India is the fifth largest economy in the world wherein the contribution of
companies plays a prominent role as it enables financial stability to people,
meets their demands regarding desired goods and services, generates employment
and moreover, it acts as the backbone of economy. In the OECD, the business
sector as a whole produce 72% of GDP, and companies with annual revenues of $1
billion or more make up a rising portion of that.
This area comes under the umbrella of Companies act, 2019 (referred as Act
hereinafter), a legislation that regulates the companies and businesses in India
by controlling the formation of companies, duties and responsibilities of
directors and their dissolution.
"A corporation is an artificial being, invisible, intangible and existing only
in contemplation of law." It acts through living persons and herein the
exigency is felt to appoint some human agents who could look after the
management and supervise the activities of the company. Board of director is
collective body of directors of the company who are the hands behind the
functioning of a company and among them one is independent director.
The Concept Of Independent Director
The Act mentions that "independent director" means an independent director
referred to in sub-section (6) of section 149 of the Act. "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."
Basically an independent director is a non-executive director and an important
component of the board of director and is the non-executive director who has no
financial ties, work in the best interest of the company, acts as a watchdog and
supervise the functioning being unbiased. The concept of "independent directors"
is new to India; it was first brought to India by the 1999 Kumar Mangalam Birla
committee on corporate governance.
Three years later the Naresh Chandra committee gave governance more thought.
Finally, in 2004 the Narayan-Murthy committee affected changes to clause 49 of
the listing agreement. This concept has been copied from the English laws and
implemented in the similar way in India.
Who Can Become Independent Director?
Section 149(6) of the Act prescribes the criteria for independent director which
is as following:
Required Companies To Appoint Independent 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
company, 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 a transaction not exceeding ten per cent. 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
- None of whose relatives:
- Is holding any
security of or interest in the company, its holding, subsidiary, or
associate company during the two immediately preceding financial years
or during the current financial year.
Exception- that the relative may hold security or interest in the
company of face value not exceeding fifty lakh rupees or two per cent of
the paid-up capital of the company, its holding, subsidiary, or
associate company or such a 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 an 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 two per cent or more of its gross turnover or total income
singly or in combination with the transactions referred to in sub-clause
(i), (ii) or (iii);
- who, neither himself nor any of his relatives:
holds or has held the position of a key managerial personnel or is or
has been an employee of the company or its holding, subsidiary, or
associate company in any of the three financial years immediately
preceding the financial year in which he is proposed to be appointed;
Provided that in the case of a relative who is an employee, the
restriction under this clause shall not apply for his employment during
the preceding three financial years.
- is or has been an employee or proprietor or a partner, in any of the
three 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
- 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 a
- holds together with his relatives two per cent. or more of the total
voting power of the company; or
- is a Chief Executive or director, by whatever name called, of any
nonprofit 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 two per cent. or
more of the total voting power of the company.
|Type Of Company
|Requirement Of Independent Director
|Every listed public company
|Shall have at least one-third (1/3rd) of the
total number of directors
(in case of any fraction contained in such one-third number shall be rounded
off as one) e.g. 3.5 will be rounded into 4
(The paid-up share capital or turnover or outstanding loans, debentures and
deposits, as the case may be, as existing on the last date of the latest audited
financial statements shall be taken into account.)
- Having paid-up share capital of ten crore rupees or more; (10 crore) or
- Having turnover of one hundred crore rupees or more; (100 crore) or
- Having, in aggregate, outstanding loans, debentures and deposits,
exceeding fifty crore rupees.
|Shall have at least two directors as independent
|If a company ceases to fulfil any of three
conditions laid down above for three consecutive years
|It shall not be required to comply with these
provisions until such time as it meets any of such conditions.
Unlisted public Company of following classes:
- A joint venture
- A wholly owned subsidiary; and
- A dormant company (defined under section 455 of act)
A company covered under this rule 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:
A company belonging to any class of companies for which a higher number of
independent directors has been specified in the law for the time being in force
shall comply with the requirements specified in such law.
Prominence Of An Independent Director
It is important that insiders do not take undue advantage of their position and
take unfair advantage. In order to prevent such situation, the demand for
Independent Director has risen during the recent years in India. Independent
directors can counterbalance managerial infirmities in the company.
ensure legal and ethical behavior of the company. . It has been decided in
Central Government Vs. Sterling Holiday Resorts (India) Ltd. and Ors.
that "the Board of directors should be strengthened by appointing independent
And some other importance of independent director are as following:
- Brings objectivity to the Board process
- Improves corporate governance
- Ensures Statutory Compliances
- To protect minority shareholders
- Risk Management and Review
The analogy which is drawn from analyzing the concept of independent director
has been brought in order to ensure natural justice which includes three
important principles namely opportunity to be heard, nobody will be judge in his
own cause and a reasonable decision.
The concept of independence director makes sure to protect the interest of
minority and also to save guard the stakeholders from the exploitation which me
occur due to wings and fancies of executive directors of a company moreover it
ensures that corporate governance is followed promoting justice equity and good
Moreover, the implementation of the concept of independent director in real life
seems to be something which deviates from its objective with which it has been
included due to the fact that the presence of independence in the part of
independence director seems to be like a Mirage in the desert due to the fact
that the board of director which includes executive highly influence the
decision making and there is least chance of unbiasedness.
The concept of including the concept of independent director seems justified but
the gap between the concept in paper and implementation in real life seems
broadly bridged. The independence of the independent director is still a matter
of debate as the decision making of the board of director is greatly influenced
by the executive directors.
There is a need that more strict actions should be taken by the legislation in
order to ensure that corporate governance meets the welfare of people by
providing such a mechanism which could ensure performance of company in a fair
just way which is not only enhances the profit of company but also adds to the
betterment of society by ensuring that people who are behind the corporate veil
actually and morally and refrain from doing and unfair practices.
- MARSHALL, J in Dartmouth College v. Woodward, 4 L Ed 629
- 2006 131 CompCas 6 CLB, 2006 71 SCL 372 CLB