Requirements:
An independent director is someone who does not have any material or pecuniary relationship with the company/directors. Section 149(6) of the Companies Act 2013 [Act] prescribes the criteria for independent directors which are as follows:
Remuneration:
The Act expressly disallows independent directors from obtaining stock options and remuneration other than sitting fees and reimbursement of travel expenses for attending the board and other meetings. Profit related commission may be paid to them, but subject to the approval of the shareholders. The reason for restricting the remuneration was to prevent personal financial nexus with the company and to safeguard their independence. However, the flip side is if the remuneration is not attractive then it would be difficult for companies to attract suitable and experienced persons for the position.
An independent director is someone who does not have any material or pecuniary relationship with the company/directors. Section 149(6) of the Companies Act 2013 [Act] prescribes the criteria for independent directors which are as follows:
- such individuals must possess integrity and relevant industrial expertise;
- such individuals must not have any material or pecuniary relationship with the company or its subsidiaries;
- they or their relatives should not have had any pecuniary relationship with the company or its subsidiaries, amounting to 2% or more of its gross turnover or total income or INR 5 million, whichever is less, during the two immediately preceding financial years or in the current financial year;
- such appointees or their relatives should not have any key managerial position in the company or its subsidiary companies during any of the three preceding financial years;
- such persons or their relatives should not have been an employee of the company or its subsidiary companies during any of the three preceding financial years;
- they or their relatives must not be a director of a nonprofit organization, which receives 25% or more of its receipts from the company or its subsidiary companies or its promoters/directors or from anyone who holds 2% of voting rights in such companies;
- such individuals must not be a promoter of the company or its subsidiaries;
- they must not hold more than 2% voting rights in the company either by themselves or together with their relatives.
However 'independence' is not affected if a relative of the independent director holds a key position in a competitor entity. Both under the Companies Act and SEBI's Listing Agreement, it is possible for a director to be an independent director of a company, though his or her spouse/ relative is a director of a competitor company,
Remuneration:
The Act expressly disallows independent directors from obtaining stock options and remuneration other than sitting fees and reimbursement of travel expenses for attending the board and other meetings. Profit related commission may be paid to them, but subject to the approval of the shareholders. The reason for restricting the remuneration was to prevent personal financial nexus with the company and to safeguard their independence. However, the flip side is if the remuneration is not attractive then it would be difficult for companies to attract suitable and experienced persons for the position.
