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
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:
- who, in the opinion of the Board, is a person of integrity and possesses
relevant expertise and experience;
- 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:
- who, in the opinion of the board of directors, is a person of integrity
and possesses relevant expertise and experience;
- who is or was not a promoter of the listed entity or its holding,
subsidiary or associate company;
- who is not related to promoters or directors in the listed entity, its
holding, subsidiary or associate company;
- 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
(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
- the Public Companies having paid up share capital of ten crore rupees or
- the Public Companies having turnover of one hundred crore rupees or more;
- 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
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
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]
- 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;
- Bring an objective view in the evaluation of the performance of board
- Scrutinize the performance of management in meeting agreed goals and
objectives and monitor the reporting of performance;
- Satisfy themselves on the integrity of financial information and that
financial controls and the systems of risk management are robust and
- Safeguard the interests of all stakeholders, particularly the minority
- Balance the conflicting interest of the stakeholders;
- 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;
- 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-
- Executive directors can be appointed from within the company while an
independent director is to be appointed from outside the company.
- ESOPs can be granted to an executive director while the same cannot be
granted to an independent director.
- executive directors are liable to retire by rotation while non-executive
directors and not liable to retire by way of rotation.
- 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.
- Executive directors cannot become chairman of various committees of
board while a chairman of committees of board has to be independent
- 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.
- 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.
- 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.
- 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.
- Section 2(10) of the Cpmpanies Act, 2013
- Definitions, business dictionary, http://www.businessdictionary.com/definition/director.html.
- Definitions, business dictionary, http://www.businessdictionary.com/definition/company-director.html.
- Section 2(47) of the Companies Act, 2013.
- Rule 16, SEBI (LODR) , 2015.
- Rule 4, The Companies (Appointment and Qualification of Directors)
- Part II Schedule IV, Companies Act, 2013.
- Energy Watchdog vs. Union Of India & Ors W.P.(C)No.9269/2017.