Independent Directors

The provisions relating to Independent Directors have been taken from Sections 149, 150 of Companies Act, 2013 and Schedule IV read with Rule 4, 5 & 6 of the Companies ( Appointment and Qualification of Directors) rules, 2014

ESSENCE :

The Companies Act, 2013 (“Act”), aims to overhaul the provisions relating to independent directors completely by conferring greater power and responsibility on them in the governance of a company. The Ministry of Corporate Affairs carried out corresponding changes to the provisions of 1956 Act, so as to include the requirement of having an independent director on the board of listed companies to oversee corporate governance. However, such attempts proved to be futile as the changes failed to explain the roles, duties or liabilities of independent directors lucidly. The Board’s independence from external influences is critical and is directly proportional for effective corporate governance. Thus, the need for comprehensive and strong legislation relating to independent directors became vital and eventually led to the enactment of the Act.

WHO CAN BE AN INDEPENDENT DIRECTOR?

Section 149 (6) of the New Act recognizes the concept of an “Independent Director”. This term is defined to mean a person –

1. who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience.
2. who is or was not a promoter of the company, or its holding, subsidiary or associate company (hereinafter referred to as Associate Companies)
3. who is not related to promoters or directors of the company or any of its associate companies.
4. who has or had no pecuniary relationship with any of the above persons/companies during the current or two immediately preceding financial years.
5. None of his relatives has or had pecuniary relationship or transaction with the above persons amounting to 2% or more of its gross turnover or total income or Rs.50 lakhs (or such higher amount as may be prescribed) – whichever is lower during the current or two preceding financial years.
6. who, neither by himself or his relatives –
   1. holds or has held the position of key managerial personnel or as employee of the company or any of its associate companies in any of the 3 financial years immediately preceding the year of his appointment.
   2. is or has been an employee, proprietor or partner of the following during any of the 3 preceding financial years.
      • A firm of Auditors, Company Secretaries or Cost Auditors of the company or any of its associate companies.
      • Any legal or consulting firm which has or had transaction with the company in or any of its associate companies amounting to 10% or more of the gross turnover of the firm.
   3. Holds, together with his relatives, 2% or more of the Voting power of the company.
   4. Is a Chief Executive or director of any non-profit organization that receives 25% or more of its receipts from the company, any of its promoters, directors or its associate companies or that hold 2% or more of the total voting power of the company.
7. who is not a Managing/Whole Time/Nominee Director.
8. He 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.

WHICH COMPANIES MUST APPOINT AN INDEPENDENT DIRECTOR :

Every listed Company is required to have at least 1/3rd of the total number of directors as Independent Directors. Further, Rule 4 provides that every Public Company having

1. Paid up capital of Rs.10 crores or more, or
2. Turnover of Rs.100 crores or more or
3. Which has, in the aggregate, outstanding loans, debentures and deposits exceeding Rs.50 crores shall have at least 2 Independent Directors.

Thus, small public unlisted companies and private companies are not required to appoint Independent Directors.

SEBI REGULATIONS :

It may be noted under the revised clause 49 of the Listing Agreement SEBI has provided as under.

1. The Board of Directors of a listed company shall have an optimum combination of executive and non executive directors with at least one Woman Director and not less than 50% of the Board comprising of non-executive directors.
2. Where the Chairman of the Board is a non-executive director, at least one-third of the Board shall comprise of Independent Directors.
3. If the company does not have a regular non-executive Chairman, at least 50% of the Board should comprise of Independent Directors.

REMUNERATION TO INDEPENDENT DIRECTORS:

An Independent Director shall not be entitled to receive any remuneration other than a fee and reimbursement of expenses, for attending the meetings of the Board or any committee thereof or for any other purpose as decided by the Board. Such fees cannot exceed Rs. 1 lakh per meeting of the Board or Committee thereof as prescribed U/s. 197 (5). He shall also be entitled to receive profit related commission as may be approved by the members. However, he shall not  be entitled to receive the benefit of stock option.

TERM OF APPOINTMENT:

An Independent Director can, subject of provisions of section 152, hold office for a term of 5 consecutive years. He can be appointed as such for a further term, not exceeding 5 years, if the members pass a special resolution and disclosure of such appointment is made in the Board Report. After the expiry of 10 years period he cannot be re-appointed as an Independent Director.

He can, however, be appointed as such director after expiry of 3 years provided he was not directly or indirectly associated with the company in any other capacity either directly or indirectly. It may be noted that the period during which the Independent Director has held office as such director before the commencement of the new Act shall not be counted for computing the period of 10 years, stated above.

Further, an Independent Director shall not be liable to retire by rotation as provided in section 152 (6) and (7). The appointment of Independent Director shall be approved by the company in General Meeting as provided in section 152(2).

DUTIES OF INDEPENDENT DIRECTORS :

Some of the important duties are:

1. To 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;
2. To strive to attend all general meetings, meetings of the Board of Directors and the Board committees of which he is a member;
3. To keep themselves well informed about the company and the external environment in which it operates;
4. To 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;
5. To 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;
6. To report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
7. To act within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;

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 in 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 rules made there under and that the proposed director is independent of the management.
4. The appointment of independent directors shall be formalized through a letter of appointment, which shall set out:
   1. the term of appointment;
   2. 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;
   3. the fiduciary duties that come with such an appointment along with accompanying liabilities;
   4. provision for Directors and Officers insurance, if any;
   5. the Code of Business Ethics that the company expects its directors and employees to follow;

CONCLUSION :

The Act empowers independent directors with proper checks and balances, so that such extensive powers are not exercised in an unbridled manner, but in a rational and accountable way. They should enhance corporate governance and ensure the management and affairs of the companies are conducted in the interest of stakeholders. It is expected that these changes will avoid corporate scandals in future and insulate shareholders interest.

The Independent Director will have to suggest remedial steps to be taken and also see that they are promptly implemented.  In other words, the Role of an Independent Director under the New Act will be that of a “SUPER WATCHDOG” who has to ensure that those in the day to day management (including all Directors on the Board) are functioning in the best interest of the stakeholders, minority shareholders, regulators, workers, customers and public at large.