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Role of Independent Board of Directors under The Companies Act, 2013

Board of Directors, as per the Companies Act, 2013 means the collective body of the directors of a company.[i] It is a collective body of persons who are responsible for taking long term decisions on behalf of a company. As, a company is an artificial person, created by law having separate legal entity which functions different from the member who compose it and the members and shareholders are not responsible for the supervision of the company, a board is formed to perform such functions on behalf of a company.

Director may be defined as a person who leads, manages, or supervises an organization, program, or project. [ii] Director, in relation to a company may be defined as an appointed or elected member of the board of directors of a company who, with other directors, has the responsibility for determining and implementing the company's policy. [iii]

Independent Board of Directors

There was no provision for the appointment of Independent Board of Directors to a Company in the previous Companies Act. Appointment of Independent Board of Directors was made mandatory by the present Companies Act 2013 with the purpose of ensuring good corporate governance and enhancing the credibility of the company.

As per the Companies Act, 2013, An independent director means an independent director referred to in sub-section (6) of section 149[iv]. As per the section 149(6), 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 fulfills the requirements mentioned therein.

All those provisions which are mentioned in the provisions of section 149(6) are there to ensure that the person to be appointed would be a person of integrity and possesses requisite expertise and experience and is not having any sort of pecuniary or other interest in the company for whom he will be appointed as an independent director, nor any relative or family member of such director is having such interest in the company which could make his decision or actions in that company as the director of that company to be biased.

These provisions are there to ensure the fulfillment of the purpose of appointing an independent director to a company which is already mentioned above.

For more clarity of what an independent director exactly is, we can refer some definitions and provisions.

Section 149(6), Companies Act, 2013- 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:
  1. who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
  2.  i. 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.
Along with that, various other restrictions as to neither he nor any of his relatives should have any prescribed percentage of the pecuniary or other kind of interest in the company, etc.

As per the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015[v]
"Independent director" means a non-executive director, other than a nominee director of the listed entity:
  1. who, in the opinion of the board of directors, is a person of integrity and possesses relevant expertise and experience;
  2. who is or was not a promoter of the listed entity or its holding, subsidiary or associate company;
  3. who is not related to promoters or directors in the listed entity, its holding, subsidiary or associate company;
  4. who, apart from receiving director's remuneration, has or had no material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year.

(C) holds together with his relatives two per cent or more of the total voting power of the listed entity.

And there are many other regulations which provide for the requirements for an independent director to the board.

Some guidelines as to the minimum number of Independent Directors to be appointed in what particular case are given in Rule 4 of the Companies (appointment and qualification of directors) rules 2014.

4. Number of independent directors [vi]

The following class or classes of companies shall have at least two directors as independent directors:
  1. the Public Companies having paid up share capital of ten crore rupees or more; or
  2. the Public Companies having turnover of one hundred crore rupees or more; or
  3. the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees.

Purpose of appointing Independent Directors to the Board

Board of Directors is responsible for the superintendence, control, directions, actions and taking decisions on the behalf of a company. In order to ensure that their decisions would not be biased and free from being in their interest rather than in the interest of the company, there are mandatory provisions for the appointment of Independent Directors, outside directors or non-executive directors.

The purpose of appointing the Directors from outside the company is to ensure that neither they, nor their family member or relative is having any pecuniary or other kind of interest in the company which can affect his decision as a director of that company. This would ensure good governance, transparency and authenticity in the decisions and acts of the company because an Independent Director is having the power to raise the red flag as and when he feels that the act or decision of the board is not appropriate, favorable or in the interest of the company and is taken for some personal enrichment of the decision maker.

Role of Independent Board of Directors:

Schedule IV to the Companies Act, 2013 provides for a Code for Independent Directors which defines the conduct and acts expected on part of an Independent Director and which could be said to be the job and identity of an Independent Director.

