MEMBERS IN PRACTICE

ETHICAL STANDARDS BOARD (ESB)The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)

Provisions Relating to DIRECTOR SIMPLICITOR / INDEPENDENT

DIRECTOR VIS-À-VIS

MEMBERS IN PRACTICE

Provisions relating to Director simPlicitor/

inDePenDent Director vis-à-vis

members in Practice

Ethical Standards BoardThe Institute of Chartered Accountants of India

(Set up by an Act of Parliament)

Ethical Standards BoardThe Institute of Chartered

Accountants of India(Set up by an Act of Parliament)

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Provisions relating to director simplicitor/ independent Director vis-à-vis Members in practice

President’s message

“When you are able to maintain your own highest standards of integrity - regardless of what others may do - you are destined for greatness.” – Napoleon Hill

The maintenance of the highest standards and professional ethics is of utmost importance. The fundamental principles signify the profession’s recognition of its responsibility of public interest for Chartered Accountants. The Institute of Chartered Accountants of India is making its norms in various spheres relating to the profession of chartered accountancy and updating the same from time to time.

The Independent Director, being a non executive director engages in improving corporate credibility and governance standards of the Company. Chartered Accountants due to their expertise and knowledge are preferred choice of a company for nomination as Independent Director. They are expected to act as a guide to the company and ensure that the company moves in the right direction utilising their expertise. Therefore, it is necessary for chartered accountants being a independent director, to be aware of their responsibilities and the ethical requirements vis-à-vis The Chartered Accountants Act, 1949, Code of Ethics etc.

The Ethical Standards Board considering the importance of this decided to bring booklet on “Provisions relating to Director Simplicitor/ Independent Director vis-à-vis Members in Practice”. At this juncture, I compliment the efforts of CA. Kemisha Soni, Chairperson, CA. N. C. Hegde, Vice-Chairman and other members of the Ethical Standards Board, for bringing out this booklet.

I sincerely believe that this booklet will be of immense use to the members.

ca. atul Kumar guptaPresident

vice-President’s message

The Institute of Chartered Accountants of India (ICAI) has since long been adhering to the values of excellence, independence, integrity and infuses in its members the utmost sense of responsibility and commitment towards the professional ethics. The Institute through the Ethical Standards Board develops and issues ethical standards and other pronouncements for the members. It works towards evolving a dynamic and contemporary Code of Ethics and ethical behaviour for members as also to protect the dignity and interests of the members.

I am happy to announce that in its endeavour of meaningful knowledge dissemination and acquainting members with the contemporary ethical requirements, the Ethical Standards Board is bringing out the booklet on “Provisions relating to Director Simplicitor/ Independent Director vis-à-vis Members in Practice”. This booklet shall serve as compendium and would provide useful insights pertaining to the relevant scope of work as per the provisions of the Companies Act and code of ethics which is utmost essential while discharging their duties as Independent Director or Director Simplicitor in a company. I express my appreciation for CA. Kemisha Soni, Chairperson, CA. N C Hegde Vice-Chairman and other esteemed members of the Board. I sincerely believe that the members of the profession shall find the booklet immensely useful and relevance.

ca. nihar n. JambusariaVice-President, ICAI

Ethical Standards BoardThe Institute of Chartered Accountants of India(Set up by an Act of Parliament)

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chairperson’s message

The Ethical Standards Board is continuously working towards achieving its objective to set up contemporary ethical standards for chartered accountants and strengthening the public confidence in the profession.

Keeping in view of the responsibilities of the members in practice being a independent director or Director Simplicitor in Companies, and their compliances with the professional ethics, the Ethical Standards Board has come up with this booklet. This booklet contains relevant provisions of Companies Act, 2013, the Chartered Accountants Act, 1949, Code of Ethics, frequently asked questions and the decisions of the Ethical Standards Board taken from time to time on the said issue.

