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Questions to assess the independence of an Independent Director

The independence of a Director is critical to ensure objective thinking, discussions and decision-making in the boardroom.

The Companies Act, 2013 (the Act) and SEBI LODR Regulations, 2015 (LODR) have indicated some criteria for assessing the independence of an ID. Independence however is a state of mind, and cannot be determined with reference to statutory or regulatory provisions or definitions. Before appointing a Director as an Independent Director (ID), the following must be gone into to assess whether an ID is truly independent.

  1. Compliance with definition under the Act and LODR – It is important to ensure that the person complies with all the provisions relating to the definition of an ID.
  2. Absence of conflict of interest – Conflict of interest, real or perceived, should be avoided. Any conflict has the potential to impact the independence of a Director. Such a conflict should be disclosed as soon as is reasonably possible, and the Director concerned should disassociate himself/ herself from the discussions and the decision relating to the subject where there is a conflict.
  3. Absence of pecuniary interest – The Act allows a Director to have income from a company on whose Board he/she sits, and be classified as an ID, provided that the income from the company for the Director is not in excess of 10% of his/her total income. However, independence being a state of mind, there should be no limits prescribed, and there should be no pecuniary relationship.
  4. Past track record – It is difficult to anticipate how a Director would conduct himself/ herself on the Board. Would this Director shy away from asking tough questions. However, from the past track record of the person, it would be possible to ascertain whether he/she has demonstrated independence of judgement and whether he/she is afraid to ask the difficult questions and challenge the management.

Being truly independent at the time of appointment is critical. It is even more important to ensure that the Director stays truly independent throughout his/her term.