Part I of the schedule provides for the Guidelines of professional conduct on part of Independent Directors as to how he should hold ethical standards, how to act while exercising his duties, to act in a bona fide manner and not to abuse or misuse the position held by him, etc.

The Role and functions of the Independent Directors are there under part II of the Schedule IV which says that:

The independent directors shall: [vii]

  1. Help in bringing an independent judgment to bear on the Board's deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;
  2. Bring an objective view in the evaluation of the performance of board and management;
  3. Scrutinize the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;
  4. Satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
  5. Safeguard the interests of all stakeholders, particularly the minority shareholders;
  6. Balance the conflicting interest of the stakeholders;
  7. Determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;
  8. Moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder's interest.

Energy Watchdog vs. Union of India & Ors [viii]

It was held in this case that, ‘Appointment process of independent directors shall be independent of the company management. While selecting independent directors the board shall ensure that there is appropriate balance of skills, experience and knowledge in the board so as to ensure the credibility and authenticity of the acts and decisions of the Board.'

An Independent Director acts as a guide, coach, and mentor to the Company. The role includes improving corporate credibility and governance standards by working as a watchdog and help in managing risk. Independent directors are responsible for ensuring better governance by actively involving in various committees set up by company.

Since, the provisions of the Companies Act, 2013 require an Independent Director to not to be associated to the company in any manner, they are very different from the other Directors to the Board of the Company. The way an Independent Director is appointed from outside the company and is a person who is not having any pecuniary or other form of interest in the Company, it could be ensured that he will be acting in a just, equitable and fair manner and his all acts would be directed to the protection of interests of the stakeholders to the Company.

Some major differences which could be pointed out between a Director (Executive Director) and an Independent (Non-Executive) Director-

  1. Executive directors can be appointed from within the company while an independent director is to be appointed from outside the company.
  2. ESOPs can be granted to an executive director while the same cannot be granted to an independent director.
  3. executive directors are liable to retire by rotation while non-executive directors and not liable to retire by way of rotation.
  4. executive directors are appointed for one year and can be reappointed but the same is not there in the case of a non-executive director as they can be appointed for 5 years at a time and can serve 2 consecutive terms.
  5. Executive directors cannot become chairman of various committees of board while a chairman of committees of board has to be independent director.
  6. Executive directors can have monetary or pecuniary interest or relationship with the company but the same is strictly prohibited in the case of an independent director.
  7. There is no need to hold a separate meeting of executive directors only but at least one meeting must be held of independent directors where only independent directors will be present there.
  8. There is no prescribed minimum number of executive directors to be appointed in a company, while, there is such prescription in the case of appointment of independent directors which is 1/3 of the total directors in case of a listed company and at least 2 in case of an unlisted company.
  9. Every company is required to appoint executive directors on their board whereas only certain companies fulfilling certain prescribed parameters are required to appoint independent directors.

So, it is very clear from the above discussed provisions, situation and the cases that the role of an independent director in a company is very important in order to ensure the protection, safeguard and guarantee to the interests of the stakeholders of the company. The directors, who are appointed to the board by the company from within the company may not be that much relied on as they are allowed to have pecuniary and other form of interests in the company which may at some point may result in making their decision biased.

So, it is for the purpose of increasing the credibility and authenticity of the decisions of the company and that of its board in its decisions and towards the interests of the stake holders that the mandatory provisions of the appointment of independent directors to the board of the company are appropriate and do not need any modification to the detriment of their appointment.

  1. Section 2(10) of the Cpmpanies Act, 2013
  2. Definitions, business dictionary,
  3. Definitions, business dictionary,
  4. Section 2(47) of the Companies Act, 2013.
  5. Rule 16, SEBI (LODR) , 2015.
  6. Rule 4, The Companies (Appointment and Qualification of Directors) Rules, 2014.
  7. Part II Schedule IV, Companies Act, 2013.
  8. Energy Watchdog vs. Union Of India & Ors W.P.(C)No.9269/2017.

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