CS Akhilesh Kumar Jha
Introduction
The concept of Independent director was introduced in the Report of Kumar Mangalma Birla Committee. The main purpose for establishment of this committee was to promote good cooperate Governance and make transparency among Companies and its stakeholders.
The main focus of this Committee were as follow:-
1) To fix a standard for listed companies by way of necessary amendment in the Listing Agreement so that the transparency among companies and its stakeholder may be cleared and to fix some important clauses in the listing agreement which shall be related to continues disclosures etc.
2) To prepare a Code for companies.
3) To take necessary safeguard related to the information of Insider Trading.
So, considering the motive of investors and stakeholders, this committee had also prepared a “Code” for companies. In this code, the committee recommended two requirements. First was Mandatory requirement like its applicably, composition of Board of Directors, Audit Committee, Remuneration Committee, Board Procedure, Management discussion and Analysis Report and Information sharing with shareholder and other one was non-mandatory requirement.
Thereafter, Corporate Governance has been introduced as Clause 49 of the Listing Agreement.
Meaning of Independent Director under Listing Agreement
Clause 49 prescribes the following definition “Independent Director”. The expression ‘independent director’ shall mean a nonexecutive director of the company who:-
“a. apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director;
b. is not related to promoters or persons occupying management positions at the board level or at one level below the board;
c. has not been an executive of the company in the immediately preceding three financial years;
d. is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following:
i) the statutory audit firm or the internal audit firm that is associated with the company, and
ii) the legal firm(s) and consulting firm(s) that have a material association with the company.
e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director.
f. is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares.
g. is not less than 21 years of age.”
In simple way, the person, who is appointed as Independent director, has no any connection with company whether directly or indirectly.
Meaning of Independent Director under the Companies Act, 1956
There is no definition has been prescribed under Companies Act, 1956 related to “Independent Director”
Meaning Independent Director under the Companies Act, 2013
In view of more transparency, the Companies Act, 2013 has prescribed the concept of “Independent Director.” Let’s discuss the Independent director:-
Section 2 (47) Independent Director, “means a independent director refer to in sub section (6) of Section 149 of the Act,”
Section 149(6) “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 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 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;
(e) Who, neither himself nor any of his relatives—
(i) Holds or has held the position of 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 organization 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 may be prescribed.”
Comparison between Listing Agreement and the Companies Act, 2013
For aforesaid definition of the Companies Act, 2013 is wider than the definition as prescribed under the Listing Agreement. Now, we discuss the main differences of definitions.
| Sl. No | Listing Agreement | Sl. No | The Companies Act, 2013 | Comment |
| 1. | A nonexecutive director of the company who apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director; | 1. | Who has or had no pecuniary relationship 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 whose relatives 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; |
The clause which is mentioned under the Companies Act, 2013 is wider than the clause mentioned under Listing Agreement.
The Companies Act, 2013 has not only covered the company but its holding, subsidiary, associate, its promoter or directors etc also. The Companies Act, 2013 has also fixed the maximum time period for transaction i.e. 2 years. The Companies Act, 2013 has also restricted the relative of directors to enter transactions etc. |
| 2. | A nonexecutive director of the company who is not related to promoters or persons occupying management positions at the board level or at one level below the board;
|
Similar clauses are not mentioned under the Companies Act, 2013, Here, the restriction has been imposed only board level but under the Companies Act 2013, which is mentioned in point no 1. Above, restricts the transaction and pecuniary relationship with company, its holding, its subsidiary etc… | ||
| 3. | A nonexecutive director of the company who has not been an executive of the company in the immediately preceding three financial years; | |||
| 4. | A nonexecutive director of the company who is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following:-
i) the statutory audit firm or the internal audit firm that is associated with the company, and
ii) the legal firm(s) and consulting firm(s) that have a material association with the company. |
2. | Who, neither himself nor any of his relatives 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; |
Both the clauses are almost similar but the scope of Companies Act, 2013 is wider than the Scope of Listing Agreement. |
| 5. | A nonexecutive director of the company who is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director. |
|
||
| 6. | A nonexecutive director of the company who is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares | |||
| 7. | A nonexecutive director of the company who is not less than 21 years of age. | |||
| 3 | Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience. | New point under the Companies Act, 2013, Any person who has in any kind of expertise and experience shall be covered under this law. The companies Act, 2013 has not clarified the expertise in this regard. | ||
| 4 | Who is or was not a promoter of the company or its holding, subsidiary or associate company.
|
The person who is independent Director is prohibited to be a promoter for the company or its holding company or its subsidiary and its associate company, where the listing agreement just put the restriction related to connection of board level. | ||
| 5 | Who is not related to promoters or directors in the company, its holding, subsidiary or associate company.
|
The companies Act, 2013 is also prohibited the connectivity of promoter and individual director. It means a person who is connected, directly and indirectly, with director in any associate company of main company, the person cannot be appointed as independent director of such main company. | ||
| 6 | Who, neither himself nor any of his relatives holds or has held the position of 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;
|
The Companies Act, 2013 has imposed restriction for a person who is appointed as an independent Director, if he or his relative is a key managerial person in any company or its holding or its associate company etc.