I would also like to place on record my deep appreciation to the officers of Secretariat of Ethical Standards Board in this regard. I hope that this publication will be of immense use to the members, and other interested readers.

ca. Kemisha soni Chairperson, Ethical Standards Board

vice-chairman’s message

I am extremely happy to share that Ethical Standards Board is coming up with the booklet on “Provisions relating to Director Simplicitor/ Independent Director vis-à-vis Members in Practice”. This booklet is a compilation of provisions relating to member in practice being Director Simplicitor /Independent Director , and FAQs relating to such members. I extend my words of appreciations to Chairperson, and other esteemed members of the Board. I would also like to place on record my deep appreciation for the Secretariat of Ethical Standards Board for his efforts and contribution in bringing out this booklet.

I hope that this booklet help to members in discharging their responsibility.

ca. nandkishore chidamber Hegde Vice-Chairman

Ethical Standards Board



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acknowledgementThe Ethical Standards Board acknowledges the valuable contribution made by CA. Prafulla Premsukh Chhajed, Past President, CA. Shriniwas Yeshwant Joshi, CA. Durgesh Kabra, CA. Rajendra Kumar P and CA. G. Sekar for bringing out this publication. We wish to place on record sincere thanks to all the members for their suggestions, support and guidance in finalizing this booklet



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composition of ethical standards board 2020-2021members

• CA. Kemisha Soni, Chairperson• CA. Nandkishore Chidamber Hegde, Vice-Chairman• CA. Atul Kumar Gupta, President (Ex-officio)• CA. Nihar Niranjan Jambusaria, Vice-President (Ex-officio)• CA. Jay Chhaira• CA. Prafulla Premsukh Chhajed, Past President• CA. Tarun Jamnadas Ghia• CA. Aniket Sunil Talati• CA. Babu Abraham Kallivayalil• CA. G Sekar• CA. M P Vijay Kumar• CA. Ranjeet Kumar Agarwal• CA. Shriniwas Yeshwant Joshi• CA. Hans Raj Chugh• CA. Pramod Jain• CA. (Dr.) Sanjeev Kumar Singhal• CA. Charanjot Singh Nanda• CA. Dheeraj Kumar Khandelwal• Adv. Vijay Kumar Jhalani• Ms. Mahua Pal• Shri Sunil Kanoria

co-opted members• CA. Sanjiv Kumar Chaudhary• CA. Minesh Jain• CA. Pankaj Tyagi• CA. B.S. Yadav• CA. Shrikumar Banerjee• CA. Sunil Talati, Past President• CA. Rajiv Saldi

special invitee• CA. Maitreyee Roy• CA. Sunil Bajaj



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table of contents messages

i. Provisions aPPlicable for inDePenDent Director

a. Provisions applicable for independent Director under companies act, 2013 11

Section 149. Company to have Board of Directors 11

Section 150. Manner of selection of independent directors and maintenance of databank of independent directors.— 13

b. Provisions applicable for independent Director under the companies (Appointment and Qualification of Directors) Rules, 2014. 14

Rule 3 Woman Director on the Board. 14

Rule-4 Number of Independent Directors 14

Rule- 5 Qualifications of Independent Director 15

Rule 6. Compliances required by a person eligible and willing to be appointed as an independent director. 16

C. Code for independent Directors (schedule iv of Companies Act, 2013) 17

D. Provisions applicable for Director simplicitor mentioned under volume-ii of code of ethics, 2020:- 21

Clause (11) of the part I of the first schedule of the Chartered Accountants Act, 1949 and commentary appearing in Volume II of revised Code of Ethics, 2020 21

Commentary to clause (4) of the part I of the second schedule of the Chartered Accountants Act, 1949 appearing in Volume II of revised code of ethics, 2020 22

e. Provisions applicable for Director mentioned under volume-i of code of ethics, 2019 based on the 2018 edition of code of ethics issued by international Ethics standards Board for Accountants (iEsBA):- 23

Section 522- Recent Service with an Audit Client 23

Requirements and Application Material 23

Service During Period Covered by the Audit Report 23

Service Prior to Period Covered by the Audit Report 23

Section 523 Serving as a Director or Officer of an Audit Client 24

Requirements and Application Material 24

Service as Director or Officer 24

ii. FAQs on DiRECtoR simpliCitoR / inDEpEnDEnt DiRECtoR 24



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i. Provisions applicable for independent Director

a. Provisions applicable for independent Director under companies act, 2013

section 149. Company to have Board of Directors

(1) Every company shall have a Board of Directors consisting of individuals as directors and shall have—

