Applicability of Independent Director and provision relating to Eligibility
Introduction : It is important to know that who can be Independent director and which are the companies that are mandatorily required to appoint Independent directors. Whether there is any amendment which has been made in the definition of Independent Director; In this article we will cover all the aspect relevant to it.
Applicability of Independent Director:
Every Listed Companyis required to appoint Independent Director, Number of Independent directors in listed company shall be at least one-third of total number of directors on board of company. It shall be noted that here, in case while determining number of independent that are required to be appointed if number is fraction it shall be rounded upwards.
For unlisted company as per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following classes of companies shall have at least 2 directors as independent directors.
Which amount is to be taken to calculate above limit?
To calculate the above limit amount which is prevailing as on last date of latest audited financial statement is to be considered.
What if entity is also required to form audit committee?
As per section 177(2) of Companies Act, 2013; Audit committee shall have minimum of three directors and in which Independent Director shall be forming majority.
What if in current year company is not fulfilling criteria as specified above?
It has been clearly mentioned that company is required to comply with the provision even it is fulfilling any of the condition in receding three years. Therefore, if company wants any relaxation then in that case it shall be noted that none of the conditions has been fulfilled in preceding 3 years.
If we take an illustration that how much minimum number of independent directors will be required to be appointed under various scenario it will be as follows:
|Particulars||Directors on Board||Requirement of Audit Committee||Members in Audit Committee||Minimum Independent directors required|
Scenario 1: It is listed company and therefore will be required to appoint at least 1/3th directors as Independent Director and Majority of members in Audit Committee shall be Independent directors, Higher of two are required to be appointed. Therefore, minimum independent director that will be required to appointed will be 3 (1/3thof 9 rounded upward or majority in 5 members of Audit Committee i.e. 3).
Same way in scenario 4 and 6 calculation will be made to calculate minimum number of directors.
Scenario 2: In case of company being unlisted but fulfilling all the requirement specified above in rule 4, then it will be required to appoint minimum 2 directors as independent director and also if it is required to constitute audit committee then in audit committee members shall consist majority of director as Independent director.
Therefore, in Scenario 2 and Scenario 4, two directors are required to be appointed as Independent Directors (i.e. minimum as required by section 149)
Scenario 3: Minimum Independent director that will be required to be appointed will be 3. (i.e. higher of 2 which is required by section 149 and 3 which is required as per section 177 i.e. majority members in audit committee being independent directors.)
What if there is vacancy in place of Independent director? Who will fill the vacancy?
In case there is vacancy on place of independent director, it shall be noted that if company has minimum number of independent directors than there is no restriction on time limit within which independent director is required to be appointed, however if company has vacancy in place of independent director and it does not fulfills criteria of minimum independent director requirement than Board of Directors shall fill the vacancy in immediate next board meeting or within 3 months from date of vacancy whichever is later.
Whether there is any exemption which has been provided to any class of companies even if they are fulfilling the conditions specified in rule 4?
If company is a joint venture, a wholly owned subsidiary or a dormant company then in that case exemption is provided; i.e. they are not required to appoint independent directors; but it shall be noted if the above class of company are listed company then in that case again they are required to appoint 1/3thof there directors on board as Independent Director.