INDEPENDENT DIRECTOR - An Overview

INDEPENDENT DIRECTOR

Independent Director is that Non-Executive Director of the Company who does not have any material or pecuniary transaction with the Company, Directors, Promoters, senior managers, holding or subsidiary Company or associates apart from receiving managerial remuneration.

Independent Director under Clause 49 of Listing Agreement.

As per new circular, ‘independent director’ means non-executive director who :

1. Apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director. 
2. Is not related to promoters or persons occupying management positions at the board level or at one level below the board
3. Has not been an executive of the company in the immediately preceding three financial years
4. Is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares.
5. Is not a material supplier, service provider or customer or a lessor or lessee of the Company, which may affect independence of the Director.
   
6. Is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following :

      (i) The statutory audit firm or the internal audit firm that is associated  

          with the company, and 

        

       (ii) The legal firm(s) and consulting firm(s) that have a material                

          association with the company

Appointment of Independent Director

• The Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors.

• Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors.

Provided that where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors.

Role of Independent Directors

Independent Director plays a very vital role in the Company. He is placed with fiduciary duty of maintaining standard level of corporate governance in the Company and prevents non compliance. He is watchdog of the Company and works in risk management, corporate governance, improving credibility etc.

In case of listed Companies, it is mandatory to set up Audit Committee which should comprise of two third Independent Directors.        

Important functions of Independent Director:

Following are some of very important functions of Independent Directors in the Company. 

1. Consideration and review of annual financial statements of the Company before it is placed before the Board for its finalization. Review of changes in application of accounting policies, major changes impacting Company’s position etc.  
2. Assisting the Board by recommendation in matters of appointment, reappointment and in some cases removal of statutory Auditor of the Company.
3. Consideration of financial reporting process. 
4. Consideration of quarterly financial statements. 
5. Consideration of Internal Audit process and make recommendations for improving the same. 
6. Place before the Board findings about the fraud, material non-disclosures etc, came to the knowledge of Independent Director. 
7. Consideration and analysis of reasons for the same. 
8. Special Review relating to related party transactions, transactions between subsidiary-holding company transactions and investments made between them, internal control procedure weakness etc.
9. At all the times he should act in good faith and impartially.

Conclusion:

In order to sum up we can say, Independent Directors are expected to play role of a torchlight for development and maintenance of Corporate Governance in a Company. For listed Company, he is statutorily a very important person. He is expected to act as scrutinizer, who will ensure adequate measurements placed for proper disclosures in financial reporting of the Company and maintenance of high standards of internal auditing.