(a) a minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company; and

(b) a maximum of fifteen directors: Provided that a company may appoint more than fifteen directors after passing a

special resolution: Provided further that such class or classes of Companies as may be prescribed,

shall have at least one woman director. (2) Every company existing on or before the date of commencement of this Act shall within

one year from such commencement comply with the requirements of the provisions of sub-section (1).

(3) Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.

(4) Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public Companies.

Explanation.—For the purposes of this sub-section, any fraction contained in such one-third number shall be rounded off as one.

(5) Every company existing on or before the date of commencement of this Act shall, within one year from such commencement or from the date of notification of the rules in this regard as may be applicable, comply with the requirements of the provisions of sub-section (4).

(6) An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;



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(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(e) who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non profit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

(7) Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6).

Explanation.—For the purposes of this section, ―nominee director‖ means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests.



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(8) The company and independent directors shall abide by the provisions specified in Schedule IV.

(9) Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of sections 197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

(10) Subject to the provisions of section 152, an independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.

(11) Notwithstanding anything contained in sub-section (10), no independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director:

Provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Explanation.—For the purposes of sub-sections (10) and (11), any tenure of an independent director on the date of commencement of this Act shall not be counted as a term under those sub-sections.

(12) Notwithstanding anything contained in this Act,—

(i) an independent director;

(ii) a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

(13) The provisions of sub-sections (6) and (7) of section 152 in respect of retirement of directors by rotation shall not be applicable to appointment of independent directors.

section 150. manner of selection of independent directors and maintenance of databank of independent directors.—

(1) Subject to the provisions contained in sub-section (6) of section 149, an independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by any body, institute or association, as may by notified by the Central Government, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors:

Provided that responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director shall lie with the company making such appointment.


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(2) The appointment of independent director shall be approved by the company in general meeting as provided in sub-section (2) of section 152 and the explanatory statement annexed to the notice of the general meeting called to consider the said appointment shall indicate the justification for choosing the appointee for appointment as independent director.

(3) The data bank referred to in sub-section (1), shall create and maintain data of persons willing to act as independent director in accordance with such rules as may be prescribed.

(4) The Central Government may prescribe the manner and procedure of selection of independent directors who fulfil the qualifications and requirements specified under section 149.

b. Provisions applicable for independent Director under the companies (Appointment and Qualification of Directors) Rules, 2014.

rule 3 Woman Director on the board.

The following class of Companies shall appoint at least one woman director-

(i) every listed company;

(ii) every other public company having -

(a) paid–up share capital of one hundred crore rupees or more; or

(b) turnover of three hundred crore rupees or more:

Provided that a company, which has been incorporated under the Act and is covered under provisions of second proviso to sub-section (1) of section 149 shall comply with such provisions within a period of six months from the date of its incorporation:

Provided further that any intermittent vacancy of a woman director 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.

Explanation.- For the purposes of this rule, it is hereby clarified that the paid up share capital or turnover, as the case may be, as on the last date of latest audited financial statements shall be taken into account.

Rule-4 number of independent Directors

(1) The following class or classes of Companies shall have at least two directors as independent directors -

(i) the Public Companies having paid up share capital of ten crore rupees or more; or

(ii) the Public Companies having turnover of one hundred crore rupees or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:



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Provided that in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it:

Provided further that any intermittent vacancy of an independent director 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:

Provided also that where a company ceases to fulfil any of three conditions laid down in sub-rule (1) for three consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions;

Explanation. - For the purposes of this rule, it is here by clarified that, the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account:

Provided that a company belonging to any class of Companies for which a higher number of independent directors has been specified in the law for the time being in force shall comply with the requirements specified in such law.

(2) The following classes of unlisted public company shall not be covered under sub-rule (1), namely:-.

