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Meaning of Independent director
The dictionary meaning of Independent word is that “one is not influenced or controlled by others in matters of opinion or refusing to be under obligation to others or you can say that person possesses a competency – to be financially independent or independent in terms of knowledge”. In layman language, we believe that person is independent, if he/she is financially stable.
Let’s move towards the subject
Independent Director means who is independent and who is authorised / responsible for efficient functioning of the Company, who is supposed to look after important matters of the Company in independent way by keeping in mind the overall development of the Company along with interest of all stakeholders of the Company and the economy as whole.
As per the Companies Act, 2013, 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. An independent director is a person who is not related to the promoters or other members of the Company.
Applicability of independent director
Following class of Companies are required to appoint independent director on their board:
Strength of independent director in the Company depends on case to case.
Role of independent director
Independent Director has a crucial role in Corporate Governance. Independent director plays vital role in determining the levels of remuneration among executive directors, key managerial personnel and senior management and their appointment too, wherever necessary.
Independent director has a strong influence on audit committee as the composition of audit committees mainly consist of independent directors. However having independent directors on the Board haven’t proved to be a sure-shot method to deter companies from malpractices, increasing instances of institutional activism and the rise of proxy advisory firms may force greater accountability from independent directors. In a recent case, when board of major cement company ACC proposed to increase the payment of technological know-how fees to its parent firm, Holcim (Switzerland), but independent directors of both the companies, I.e., ACC & Ambuja cements, rejected such proposal on the grounds that interest of minority shareholders should not be affected due to increase in royalty payments.
Conditions to be met by independent director
Independent director needs to work as moderator and arbitrator in the best interest of the Company as a whole in situations of conflict between the management and shareholders’ interest. In short, there is a significant onus on them to assist in safeguarding the legitimate interest of the company and its stakeholders.
Why Company should have independent director?
Before answering above question, I would like to throw light on different forms of business – proprietorship and Company. In proprietorship, the whole business is conducted by one sole individual. So in above case there is no complexity involved in running business at all, but this is not possible in case of company. In Company there are lots of complex functions, rules and regulations which are required to be complied to avoid legal and monetary penalty. So for better functioning of the Company there should be efficient Board (efficient board means constitution of Board in such a way that affairs of the Company be easily managed).
Independent director is a highly qualified as well as experienced person of field on which a Company and its stakeholders can rely upon. It will be for sure helpful to the Company. Even if independent director have experience of different field which is altogether different from the Company’s function, then still it can prove beneficial to the Company. Example: if Company is engaged in manufacturing of synthetic while independent director have experience of international marketing field, then it will surely help the Company in exploring the new market for the Company’s product and which is ultimately helpful for boosting Company’s stability – financial as well as market.
Some Corporate appoint independent director out of compulsion merely for compliance purpose and think them as burdensome on the Company but it’s not valid at all. Corporate should have to gulp up the spirit behind the law for enacting independent director’s appointment in Company. There is one saying – “Change your attitude, change your destiny.” Keeping in mind this saying, if corporate change their mind and see the things in positive way, it will be win-win situation for them by appointing independent director on the Board.
Conclusion: It is evident that independent director is hidden diamond for the Company. Company just need to polish it as per its requirement. Company shouldn’t have to worry about cost in terms of fees of independent director but should have a faith that fees given to independent director is only penny while knowledge/services received from the independent director is in pound.
In Short, “law should prevail over attitude, not attitude prevail over law.”
About the author: Dharmesh Vankar (Swami) is a qualified Company Secretary (ACS-42284), residing In Vadodara and currently working in Company Secretary Firm as Senior Team Member. You can reach him at [email protected] or (M) 9558930408.
Disclaimer: The entire content of this document is author’s own interpretation & personal view. This Is only a knowledge sharing initiative and author do not intend to solicit any business or profession.