Learn who is an independent director under the Company law, the eligibility criteria under Section 149(6), IICA databank registration, proficiency test requirements, roles, appointment process, and remuneration rules.

Have you ever noticed how the same few people seem to be on every company’s board?

You open an annual report or a corporate filing, and there they are — the same names, advising CEOs, influencing strategies, attending a handful of meetings, and earning more in sitting fees than what many professionals make in months.

You might think, what’s their secret? Are they political insiders or old corporate veterans with connections in every boardroom?

Not necessarily.

Most of them simply understood something that others didn’t. You don’t have to be a CEO or a promoter to enter the boardroom. You just need to understand corporate governance, compliance, finance, and how to position yourself as board-ready.

That’s what being an Independent Director is all about. It’s about credibility, judgment, and the ability to guide companies with integrity. And the best part — professionals from law, finance, and management backgrounds can all step into this role with the right knowledge and strategy.

So, who exactly is an Independent Director?

What responsibilities do they carry? How do they influence corporate decisions, and what qualifications are needed to become one?

Let’s understand the concept in depth — what makes Independent Directors such a crucial part of modern corporate governance, how they protect stakeholder interests, and how you can build your way into the boardroom too.

An independent director is a non-executive member of a company’s board of directors who maintains complete independence from the company’s management and promoters.

Under Section 149(6) of the Companies Act, 2013, an independent director is defined as someone who is neither a managing director, whole-time director, nor a nominee director, and possesses integrity along with relevant expertise and experience as determined by the board.

The core distinguishing feature lies in the absence of any material or pecuniary relationship with the company, its promoters, directors, or management that could compromise independent judgment.

This means the independent director should not have been a promoter, should not be related to any director or promoter, and should not have had any significant financial dealings with the company beyond receiving sitting fees and commission as permitted under the Act.

Who is an independent director: Legal definition

Legal definition as per SEBI LODR Regulation 16

Under Regulation 16 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the concept of an Independent Director takes on a more stringent meaning for listed companies.

SEBI defines an independent director as a non-executive director who, apart from receiving director’s remuneration, does not have any material pecuniary relationship or transaction with the company, its holding company, subsidiaries, or their promoters or management.

SEBI’s framework emphasizes that independence must be assessed not just on paper but in substance. The board must affirmatively determine that the director has no relationship with the company that could interfere with the exercise of independent judgment in carrying out the responsibilities of a director. This additional layer ensures that listed companies, which have public shareholders, maintain higher governance standards.

Legal definition as per Companies Act 2013

The Companies Act, 2013 provides the foundational definition of an Independent Director under Section 149(6). According to this provision, an independent director is a person who is not a managing director, whole-time director, or nominee director, and who meets specific criteria designed to ensure genuine independence in decision-making.

Section 149(6) lays down that such a director should not have any pecuniary relationship—either individually or through relatives—with the company, its holding, subsidiary, or associate company, or their promoters or directors, during the two immediately preceding financial years or the current year. Further, the provision prescribes eligibility criteria relating to integrity, expertise, and experience, ensuring that the person can bring an unbiased perspective to the board’s deliberations.

In essence, the Companies Act focuses on eliminating conflicts of interest by requiring that independent directors remain free from any business or personal associations that could compromise their objectivity. This legislative framework forms the cornerstone of independence for all companies—listed and unlisted—setting the stage for the enhanced governance expectations later elaborated by SEBI.

Core principle of independence

The fundamental principle underlying the concept of independent directors is ensuring unbiased oversight and decision-making at the board level. Independent directors serve as a check and balance mechanism, protecting the interests of minority shareholders and stakeholders who may not have direct representation or control over management.

Their independence allows them to challenge management decisions objectively, question strategic choices, and ensure that the company operates with transparency, accountability, and in compliance with all applicable laws and ethical standards.

What is the purpose of an Independent Directors?

Now that we have answered Who is an Independent Director?, let us look at the purpose of Independent Director in a public company.

Corporate governance and transparency

Independent directors play a crucial role in strengthening corporate governance frameworks by bringing objectivity to board deliberations and decisions.

They act as a counterbalance to executive directors who are involved in day-to-day management, ensuring that decisions are made in the best long-term interests of the company rather than serving short-term management goals. Their presence signals to investors, regulators, and the public that the company is committed to transparent operations and ethical business practices, which enhances corporate credibility and can improve access to capital.

Protection of stakeholder interests

The primary responsibility of independent directors is to safeguard the interests of all stakeholders, particularly minority shareholders who lack the voting power to influence company decisions directly.

They ensure that majority shareholders and promoters do not make decisions that unfairly benefit themselves at the expense of minority investors. Additionally, independent directors monitor compliance with statutory requirements, oversee financial reporting accuracy, and ensure that the company’s actions align with broader stakeholder interests including employees, creditors, customers, and the community at large.

Independent Director vs Other Director Types

Companies have various categories of directors — executive directors, which include managing directors and whole-time directors, and non-executive directors, who are not involved in the day-to-day management of the company. Let’s compare each with the Independent Director.

Independent director vs Non-executive director

While both independent directors and non-executive directors are not involved in the day-to-day management of the company, there is a critical distinction in their relationship with the company.