(a) a joint venture;

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act.”

Rule- 5 Qualifications of independent Director

(1) An independent director 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.

(2) None of the relatives of an independent director, for the purposes of sub-clauses (ii) and (iii) of clause (d) of sub-section (6) of section 149,-

(i) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors; or

(ii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for an amount of fifty lakhs rupees, at any time during the two immediately preceding financial years or during the current financial year.


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rule 6. compliances required by a person eligible and willing to be appointed as an independent director.

(1) Every individual –

(a) who has been appointed as an independent director in a company, on the date of commencement of the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019, shall within a period of 7[thirteen months] from such commencement; or

(b) who intends to get appointed as an independent director in a company after such commencement, shall before such appointment, apply online to the institute for inclusion of his name in the data bank for a period of one year or five years or for his life-time, and from time to time take steps as specified in sub-rule (2), till he continues to hold the office of an independent director in any company:

Provided that any individual, including an individual not having DIN, may voluntarily apply to the institute for inclusion of his name in the data bank.

(2) Every individual whose name has been so included in the data bank shall file an application for renewal for a further period of one year or five years or for his life-time, within a period of thirty days from the date of expiry of the period upto which the name of the individual was applied for inclusion in the data bank, failing which, the name of such individual shall stand removed from the data bank of the institute:

Provided that no application for renewal shall be filed by an individual who has paid life-time fees for inclusion of his name in the data bank.

(3) Every independent director shall submit a declaration of compliance of sub-rule (1) and sub-rule (2) to the Board, each time he submits the declaration required under sub-section (7) of section 149 of the Act.

(4) Every individual whose name is so included in the data bank under sub-rule (1) shall pass an online proficiency self-assessment test conducted by the institute within a period of one year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the databank of the institute:

3[Provided that an individual shall not be required to pass the online proficiency self-assessment test, when he has served as a director or key managerial personnel, for a total period of not less than ten years, as on the date of inclusion of his name in the databank, in one or more of the following, namely:-

(a) listed public company; or

(b) unlisted public company having a paid-up share capital of rupees ten crore or more; or

(c) body corporate listed on a recognized stock exchange:

Provided further that for the purpose of calculation of the period of ten years referred to in the first proviso, any period during which an individual was acting as a director or as a key managerial personnel in two or more Companies or bodies corporate at the same time shall be counted only once.



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Explanation: For the purposes of this rule,-

(a) the expression “institute” means the ‘Indian Institute of Corporate Affairs at Manesar’ notified under sub-section (1) of section 150 of the Companies Act, 2013 as the institute for the creation and maintenance of data bank of Independent Directors;

(b) an individual who has obtained a score of not less than sixty percent. in aggregate in the online proficiency self-assessment test shall be deemed to have passed such test;

(c) there shall be no limit on the number of attempts an individual may take for passing the online proficiency self-assessment test.

* “Act” means the Companies Act, 2013

C. Code for independent Directors (schedule iv of Companies Act, 2013)The Code is a guide to professional conduct for independent directors. Adherence to these standards by independent directors and fulfilment of their responsibilities in a professional and faithful manner will promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors.

i. guidelines of professional conduct:

An independent director shall:

(1) uphold ethical standards of integrity and probity;

(2) act objectively and constructively while exercising his duties;

(3) exercise his responsibilities in a bona fide manner in the interest of the company;

(4) devote sufficient time and attention to his professional obligations for informed and balanced decision making;

(5) not allow any extraneous considerations that will vitiate his exercise of objective independent judgment in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making;

(6) not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person;

(7) refrain from any action that would lead to loss of his independence;

(8) where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly;

(9) assist the company in implementing the best corporate governance practices.


