Independent Directors Before an IPO: Board Readiness in India

By CA Dhruv Seth, Seth & Associates, Chartered Accountants, Lucknow

Most IPO checklists put board composition near the bottom, below the restated financials and the drafting of the offer document. It surfaces late, often in the week the merchant banker asks for the audit committee's sign-off. By then the promoter is hunting for two independent directors in a fortnight, and the quality of that search shows. Board readiness is a twelve-month exercise, not a board resolution.

The obligation may already apply

Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 requires an unlisted public company to appoint at least two independent directors if it meets any one of three tests: paid-up share capital of Rs 10 crore or more, turnover of Rs 100 crore or more, or aggregate outstanding loans, debentures and deposits exceeding Rs 50 crore. The figures come from the latest audited financial statements. Wholly owned subsidiaries, joint ventures and dormant companies are outside the rule.

Companies in the Rs 100 crore to Rs 1,000 crore band usually cross the turnover test years before listing enters the conversation, and several are already non-compliant without knowing it.

An SME platform listing exempts less than promoters assume

Regulation 15(2) of the LODR Regulations keeps most of the corporate governance chapter, Regulations 17 to 27, away from entities listed on the SME platforms. This is often read as freedom from independent directors. It is not.

The Companies Act applies on its own footing. Section 149(4) requires every listed public company to have at least one-third of its directors as independent directors. Section 177 requires an audit committee of at least three directors with a majority of independent directors. Section 178 requires a nomination and remuneration committee of three or more non-executive directors, at least half of them independent.

SEBI has also been narrowing the exemption. With effect from 1 April 2025, Regulation 23 on related party transactions applies to an SME-listed entity with paid-up equity capital above Rs 10 crore or net worth above Rs 25 crore as on the last day of the previous financial year. A related party transaction is then material if it exceeds the lower of Rs 50 crore or 10 per cent of annual consolidated turnover.

The mainboard arithmetic

For a mainboard listing, Regulation 17 sets the composition:

• at least one-third independent directors where the chairperson is a regular non-executive director;

• at least half where there is no regular non-executive chairperson;

• more than half where the non-executive chairperson is a promoter, or is related to a promoter or to management at or one level below the board;

• a minimum of six directors and at least one woman director, with an independent woman director for the larger entities by market capitalisation.

The audit committee under Regulation 18 is stricter than the Companies Act: two-thirds independent directors and an independent chairperson. Under Regulation 25(2A) the appointment, re-appointment or removal of an independent director requires a special resolution, and a vacancy must be filled within three months.

Finding independent directors before an IPO takes longer than expected

Every independent director must be registered with the databank maintained by the Indian Institute of Corporate Affairs, and must clear the online proficiency self-assessment test within two years of registration unless exempt. The exemption broadly covers ten years as a director or key managerial personnel of a listed public company, or of an unlisted public company with paid-up capital of Rs 10 crore or more.

Registration is rarely the constraint. Satisfying section 149(6) is. Pecuniary relationships, relatives on the payroll, past employment within the group and consultancy arrangements disqualify precisely the people a promoter would approach first.

Capacity matters as much as eligibility. The audit committee approves the restated financials and the related party framework that go into the offer document. A director who signs without reading is a risk no disclosure can cover.

Key takeaways

• Test Rule 4 against your last audited numbers; the two-director requirement may already be live.

• An SME platform listing does not remove Companies Act board and committee obligations.

• Allow six to twelve months to identify, verify and induct independent directors before an IPO.

• Confirm databank registration and proficiency status before appointment, not after.

• Build the audit committee for financial competence, because it owns the numbers in the offer document.

This article is for general information and does not constitute investment, legal or tax advice. Regulations change; please verify the current position or speak to a qualified adviser before acting.