A non-executive director may have associations with the company, its promoters, or significant shareholders that do not disqualify them from board membership but prevent them from being classified as “independent.” For example, a non-executive director could be a representative of a major institutional investor, a consultant to the company, or someone who has family ties to promoters.

Independent directors, on the other hand, must meet stringent criteria that specifically prohibit such relationships. They cannot be promoters, cannot be related to directors or promoters, cannot have significant financial dealings with the company, and must not have been employees or service providers in recent years. This higher standard of independence ensures they can provide truly objective oversight. While all independent directors are non-executive directors, not all non-executive directors qualify as independent directors under the law.

Independent director vs executive director

Executive directors are fundamentally different from independent directors in both their role and their relationship with the company. Executive directors, which include managing directors and whole-time directors, are employees of the company and are deeply involved in its operational management and daily decision-making. They typically hold key managerial positions such as CEO, CFO, or COO, and are responsible for implementing board strategies and running the business.

Independent directors, by contrast, have no executive authority or operational responsibilities. Their role is purely supervisory and advisory—they attend board meetings, participate in strategic discussions, serve on board committees, and provide oversight of management performance. They are not on the company’s payroll as employees, do not receive salaries or employee benefits, and are compensated only through sitting fees and commission as permitted. This separation ensures they can objectively evaluate the performance of executive directors and management without any conflict of interest arising from their own employment status.

Which companies must appoint independent directors?

Independent directors are not required for every company — their appointment is mandated primarily for listed entities and certain large public companies. The intent is to ensure that companies with significant public interest maintain transparency, accountability, and balanced board oversight.

Listed public companies

Requirement under Companies Act

Every company whose shares are listed on a recognized stock exchange in India is mandated under Section 149(4) of the Companies Act, 2013 to have at least one-third of the total number of directors as independent directors. This means if a listed company has a board of nine directors, at least three must be independent. If the calculation results in a fraction, it is rounded up to the next whole number—for instance, if one-third of 10 directors equals 3.33, the company must appoint four independent directors.

This requirement reflects the importance of robust governance standards for companies that raise capital from the public and have a broad shareholder base. The one-third threshold ensures that independent voices have significant weight in board deliberations and can effectively challenge management decisions when necessary. Failure to maintain this minimum composition can result in penalties and potential delisting consequences.

Requirement under SEBI LODR Regulations

Beyond the Companies Act requirements, listed companies must also comply with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Regulation 17 specifies additional composition norms, including that if the chairman of the board is a non-executive director, at least one-third of the board should comprise independent directors. However, if the chairman is an executive director or a promoter, then at least half the board must be independent directors.

SEBI also mandates specific qualifications for independent directors on listed company boards, including restrictions on the number of directorships, mandatory attendance requirements, and enhanced disclosure obligations. These regulations work in tandem with the Companies Act to create a comprehensive governance framework for listed entities.

Unlisted public companies

While listed companies automatically require independent directors, certain categories of unlisted public companies must also appoint them. According to Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, an unlisted public company must have at least two independent directors if it meets any one of the following three thresholds.

First, public companies with a paid-up share capital of Rs. 10 crore or more must appoint at least two independent directors.

Second, those with a turnover of Rs. 100 crore or more in any financial year are required to comply with this mandate.

Third, companies that have aggregate outstanding loans, debentures, and deposits exceeding Rs. 50 crore must also appoint two independent directors.

The calculation is based on figures from the last audited financial statements. Importantly, if a company crosses any of these thresholds, it must appoint the required independent directors within the immediate next board meeting or within 3 months, whichever is later.

These thresholds ensure that even unlisted companies of significant size operate with adequate independent oversight, recognizing that such companies still have multiple stakeholders including creditors, employees, and potentially minority shareholders who deserve protection.

Exemptions

Not all companies that meet the above thresholds are required to appoint independent directors. Rule 4(2) of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides specific exemptions for three categories of unlisted public companies.

First, wholly-owned subsidiaries are exempt from appointing independent directors. Since these companies are entirely controlled by their parent company and have no minority shareholders or external investors, the rationale for independent oversight is diminished. Second, joint venture companies are also exempted, as these entities typically have board representation from all joint venture partners who collectively ensure adequate governance.

Third, dormant companies as defined under Section 455 of the Companies Act, 2013 do not need independent directors. Dormant companies are those that have been formed for future projects or to hold assets and have had no significant accounting transactions during the previous two financial years. Given their inactive status, the requirement for independent directors is considered unnecessary.

Who can become an independent director?

The Companies Act, 2013 and the SEBI (LODR) Regulations, 2015 are both very stringent in defining who can — and who cannot — qualify as an independent director. The objective is to ensure that only individuals with proven integrity, relevant expertise, and complete independence of judgment occupy this crucial position on the board.

Basic eligibility criteria

The foundation for becoming an independent director starts with meeting the positive qualifications specified in Section 149(6) of the Companies Act, 2013.

The board of directors must be satisfied that the person is of good character, possesses integrity, and has relevant expertise and experience that can contribute meaningfully to the company’s operations and governance. This is a subjective assessment but typically considers the person’s professional background, industry knowledge, functional expertise in areas like finance, law, human resources, or operations, and their track record in previous roles.

