(To familiarise with the best practices on Corporate Governance & Corporate Laws)
Introduction:
The concept of Independent director has been originated to drive the companies towards inculcating the concept of Corporate Governance in their management. Let us understand the listing rules related to the role and responsibilities of Independent Directors, being followed by NASDAQ, the American stock exchange.
Composition of the Board:
Listing rules specifies the composition of the Board shall consist majority of Independent Directors.
Who is an Independent Director?
Independent Director means a person other than an executive officer or employee of the company or any other individual having a relationship which is in the opinion of the company’s Board of Directors, would interfere with the exercise of independent judgement in carrying out the responsibilities of a director.
Executive Session’s:
Independent Directors must have regularly scheduled meetings at which only Independent Directors are present (“executive sessions“). It is contemplated that executive sessions will occur at least twice a year, and perhaps more frequently, in conjunction with regularly scheduled board meetings.
Audit Committee Charter:
Each Company is required to adopt a formal written charter that specifies the following:
- scope of its responsibilities and the means by which it carries out those responsibilities;
- the outside auditor’s accountability to the audit committee;
- audit committee’s responsibility to ensure the independence of the outside auditor;
- the rights and responsibilities as articulated in the audit committee charter empower the audit committee and enhance its effectiveness in carrying out its responsibilities.
Consistent with the above, the charter must specify all audit committee responsibilities which requires that each audit committee must establish procedures for the confidential, anonymous submission by employees of the listed Company of concerns regarding questionable accounting or auditing matters.
Audit Committee Composition and its requirements:
Each Company must have and certify that it has and will continue to have an audit committee of at least three members, each of whom must:
- be an Independent Director;
- meet the criteria for independence;
- not have participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years.
Additionally, each company must certify that it has, and will continue to have, at least one member of the audit committee who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.
Notification of Non-Compliance:
Companies must provide Nasdaq with prompt notification after an executive officer of the company becomes aware of any non-compliance by the company.
Cure Period:
Meaning: Time limit to regain the compliance on certain happenings beyond reasonable control.
Incase of Majority of Independent Directors:
Due to vacancy or cessation of a director, the company shall regain the compliance earlier of its next annual shareholders meeting or one year from the occurrence of the event that caused the failure to comply with this requirement; provided, however, that if the annual shareholders meeting occurs not later than 180 days from the following events that caused the failure to comply with this requirement, the company shall instead have 180 days from such event to regain compliance. A company relying on this provision shall provide notice to Nasdaq immediately upon learning of the event or circumstance that caused the non-compliance.
Incase of Audit Committee:
On an Event of Member ceases to be Independent Director, the audit committee member may remain on the audit committee until the earlier of its next annual shareholders meeting or one year from the occurrence of the event that caused the failure to comply with this requirement. A company relying on this provision must provide notice to Nasdaq immediately upon learning of the event or circumstance that caused the non-compliance.
On an Event of Casual vacancy, the cure period as stated above is not otherwise being relied upon for another member, the company shall regain the compliance earlier of its next annual shareholders meeting or one year from the occurrence of the event that caused the failure to comply with this requirement; provided, however, that if the annual shareholders meeting occurs not later than 180 days from the following events that caused the failure to comply with this requirement, the Company shall instead have 180 days from such event to regain compliance. A company relying on this provision shall provide notice to Nasdaq immediately upon learning of the event or circumstance that caused the non-compliance.
Conclusion:
- Executive session-meetings are meant for Independent Directors only and the said sessions are not being followed in India and it shall be adopted in India.
- In India, Independent director should be replaced within 180 days and the same shall be implemented in Nasdaq listing rules.
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In terms of audit committee composition, Independent director should not have participated in the preparation of the financial statements of the company or any current subsidiary of the company at any time during the past three years and at least one member of the audit committee shall be in a past employment either in finance or accounting.
- In India, it is advisable to have a charter on roles and responsibilities of committees like Nasdaq.
- The onus of any Non-Compliance in listing agreements is on the Board and same shall be communicated to the stock exchanges as practised by Companies listed on Nasdaq.