Independent Director means Director who apart from receiving directors remuneration, do not have any maternal/ pecuniary relationship or transaction with the company, its promoters, its management or its subsidiaries, which in judgment of the Board may affect independence of judgment of the Director.

Independent Director plays an active role in various committees to be set up by a company to ensure good governance. Listed companies are required to set up audit committees of minimum three directors, on which, two-thirds should be Independent Director. The audit committee chaired by an Independent Director shall inspect the company’s financial statements and can also recommend replacement of the statutory auditor.

Independent Directors are responsible for formulating and implementing business strategies on behalf of shareholders and have to ensure that the business activities of the company are compatible with all legal requirements. They have to perform crucial governance functions.

As per the Companies Act, 1956 the Independent Director should satisfy the following criteria:

1. He should not be a relative of the Chairman, Managing Director, Whole time Director or Secretary of the Company.

2. He should not hold 2% or more shares, of the company, presently or even in past.

3. He should not have been a supplier, vendor or customer of the company.

4. He should not have been an auditor, internal auditor, or legal advisor or consultant of the Company during any of the three preceding financial years.

5. He should not have held any position in the Company; i.e., ex-employee.

6. He should not have been a Director for continuous period of nine years.

As per revised clause 49 of the Listing Agreement the definition of the term ‘independent directors’ would mean a non-executive director who:

1. Does not have a pecuniary relationship with the company, its promoters, senior management or affiliate companies.

2. Is not related to promoters or the senior management.

3. Has not been an executive with the company in the immediately three preceding financial years.

4. Is not a partner or executive of the auditors/lawyers/consultants of the company for the last three years.

5. Is not a supplier, service provider or customer of the company.

6. Does not hold 2 per cent or more of the shares of the company.

Normally Nominee Directors of Bank or Financial Institution will not be considered as independent Director as per the Companies Act. However under Clause 49 of the Listing Agreement issued by SEBI such Directors are considered as independent Director.

The duties and responsibilities of independent Directors are normally as they are of director of the Company viz.

1. He should furnish information in the prescribed form to the company about disclosure of General Notice of directorship, membership of body corporate and other entities.

2. He should also inform the Company about any change in the details submitted subsequently.

3. He should provide a list of his relatives as defined in the Companies Act and their directorship and interest in other concerns.

4. The Director shall have fiduciary duty to act in goodfaith and in the interest of the company.

5. It is the duty of the Independent Director to acquire proper understanding of the business of the Company.

6. He should act only within the powers laid down by the Memorandum of Association and Articles of Association and by applicable law and regulations.

7. He should not be a Director of more than fifteen Companies.

Such an Independent Director could be working as member of Audit Committee prescribed under Section 292A of the Companies Act. In such situation he has to look into the obligations of Audit Committee and perform the duty.

The role and responsibility of an Independent Director arising out clause 49 requirements of role of audit committee would include

1. Oversight of company financial reporting process and disclosure of its financial information.

2. Recommending to Board on the appointment, re-appointment and if required replacement or removal of statutory auditor and fixation of audit fees.

3. Review with management, the annual financial statements before approval by the board with particular reference to Directors Responsibility Statement, changes in accounting policy, major accounting estimates, audit findings adjustments, compliance with listing and other legal requirements, disclosure of related party transactions and qualification in the draft audit report.

4. Review of quarterly financial statements.

5. Review with management, performance of statutory and internal auditors, adequacy of internal control systems, adequacy of internal audit function including their structure, frequency, reporting.

6. Discussing significant finding of internal auditors, including internal investigations made by them into areas of fraud, irregularities or major failures of internal control systems.

7. Discussing with auditors on the scope of the audit.

8. Reviewing reasons for defaults into payments.

9. Reviewing the whistle blower mechanism.

10. Mandatory review must be made of related party transactions and internal control weaknesses.

11. Review financial statements of subsidiary companies with special attention to investments made by them.

12. Review uses/application of funds from public issues, rights issues, preferential issues etc.

13. Disclose shareholdings in the listed company.