While the law does not prescribe specific educational qualifications, most companies look for individuals with substantial professional achievements—typically senior executives who have retired from leadership positions, professionals with 15-20 years of experience, academicians with specialized knowledge, or retired bureaucrats and regulators who bring domain expertise. The emphasis is on bringing diverse perspectives and specialized skills that complement the existing board composition and help guide strategic decision-making.

Additionally, aspiring independent directors must be at least 21 years old if the company is listed (as per Regulation 16 of SEBI LODR) or 18 years for unlisted companies under the Companies Act. There is no maximum age limit under the Companies Act, though SEBI caps the age at 75 years for independent directors of listed companies unless shareholders approve their continuation by a special resolution.

Key disqualifications under Section 149(6)

Section 149(6) of the Companies Act, 2013 lays down extensive negative criteria that disqualify certain individuals from being appointed as independent directors. Understanding these disqualifications is crucial, as violating them can render the appointment invalid and expose both the company and the director to penalties.

A person cannot be an independent director if they are, or have ever been, a promoter of the company or its holding, subsidiary, or associate companies. This prohibition extends to being related to any promoters or directors—the term “related” includes spouse, parents, children, and siblings. Such familial restrictions ensure that directors appointed as “independent” do not have personal relationships that could compromise their objectivity.

Financial relationships are strictly regulated. A person cannot be an independent director if they have had any pecuniary relationship with the company, other than remuneration as a director or having transactions not exceeding 10% of their total income, during the current financial year or the two immediately preceding financial years. This means if someone has provided consulting services worth more than 10% of their annual income to the company, they cannot serve as an independent director.

The law also imposes a three-year cooling-off period for several categories. Anyone who has been a key managerial personnel (KMP) or employee of the company in the preceding three financial years cannot be an independent director. Similarly, if someone was a partner or employee of the company’s auditing firm, or served as a legal consultant or company secretary to the company within the past three years, they are disqualified.

Shareholding limits apply as well. If a person, together with their relatives, holds voting rights exceeding 2% of the company’s total voting power, they cannot be an independent director. Additionally, if someone is the chief executive or director of any non-profit organization that receives 25% or more of its receipts from the company, or if that NPO holds 2% or more of the company’s voting power, the person is disqualified from being an independent director.

Additional requirements

Registration With IICA databank

Beyond meeting the eligibility criteria under the Companies Act, every individual who wishes to be appointed as an independent director in India must register with the databank maintained by the Indian Institute of Corporate Affairs (IICA). This requirement was introduced through an amendment to the Companies (Appointment and Qualification of Directors) Rules in 2014 and is now mandatory under Rule 6 of these rules.

The IICA databank serves as a centralized repository of qualified individuals who are willing and eligible to serve as independent directors. Companies looking to appoint independent directors can search this databank to identify suitable candidates based on their expertise, experience, industry background, and location. Registration demonstrates that an individual has undergone the necessary verification processes and met the regulatory requirements, giving companies confidence in their eligibility. Failure to register with the databank means a person cannot be validly appointed as an independent director in any Indian company.

Passing online proficiency test

In addition to databank registration, aspiring independent directors must pass an online proficiency self-assessment test conducted by IICA, unless they qualify for specific exemptions. This requirement, introduced under Rule 6(4) of the Companies (Appointment and Qualification of Directors) Rules, ensures that individuals serving as independent directors have adequate knowledge of corporate governance, legal frameworks, and board processes.

The test assesses candidates on various topics including the Companies Act 2013, SEBI regulations, board committee functions, financial oversight, risk management, and ethical conduct standards. Passing this test is mandatory within two years of registering with the IICA databank. If an individual fails to pass the test within this timeframe, their name will be removed from the databank and they cannot continue serving as an independent director until they successfully complete the assessment.

IICA databank registration process

What is the IICA databank?

Mandatory registration under Section 150

The Indian Institute of Corporate Affairs (IICA), a statutory body established under the Ministry of Corporate Affairs, has been designated under Section 150(1) of the Companies Act, 2013 to create and maintain a databank of persons eligible and willing to be appointed as independent directors. This provision empowers the Central Government to notify an institute to maintain such a database and prescribe rules for its operation.

The databank became operational in December 2019 following the notification of amended rules. Its primary objective is to enhance the quality and effectiveness of independent directors in India by creating a transparent, accessible pool of qualified professionals. Companies can search the databank to identify suitable candidates, while aspiring directors gain visibility to potential board opportunities through their registered profiles.

How to register

Prerequisites: DIN and basic documents

To obtain DIN, file Form DIR-3 on the MCA portal (www.mca.gov.in) with your personal details including PAN, Aadhaar, photograph, proof of identity, and proof of address. Generally, people engaged professional services of Chartered Accountant, Company Secretary, or Cost Accountant to obtain the DIN.

The form is digitally signed and certified by you and a practicing CA/CS/CMA.

The application fee for DIN is ₹500 (subject to revision—check MCA portal for current fee).

After submitting Form DIR-3 with required documents and fee payment, the MCA processes your application typically within 7-10 working days. Upon approval, your DIN is allotted and communicated via email to your registered email address.

