Type: Definition Essays
Sample donated: Kristen Foster
Last updated: August 27, 2019
The inception of the idea of theautonomous or an independent direcor under the current corporate lawadministration a can be traced back to the proposals of the Kumar Mangalam Birla board of trustees (1999), theNaresh Chandra panel (2002) and the Narayana Murthy council (2003). Further tothese expert recommendations, the expression “independent directors”seems intriguing. In India when the Securities and Exchange Board of India ajoined provision 49 in the Listing Agreement.
Statement 49 gives acomprehensive meaning of independent directors, covering under its an ambitnon-official executives who don’t have any material or monetary associationwith the organization, its promoters, administration or auxiliaries, which mayinfluence the autonomy of their judgment. Independent Directors as per the Listing Agreement, can’t be substantialor major shareholders of the organization (i.e.
owning at least 2% of thevoting rights), however they are qualified to get remuneration in accordance with the decision of the Boardand after obtaining prior permissions and approval of the shareholders. The Company’s Act of 1956 does not mention the expression “independent directors” India’s listing standardsrequire the boards of listed companies to include independentdirectors but neither the Listing Agreement nor the 1956 act precisely definetheir roles and liabilities..
The Company’s Act of 1956 places independent directors on the sameplatform or an equal footing as of otherdirectors with regards to purposes of decision making and does not specify anyprivilege, duty or function which they ought to perform or the liabilities theycould incur for the actions of the board. This has prompted to a situation ofuncertainty regarding the roles and responsibilities of the independent directors.This has brought the Indian law in line with the legal position in jurisdictionssuch as UK, where the codified dutiesand roles of an independent director exist alongside their common law duties. Definition andNumber of Independent Directors Anindependent director of a company is a non-executive director who:Onlyreceives his directorsremuneration but apart from that does not have anymaterial pecuniary relationships or transactions with the company or withanyone else in the management1. Has no relations withto promoters or even the a management atthe Board level, or the level below that.2. Has not been anexecutive of the company in the last three years;4. Is not a partner or an executive of thestatutory theauditing firm, the internal audit firm that is associated a with the company,and has not been a partner or an executiveof any such firm for the last three years.
This will also to apply to legalfirm(s) and consulting firm(s) that have material association with the entity;5. Is not a related to the company as someimportant the supplier, vendor or a customer and also does not hold asubstantial share in the company which is 2% or more of the block of votingshares;6. He has not been a director of the company,independent or otherwise, for not more then three years. Ingeneral, 1/3rd of the total number of adirectors as Independent Directors should be an adequate for a company havingsignificant a publicinterest, irrespective of awhether the Chairman is executive or non-executive, the independent or not. In certaincases Regulators may specify a requirement of Independent Directors a for companies falling within theirregulatory domain. Nominee thedirectors appointed by the any institution or in a pursuance of any agreementor Government appointees representing Government shareholding shouldnot be deemed to be Independent Directors.
The concept ofIndependent Directors The J.J Irani Committee, a specialistpanel constituted by the Ministry of Corporate Affairs to advise the Governmenton the new organization law, has in its report talked about in detail theprogressions required in the arrangements, in relation to the Board ofDirectors. As for the Independent Directors, the Committee is of the view thatgiven the obligation an of the Board to adjust different interests, t. This isan especially vital for open organizations or organizations, with a criticalopen intrigue. While executiveat given the responsibility a of the Board tobalance various interests, the presence of a Independent a directors on theBoard,s speaking to organizations, particular interests would be a bound to thepoint of view managed by such interests, Independent Directors be would havethe capacity to bring a component of objectivity, to Board prepare in the ageneral interests of the organization and in this way to the event of minorityinterests and littler shareholders.
.Law ought to, dependence, therefore, isnot to be, viewed merely as independence a from promoter a Interests but fromthe point of view of vulnerable stakeholders, who cannot otherwise get theirvoice heard, perceive the guideline of Independent theDirectors and spell outtheir part, capabilities and risk. However necessity of nearness of IndependentDirectors may change every now and then relying upon the size and sort oforganization. There can’t be a solitary technique that will suit allorganizations.
Accordingly number of Independent directors might be recommendedthrough standards for various classes of organizations.Important provisions in Law related to”Independent Director” 1. A person shall notserve as an Independent a Directorin more than seven listed companies.2. Further, any person whois serving as a whole time director thein any listed company shall serve as an Independent Director for not more thanthree listed companies.13.
