Can employees of a fellow subsidiary company can technically be appointed as independent directors of the Company?
Summary: An independent director is a non-executive director without a managerial or nominee role, required to meet specific criteria concerning integrity, expertise, and independence from the company, its promoters, directors, and associated group entities, including subsidiaries and associates. While the Companies Act distinguishes between a subsidiary and a fellow subsidiary, potentially allowing an employee of a fellow subsidiary to technically meet the independence criteria related to being an employee of the company or its subsidiary, this practice raises concerns regarding the spirit of the law. As highlighted by cases like LinkedIn, intricate reporting structures within a larger corporate group can indicate indirect relationships and potential lack of independence, suggesting a director might be influenced by promoters rather than acting solely in the company’s best interest. Consequently, although not explicitly prohibited by all clauses, appointing employees of a fellow subsidiary as independent directors is generally not recommended due to the difficulty in demonstrating true independence and the risk of contradicting the law’s underlying intent.
Assessment of Eligibility for Independent Director Appointment: Criteria vs. Compliance
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 —
| Criteria In relation to the person (employees of a fellow subsidiary company) who is proposed to be/has been appointed as an independent director of “the company” | Whether falling within the Criteria? |
| (a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience | Yes |
| (b) who is or was not a promoter of the company or its holding, subsidiary or associate company | Yes |
| (c) who is not related to (relative of)** promoters or directors in the company, its holding, subsidiary* or associate company; | Yes |
| (d) 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 or such amount as may be prescribed,] 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 | Yes – (need clarification, total income as ID only or in other capacities also) |
| (e) 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 (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 (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);] |
Yes
Yes Yes Yes |
| (f) 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; (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 |
Yes
Yes Yes Yes Yes |
| (g) An independent director 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. | Yes |
- Subsidiary and Fellow Subsidiary are two different terminologies. While ‘Fellow Subsidiary’ is not defined under the Companies Act, both terms are defined under separate headings in AS-18. Therefore, we can conclude that they are distinct concepts.
- Even under section 188, both are identified in their individual capacities.
- The term ‘related’ should be interpreted in accordance with the definition of ‘relative’ provided in Section 2(77) of the Companies Act, 2013.
- To be appointed as an ID, one shall be registered with the data bank and shall pass the Online Proficiency Test. However, certain categories of persons have been exempted from the requirement of passing the Test who possess requisite experience and expertise as prescribed.
The LinkedIn Case (Spirit of law beyond the letter of law)
In case of LTIPL, the ROC through its interpretation has stated that the majority of the directors of LTIPL are employees of LinkedIn Corporation or Microsoft Corporation whose reporting channel would end up to Mr. Ryan Roslansky or Mr. Satya Nadella.
The ROC has contended that considering the layers of reporting channels discussed in its order, “right to exercise” of control of the majority of the directors of the subject company lies with Mr. Ryan Roslansky or Mr. Satya Nadella. Accordingly, Mr. Ryan Roslansky or Mr. Satya Nadella have been identified as SBOs by ROC.
So, it is important to note that there is an indirect monetary relationship between the employee of fellow subsidiary and the ultimate holding company and such relationship between them will adversely affect the independence of the director (to be appointed) or makes him a subservient person doing things and exercising powers as a director according to the wishes of the promoters rather than upholding and safeguarding the company’s interests. In other words, such relationship renders him obedient or submissive to promoters. This adversely affects his ability to take independent view and exercise unbiased judgement.
Conclusion on Appointments:
- Employees of a fellow subsidiary company can technically be appointed as independent directors of the Company.
- However, this practice may go against the spirit of the law.
Disclosure Requirements:
- Justification for the appointment of independent directors must be disclosed in the explanatory statement.
- Providing adequate justification for such appointments could be challenging.
Recommendation:
- Refrain from appointing employees of fellow subsidiary companies as independent directors.
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