If you are unsure whether you already have DIN from previous directorship positions, you can check DIN status on the MCA portal using your PAN number. The system will show existing DIN associated with your PAN if any was allotted previously.

Please note that before applying for DIN, you need to purchase a Digital Siganture Certificate (DSC) as well to digitally sign the DIR-3. You can purchase a DSC from the professional certifying your DIR-3.

You should also prepare documents evidencing your professional qualifications, work experience, and current or past directorships, as this information will need to be entered into your databank profile.

Registration steps on MCA and IICA portals

The process of registering with the Independent Director Databank is completed in two main stages — first, by creating an account on the Ministry of Corporate Affairs (MCA) portal, and then by registering on the IICA Independent Director’s Databank through that MCA account.

Part I: Creating an MCA account

Start by visiting the MCA Portal and clicking on Login/Sign Up at the top-right corner. On the registration page, select Registered User as the category and Individual as the user role. Enter your PAN number (in capital letters) and proceed to fill in your personal details such as name, date of birth, gender, profession, and industry. Next, provide your contact details (address, mobile number, and email ID), create a password, and choose a security question for account recovery.

Once you submit the form, you’ll receive an OTP on your registered mobile number for verification. After confirming it, your registration will be complete. Your MCA User ID will be sent to your registered email (this may take a few days). Once you receive it, you can proceed to register on the Independent Director’s Databank.

Part II: Registering on the independent director’s databank

After your MCA account becomes active, log in again to the MCA portal and select Login for V3 Filing. Under the MCA Services tab, go to ID Databank Services → Individual Registration. You will be asked to confirm your identification using a DIN, PAN, or Passport number, depending on what you have. Verify using OTP and then click Proceed to be redirected to the Independent Director’s Databank Portal.

On the Databank portal, select Login with OTP, enter your email or mobile number, and complete the login verification. Once inside, you’ll be prompted to complete your profile — including personal, educational, and professional details, along with areas of specialization such as finance, law, or operations. You can also choose what information you want companies to see.

Registration fees

Registration with the IICA databank requires payment of prescribed fees, which vary based on the subscription duration you choose.

Choose one of the subscription options:

₹5,000 + GST → 1-Year Subscription
₹15,000 + GST → 5-Year Subscription
₹25,000 + GST → Lifetime Subscription

Most professionals opt for the five-year or lifetime subscription options as they offer better value and ensure continuous availability in the databank without needing renewal.

Payment can be made online through the IICA portal using net banking, credit card, or debit card. After successful payment, your registration is complete, and your profile becomes searchable by companies looking to appoint independent directors, though you must still pass the proficiency test to remain in the databank.

Online proficiency self-assessment test

Who must pass the test

Every individual whose name is included in the IICA databank must pass an online proficiency self-assessment test within two years from the date of inclusion, as mandated by Rule 6 of the Companies (Appointment and Qualification of Directors) Rules. This requirement applies to both existing independent directors and those aspiring to become independent directors. Failure to pass the test within the two-year window results in automatic removal of the person’s name from the databank.

The test is designed to ensure that independent directors possess adequate knowledge of corporate governance principles, legal frameworks, financial oversight, and ethical conduct standards. It covers topics including the Companies Act 2013, SEBI regulations, board committee functions, audit and risk management, stakeholder relations, and the specific duties and responsibilities outlined in Schedule IV for independent directors. Passing this test has become a prerequisite for serving as an independent director in any Indian company.

Exemptions from the test

Rule 6(4) of the Companies Rules provides specific exemptions from the proficiency test for individuals who already possess substantial experience or qualifications. The primary exemption applies to anyone who has served for a total period of at least three years as a director or key managerial personnel in listed public companies, large unlisted public companies (paid-up capital of Rs. 10 crore or more), bodies corporate incorporated outside India having a paid-up share capital of US$ 2 million or more, or in certain other specified entities including statutory corporations, foreign companies, or in senior government positions.

Additionally, professionals who have been in practice for at least ten years as chartered accountants, company secretaries, cost accountants, or advocates are exempt from the test requirement. This recognizes their existing professional competence and regulatory knowledge. However, it’s important to note that the three-year experience must have been accumulated as of the date of inclusion in the databank—experience gained after registration does not qualify for retrospective exemption.

Test format and passing requirements

The proficiency test consists of 50 multiple-choice questions with each question carrying two marks, totaling 100 marks. To pass, candidates must score at least 50%, meaning they need to answer correctly at least 25 out of 50 questions. Importantly, there is no negative marking, so incorrect answers do not reduce your score. The test duration is 75 minutes.

The test is conducted online through a proctored platform accessible from the IICA databank portal. You can schedule your test by booking one of two daily slots: 2:00 PM to 3:00 PM or 8:00 PM to 9:00 PM. There is no limit on the number of attempts, but you must maintain a gap of at least one day between consecutive attempts. IICA provides 42 free e-learning modules covering all test topics, and you can also take unlimited mock tests to familiarize yourself with the test environment before attempting the actual assessment.

To know everything about the independent director exam, read my article on Complete Guide to Independent Director Exam.

