Introduction

An Independent Director plays a critical role in maintaining the balance and transparency of a company’s governance framework. As defined under Section 149(6) of the Companies Act, 2013, an Independent Director is a non-executive director who brings impartiality, diverse expertise, and accountability to the Board. They help ensure that the company operates in the best interests of all stakeholders while adhering to ethical and regulatory standards.

Simplified Definition of Independent Director under Section 149(6) of the Companies Act, 2013

An Independent Director is a director who meets the following criteria:

1. Exclusion from Certain Roles

• The director must not be a Managing Director (MD), Whole-Time Director (WTD), or a Nominee Director.

2. Integrity and Expertise

• In the opinion of the Board, the director must have integrity and possess relevant expertise and experience.

3. Non-Promoter

• The director must not be a promoter of:

  • The company.

  • Its holding, subsidiary, or associate company.

4. No Relation to Promoters or Directors

• The director must not be related to:

  • Promoters.

  • Directors of the company, its holding, subsidiary, or associate company.

5. No Pecuniary Relationship

• The director must not have any pecuniary relationship, other than receiving remuneration, with:

  • The company.

  • Its holding, subsidiary, or associate company, during the two immediately preceding financial years or the current financial year.

6. Limited Transactions

• The director must not have any transactions with the company, its holding, subsidiary, or associate company exceeding 10% of their total income during:

  • The two immediately preceding financial years.

  • The current financial year.

7. Restrictions on Relatives

None of the director’s relatives should:

i. Holding Securities

• Hold securities in the company, its holding, subsidiary, or associate company exceeding:

  • Rs 50 lakh or

  • 2% of the paid-up capital (whichever is lower).

ii. Indebtedness

• Be indebted to the company, its holding, subsidiary, or associate company for an amount exceeding Rs 50 lakh.

iii. Guarantees

• Provide guarantees or securities with respect to indebtedness of any third party to the company, its holding, subsidiary, or associate company for an amount exceeding Rs 50 lakh.

iv. Pecuniary Transactions

• Have any other pecuniary transactions with the company, its holding, subsidiary, or associate company amounting to 2% or more of the gross turnover or total income (either singly or combined with the above-mentioned transactions).

8. Employment and Professional Connections

Neither the director nor their relatives should:

i. Employment

• Be a Key Managerial Personnel (KMP) or an employee of the company, its holding, subsidiary, or associate company during any of the three immediately preceding financial years.

ii. Professional Associations

• Be an employee, proprietor, or partner during the three immediately preceding financial years in:

  • A firm of Chartered Accountants (CA), Company Secretaries (CS), or Cost Accountants (CMA)providing services to the company, its holding, subsidiary, or associate company.

  • A legal or consulting firm that has had transactions with the company, its holding, subsidiary, or associate company amounting to 10% or more of the firm’s gross turnover.

iii. Shareholding

• Hold (together with relatives) 2% or more of the total voting power of the company.

iv. Non-Profit Organizations

• Serve as a Chief Executive Officer (CEO) or director of any non-profit organization that:

  • Receives 25% or more of its receipts from the company, its promoters, directors, or its holding, subsidiary, or associate company.

  • Holds 2% or more of the total voting power of the company.

9. Other Qualifications

• The director must also meet any additional qualifications as may be prescribed under relevant rules or regulations.

Conclusion

Independent Directors serve as the cornerstone of good corporate governance by ensuring fairness, accountability, and transparency. Their independence from the management and promoters safeguards the interests of minority shareholders and fosters trust among stakeholders. Understanding the eligibility criteria outlined in Section 149(6) of the Companies Act, 2013, is crucial for appointing suitable Independent Directors who can contribute to the company’s long-term success and sustainability.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

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