The maximum tenure ofIndependent Directors shall be in theaccordance with the Companies Act, 2013 and clarifications/ circulars issued a by the Ministry of CorporateAffairs, in this regard, from time to time.4. The company shall issuea formal letter of aappointed to Independent Directors in the manner as mentioned in the CompaniesAct, 2013.
5. The terms andconditions of appointment shall also be disclosed over the website of thecompany.6.
The NominationCommittee shall lay down the aevaluation criteria for the performance evaluation of Independent Directors.7. The company shall disclosethe criteria for performance evaluation, as laid down by the NominationCommittee, in the annual Report.
8. The performanceevaluation of Independent Directors is to be done by the entire Board ofDirectors.9. The Independentdirectors of the company should conduct at least one meeting in a year.10.
All fees/ compensationif any paid to non-executive directors, including Independent Directors, shallbe fixed by the Board of Directors and shall require previous approval ofshareholders in general meeting. The shareholders’ the resolution shall specify thelimits for the maximum number of stock options that can granted tonon-executive directors, in any financial year and in aggregate.11. Reg. 16(5) of SEBI (Mutual Funds) Regulations, 1996provides that two-thirds of the board of directors, of a trustee company shallbe independent persons aand shall not be associated with the sponsors or be associated with them in anymanner whatsoever.2Under Reg 21(1)(d) at 50% of theBoard of Directors of an asset management company must be Independent Directorsi.e.
directors, who are not iassociates of the sponsor or any of its subsidiaries.3 Appointmentof Independent Director4 Ø Section149(4) and (5) of the 2013 Act are also new provisions relating toappointment of Independent Directors.Ø Ina listed company at least one third of the total number of directorsshall be Independent Directors.5Ø TheCentral Government may prescribe minimum number of Independent Directors to beappointed by other classes of public companies. Rule 4 of the Companies(Appointment and Qualification of Directors) Rules, 2014, requires publiccompanies which are not listed to have at least two Independent Directors ifsuch companies have(i) a paid up sharecapital of rupees ten crores or more or(ii) turnover of rupeesone hundred crores or more or(iii) outstanding loansor debentures or deposits which in aggregate exceed rupees fifty crores or moreØ Ifan Independent Director resigns before completion of his tenure and the date ofresignation if the company does not meet the parameters prescribed in s.149(4) of the 2013 Act then the company will be required to appoint another Independent Director in hisplace and stead (by filling thevacancy as a casual vacancy).
Ø Asper Schedule IV-Code for Independent Directors, an Independent Directormay beappointedonly at a meeting of the shareholders and any vacancy caused due to resignation or removalshall be filled up within 180 days.Ø Theschedule however does not specifically stipulated appointment by theshareholders to fill up of a vacancy caused due to the conditions specified ins. 167 of the 2013 Act getting attracted. Based on a combined reading of ss.
161,152 of the 2013 Act, Schedule IV of the 2013Act and Rule 4 of the Companies Rules, 2014there appears to be no bar in the Board forfilling up such a vacancy.Ø Asper section 150(2) read with s. 152(2) of the 2013 Act, appointment ofIndependent Directors shall be approved by theshareholders in a general meeting.Ø Asper s. 2(71) of the 2013, the term public company includes a private companywhich is a subsidiary of a public company and therefore such private companies will also be required to appointIndependent Directors if they fall under the class of companies prescribed bys. 149(4) Need of independentdirectors on the board Thereare a few particular advantages that an independent top managerial staff canconvey to an organization, the most importantly is that the interior regulationsthat are can be controlled, and the fraud or mismanagement which is being doneby the organization can be conveyed to the shareholders of the organization andto the general population at large. It has some different advantagesadditionally, which includes :Ø Counterbalancedthe administration blemishes in an organization.
Ø Guaranteethe act of legitimate and moral conduct at the organization, and in themeantime fortifying bookkeeping and accounting controls. Ø Makethe name of the organization more popular through his contacts and skill inorder to strengthen and reinforce the share capital of the organization. Ø Bea part of long haul choices which should be taken, for the welfare of theorganization.
