• Feb
  • 15
  • 2013

Independent Directors under the Proposed Companies Bill, 2011

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Independent Directors

With a view to add transparency, fairness and independence in decision making to safeguard of stakeholders’ interest, the concept of Independent Directors was introduced. While the concept was till date applicable on Listed Public Companies, the New Company Law proposes to introduce the same upon big Public Companies as well. It is much likely that rationalism and objectivity would be inducted in the processes of the Company with this initiative.

Salient Features of the Proposed Law:

  • Every Listed Public Company to have at least one-third of the total number of Directors as Independent Directors and the Central Government has power to prescribe the minimum number of Independent Directors on the Board of other Public Limited Companies.
  • Requisites for being an Independent Director:

•     To be a director other than a managing director or a whole- time director or a nominee director;

•   Should be a person of integrity and possess relevant expertise and experience;

•   Such person should or should not have been a promoter of the company or its holding, subsidiary or associate company and such person must not related be to promoters or directors in the company, its holding, subsidiary or associate company;

•   Must not have any pecuniary relation 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;

•    None of the relatives of such person must have 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.

•   Further with respect to relatives, it has to be ensured that neither himself nor any of his relatives—

(i)    holds or has held the position of a key managerial personnel or is or had been employee of the company or its holding,subsidiary or associate company in any of the 3 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;

(b)    any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary orassociate 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 organization that receives 25% 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.

•     Must possess any other qualifications as may be prescribed

  • An independent director shall hold office for a term up to 5 consecutive years on the Board of a company, but shall be eligible for re-appointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.
  • No independent director to hold office for more than two consecutive terms, but such Independent director shall be eligible for appointment after the expiration of 3 years of ceasing to become an independent director.
  • Independent Director 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.
  • 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.
  • The appointment of Independent Director to be approved by the Company in general meeting and the explanatory statement annexed to the notice of the general meeting called to consider the said appointment to indicate the justification for choosing the appointee for appointment as Independent Director.
  • The Code for Independent Directors would also be prescribed, key features of which include:-

•   Guidelines of professional conduct;
•   Role and functions;
•   Duties;
•   Manner of appointment;
•   Reappointment;
•   Resignation or removal;
•   Separate meetings;
•   Evaluation mechanism

  • The duties of Independent Directors are also specified.
  • Separate meetings – The Independent Directors of the Company shall hold at least one 1 meeting in a year, led by the lead Independent Director of the Company, without the attendance of Non-Independent Directors and members of management;
  • Remuneration to Independent Directors – It is provided that an Independent Director shall not be entitled to any remuneration,other than sitting fee, reimbursement of expenses for participation in the Board and other meetings and profit-related commission as may be approved by the members.

Transitional Phase for Companies existing on or before the date of commencement of this Act to comply with the requirement of appointment of Independent Director within one year from such commencement or from the date of notification of the rules in this regard as may be applicable.

Independent Directors under Listing Agreement:

While the concept of Independent Directors is novel for the Companies Act, it was provided in the Listing Agreement. A brief comparison with the same is provided hereunder:-

SI.NO.

COMPANY LAW

LISTING AGREEMENT

a. Provides specific onus on Board to choose a person who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience; No specific onus on the Board for selection of Independent Director.
b. Restrict person having any pecuniary relationship with specified person but senior management is not included therein,

Mentions of such relationship during the two immediately preceding financial years or during the current financial year;

Restrict person having material pecuniary relationship with specified person including senior management,

Mentions of such relationship in the current tenure.

c. Also provides that none of the relatives of such person 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; No such condition prescribed with respect to relatives of proposed appointee.
d. Provides for such person not to be related to Promoters or Directors in the Company, its holding, subsidiary or associate Company; Provides for such person not to be related to promoters or persons occupying management positions at the board level or at one level below the board.
e. Provides that such person should neither himself nor through any of his relatives

v  Holds or has held the position of a key Managerial Personnel or is or had been the employee of the Company or its holding, subsidiary or associate Company in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed;

v  Is or has been an employee or proprietor or a partner, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed,of—

  • any firm of Auditors or Company Secretaries in Practice or Cost Auditors of the Company or its holding, subsidiary or associate Company; or
  • any legal or a consulting firm that has or had any transaction with the Company, its holding,subsidiary or associate Company amounting to10% or more of the gross turnover of such firm;
Provides that such person

v  Has not been an executive of the Company in the immediately preceding 3 financial years;

v  Is not a partner or an executive or was not partner or an executive during the preceding 3 years, of any of the following:

  • The statutory audit firm or the internal audit firm that is associated with the Company, and
  • The legal firm(s) and consulting firm(s)that have a material association with the Company.

v  Is not a material supplier, service provider orcustomer or a lessor or lessee of the Company,which may affect independence of the Director.

f. The relatives have been specifically covered in the 2% of slab for voting power. Relatives not specifically covered.
g. It also provides that such person should not be a Chief Executive or Director, by whatever name called, of any nonprofit organization that receives 25% 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. No such condition prescribed.
h. Law may also provide for other qualifications with respect to such person. However the qualification regarding age not provided as yet. Provides that such person is not less than 21 years of age.
i. Nominee Directors are excluded from the purview of Independent Directors. While in listing agreement Nominee Directors appointed by an institution, which has invested in or lent to the Company shall be deemed to be Independent Directors.
j. The term associate Company here means “associate company”, in relation to another Company, means a Company in which that other Company has a significant influence, but which is not a subsidiary Company of the Company having such influence and includes a Joint Venture Company.

Explanation.—For the purposes of this clause, “significant influence” means control of at least twenty per cent. of total share capital, or of business decisions under an agreement;

The term associate Company here means an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor.

Hence, while an ‘enterprise’ is covered here, Companies Act relates to ‘Company’ itself.

 Hence, from aforesaid comparison it may clearly be visualized that while the concept of Independent Directors would not be new for Listed Companies, a drastic increase in the eligibility criteria, where the relationship, not only with the company but also with its holding,subsidiary and associate Companies has to be checked in the beginning and also at each stage onwards. It’s going to be a tedious task for the Companies to find a person opts for their organization.

Analyzed by : CA Sujeet Pal

E-mail : sujeetpal@icai.org


3 Responses to “Independent Directors under the Proposed Companies Bill, 2011”

  1. harjeet hasija says:

    A Short Summary of section 149 of the companies bill 2012

  2. layperson says:

    Seem to be safeguards but the question is the acts of a company vs. acts of a director.Now, there are two ends to fight in case any loss is caused to the shareholders of a listed company due to act of a director.

    This provision is suitable in working of foreign companies who merely have to have one director to get the DIN number in India.Any decisions and acts willbe his responsibility and not that of the company.

    Is my understanding or interpretation wrong.

  3. R Balasubramanian says:

    A good write-up.
    The real challenge is in evolving and regulating the data base and transparency and fair play in the selection process.
    Let us pray that there is the intended independence in the appointment of independent directors.
    Regards.

    R Balasubramanian, Chennai-59.

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