Independent Directors under the Proposed Companies Bill, 2011

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:-

 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.