The Concept of “Independent Directors” though not mandated
by the Companies Act 1956,is not new to the Corporate scenario. Before the
enactment of Companies Act 2013, the Clause 49 of the listing agreement
contained the code of appointment of independent directors to the Board of
listed companies.
The concept of Independent Director has now become a
mandatory requirement under the Companies Act 2013.
Scope of Section 149 :
Section 149 of the Companies Act 2013 deals with
provisions relating to the Appointment of Board of Directors. Sub sections (6) to (13) of the Section 149 provides for the qualification, term, liability, code of
conduct and other aspects relating to the Independent Director.
Rule 4 of The Companies Appointment and Qualification of
Directors) Rules, 2014[1]:
The following class or classes of companies shall have at
least two 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:
Provided that in case a company covered under this rule
is required to appoint a higher number of independent directors due to
composition of its audit committee, such higher number of independent directors
shall be applicable to it:
Qualifications of
an ‘I.D’:
According to Section 149(6), the following persons (other
than a Managing Director or Whole Time Director of a Company) are eligible to
be appointed as independent directors of a Company:
a)
A person who, in the
opinion of the Board, is a person
of integrity and possesses relevant expertise and experience
b)
A person who is or
was not a promoter of the company or its holding, subsidiary or associate company;
c)
A person who is not related to promoters or directors in the company, its holding, subsidiary or associate
company;
d)
A person 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;
e)
A person 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;
f)
A person 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 non profit
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
g)
A person who
possesses such other qualifications as may be prescribed.
The Ministry of Corporate Affairs has clarified that, the
term “Pecuniery Relationship” does not include transactions at “Arms length”
price and they are excluded from Section 149 (6) [2]
Declaration by the Independent Director:
According to Section 149 (7), Every I.D,
·
At the first Board
meeting after his appointment, and
·
First Board meeting
in every financial year or
·
whenever there is any change in the
circumstances which may affect his status as an independent director
Shall give a declaration that he meets the criteria of
independence as provided in sub-section (6) of Section 149.
Term of office:
·
As per the provisons
of Section 149 (10) an I.D shall hold office for a term up to five consecutive years on the Board of a company.
·
An I.D is eligible
for re-appointment on passing of a special resolution by the shareholders. Such
appointment shall be disclosed in the Board's report.
·
According to Section
149 (11), No I.D, 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 during the said period of three
years, he shall not be appointed in or be associated with the company in any
other capacity, either directly or indirectly.]
·
The provisions of
sub-sections (6) and (7) of section 152 in respect of retirement of directors
by rotation shall not be applicable to appointment of I.D’s. – Section 149 (13)
Liabillity :
The 2013 Act , while providing provisions relating to the
I.D’s have also provided a shield to safeguard such directors from liability.
Section 149 (12) draws a line of demarcation between acts committed within and
outside the knowledge and consent of the I.D’s in determining the liability of
the I.D’s. Accordingly an I.D is 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. Though the wordings of the section with
regard to the determination of liability of the I.D is vague and broad, the
burden of proof is on the person who is desirous of imposing the liability on
the I.D.
Other Provisions:
·
Subsection 8 of
Section 149 connects with Schedule IV which provides for a comprehensive code
of conduct with respect to the I.D.
·
Subject to the provisions of sections 197 and
198, an I.D shall not be entitled to any stock option. However he may receive
remuneration by way of fee provided under sub-section (5) of section 197,
reimbursement of expenses for participation in the Board and other meetings and
profit related commission as may be approved by the members.[3]
Highlights of Schedule IV of the Act:
1. The
Code provides for guidelines for professional conduct of the I.D, which entrust
fiduciary responsibility upon those directors to exercise their powers and
duties in a bonafide and diligent manner.
2. The
Code enunciates the roles and functions of the I.D, where the I.Ds are required
to take up different roles as a moderator, scrutiniser, a mediator etc ensuring
effective functioning of the Board proceedings and safeguard the stakeholders
interest.
3. The
Code lists the duties of the I.Ds right from periodical attendance and
reporting of the Board Proceedings to acting as a Check point in preventing as
to be filled any unfair practices etc happening in the Board and in the
Company.
4. The
Code provides for the manner of appointment, removal and resignation of the IDs
where in event of appointment, a letter of appointment containing various
provisions relating to his appointment is mandatory[4].
In event of resignation / removal his place has to be filled up within 180 days
from such resignation / removal. The MCA has clarified that, appointment of
I.Ds who appointed before the commencement of this Act will not be considered
for the purpose of calculating their tenure and fresh appointment has to be
made under Section 149 (10) & (11) read with Schedule IV.[5]
5. The code madates the meeting of the I.Ds
without the presence of other directors of the Company atleast once in a year
to review the activities of the Board throughout the year.
6. The
performance evaluation of the I.D shall be done by the Board excluding the director
being evaluated and based on the report of such evaluation, the continuation of
the I.D in the Company shall be determined.
In
conclusion, it is very understood that the object behind the concept of
Independent Directors as mandated by the legislation, is highly relevant for
fair and ethical corporate governance, protection of Minority stakeholders’
interest and also it acts as a check point in conduct of affairs of the Board.
As
pointed out in JJ Irani Committee Report, “The concept of Independence is not
to be viewed merely as independence from promoters interest but from the point
of view of the vulnerable stakeholders who cannot otherwise get their voice
heard ”, the new law has taken into
consideration so many checkpoints before drafting the provisions relating to
I.D’s.
However
the question that whenever the compliance of this law is both in letter as well
as in spirit has to be answered only over a period of time. Also the fact that
the executive and wholetime directors’ fear of losing their confidentiality in
entry of an external director who overlooks their proceedings cannot be ignored
in a short period of time. To fill up the requirements, it needs as many
independent directors as possible.
Also
the fear of the Companies in finding a person of Expereince and expertise in
the field is also to be noted here, as
Further
the challenge lies in the hands of the I.D’s who are appointed with slightly
over mounted responsibilities and when they overcome the same and contribute to
the clean corporate governance.