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ii. role and functions:

The independent directors shall:

(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;

(2) bring an objective view in the evaluation of the performance of board and management;

(3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;

(4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;

(5) safeguard the interests of all stakeholders, particularly the minority shareholders;

(6) balance the conflicting interest of the stakeholders;

(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;

(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.

iii. Duties :

The independent directors shall—

(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;

(2) seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;

(3) strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;

(4) participate constructively and actively in the committees of the Board in which they are chairpersons or members;

(5) strive to attend the general meetings of the company;

(6) where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;



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(7) keep themselves well informed about the company and the external environment in which it operates;

(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;

(9) pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;

(10) ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;

(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;

(12) 1[“act within their authority”], assist in protecting the legitimate interests of the company, shareholders and its employees;

(13) not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.

iv. manner of appointment:

(1) Appointment process of independent directors shall be independent of the company management; while selecting independent directors the Board shall ensure that there is appropriate balance of skills, experience and knowledge in the Board so as to enable the Board to discharge its functions and duties effectively.

(2) The appointment of independent director(s) of the company shall be approved at the meeting of the shareholders.

(3) The explanatory statement attached to the notice of the meeting for approving the appointment of independent director shall include a statement that in the opinion of the Board, the independent director proposed to be appointed fulfils the conditions specified in the Act and the rules made thereunder and that the proposed director is independent of the management.

(4) The appointment of independent directors shall be formalised through a letter of appointment, which shall set out :

(a) the term of appointment;

(b) the expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to serve and its tasks;

(c) the fiduciary duties that come with such an appointment along with accompanying liabilities;

(d) provision for Directors and Officers (D and O) insurance, if any;


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(e) the Code of Business Ethics that the company expects its directors and employees to follow;

(f) the list of actions that a director should not do while functioning as such in the company; and

(g) the remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any

(5) The terms and conditions of appointment of independent directors shall be open for inspection at the registered office of the company by any member during normal business hours.

(6) The terms and conditions of appointment of independent directors shall also be posted on the company’s website.

v. re-appointment:

The re-appointment of independent director shall be on the basis of report of performance evaluation.

VI. Resignation or removal:

(1) The resignation or removal of an independent director shall be in the same manner as is provided in sections 168 and 169 of the Act.

(2) An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within 2[“three months”] from the date of such resignation or removal, as the case may be.

(3) Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.

vii. separate meetings:

(1) The independent directors of the company shall hold at least one meeting 3[“in a financial year”], without the attendance of non-independent directors and members of management;

(2) All the independent directors of the company shall strive to be present at such meeting;

(3) The meeting shall:

(a) review the performance of non-independent directors and the Board as a whole;

(b) review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;

(c) assess the quality, quantity and timeliness of flow of information between



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the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

viii. evaluation mechanism:

(1) The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.

(2) On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.

4[“Note: The provisions of sub-paragraph (2) and (7) of paragraph II, paragraph IV, paragraph V, clauses (a) and (b) of sub-paragraph (3) of paragraph VII and paragraph VIII shall not apply in the case of a Government company as defined under clause (45) of section 2 of the Companies Act,2013 (18 of 2013), if the requirements in respect of matters specified in these paragraphs are specified by the concerned Ministries or Departments of the Central Government or as the case may be, the State Government and such requirements are complied with by the Government companies.”]

D. Provisions applicable for Director simplicitor mentioned under volume-ii of code of ethics, 2020:-Clause (11) of the part I of the first schedule of the Chartered Accountants Act, 1949 and commentary appearing in Volume II of revised Code of Ethics, 2020

2.14.1.11 A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he :-

Clause (11): engages in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage:

Provided that nothing contained herein shall disentitle a chartered accountant from being a director of a Company, (not being a managing director or a whole time director), unless he or any of his partners is interested in such company as an auditor;xx xx xx

Director simplicitor

2.14.1.11(iv) As regards the question of permitting a member in practice to be a, Promoter/Promoter- Director, Subscriber to the Memorandum and Articles of Association of any Company, it was decided that:

(a) Director of a Company

(1) The expression “Director Simplicitor” means an ordinary/simple Director who is not a Managing Director or Whole time Director and is required only in the Board Meetings of the company and not paid any remuneration except for attending such meetings.

(2) A member in practice is permitted generally to be a Director Simplicitor in any Company including a board-managed Company and as such he


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is not required to obtain any specific permission of the Council in this behalf unless he or any of his partners is interested in such Company as an auditor, irrespective of whether he and/or his relatives hold substantial interest in that Company.

