Independent director

A board has three kinds of people on it, and the workbook is careful to keep them apart:

That middle row is the one candidates lose marks on. A non-executive director is not automatically independent: the workbook defines them as directors "who are not part of management but not independent, either". Being outside management is necessary for independence and nowhere near sufficient.

Why an analyst cares: the independent directors are the only people on the board with no stake in management keeping its job. They are the mechanism by which minority shareholders get someone in the room, and the proportion of them is the first number to look at when judging a company's corporate governance.

The board threshold depends on who chairs it. SEBI regulation stipulates that independent directors should constitute:

Chairman is an executive director  ->  at least 50% of the board
In all other cases                 ->  at least 1/3 of the board

The logic is straightforward. An executive chairman concentrates management and board leadership in one person, so the counterweight has to be heavier. The workbook adds that for strong governance standards a majority of the board should be independent — more than SEBI requires in the one-third case.

Committee thresholds, and the gap between ideal and mandated. The workbook states each committee twice: what would be ideal, and what SEBI actually requires. That gap is itself examinable.

The nomination committee point carries the reasoning: the degree of independence of independent directors is likely to be high if the company executives do not have a role in their appointment. A director chosen by the management he is meant to supervise is independent only on paper.

Independence is tested by disclosure, not by the label. On remuneration, the workbook asks that all the income an independent director earns from the company for all assignments be thoroughly disclosed, so that shareholders can evaluate the true degree of independence. A director drawing large consulting fees alongside his sitting fees is disclosed as independent and is not.

Two companies, each with a 12-member board.

Company A — the chairman is also the managing director.

Required independent directors = 50% of 12 = 6
Actual                                      = 6   -> complies, at the minimum

Company B — the chairman is a non-executive.

Required independent directors = 1/3 of 12 = 4
Actual                                      = 6   -> comfortably above

Same six independent directors, and the same board size — but Company A is scraping the floor of a stricter rule while Company B clears a looser one. An analyst comparing them on the raw count of independent directors would call them identical and would be wrong.

Now the committees, for Company A:

And one more fact from the notes to the accounts: two of Company A's six independent directors billed the company Rs 45 lakh between them for advisory work, against sitting fees of about Rs 12 lakh each. Disclosed, as the workbook requires — and that disclosure exists precisely so the analyst can decide whether six independent directors is really six.

Chapter 7, section 7.6.2 (Corporate governance), sets out board composition in item (i) and the committee compositions in items (iii), (vi), (viii) and (ix).

The numbers are what get asked: 50% where the chairman is an executive director, one-third otherwise, and two-thirds of the audit committee. Equally examinable is the qualitative distinction in the first line — that a non-executive director is not the same as an independent director.

Watch the wording of the question. The workbook repeatedly separates what "ideally" should happen from what "SEBI regulation currently stipulates", and a question asking what the regulation requires has a different answer from one asking what good governance would be.

• Non-executive does not mean independent. The workbook's own phrasing is "not part of management but not independent, either". This is the commonest error on the topic.
• 50% or one-third — it depends on the chairman. Executive chairman gives 50%; every other case gives one-third. Candidates memorise one number and apply it to both.
• The audit committee needs two-thirds independent, not all. "Entirely independent" is the workbook's ideal, not SEBI's requirement.
• The remuneration committee rule is about non-executives plus an independent chairman — not a two-thirds or one-half proportion of independent members.
• A majority of independent directors is best practice, not the minimum. The workbook recommends it while SEBI requires less.
• Disclosure of an independent director's total income from the company is a governance test in itself. Large non-board fees are the standard way a nominally independent director is not.
• The nomination committee point is about who appoints them: executives involved in the appointment undermine the independence before the director ever sits down.