Roles and responsibilities of independent directors

Primary duties

Monitoring management performance

One of the most critical responsibilities of independent directors is to scrutinize and monitor the performance of management and executive directors. This involves reviewing whether the company is achieving its stated strategic objectives, assessing the quality of execution by the management team, and evaluating whether key performance indicators are being met. Independent directors bring objectivity to performance reviews, as they are not part of the management team and have no personal stake in defending operational decisions.

This monitoring role extends to questioning management’s assumptions, challenging proposed strategies when necessary, and ensuring that adequate management information systems are in place to track performance accurately. Independent directors are expected to ask probing questions during board meetings, request additional information when presentations are unclear or incomplete, and follow up on action items from previous meetings. Their oversight helps prevent complacency, encourages management accountability, and ensures that the board’s decisions are being implemented effectively.

Safeguarding minority shareholder interests

A fundamental duty of independent directors is to act as guardians of minority shareholders who lack the voting power to influence corporate decisions directly. While promoters and majority shareholders typically have board representation through executive or nominee directors, minority shareholders rely on independent directors to ensure their interests are not overlooked or compromised. This becomes particularly important in transactions involving related parties, where there’s potential for majority shareholders to benefit at the expense of minority investors.

Independent directors must ensure that all shareholders are treated fairly, that related-party transactions are conducted at arm’s length and on commercially reasonable terms, and that any conflicts of interest are properly disclosed and managed. They play a crucial role in approving major decisions like mergers, acquisitions, capital restructuring, or dividend policies, ensuring these decisions serve the long-term interests of all shareholders rather than providing short-term benefits to controlling shareholders.

Strategic guidance and risk management

Independent directors contribute significantly to the company’s strategic direction by bringing diverse industry experience, functional expertise, and external perspectives that executive directors may lack. They participate in strategy formulation, helping the board evaluate different strategic options, assess market opportunities and threats, and make informed decisions about resource allocation and business expansion or contraction. Their independence allows them to challenge conventional thinking and push management to consider alternative approaches.

Equally important is their role in risk oversight. Independent directors must ensure that the company has robust risk management systems in place to identify, assess, and mitigate various risks including financial risks, operational risks, regulatory compliance risks, cybersecurity threats, and reputational risks. They review risk management policies, assess whether risk mitigation strategies are adequate, and ensure that risk tolerance levels are appropriately set and communicated. By providing this strategic guidance and risk oversight, independent directors help steer the company toward sustainable long-term growth while protecting it from preventable crises.

Committee participation

Audit committee

Section 177 of the Companies Act, 2013 mandates that certain companies must constitute an Audit Committee, and this committee must have at least two-thirds/majority of its members as independent directors. For listed companies, Regulation 18 of SEBI LODR further requires that all members of the Audit Committee must be financially literate and at least one member should have accounting or financial management expertise.

The Audit Committee oversees the company’s financial reporting process, ensuring that financial statements present a true and fair view of the company’s financial position. It reviews quarterly, half-yearly, and annual financial statements before submission to the board, discusses significant accounting policies and practices, and monitors compliance with accounting standards.

The committee also evaluates the adequacy of internal control systems, reviews internal audit reports, and assesses the independence and performance of statutory auditors. Independent directors on the Audit Committee serve as a crucial link between the board, management, internal auditors, and external auditors, ensuring financial transparency and integrity.

Nomination and remuneration committee

The Nomination and Remuneration Committee, required under Section 178 for certain companies, must comprise at least three directors, with the majority being independent directors. For listed companies, SEBI mandates under Regulation 19 that the committee chairperson must be an independent director. This committee plays a vital role in determining the compensation structure for executive directors, key managerial personnel, and senior management.

Independent directors on this committee ensure that executive compensation is aligned with company performance and industry benchmarks, preventing excessive or unjustified pay packages that could constitute a misuse of company resources. They also identify and evaluate potential candidates for board and senior management positions, assess the skills and competencies required, and recommend appointment or removal of directors. This involvement ensures that succession planning is robust and that appointments are made on merit rather than personal relationships or favoritism.

Other key committees

Beyond Audit and Nomination & Remuneration Committees, independent directors serve on several other important board committees. The Stakeholder Relationship Committee, which addresses shareholder grievances and monitors share transfers and transmission, typically includes independent directors to ensure fair treatment of all shareholders. The Corporate Social Responsibility (CSR) Committee, required for companies meeting certain thresholds under Section 135 of the Companies Act, must include at least one independent director.

Listed companies may also have a Risk Management Committee where independent directors provide oversight of the company’s risk management framework. Some companies establish special committees for specific transactions like mergers or acquisitions, where independent directors’ participation ensures that such decisions are evaluated objectively and serve the company’s best interests. Through active participation in these committees, independent directors extend their oversight beyond board meetings and dive deeper into specialized areas requiring their expertise and independent judgment.

Conduct requirements

Schedule IV of the Companies Act

Schedule IV of the Companies Act, 2013 sets out a comprehensive code of conduct that all independent directors must follow.

These guidelines cover both the duties and the professional conduct expected from individuals serving in this critical governance role. The primary duty includes upholding ethical standards of integrity and probity—independent directors must act honestly, in good faith, and in the best interests of the company and all its stakeholders.

