Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It ensures transparency, accountability, and fairness in a company’s relationship with all its stakeholders. In India, corporate governance gained prominence after several corporate scandals and failures. A

key pillar of effective governance is the role of Independent Directors who act as custodians of stakeholders’ interests, especially minority shareholders.

Legal Framework Governing Corporate Governance in India

India's legal and regulatory framework for corporate governance is primarily governed by:

• Companies Act, 2013

• Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR)

• Clause 49 of the erstwhile Listing Agreement

Definition of Independent Director

According to Section 149(6) of the Companies Act, 2013, an Independent Director is a director other than a managing director, 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;

• Who is not a promoter or related to promoters or directors of the company, its holding, subsidiary, or associate;

• Who has or had no pecuniary relationship with the company, its subsidiaries, promoters, or directors during the two immediately preceding financial years or the current year;

• Who holds no managerial position or is not an employee of the company, its subsidiaries, or holding company.

Applicability of Independent Directors

As per Section 149(4) and Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following companies must appoint at least two Independent Directors:

• Listed public companies

• Public companies having:

  • Paid-up share capital of ₹10 crore or more

  • Turnover of ₹100 crore or more

  • Outstanding loans, debentures, and deposits exceeding ₹50 crore

Duties of Independent Directors

Section 149(8) and Schedule IV of the Companies Act, 2013 prescribe the Code for Independent Directors. The key duties include:

• Upholding ethical standards and acting objectively

• Balancing conflicting interests of stakeholders

• Attending Board and Committee meetings actively

• Safeguarding confidential information

• Reviewing the performance of management and suggesting improvements

Tenure and Reappointment

As per Section 149(10) and (11):

• An Independent Director can hold office for a term of up to 5 consecutive years.

• He/she can be reappointed for a second term by passing a special resolution.

• After two terms, a cooling-off period of 3 years is mandatory before reappointment.

Liabilities of Independent Directors

Independent Directors are not liable for any act of omission or commission by the company unless:

• They were involved in the act knowingly

• It happened with their consent or connivance

• It is attributable to lack of due diligence

This is specified under Section 149(12).

SEBI LODR Requirements for Listed Companies

SEBI has further strengthened the role of Independent Directors through the SEBI (LODR) Regulations, 2015, especially Regulations 16 to 25:

• At least one-third of the board of a listed company must comprise Independent Directors.

• Audit Committee, Nomination and Remuneration Committee, and Stakeholders’ Relationship Committee must include Independent Directors.

• The Chairperson of the Board must be a non-executive director and should not be related to the MD/CEO if the company has a regular non-executive chairperson.

Performance Evaluation of Independent Directors

As per Section 178(2) and SEBI LODR, the performance of Independent Directors must be evaluated annually by the Board. Criteria include:

• Participation in Board meetings

• Decision-making quality

• Upholding corporate governance standards

Resignation and Disclosure

An Independent Director must give a reasoned resignation letter which the company is required to file with Registrar of Companies (ROC) under Form DIR-12. Additionally, disclosures are also made to the stock exchange in case of listed companies.

Corporate Governance Benefits Through Independent Directors

• Enhances transparency and accountability

• Improves investor confidence

• Acts as a check on promoter dominance

• Strengthens internal controls and risk management

• Ensures compliance with applicable laws

Frequently Asked Questions (FAQs)

- Who can become an Independent Director in India?

Any person who is not connected to the company or its promoters in any capacity and fulfills the eligibility conditions under Section 149(6) of the Companies Act, 2013.

- Is it mandatory for all companies to appoint Independent Directors?

No. Only listed companies and certain public companies (based on capital, turnover, or borrowings) are required to appoint Independent Directors.

- Can a retired government servant be appointed as an Independent Director?

Yes, provided they meet the eligibility criteria and have no pecuniary or other conflicts of interest.

- How is the independence of a director determined?

Independence is determined based on factors such as:

• Lack of any pecuniary relationship

• No past or current employment with the company or its group

• No material financial dealings with the company

- Is there any registration or examination required for Independent Directors?

Yes. MCA has launched an Independent Directors' Databank, and as per Rule 6 of Companies (Appointment and Qualification of Directors) Rules, 2014, an individual must register and pass an online proficiency self-assessment test, unless exempted based on experience.

- What happens if a company does not appoint Independent Directors as required?

Failure to comply with these provisions may attract penalties under Section 172 of the Companies Act, 2013, which includes fines for the company and its officers.

- Are Independent Directors paid by the company?

Yes, they are entitled to:

• Sitting fees (as per Section 197)

• Reimbursement of expenses

• Profit-related commission, if approved by shareholders

However, they are not entitled to stock options.

Conclusion

Independent Directors play a vital watchdog role in enhancing corporate governance in India. The Companies Act, 2013 and SEBI regulations have created a strong legal foundation to support their functioning. Their presence ensures that decisions are made with fairness, due diligence, and with stakeholders' interests in mind. As India moves towards global corporate governance standards, the role of Independent Directors will continue to evolve and strengthen.