Suppose Mr. A is appointed as independent Director in an A Ltd and A Ltd has an Associate company where his relative Mr. B is a company Secretary, In that case his appointment is not valid as per the Companies Act, 2013. |
||
| 7 | Who, neither himself nor any of his relatives holds together with his relatives two per cent or more of the total voting power of the company; or | The Companies Act, 2013 also imposed restriction to the directors who hold 2% or more voting power of the Company | ||
| 8. | Who, neither himself nor any of his relatives Is a Chief Executive or director, by whatever name called, of any nonprofit organization 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 | The companies Act, 2013 has also scoped on Non Profit Organization. This clause is not prescribed under the Listing Agreement. | ||
| 9. | Who possesses such other qualifications as may be prescribed. |
In this regard, the Companies Act, 2013 shall prescribe the rule. |
Declaration by the Independent Director
According to Section 149 (7), The Independent Director shall give declaration that he is complying with the criteria of Section 149 (6) of the Act in the First Board Meeting of the Company after incorporation and thereafter the First Board Meeting of each financial year or when ever his status of Independent directors has affect.
Duties, Role and Responsibility of Independent Director
The independent Director and company shall comply with the Schedule IV of the Act; it is a frame and area of Independent Director. Let’s discuss.
Code for Independent Directors
The Code is a guide to professional conduct for independent directors. Adherence to these standards by independent directors and fulfillment of their responsibilities in a professional and faithful manner will promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors.
I. Guidelines of professional conduct:
An independent director shall:
(1) uphold ethical standards of integrity and probity;
(2) act objectively and constructively while exercising his duties;
(3) exercise his responsibilities in a bona fide manner in the interest of the company;
(4) devote sufficient time and attention to his professional obligations for informed and balanced decision making;
(5) not allow any extraneous considerations that will vitiate his exercise of objective independent judgment in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making;
(6) not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person;
(7) refrain from any action that would lead to loss of his independence;
(8) where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly;
(9) assist the company in implementing the best corporate governance practices.
II. Role and functions:
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 those 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.
III. Duties:
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) acting within his 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.
IV. 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 at 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 the 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:
(a) The term of appointment;
(b) 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;
(c) The fiduciary duties that come with such an appointment along with accompanying liabilities;
(d) Provision for Directors and Officers (D and O) insurance, if any;
(e) The Code of Business Ethics that the company expects its directors and employees to follow;
(f) The list of actions that a director should not do while functioning as such in the company; and
(g) The remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any.
(5) The terms and conditions of appointment of independent directors shall be open for inspection at the registered office of the company by any member during normal business hours.
(6) The terms and conditions of appointment of independent directors shall also be posted on the company’s website.
V. Re-appointment:
The re-appointment of independent director shall be on the basis of report of performance evaluation.
VI. Resignation or removal:
(1) The resignation or removal of an independent director shall be in the same manner as is provided in sections 168 and 169 of the Act.
(2) An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within a period of not more than one hundred and eighty days from the date of such resignation or removal, as the case may be.
(3) Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.
VII. Separate meetings:
(1) The independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management;
(2) All the independent directors of the company shall strive to be present at such meeting;
(3) The meeting shall:
(a) Review the performance of non-independent directors and the Board as a whole;
(b) Review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;
(c) Assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.
VIII. Evaluation mechanism:
(1) The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.
(2) On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.
Now, the code of Independent Director is combination of moral duty of an Individual which depends upon person to person. Whatever is prescribed under this Code of Independent Director, it is just a basic lesion of an Individual towards his work. So it is the positive of the Companies Act, 2013 which covers these entire moral lesions.
Stock Option Scheme
The companies Act, 2013 prohibits to take Stock Option but he may receive fee according to Section 197 of the Act. He may also entitle to receive reimbursement of expenses for participating in the Board Meeting and other meeting and profit related commission as may be approved by the member.
Period of holding office
An Independent Director holds office only for 5 consecutive years. He is eligible for further re-appointment after passing of Special Resolution by the Company.
Thereafter, it is mandatory to disclose in the Director Report for his re-appointment.
The interesting point of the Companies Act, 2013, an independent Director shall be appointed for 5 consecutive years. He again eligible for re-appointment but he shall not be appointed more than 2 consecutive term. It means he may be appointed for total tenure of 10 years. Thereafter, as soon as he ceases from his position, he shall not be appointed for three years. It means every 10years of his period; three years shall be a holiday period.
It is noted that during the holiday period (three years period), he shall not be appointed or associated with company by any means, directly or indirectly.
How Can Appoint an Independent Director
This is a new concept under the Companies Act, 2013. In this new concept, the Independent director shall be appointed from a Data base which is created and maintained as per Section 150 of the Act. In this Section, anybody corporate, institute or association which shall be notified by the Central Government, who have sufficient knowledge and expertise to maintaining such data bank. These concerns have own website in this regard. The data bank must be contained three main basic informations like name, address and qualification of persons who want to act as Independent Director.
So, the Independent Director shall be selected from this data bank.
The appointment of Independent Director shall be made in the General Meeting of the Company. So, the explanatory statement annexed to the Notice of the General Meeting must be disclosed the Justification for choosing the appointee for appointment as Independent Director.
The Companies Act, 2013 is trying to give much more transparency for stakeholders in every area; we are just waiting of its complete applicability. The central government shall prescribe the rule for maintiang the date of independent director and they also prescribed the manner for selection of Independent director.
Conclusion
The introduction of Independent Director under the Companies Act, 2013 reflects more transparency in the corporate world. Whatever is written in the code of conduct of Independent Director under the Schedule IV of the Act, if hundred percent applies where there shall be independent director, the benefit defiantly will go to the hand of stakeholders and society at large.
can a executive director of co. X ltd be appointed as independent director of Y ltd, when X ltd provides some services to Y ltd and is paid commission for that?