Independent directors are expected to act objectively and constructively while exercising their duties. They should not allow any extraneous considerations, personal interests, or external pressures to influence their independent judgment when participating in board decisions.

Schedule IV emphasizes that independent directors must devote sufficient time and attention to their professional obligations to make informed and balanced decisions.

They should maintain confidentiality of information, neither disclosing confidential information including commercial secrets, unpublished price-sensitive information, or proprietary data, nor using such information for personal gain. Additionally, independent directors must ensure the company has an adequate vigil mechanism to report concerns about unethical behavior or suspected fraud, and they must protect individuals who use these whistleblower mechanisms from retaliation.

Read the article on Roles and Responsibilities of Independent Directors to know in detail.

Appointment and tenure of independent directors

How independent directors are appointed

Board resolution and shareholder approval

The appointment process for an independent director begins with the board of directors identifying suitable candidates, either through search of the IICA databank, recommendations from the Nomination and Remuneration Committee, or through professional networks. Once a candidate is identified, the board must pass a resolution approving the appointment, after satisfying itself that the person meets all eligibility criteria under Section 149(6) and has no disqualifications.

Following board approval, the appointment must be ratified by shareholders in a general meeting. The notice convening the meeting must include an explanatory statement justifying why the proposed person should be appointed as an independent director, highlighting their expertise, experience, and the value they would bring to the board. This explanation should also confirm that the person meets all independence criteria. Shareholders vote on the appointment through an ordinary resolution (simple majority) or special resolution in terms of SEBI LODR Regulation 25. After shareholder approval, the company must file Form DIR-12 with the Ministry of Corporate Affairs within 30 days, officially notifying the appointment.

Letter of appointment

Every independent director must receive a formal letter of appointment that clearly sets out the terms and conditions of their appointment as required under Regulation 46 of SEBI LODR for listed companies and as a best practice for others. This letter should specify the term of appointment, which cannot exceed five years, and outline the roles, duties, and responsibilities expected from the independent director, including committee memberships if any.

The appointment letter must detail the remuneration structure, specifying sitting fees payable for board and committee meetings, any commission linked to company profits if approved by shareholders, and reimbursement policies for travel and other expenses. It should also set out expectations regarding time commitment, number of board and committee meetings annually, and any specific areas where the director’s expertise will be particularly valuable. This formal documentation ensures clarity and helps avoid misunderstandings about the scope and terms of the independent directorship.

Term limits

Under Section 149(10) and (11) of the Companies Act, 2013, an independent director can be appointed for a term of up to five consecutive years. They are eligible for reappointment for another term of five years, but this second appointment requires approval by shareholders through a special resolution (requiring three-fourths majority). Importantly, the reappointment can only happen after the board has evaluated the independent director’s performance.

No independent director can hold office for more than two consecutive terms, meaning the maximum continuous tenure is 10 years.

After completing two terms, the director must observe a cooling-off period of three years before they can be reappointed to the same company. During this three-year period, the individual cannot hold any position in the company or its group entities, whether as director, consultant, employee, or advisor.

This term limit structure serves multiple purposes. It ensures fresh perspectives are regularly brought to the board, prevents independent directors from becoming too close to management over extended periods, and maintains the independence that is the foundation of their role. The special resolution requirement for the second term gives minority shareholders an effective veto over reappointments they find unsuitable.

Declaration of independence

Annual declaration requirements

Independent directors have ongoing disclosure obligations to ensure their independence is maintained throughout their tenure. Section 149(7) of the Companies Act requires every independent director to give a declaration that they meet the criteria of independence as specified in Section 149(6). This declaration must be provided at three specific times: first, at the first board meeting in which they participate as a director; second, at the first meeting of the board in every financial year; and third, whenever there is any change in circumstances that may affect their status as an independent director.

The annual declaration is typically made using Form MBP-1 and must be submitted at the beginning of each financial year. This declaration confirms that the director continues to meet all independence criteria, has not acquired any disqualifying relationships or interests, and remains free from any material pecuniary relationships with the company beyond permitted remuneration. If at any point during the year an independent director’s circumstances change in a way that affects their independence—for example, they acquire shares exceeding the 2% threshold, or a relative joins the company as an employee—they must immediately inform the board and provide a fresh declaration. This ongoing disclosure mechanism ensures transparency and allows the board and shareholders to take corrective action if independence is compromised.

Read my article on Appointment of Independent Director for a detailed guide on appointment process.

Remuneration of independent directors

Sitting fees

Independent directors are entitled to receive sitting fees for attending board meetings and committee meetings as provided under Section 197(5) of the Companies Act, 2013. The maximum sitting fee was substantially increased from Rs. 20,000 under the old Companies Act, 1956, to Rs. 1,00,000 (one lakh rupees) per meeting under the current Act. This increase recognizes the enhanced responsibilities and potential liabilities that independent directors bear.

Companies have the discretion to pay sitting fees anywhere from a nominal amount up to this statutory maximum, with the actual amount typically determined by the board based on the company’s size, profitability, and market practices. Many large listed companies pay the maximum permissible amount, while smaller companies might pay Rs. 20,000 to Rs. 50,000 per meeting. The sitting fee is paid separately for board meetings and for each committee meeting attended, so an independent director who attends both a board meeting and an audit committee meeting on the same day would receive sitting fees for both meetings.

