Tuesday, 5 July 2016


The concept of Independent Director was introduced in India by the CII’s ‘Desirable Corporate Governance’(CII Code) in 1998. Section 2(47) and Section 149 of The Companies Act,2013 deals with Independent Directors.
One of the sections of the Act, 2013 is section 149 which also deals with the appointment and qualification of Independent Directors on the board of the Company and their importance in good corporate governance in the Company. The Act, 2013 has specifically defined the roles, duties, liabilities and the manner of selection of Independent Directors in board and various committees of the Company .
The need for the Independent Directors came into existence due to the need of a strong framework of corporate governance in the functioning of the company The Act, 2013 makes the role of Independent Directors very different from that of executive directors. An Independent Director is vested with a variety of roles, duties and liabilities for good corporate governance. He helps a company to protect the interest of minority shareholders and ensure that the board does not favour any particular set of shareholders or stakeholders. The role they play in a company broadly includes improving, governance standards, corporate credibility and the risk management of the company.Independent Director is to take unbiased decisions and to checks various decisions taken by the management and majority stakeholders. An Independent Director brings the accountability and credibility to the board process.
The Act, 2013: The Act, 2013 has adopted many of the provisions of clause 49 of the listing agreement and has defined the term 'Independent Director' u/s 2(47) which says that 'Independent Director' means an Independent Director as referred to in sub-section (5) of section 149. The new Act along with the definition of Independent Director also provides the criteria for appointing, qualifications, tenure, remuneration and liability of Independent Director’s.
As per sub-section 6 of Section 149 of the Act, ID means a director other than a managing director or wholetime 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) - 1. Who is or was not a promoter of the company,
2. Who is not related to promoters or directors in the company
c) Who has or had no pecuniary relationship with the company
d) None of whose relative has or had pecuniary relationship or transaction with the company.
e) Who, neither himself nor any of his relative---
i. Holds or has held the position of a key managerial personnel
ii. Is or has been an employee or proprietor or a partner, in any of the three financial years preceeding.
iii. Holds together with his relative two per cent or more of the total voting power of the company; or
iv. Is a Chief Executive or director, of any nonprofit organization, or who possesses such other qualifications as may be prescribed.
The process of identification and appointment of an ID itself provide hints about the likelihood of the person acting independently. A good way to identify and appoint an ID is to involve a nominations committee of the board, or involve the entire board. This will ensure that prejudice and proximity to management, or a majority shareholder, do not influence the selection of ID.
Under the Act, 2013, strict eligibility criteria have been laid down for the appointment of an ID for example; an ID should not be related to the company or its holding or its subsidiary or its associate company, he himself or his relatives should not have or had any pecuniary relationship or transaction with the company or its holding or its subsidiary or its associate company during the current financial year. He also has to declare to the board that he is independent at the time of his appointment and also whenever there is a change that may affect his independence. Both the company and the ID shall abide by the provisions of the act5. Also the appointment of ID shall be approved at the meeting of the shareholders and the explanatory statement attached to the notice of the meeting for approving the appointment of an ID shall include a statement that in the opinion of the Board, the ID's proposed to be appointed fulfils the conditions specified in the Act, 2013 and the Rules and the proposed director is independent of the management. An ID shall hold the office for a term up to five consecutive years, 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. He is not entitled to any stock option or any remuneration, but he may receive sitting fee and any profit related commission as approved by members.
The Act, 2013 has described the manner or procedure for selection of ID's under section 150. This section says that selection of an ID shall be done from a Data Bank maintained by anybody, institute or association, as may be notified by the Central Government, containing names, addresses and qualifications of persons who are eligible and willing to act as ID. It also says that the appointment of an ID shall be approved by the company in general meeting and the explanatory statement indicating the justification behind appointing such person, attached with the notice of general meeting.
The role of an ID is considered to be of a great significance. The guidelines, role and functions and duties and etc are broadly set out in a code described in Schedule IV of the Act, 2013. The code lays down certain critical functions like safeguarding the interest of all stakeholders, particularly the minority holders, harmonizing the conflicting interest of the stakeholders, analyzing the performance of management, mediating in situations like conflict between management and the shareholder's interest and etc.
The code also lays down certain important duties like keeping themselves updated about the company and the external environment in which it operates, not disclosing important and confidential information of the company unless approved by the board or required by law, actively participating in committees of the board in which they are chairperson or members, keeping themselves update and undertaking appropriate induction and refreshing their knowledge, skills and familiarity with the company, regularly attend the general meetings of the company and etc.
The Act, 2013, has sought to balance the wide nature of the obligations, functions and duties imposed on an ID. The Act, 2013, restricts and limits the liability of ID's to the matters which are directly relatable to them. Section 149 (12) limits the liability of an ID "only in respect of 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".
Nominee directors, despite not being considered as 'independent' under the new definition, would nevertheless be eligible for immunity, as long as they are non-executive.
The new concept of having ID is a welcome step for corporate governance in India. The Act, 2013 has conferred greater empowerment upon ID's to ensure that the management & affairs of a company is being run fairly and smoothly. But, at the same time, greater accountability has also been placed upon them. The Act, 2013 empowers the ID's to have a definite 'say' in the management of a company, which would thereby immensely strengthen the corporate governance.
However it is also important to keep in mind that good corporate governance is not just the outcome of appropriate selection and effective functioning of ID's. Every director, whether independent/nonindependent, executive/non-executive has a distinct role in the functioning of the company. It is only when the entire board functions effectively which results to good corporate governance and benefit minority as well as majority shareholder in its long term which maintains a good corporate image in the market.


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