Independent Directors in a Public Limited NBFC: Does the Chairman's Status Affect the Required Count?

Overview

When advising a public limited company engaged in non-banking financial activity, one of the recurring compliance questions is: how many independent directors are required, and does the chairman's independence status change that number? The answer depends on a layered analysis across three distinct regulatory frameworks — the Companies Act, 2013, the RBI (Non-Banking Financial Companies – Governance) Directions, 2025, and, where applicable, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("SEBI LODR Regulations, 2015").

The short answer is this: for an unlisted public NBFC, the chairman's status — whether independent or not — has absolutely no bearing on the number of independent directors the board must include. That number is determined purely by financial thresholds and RBI layer classification. The chairman's profile becomes relevant only when the NBFC is listed, and even then, the trigger under Regulation 17(1)(b) of the SEBI LODR Regulations, 2015 is more specific than the commonly assumed shorthand of "if the chairman is not independent, half the board must be."

The Three Regulatory Tracks

Three parallel frameworks govern independent director composition for a public NBFC. Each operates independently, and where they overlap, the higher standard prevails.

Track 1: The Companies Act, 2013

For Listed Public Companies:

Section 149(4) of the Companies Act, 2013 mandates that every listed public company must have at least one-third of its total directors as independent directors. The Explanation to Section 149(4) further provides that any fraction arising from the one-third computation must be rounded up to the next whole number.

Section 149(6) of the Companies Act, 2013 lays down the eligibility criteria and the independence conditions that a director must satisfy to qualify for appointment as an independent director.

For Unlisted Public Companies:

Rule 4(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014 requires at least two independent directors on the board of any unlisted public company that crosses any one of the following financial thresholds:

  • Paid-up share capital of ₹10 crore or more
  • Turnover of ₹100 crore or more
  • Aggregate outstanding loans, debentures, and deposits exceeding ₹50 crore

Critically, Rule 4(1) fixes a flat floor of two independent directors irrespective of board size. It makes no reference to the chairman's identity, designation, or independence status.

The proviso to Rule 4(1) contains an important hierarchy rule: where any other law in force prescribes a higher number of independent directors for a given class of companies, the higher number must be complied with — and the Rule 4(1) minimum is displaced to that extent.

**Exemptions Under Rule 4(2)😗*

Rule 4(2) of the Companies (Appointment and Qualification of Directors) Rules, 2014 carves out certain classes of unlisted public companies from the Rule 4(1) obligation altogether, even if they satisfy the financial thresholds. The exempted categories include:

  • Joint venture companies
  • Wholly owned subsidiaries
  • Dormant companies under Section 455 of the Companies Act, 2013

An NBFC structured as a wholly owned subsidiary of a bank, a foreign parent, or a holding company would fall outside Rule 4(1) by virtue of this exemption. However, this Companies Act exemption does not extend to the RBI's governance framework, which carries no equivalent carve-out.

Track 2: RBI (Non-Banking Financial Companies – Governance) Directions, 2025

The RBI (Non-Banking Financial Companies – Governance) Directions, 2025, effective from 28 November 2025, consolidate the governance requirements for NBFCs under a layered regime. These Directions have withdrawn and replaced the governance chapter of the erstwhile Scale Based Regulation Master Direction dated 19 October 2023.

Under this framework:

  • Chapter III applies to all NBFCs
  • Chapters II to IV apply additionally to Middle Layer NBFCs (NBFC-ML)
  • Chapters II to V apply additionally to Upper Layer NBFCs (NBFC-UL)

The RBI's composition floor — requiring at least one-third of the board to be independent directors — sits within the chapters applicable to Middle Layer and Upper Layer NBFCs. This floor is imposed independently of whether the NBFC is listed or unlisted, and independently of the chairman's profile.

Important: A Base Layer NBFC (NBFC-BL) is entirely outside the RBI's independent director composition floor. Its ID requirement, if any, derives solely from the Companies Act position.