(b) Promoter/Promoter-Director

There is no bar for a member to be a Promotor/Signatory to the Memorandum and Articles of Association of any Company. There is also no bar for such a Promoter/Signatory to be a Director Simplicitor of that Company irrespective of whether the objects of the Company include areas which fall within the scope of the profession of Chartered Accountants. Therefore members are not required to obtain specific permission of the Council in such cases. It must be clarified that under Section 25 of the Chartered Accountants Act, no Company can practice as a Chartered Accountant.

xx xx xx

Commentary to clause (4) of the part i of the second schedule of the Chartered Accountants Act, 1949 appearing in volume ii of revised code of ethics, 2020

xx xx xx

(a) Where the member is holding a position in the Company as Director , officer or em-ployee

Section 141(3)(b) of the Companies Act, 2013 specifically prohibits a member from auditing the accounts of a Company in which he is an officer or employee of the Com-pany, or in the employment of an officer or an employee of the Company (irrespective of the question of substantial interest).

Moreover, in case the member who is Director Simplicitor (general permission) in a Company, the Council has prohibited such member from auditing the accounts of a Company, whether or not he holds substantial interest in the Company.

In case the member seeks specific permission of the Council to be Whole Time or Man-aging Director in a Company, he would , on grant of such permission, not be entitled ei-ther to engage in attest functions (which includes audit), or to hold substantial interest in the Company. Although the provisions of the aforesaid section are not specifically applicable in the context of audits performed under other statutes, e.g. Tax Audit, yet the underlying principle of independence of mind is equally applicable in those situa-tions also.

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(e) Where the relative of the member is a director or is in the employment of the Company as a director or key managerial person

Section 141 (3) (f) of Companies Act, 2013 bars a person from accepting audit of a Company where the relative of the member is director or is in the employment of the Company as a director or key managerial person.

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cooling off period after completion of tenure as Director

2.15.1.4(xv) A member shall not accept the assignment of audit of a Company for a period of two years from the date of completion of his tenure as Director, or resignation as Director of the said Company.

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e. Provisions applicable for Director mentioned under volume-i of code of ethics, 2019 based on the 2018 edition of code of ethics issued by inter-national Ethics standards Board for Accountants (iEsBA):-

section 522- recent service with an audit client

Requirements and Application Material

Service During Period Covered by the Audit Report

R522.3 The audit team shall not include an individual who, during the period covered by the audit report:

(a) Had served as a director or officer of the audit client; or

(b) Was an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.

service Prior to Period covered by the audit report

522.4 A1 A self-interest, self-review or familiarity threat might be created if, before the peri-od covered by the audit report, an audit team member:

(a) Had served as a director or officer of the audit client; or

(b) Was an employee in a position to exert significant influence over the preparation of the client’s accounting records or financial statements on which the firm will express an opinion.

For example, a threat would be created if a decision made or work performed by the individual in the prior period, while employed by the client, is to be evaluated in the current period as part of the current audit engagement.

522.4 A2 Factors that are relevant in evaluating the level of such threats include:

• The position the individual held with the client.

• The length of time since the individual left the client.

• The role of the audit team member.

522.4 A3 An example of an action that might be a safeguard to address such a self-interest, self-review or familiarity threat is having an appropriate reviewer review the work performed by the audit team member.


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section 523 serving as a Director or officer of an Audit Client

Requirements and Application Material

Service as Director or Officer

R523.3 A partner or employee of the firm or a network firm shall not serve as a director or officer of an audit client of the firm.

Further, as per Section 141(3) (b) of the Companies Act, 2013, an officer or employee of the company or a person who is a partner, or who is in the employment, of an officer or employee of the company, shall not be eligible for appointment as an auditor of a company.

ii. faQs on Director simplicitor / independent Director

Q1. Whether appointment of an independent Director on companies board is mandatory?

A. As per Section 149(4) of Companies Act, 2013, every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public Companies.

