Board Composition and Independent Directors

In one line

Every company must have a Board of a fixed minimum and maximum size, with a resident director, in prescribed cases a woman director, and in a listed public company at least one third independent directors, who must satisfy a long test of independence, declare it every year, follow a statutory code, hold office for a term of five years renewable once, and bear a liability narrower than that of an executive director.

In exam wording: section 149(1) fixes the numbers, section 149(4) requires at least one third independent directors in every listed public company, section 149(6) defines independence, section 149(10) and (11) fix the tenure at five consecutive years, twice at most, section 149(12) narrows the liability, and Schedule IV is the Code for Independent Directors.

Why the law has this at all

A Board that is entirely made up of the people who run the company cannot check the people who run the company. That is the whole problem of corporate governance in one line, and the Act's answer is structural rather than moral: put people on the Board who are not part of management, do not owe management money, and are not related to the promoters, and give them a code that tells them what they are for.

The other composition rules answer smaller problems. A maximum of fifteen prevents an unwieldy Board. A resident director ensures somebody the regulator can reach is actually in India. A woman director in prescribed companies answers the plain fact that boards were closed to half the population. A small shareholders' director gives the smallest holders a voice they could never win by voting.

And section 149(12) answers the objection to the whole scheme. If an independent director carried the same liability as the managing director, nobody worth having would take the job. So the Act narrows his liability, and the narrowing is the price of getting good people to sit.

Some words this chapter uses

A nominee director is defined in the Explanation to section 149(7). A relative is defined in section 2(77). A key managerial personnel is defined in section 2(51). Retirement by rotation is the scheme in section 152(6) and (7). A small shareholder is defined in the Explanation to section 151. A term here means the period of appointment, not a financial year.

The size and shape of the Board: section 149(1) and (2)

Every company shall have a Board of Directors consisting of individuals as directors.

Individuals, so a company cannot be a director of a company.

The minimum, under clause (a): three directors for a public company, two for a private company, one for a One Person Company.