Independent director

The legal test is in Section 149(6) of the Companies Act and Regulation 16 of LODR. Independent directors chair the audit committee, approve related-party deals and are meant to protect minority shareholders. Listed companies need at least one-third independent directors, or half where the chair is an executive or linked to the promoter. They serve at most two five-year terms, and their appointment and removal need a special resolution. Passing the legal test does not guarantee independent behaviour.

What independent directors do

They are expected to bring outside judgement to the board and to look after the interests of minority shareholders, who have no seat at the table. Much of their work happens in committees. The audit committee must be chaired by an independent director, and at least two-thirds of its members must be independent. It reviews the financial statements and the auditor's work, and approves related-party transactions. The nomination and remuneration committee, also chaired by an independent director, shapes who joins the board and how senior management is paid. Independent directors must also meet at least once a year without the executive directors and management present.

How they are paid

Independent directors receive sitting fees for meetings and may receive a commission linked to profits. They cannot receive stock options, which keeps their interests separate from those of management.

Independence in substance

The legal test checks relationships on paper. It cannot check whether a director will challenge a promoter. Signs worth reading include very long tenures, close personal or business ties to the promoter group, a director sitting on many boards at once, and poor attendance. As the analysis of governance and financial risk recounts, at Satyam Computer Services in 2009 the founder admitted that more than ₹5,000 crore of reported cash did not exist. Board oversight and audit had failed to catch years of falsified accounts.

Where to find it

The corporate governance report in the annual report lists each director, whether they are independent, their attendance, their other directorships and their committee roles. Appointments, resignations and the reasons given for a resignation are filed with the stock exchanges.

Common mistakes

• Counting independent directors and stopping there. The share of the board that is independent says little about how independent it is.
• Ignoring resignations. A resignation in the middle of a term, especially one with a vague reason, deserves a closer look.
• Assuming the audit committee has checked everything. It relies on management and the auditors for its information.

Questions investors ask

Who can be an independent director? A person with relevant experience who has no material financial or family link to the company, its promoters or its management, and who meets the tests in the Companies Act and SEBI's listing rules.

Why do independent director resignations matter? Because a director who leaves early may have seen something they were not willing to sign off on. Read the resignation letter, which the company must disclose.