Commission subject to shareholder approval

Beyond sitting fees, independent directors may also receive commission linked to the company’s net profits, but this requires explicit approval by shareholders in a general meeting as per Section 197 of the Companies Act.

The total commission payable to all non-executive directors collectively, including independent directors, cannot exceed 1% of the net profits of the company computed in accordance with the provisions of Section 198.

The shareholders must approve not just the fact that commission will be paid, but also the specific percentage or amount. Companies typically structure commission payments as an annual amount paid after financial year-end once profits are determined and audited.

This commission is meant to align independent directors’ interests with company performance, though care must be taken that the amounts are not so large as to compromise the directors’ independence or objectivity in decision-making.

Prohibition on stock options

Section 149(9) of the Companies Act, 2013 explicitly prohibits independent directors from being granted any stock options.

This restriction is fundamental to maintaining independence—if independent directors held significant equity or equity-linked instruments, their judgment could be influenced by short-term stock price considerations rather than long-term company interests.

The prohibition on stock options distinguishes independent directors from executive directors and employees who often receive stock options as part of their compensation packages to align their interests with shareholders.

For independent directors, such alignment is considered inappropriate because it could compromise their ability to make objective decisions, particularly on matters like executive compensation, dividend policy, or strategic transactions that might boost short-term stock prices at the expense of long-term sustainability. Their compensation is intentionally limited to sitting fees and profit-linked commission to maintain the arm’s length relationship that independence requires.

Liability of independent directors

Limited liability under Section 149(12) and SEBI LODR

Section 149(12) of the Companies Act, 2013 provides crucial legal protection to independent directors by limiting their liability. It states that an independent director shall be held liable only in respect of acts of omission or commission by the company that occurred with their knowledge, attributable through board processes, and with their consent or connivance, or where they had not acted diligently with respect to those specific acts.

This means that independent directors are not automatically liable for every wrongdoing or non-compliance by the company. To establish liability, it must be proven that the director had actual knowledge of the act or omission, that this knowledge was gained through proper board processes (board meetings, committee meetings, board papers, presentations), and that the director either actively consented to the action, connived in it, or failed to exercise due diligence to prevent it. This protection recognizes that independent directors, being non-executive and not involved in daily management, cannot be expected to know about or prevent operational matters that never come to the board’s attention.

Protection when acting diligently

The law provides robust protection to independent directors who act diligently and in good faith. If an independent director attends board meetings regularly, asks relevant questions, seeks clarifications when information is unclear, reviews board papers thoroughly, and votes conscientiously based on available information, they are generally protected from liability even if the company subsequently faces problems or commits violations.

Key protective actions include documenting dissent when disagreeing with board decisions—if an independent director opposes a resolution, they should ensure their dissent is recorded in the meeting minutes. This creates evidence that they did not consent to the action.

Similarly, asking for additional information or expert opinions when making major decisions demonstrates due diligence. Following up on red flags or concerns raised in previous meetings and ensuring that audit committee observations are addressed by management also constitute diligent conduct that offers legal protection.

When independent directors can be held liable

Despite the protections, there are circumstances where independent directors can face legal liability and penalties. If they had actual knowledge of a fraudulent transaction, compliance violation, or breach of fiduciary duty and either approved it or failed to raise objections, they can be held personally liable.

This is particularly relevant for matters that require board approval such as related-party transactions, loans to directors or related parties, or major asset disposals.

Independent directors can also be liable for breaches of their statutory duties under Schedule IV, such as failing to maintain confidentiality, using their position for personal gain, or not acting with independence and objectivity. Violation of securities laws, particularly insider trading regulations, can lead to serious penalties including disgorgement of profits, monetary penalties, and even criminal prosecution under the SEBI Act and SEBI (Prohibition of Insider Trading) Regulations.

Additionally, independent directors can be held liable under various provisions of the Companies Act for specific violations—for example, Section 166 imposes duties on all directors including independent directors to act in accordance with the company’s articles of association, act in good faith to promote the company’s objects, exercise due care and diligence, and not involve themselves in situations of conflict of interest.

Conclusion

The role of an independent director has evolved from being a mere regulatory checkbox to becoming a cornerstone of effective corporate governance in India.

Through stringent eligibility criteria, mandatory registration with the IICA databank, proficiency testing requirements, and clearly defined responsibilities under the Companies Act 2013 and SEBI regulations, India has built a robust framework to ensure that independent directors can genuinely provide objective oversight and protect stakeholder interests.

For aspiring independent directors, the path is now well-defined: obtain your DIN, register with the IICA databank, pass the proficiency test, build your professional profile, and position yourself for board opportunities that match your expertise. For companies, appointing the right independent directors who bring complementary skills, industry knowledge, and truly independent judgment can significantly enhance governance standards and long-term value creation.

As corporate India continues to mature and integrate with global markets, the importance of strong, independent board oversight will only grow. Independent directors who approach their role with diligence, integrity, and a commitment to continuous learning will find themselves at the forefront of shaping India’s corporate future while enjoying the professional satisfaction of contributing to businesses beyond their own organizations.

