1. BACKGROUND
The concept of independent directors can be traced to the developed economies of the West with the United Kingdom and the U.S.A. sharing credit for its evolution during the 1950s even before legislation mandated the induction of independent directors to ensure that corporate entities did not make depredations into the public interest driven by the profit motive alone at the cost of other values. This is what gave rise to the concept of Good Corporate Governance which again owes its origin to the developed economies of the Western Hemisphere. In India, the concept of independent directors was first introduced through voluntary guidelines issued by the Confederation of Indian Industry (‘CII’).
Report suggested that any listed company with a turnover of Rs. 100 crores and above should have professionally competent, independent, non-executive directors, who should constitute at least 30 per cent of the board if the chairman of the company is a non-executive director or at least 50 per cent of the board if the chairman and managing director is the same person. This CII recommendation was later on incorporated in SEBI’s Kumar Mangalam Birla Committee Report. The Kumar Mangalam Birla Committee Report recommendation led SEBI to include clause 49 in the Listing Agreement in the year 2000.
2. WHO IS INDEPENDENT DIRECTOR ?
An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income 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;
(d)none of whose relatives—
(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year:
Provided that the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or associate company ;
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii);
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;
Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years.
(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; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate 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 nonprofit organisation that receives twenty-five per cent. 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; or
(f) who possesses such other qualifications as prescribes in rule-5.
3. APPLICABILITY
LISTED PUBLIC COMPANY
Every listed public shall have –
- Minimum 50% non – executive directors
- Where chairperson is non executive director, atleast one-third of the board of directors shall comprise of Independent directors.
UNLISTED PUBLIC COMPANY
As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following classes of companies shall have at least 2 directors as independent directors:-
(i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees.
4. ROLE OF INDEPENDENT DIRECTOR
The independent directors shall:
(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and management;
(3) scrutinize the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;
(4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;
(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.
5. DUTIES OF INDEPENDENT DIRECTOR
The independent directors shall—
(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
(2) 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;
(3) strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;
(4) participate constructively and actively in the committees of the Board in which they are chairpersons or members;
(5) strive to attend the general meetings of the company;
(6) where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;
(7) keep themselves well informed about the company and the external environment in which it operates;
(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
(9) 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;
(10) 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;
(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
(12) act within their authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
(13) not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.
6. MANNER OF SELECTION OF INDEPENDENT DIRECTOR
√ An 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, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors:
Provided that responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director, shall lie with the company making such appointment.
√ The appointment of independent director shall 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 shall indicate the justification for choosing the appointee for appointment as independent director.
√ Every individual-
a. Who has been appointed as ID in a company ; or
b. Who intends to get appointed, before such appointment
apply online to the institute for inclusion of his name in the data bank for a period of one year or five years or for his life-time, till he continues to hold the office of an independent director in any company.
√ Every individual whose name is so included in the data bank shall pass an online proficiency self-assessment test conducted by the institute within a period of one year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the databank of the institute:
Provided that an individual shall not be required to pass the online proficiency self- assessment test, when he has served as a director or key managerial personnel, for a total period of not less than ten years, as on the date of inclusion of his name in the databank, in one or more of the following, namely:-
(a) listed public company;
(b) unlisted public company having a paid-up share capital of rupees ten crore or more; (c) body corporate listed on a recognized stock exchange.
7. REMUNERATION OF ID
An independent director shall not be entitled to any stock option and may receive remuneration by way of sitting fee which is maximum 1 lac rupees , reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.
8. TERM OF OFFICE
An independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.
No independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director:
Provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.
For e.g., Mr. A is appointed as ID in ABC Ltd. For 5 years and after completion of 5 years with a gap of 2 months he gets appointed in the same company for further 5 years. Now after completion of those 5 years, he again can not be appointed as ID for 3 years as ID or in any other capacity. That gap of 2 months earlier will be treated as “consecutively”. It can not be treated as loophole in the law.
9. COMMISSION IN CASE OF PROFITS ONLY
The remuneration payable to directors who are neither managing directors nor whole-time directors(i.e., Non-executive Directors) shall not exceed,—
(A) one per cent. of the net profits of the company, if there is a managing or whole-time director or manager;
(B) three per cent. of the net profits in any other case(i.e., if there is no MD/WTD/Manager).
10. NUMBER OF MEETINGS
The independent directors of the company shall hold at least one meeting in a financial year, without the attendance of non-independent directors and members of management; All the independent directors of the company shall strive to be present at such meeting.
11. OTHER PROVISIONS
Vacancy :
Any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.
Disclosure :
Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence.
Applicability of Schedule V :
Schedule V is not applicable on Independent Directors because it is specially for key managerial persons.
CSR Policy:
Companies that trigger the conditions of Corporate Social Responsibility Committee of the Board to formulate and monitor the CSR policy of a Company. The Companies Act, 2013 requires the CSR Committee to consist of at least three directors, including at least one independent director.
12. CONCLUSION
Satyam episode is proven to be tragic for the Indian corporate world, but it should be considered as a wake-up call to many. The Satyam case brought out the failure of the present corporate governance structure, in which independent directors failed to perform their responsibility effectively. As in Satyam case independent directors lacked commitment; they failed to live up to the stakeholders’ expectations. The only way independent directors can stop wrong doing by acting collectively.
Independent Director help in bringing Independent judgement and act as a bridge between management and shareholders by encouraging the principles of Corporate Governance through providing transparency, accountability and disclosures in the working of the Company.
The indication behind the new approach seems that the Ministry wants the Independent Directors to become more aware and cautious about their roles and responsibilities towards stakeholders so that Corporate Governance can be enhanced. A start of the progressive step towards better Corporate Governance Practices has begun. However, this is the beginning and we will have wait to see how will it practically lead the desired results.
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