Independent Director: Section 149 Explained

An independent director is defined by section 149 of the Companies Act, 2013, and the definition is a list of things the person must not be. Section 149(6) starts by excluding managing directors, whole-time directors and nominee directors, then runs six clauses of tests about promoters, pecuniary relationships, relatives and prior employment. Section 149(4) is the counting rule: every listed public company must have at least one-third of its directors as independent directors.

How many independent directors must a company have?

Section 149(4) applies to every listed public company: at least one-third of the total number of directors must be independent directors. The same sub-section lets the Central Government prescribe a minimum number of independent directors for any class or classes of public companies, so an unlisted public company's obligation comes from the rules rather than from the sub-section itself.

The Explanation to section 149(4) settles the arithmetic: any fraction contained in that one-third number shall be rounded off as one. A board of eight therefore needs three independent directors, not two and two-thirds.

That floor sits on top of the general composition rules in section 149(1): a minimum of three directors for a public company, two for a private company and one for a One Person Company, and a maximum of fifteen, which a company may exceed by passing a special resolution.

What are the independence tests in section 149(6)?

Section 149(6) opens by putting three roles outside the definition entirely. An independent director is "a director other than managing director or a whole-time director or a nominee director". The Explanation to the section defines a nominee director as one nominated by a financial institution under any law or agreement, or appointed by any Government or other person to represent its interests.

Then come the clauses. In summary of the text:

Three details in that table are amendment history rather than original text, and they matter because the pre-2018 version is still widely quoted.

• Clause (c) is no longer an absolute bar on any pecuniary relationship. The words "pecuniary relationship" were substituted by Act 1 of 2018, section 46, with effect from 7 May 2018, to read "pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed".
• The whole of clause (d), the relatives test, was substituted by the same amendment on the same date, and it carries a proviso permitting a relative to hold securities of face value up to fifty lakh rupees or two per cent of the paid-up capital, or such higher sum as may be prescribed.
• The proviso to clause (e)(i) was inserted by the same amendment, so that the restriction on a relative who is an employee does not apply to his employment during the preceding three financial years.

Section 149(7) turns the definition into a recurring disclosure. Every independent director must give a declaration that he meets the criteria of independence at the first Board meeting in which he participates as a director, then at the first Board meeting in every financial year, and again whenever there is a change in circumstances that may affect his status.

How long can an independent director serve?

Section 149(10) sets the term at up to five consecutive years, subject to section 152, with eligibility for reappointment on passing of a special resolution and disclosure of the appointment in the Board's report. Section 149(11) caps the total: no more than two consecutive terms. After that the person becomes eligible again only after three years of ceasing to be an independent director, and the proviso bars any appointment or association with the company in any other capacity, directly or indirectly, during those three years.

Two consequences run outward from those two sub-sections.

Removal changes. The first proviso to section 169(1) provides that an independent director re-appointed for a second term under section 149(10) may be removed only by special resolution, and after a reasonable opportunity of being heard. That proviso was inserted by Notification No. S.O. 768(E) dated 21 February 2018. Removal of a director under section 169 covers the ordinary route the proviso departs from.

Rotation does not apply. Section 149(13) disapplies sub-sections (6) and (7) of section 152 to the appointment of independent directors, so an independent director is outside the two-thirds pool that retires by rotation.

What is an independent director paid, and what is he liable for?

Section 149(9) is a prohibition and a permission in one sentence. Notwithstanding anything else in the Act, but subject to sections 197 and 198, an independent director shall not be entitled to any stock option, and may receive remuneration by way of the fee provided under section 197(5), reimbursement of expenses for participation in Board and other meetings, and profit related commission as approved by the members. A proviso inserted by Act 29 of 2020, section 32, with effect from 18 March 2021, allows remuneration in accordance with Schedule V where the company has no profits or inadequate profits.

Section 149(12) limits liability. An independent director, and a non-executive director who is not a promoter or key managerial personnel, is held liable only for acts of omission or commission by the company that occurred with his knowledge, attributable through Board processes, and with his consent or connivance, or where he had not acted diligently. Section 149(8) requires the company and its independent directors to abide by Schedule IV.

Section 150 adds the selection machinery: an independent director may be selected from a data bank maintained by a notified body, with due diligence remaining the appointing company's responsibility, and section 150(2) requires the appointment to be approved by the company in general meeting with an explanatory statement giving the justification for choosing the appointee. The databank of independent directors covers that section in full.

Where an independent director shows up in a filing

For the listed companies Flock covers, independence is a stated fact in filed documents rather than an inference. The Act's own hooks are in this section: the declarations required by section 149(7), and the disclosure of a second-term appointment in the Board's report required by section 149(10). A listed company's corporate governance report is the other place board composition is reported, and how to read a corporate governance report covers what that filing contains. The reason the definition is worth reading closely is that the filings assert independence, and section 149(6) is the test the assertion is made against.

Where this sits in the disclosure picture

• Retirement of directors by rotation covers the section 152 mechanism that section 149(13) switches off for independent directors.
• Removal of a director under section 169 covers the special-resolution proviso that a second-term independent director attracts.
• Director disqualification under section 164 covers the separate list of disqualifications that applies to every director.
• Duties of a director under section 166 covers the statutory duties an independent director owes alongside everyone else on the board.
• Additional, alternate and nominee directors covers the nominee-director category that section 149(6) excludes.
• How to read a corporate governance report covers the filing where board composition and independence are reported.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.