tata Sons, and Cyrus Mistry, former chairman of Tata Sons, exposed the vulnerability of independent directors who stand up to or take on a dominant shareholder. Nusli Wadia, one of the most vocal independent directors of the Tata Group, was removed from Tata firms after he publicly backed Mistry, who complained of mismanagement and corporate governance failures within the group’s companies.

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