Q2. Whether appointment of Woman Director on companies board is mandatory?

A. As per Second proviso to sub-section (1) of Section 149 of the Companies Act, 2013, such class or classes of Companies as may be prescribed, shall have at least one woman director. Rule 3 of Companies (Appointment and Qualifications of Directors) Rules, 2014 prescribes the class of Companies as referred to in Section 149 of the Companies Act, 2013 on which this provision is applicable.

Q3. Whether a member in practice can become an independent Director of a company?

A. A member in practice is permitted generally to be a Director Simplicitor’, which includes an independent director. Such Director should not be the Managing Director or Whole time Director and is required only in the Board Meetings of the company and not paid any remuneration except for attending such meetings. Specific permission of the Council is not required in this regard.

Q4. Whether a member in practice can be a Director simplicitor of a company?

A. Yes, As per Clause (11) of Part-I of first Schedule of the Chartered Accountants Act, 1949, a member in practice is not disentitled from being a director of a Company, (not being a managing director or a whole time director).

In pursuance to the above Council has clarified that a member in practice may be Director Simplicitor. The expression “Director Simplicitor” means an ordinary/simple Director who is not a Managing Director or Whole time Director and is required only in the Board



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Meetings of the company and not paid any remuneration except for attending such meetings.

Q5. Whether a member in practice can become a managing director or a whole time director of a company?

A. No, members in practice are not allowed to become a Managing Director or whole-time Director of a company generally. However, a member in practice may become a Managing Director or a whole-time Director of a company after specific and prior permission of the Council.

In pursuance to the Resolution passed by Council at its 242nd meeting held in May 2004, a member engaged in occupation of Managing Director or Whole Time Director shall not be entitled to perform any attest function.

Further as per “Guidelines for Practice in Corporate Form of Practice” appearing in Volume-II of Code of Ethics, 2020, a members in practice can hold the office of Managing Director, Whole-time Director or Manager of a body corporate within the meaning of the Companies Act, 1956 provided that the body corporate is engaged exclusively in rendering Management Consultancy and Other Services permitted by the Council in pursuant to Section 2(2)(iv) of the Chartered Accountants Act, 1949 and complies with the conditions(s) as specified by the Council from time to time in this regard. The name of the Management Consultancy Company is required to be approved by the Institute and such Company has to be registered with the Institute.

Q6. Whether a member in practice can become a managing director or a whole-time director in a company registered under section 8 of companies act, 2013?

A. A member in practice can accept position as Managing Director or whole-time Director in a Company registered under Section 8 of Companies Act, 2013 provided his position is honorary, and the Company is of charitable, educational, or non-commercial nature.

Q7. Whether a member in practice being a Director simplicitor can participate in policy or financial decisions, of the company during meetings?

A. Yes, a member in practice being a Director Simplicitor can participate in policy or financial decisions of the company during meetings, but he should not execute the said decisions or get involved in business of the company.

Q8. Whether a member in practice being a Director simplicitor can operate the accounts of the company?

A. No, a member in practice being Director Simplicitor cannot operate the accounts of the company.

Q9. Whether member in practice being a Director simplicitor can sign the financial statement and other statutory documents of the company?

A. A member in practice being a director Simplicitor can sign the financial statement and other statutory documents of the company as required to be signed by the Director while discharging his statutory obligation.


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Q10. Whether member in practice being a director simplicitor in a company can draw remuneration from the company?

A. A member in practice being a director Simplicitor in a Company may receive remuneration for attending Board Meetings of the Company.

Q11. Whether a member in practice being a Director simplicitor, or his relatives can hold substantial interest of the company?

A. Yes, as per provisions of Clause (11) of Part-I of first Schedule of the Chartered Accountants Act and Council directions under the Clause , appearing under Volume-II of Code of Ethics, 2020, a member in practice being a Director Simplicitor and/ or his relatives can hold substantial interest in a Company.

Q12. Whether a member in practice can become Director simplicitor of a company, if he, or the chartered accountants firm wherein he is a partner, or any of the partner of the said firm is interested in such Company as an auditor?

