The document compares the requirements for independent directors under Section 149 of the Companies Act of 2013 and Clause 49 of the Listing Agreement introduced by the Securities and Exchange Board of India (SEBI). There are some differences in applicability, board composition requirements, qualifications for independent directors, remuneration rules, filling vacancies, tenure limits, maximum directorships allowed, letter of appointment details, training requirements, and codes of conduct. The conclusion calls for uniformity between the two regulatory authorities on the appointment of independent directors for listed companies.

1. Volume VIII Part 3 August 10, 2014 11 Business Advisor
Independent director – Section 149 of the
Companies Act, 2013 versus Clause 49 of
Listing Agreement
Dr S. Chandrasekaran
The concept of independent director to corporate
Boards was given due importance in Asia after the
Asian financial crisis during the period of 1997-98.
Besides, the said crisis showed the need to enhance
standards of corporate governance and to promote
stronger, more responsible, transparent and
accountable management in line with international best
practices. Public participation in listed companies
warranted better and improved corporate governance
and was the need for effective Board of directors (Board). The scam after
scam in the corporate sector in India during such period compelled the
capital market regulator, the Securities & Exchange Board of India (SEBI) to
introduce the concept of independent director. It is expected that a person
who is independent of management and free of any business or other
relationship that can interfere with exercise of his independent judgment
would be better in the overall interest of all stakeholders. Thus, SEBI
introduced the concept of independent director (ID) through Listing
Agreement (LA) with an exclusive clause on corporate governance.
The Ministry of Corporate Affairs (MCA) in its wisdom considered the same
concept for big public companies, besides listed companies. In fact, the MCA
would have considered and introduced the concept of independent director
for big public companies only since the Listing Agreement takes care of all
listed companies. However, both the regulators in order to establish their
own powers have different conditions for compliance of appointment of
independent directors. The brief variations between the provisions
introduced by SEBI which would be effective from 1st October, 2014 and
MCA which is effective from 1st April, 2014 (however time period of one year
is given for compliance) are discussed hereunder.
Applicability
SEBI has introduced the mandatory appointment of IDs in listed companies
under the purview of corporate governance by introducing an exclusive
clause 49 of the LA. It applies to all listed companies.

2. Volume VIII Part 3 August 10, 2014 12 Business Advisor
MCA on its part introduced an exclusive section in the Companies Act, 2013
(Act) with the Companies (Appointment and Qualification of Directors)
Rules, 2014 (Rules) for appointment of IDs. The said provisions would apply
to all listed public companies and public companies having:
 Paid up share capital of ten crore rupees or more; or
 Turnover of one hundred crore rupees or more; or
 In aggregate, outstanding loans, debentures and deposits, exceeding fifty
crore rupees.
Board composition
Clause 49 of the LA provides two sets of composition of IDs. Accordingly,
where the chairman of the Board is a non-executive director, at least one-
third of the Board should comprise of IDs and in case the company does not
have a regular non-executive chairman, at least half of the Board should
comprise of IDs. Further, where the regular 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.
Section 149 of the Act and Rules prescribe two sets of composition, one for
listed companies and the other for applicable unlisted public companies. As
per section 149 (4) and rules:
 In case of listed public companies - at least one-third of the total number
of directors should be independent directors.
 In case of eligible public companies - at least two directors should be
independent directors.
Qualifications of independent director
LA does not recognise any qualification for IDs. However, IDs appointed as
members of audit committee shall be financially literate and at least one of
them shall have accounting or related financial management expertise. The
term “financially literate” means the ability to read and understand basic
financial statements, i.e., balance sheet, profit and loss account and
statement of cash flows.
The Act and Rules provide an exclusive section for qualifications of IDs. An
ID shall possess appropriate skills, experience and knowledge in one or
more fields of finance, law, management, sales, marketing, administration,
research, corporate governance, technical operations or other disciplines
related to the company‟s business.
Independent directors’ remuneration