Frequently Asked Questions

Can a company secretary be appointed as an independent director in the same company?

No, a company secretary working in a company as a whole-time employee cannot be appointed as an independent director in the same company. Section 149(6) specifies that an independent director cannot be a key managerial personnel or employee. However, a practicing company secretary who is not an employee of the company can be appointed as an independent director in that company or any other company.

What is the minimum age to become an independent director?

Under the Companies Act 2013, the minimum age to become a director, including an independent director, is 18 years. However, for listed companies, SEBI LODR Regulations set a higher minimum age of 21 years. There is no maximum age limit under the Companies Act, but SEBI caps the age at 75 years for independent directors of listed companies unless shareholders approve continuation through a special resolution.

Can I be an independent director if my relative is a shareholder?

Yes, you can be an independent director even if your relative is a shareholder, provided that your relatives together do not hold more than 2% of the total voting power of the company. Section 149(6)(d)(ii) specifically disqualifies individuals who, along with their relatives, hold shares carrying 2% or more voting rights. As long as the combined shareholding remains below this threshold, your relative’s shareholding does not disqualify you.

What happens if I fail the proficiency test?

If you fail the proficiency test, there is no penalty, and you can attempt the test again after maintaining a gap of at least one day from your previous attempt. There is no limit on the number of attempts you can make. However, you must pass the test within two years of registering with the IICA databank. If you do not pass within this two-year window, your name will be removed from the databank, and you cannot continue as an independent director until you register again and pass the test.

How many companies can I serve as an independent director?

Under Regulation 17A of the Companies Act 2013, a person can be an independent director in a maximum of seven listed companies at any point in time. If you are serving as a whole-time director in any listed company, then you can be an independent director in a maximum of three listed companies. There is no specific limit for unlisted companies, but the total number of directorships (including both listed and unlisted) cannot exceed 20, with the cap being 10 public companies in terms of Section 165 of Companies Act.

What is the tenure of an independent director?

An independent director can be appointed for a term of up to five consecutive years and is eligible for reappointment for one more term of five years, making the maximum continuous tenure 10 years (two consecutive terms). Reappointment for the second term requires shareholder approval through a special resolution. After serving two consecutive terms, the director must observe a three-year cooling-off period before being eligible for reappointment to the same company.

Can an independent director receive stock options?

No, Section 149(9) of the Companies Act 2013 explicitly prohibits independent directors from receiving any stock options. They can only receive sitting fees for attending meetings and profit-linked commission approved by shareholders. This prohibition ensures that independent directors maintain objectivity and are not influenced by short-term stock price considerations when making decisions on behalf of the company.

Is registration with IICA databank mandatory?

Yes, registration with the IICA databank is mandatory for all individuals who wish to be appointed or continue as independent directors. This requirement was introduced through amendments to Rule 6 of the Companies (Appointment and Qualification of Directors) Rules in 2019. Existing independent directors had to register by specified deadlines, and all new appointments can only be made from among individuals registered in the databank.

What is the cooling-off period after two terms?

After completing two consecutive terms (totaling 10 years) as an independent director in a company, the individual must observe a cooling-off period of three years before they can be reappointed to the same company. During this three-year period, the person cannot hold any position in the company or its subsidiaries, holding company, or associate companies—whether as director, employee, consultant, or in any other capacity.

Am I liable if the company commits fraud without my knowledge?

No, Section 149(12) provides that independent directors are held liable only for acts of omission or commission by the company that occurred with their knowledge (attributable through board processes) and with their consent, connivance, or where they had not acted diligently. If you had no knowledge of the fraud because it was not brought to the board’s attention through proper processes, and you had been attending meetings and acting diligently, you would generally be protected from liability.

Can I be an independent director if I was the company’s auditor 4 years ago?

Yes, you can be appointed as an independent director if you were the company’s auditor four years ago. Section 149(6)(d) disqualifies individuals who have been partners or employees of the auditing firm in any of the three immediately preceding financial years. Since four years have passed, you are outside this three-year cooling-off period and would not be disqualified on this ground, assuming you meet all other eligibility criteria.

What is the maximum sitting fee per meeting?

The maximum sitting fee that can be paid to an independent director for attending a board meeting or committee meeting is Rs. 1,00,000 (one lakh rupees) per meeting as per Rule 4 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. The actual amount paid is at the discretion of the company and may be lower, but cannot exceed this statutory maximum. Separate sitting fees can be paid for board meetings and each committee meeting attended.

Do I need to pass the proficiency test if I have 3 years of director experience?

If you have served as a director or key managerial personnel for at least three years in specified entities (listed companies, unlisted public companies with paid-up capital of Rs. 10 crore or more, or certain other entities) as of the date of your inclusion in the IICA databank, you are exempt from passing the proficiency test. However, the three years must be completed before your databank registration date—experience gained after registration does not qualify for retrospective exemption.

Can a practicing CA be appointed as an independent director?

Yes, a practicing chartered accountant can be appointed as an independent director. In fact, practicing CAs are highly sought after for independent director roles due to their financial expertise and understanding of accounting and audit matters. Additionally, CAs who have been in practice for at least 10 years are exempt from the mandatory proficiency test requirement, though they must still register with the IICA databank.

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