A. No, a member in practice cannot become Director Simplicitor of a company, if he, or the Chartered Accountancy Firm wherein he is a partner, or any of the partner of the said firm is interested in such Company as an auditor.

Q13. Whether a member in practice who earlier held the position of Director simplicitor/ independent Director in a company, accept audit assignment of the company after completion of his tenure as director?

A. No, as per commentary under clause (4) of the part I of the second schedule of the Chartered Accountants Act, 1949 appearing in Volume II of revised Code of Ethics, 2020, a member shall not accept the assignment of audit of a Company for a period of two years from the date of completion of his tenure as Director, or resignation as Director of the said Company.

Q14. Whether a member in practice who was Auditor of a company, can accept position of independent director after completion of audit assignment?

A. No, as per Section 149 (6)(e)(ii) (A & B) of Companies Act, 2013, a member in practice who was Auditor of a company, cannot accept position of Independent director after three years from completion of Audit assignment.

Q15. Whether a member in practice can use the designation of director of a company?

A. No, as per commentary under section 7 of the Chartered Accountants Act, 1949 appearing in Volume II of code of ethics, 2020, the members of the Institute who are also Directors in Companies, are not permitted to mention these positions as these would be violative of the provisions of Section 7 of the Chartered Accountants Act, 1949.

Q16. Whether a firm of Chartered Accountants can undertake the assignment of management Consultancy services of a company where a partner of the said firm is Director simplicitor?

A. Yes, it is permissible for a Firm of Chartered Accountants to undertake the assignment of Management Consultancy Services of a company where a partner of the said firm is Director Simplicitor.



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Q17. Whether a member in practice can be a Director in Cooperative Bank ?

A. Yes, a member in practice may be a Director-Simplicitor in a Co-operative Bank, provided he is not in charge of the executive functions. He, or Chartered Accountancy Firm wherein he is a partner, or any of the partner of the said firm are not interested in the Bank as an auditor.

Q18. Whether companies in which chartered accountants have been appointed as directors on their board can publish description about the chartered accountant’s expertise, specialization and knowledge in any particular field or add appellations or adjectives to their names in the prospectus or public announcements issued by these companies?

A. No, As per Clause (7) of Part-I of first Schedule of the Chartered Accountants Act, 1949 and commentary appearing in Volume-II of Code of Ethics, 2020 the prospectus or public announcements issued by these Companies often publish descriptions about the Chartered Accountant’s expertise, specialisation and knowledge in any particular field or add appellations or adjectives to their names. Attention of the members in this context is invited to the provisions of Clause (6) and (7) of Part I of the First Schedule to the Chartered Accountants Act.

In order that the inclusion of the name of a member of the Institute in the prospectus or public announcements or other public communications issued by the Companies in which the member is a director does not contravene the above noted provisions, it is necessary that the members should take necessary steps to ensure that such prospectus or public announcements or public communications do not advertise his professional attainments and also that such prospectus or public announcements or public communications do not directly or indirectly amount to solicitation of clients for professional work by the member. While it may be difficult to lay down a rigid rule in this respect, the members must use their good judgement, depending upon the facts and circumstances of each case to ensure that the above noted provisions are complied with both in letter and spirit.

It is advisable for a member that as soon as he is appointed as a director on the Board of a Company, he should specifically invite the attention of the management of the Company to the aforesaid provisions and should request that before any such prospectus or public announcements or public communication mentioning the name of the member concerned, is issued, the material pertaining to the member concerned should, as far as practicable be got approved by him. The use of the expression ‘Chartered Accountant’ is permissible. However, the member must ensure that descriptions about his expertise, specialisation and knowledge in any particular field or other appellations or adjectives are not published with his name. Particulars about directorships held by the member in other Companies can, however, be given, but the name of the firm of Chartered Accountants in which the member is a partner, should not be given.

ETHICAL STANDARDS BOARD (ESB)THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

ICAI Bhawan, A-29, Sector 62, Noida -201309 Email :[email protected] Website: www.icai.org

Documents

MEMBERS IN PRACTICE