3. Volume VIII Part 3 August 10, 2014 13 Business Advisor
Both the Act and clause 49 of the LA require that remuneration, if any, to be
paid to IDs shall be fixed by the Board of directors and shall require prior
approval of shareholders, wherever required.
However, as per the Act the requirement of obtaining prior approval of
shareholders in general meeting shall not apply to reimbursement of
expenses for participation in the Board and other meetings and payment of
sitting fees to IDs.
As per the LA, the requirement of obtaining prior approval of shareholders
in general meeting shall not apply to payment of sitting fees to IDs if made
within the limits prescribed under the Companies Act, 2013.
There is no definition of directors‟ remuneration in the LA. There being no
restriction in the LA for directors‟ remuneration, a company is free to
compensate IDs by any means, may be of monthly retainership fee or
otherwise.
The Act provides that an ID may receive remuneration by way of fee for
attending meetings of the Board or committee thereof or for any other
purpose as may be decided by the Board, reimbursement of expenses for
participation in the Board and other meetings and profit related commission
as may be approved by the members. However, there is a ceiling on overall
payment of commission to directors.
Filling of vacancy
The LA provides that whenever there is a resignation or removal of ID, such
vacancy shall be filled in within 180 days from the date of such vacancy
arises.
The Schedule to Act also provides the above condition. However, the Rule
puts the position differently. It provides that any intermittent vacancy of an
ID shall be filled up by the Board at the earliest but not later than
immediate next Board meeting or three months from the date of such
vacancy, whichever is later.
Tenure of office of ID
As per the LA, an ID shall hold office for a term up to five consecutive years
on the Board of a company and shall be eligible for reappointment for
another term of up to five consecutive years on passing of a special
resolution by the company.
There is a rider that a person who has already served as an ID for five years
or more in a company as on 1st October, 2014, shall be eligible for

4. Volume VIII Part 3 August 10, 2014 14 Business Advisor
appointment on completion of his present term for one more term up to five
years only.
The Act provides than an ID shall hold office for a term up to five
consecutive years on the Board of a company but shall be eligible for re-
appointment on passing of a special resolution by the company and
disclosure of such appointment in the Board‟s report. No ID shall hold office
for more than two consecutive terms, but such ID shall be eligible for
appointment after the expiration of three years of ceasing to become an ID.
MCA has clarified that where any appointment of ID is made for less than
five years, then it will be considered as one term and accordingly the other
term will be for another five years only.
Number of directorship an independent director can accept
As per LA, a person shall not serve as an ID in more than seven listed
companies. If such person is serving as a whole-time director in any listed
company, then he shall serve as an ID in not more than three listed
companies.
The Act provides that a person can be a director in twenty companies out of
which he can be a director in maximum ten public companies. Accordingly,
he can be an ID in ten listed companies even if he is a whole-time director in
one listed company.
Formal letter of appointment to independent directors
The LA has come out with a new concept of issue of formal letter of
appointment to IDs as introduced in the Act. The said letter of appointment
along with the detailed profile of ID shall be disclosed on the websites of the
company and stock exchanges not later than one working day from the date
of such appointment. The LA has not gone to that extent as provided in the
Schedule to the Act.
Schedule to the Act on issue of letter of appointment, inter alia, contains
matters such as (a) fiduciary duties and accompanying liabilities; (b)
provision for directors and officers insurance, if any; (c) list of actions that a
director shall not do; the remuneration particulars and so on.
Training of independent directors
LA has introduced yet another concept of training of IDs. The company shall
provide suitable training to IDs to familiarise them with the company, their
roles, rights, responsibilities in the company, nature of the industry in
which the company operates, business model of the company, etc. The

5. Volume VIII Part 3 August 10, 2014 15 Business Advisor
details of such training imparted shall be disclosed in the annual report.
There is no such provision for training of ID in the Act.
Code for IDs
LA in its conditions for corporate governance compliance included:
a. Performance evaluation of IDs
b. Separate meeting of IDs.
The Act has inserted an exclusive Schedule towards “Code for IDs”. The
code, inter alia, contains both the above said conditions besides the
following:
1. Guidelines for professional conduct
2. Role and functions
3. Duties
4. Manner of appointment
5. Re-appointment
6. Resignation or removal
Small shareholders’ director
The Rule has recognised the appointment of IDs as small shareholders‟
director whereas there is no such concept in LA. However, such director
shall meet the basic conditions for appointment of IDs as per the Act.
Accordingly, any small shareholders‟ director who is considered as an ID in
a listed company, pursuant to the provisions of the Act would be considered
as compliance under the LA.
Conclusion
Both the regulators, MCA and SEBI, are now under the supervision of
Hon‟ble Minister of Finance. It is right time for both of them to identify and
bring uniformity, to start with in the appointment of IDs in listed company.
It would be fair enough if the MCA maintains all other conditions of LA
other than applicability to unlisted public companies.
Such a move would not only make it convenient for the corporates for
proper compliance but also benefit the IDs as a whole.
(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Delhi)