Ø Helpan organization survive, develop, and flourish over time through enhancedprogression and designing a succession plan arranging through enrollment andmembership in the nomination panel. Independentdirectors and corporate administration: The requirement for the independentdirectors can be made out from the fact that they are relied upon to beindependent from the administration and go about as the trustees ofshareholders. This infers they are committed to be completely mindful of thedirect which is going ahead in the associations and furthermore to stand firmas and when vital on pertinent issues. The significance of the part of anIndependent Director is of great significances. The rules, part and capacitiesand obligations and so on are comprehensively set out in a code portrayed inSchedule IV of the Companies Act, 2013. The code sets out certain criticalcapacities like protecting the enthusiasm of all partners, especially theminority holders, blending the clashing enthusiasm of the partners, breakingdown the execution of administration, intervening in circumstances like thecontention amongst administration and the shareholder’s advantage, and so on. The independent directors areadditionally anticipated that would go to the general meetings of theorganization and to keep themselves mindful of the matters which are goingahead in the organization.
Responsibilitiestowards shareholders and Stakeholders: Independent Directors havedifferent parts to satisfy in their official capacity. Following are the mostcritical ones: Ø Theymust fulfill their obligations and must attempt to acquire transparency in the working mechanism and environment of theorganization. Since shareholders, particularly the minority shareholders, aregenerally not autohorised to investigate those undertakings of the organization,and in this manner they look upto the autonomous executives as in the Independent directors in order to give such transparency. Ø Whenthe administration or Board is taking any choices which would unfavorablyinfluence the privileges of the shareholders or creditors or workers, then theindependent direcotors must have a noteworthy part in such choices, and theyshould act in the welfare of the stakeholders.
Ø Further,they are required to audit the related party exchanges and furthermore to guaranteethe efficiency of “Whistle Blowers”Role in Committee MembershipTheCompanies Act, 2013, provides for mandatory appointment of independentdirectors in following committees so as to meet the corporate governancerequirements:· Nomination committee· Remuneration committee· Committee related to investor relations,· Audit committee.Being an individual from the Board, their partand obligations are particularly like whatever other director of the Board. Thetrustee obligations of care, industriousness and acting in accordance with somebasic honesty apply similarly to independent directors as to differentdirectors. Responsibilitiestowards the Board It is the obligation of the independentdirector to guarantee that each of those issues that are essential for theorganization are appropriately tended to by the board of Directors.
The goalsand obligations of the independent directors are same as that of the officialdirectors. However, as compared to the executive directors the time that isneeded to be devoted by the independent director and the degree of skill andcare required for the company, both are less. Analysis : Whether are there anyshortcomings with respect to the Independent director.
• Manya times, certain independent directors are added to the board because forprestige and lustre, therefore, these Independent Directors are themselves areso busy, successful individuals who already hold a no. of other similarposition. There is very less time that they can bring into the company because of having so manycommitments. This problem is enhanced when the companies hare related totechnical fields, where high technical assistance is needed about which theindependent directors have very little knowledge of. In situations like these,the Independent directors are left helpless with no choice then to rely on thejudgement of management.
6• Differentcompanies require different board structure to obtain maximum benefit. Sameformation of the board might not benefit as expected. Many company fail to understandthis and forms the normal stereotype structure of the board. For example, newlyestablished companies will require more no. of of independent directors tocontrol management’s tendency to reinvest the company’s cash flow even whenthere are few if any reinvestment opportunities.
• Independentdirectors can be very beneficial for the company, but only if they are a partof committee which suits their expertise. This will make the independentdirectors perform their monitoring function. However, mostly establishedcompanies already have such committee structures set and they are veryreluctant to make any changes in the same.7 • Thenext shortcoming is linked to above, namely not a proper placement of theknowledge and expertise skills relative to the company and its variousbusinesses places a significant advantage in the hands of management. further,management has at in its control the entire administrative machinery of thecompany because of whichindependent directors have depend on themanagement. Quite literally, Independentdirectors have limited choice in general but to take decisions on the basis ofthe information given by management is not the proper use of the power of theIndependent directors.8 After critically analysing allthe provisions, advantages and shortcomings of the Independent Directors, theconcept of Independent director is a boon or bane to the companies.
Afterleveling all the advantages and disadvantages the author have come to the finalanalysis, and herein lies the paradox, with the leadership and managementfunctions mostly lies with the management, in the absence of an overhaul of thesystem, independent directors will only be able to discharge their duties andfunctions effectively if management itself is committed to the role of suchdirectors. This is specifically a case where companies do not have board with alot of Independent directors. Even wherethe names of the Independent directors is added to add more value to the company,effect of Board composition could be spurious because such performance could bea function of the quality of management itself.
Ifhigh quality managers are more likely to place outsiders on Boards than poorquality managers who do not want to be monitored, a finding that shareholdersare better served by outsider-dominated Boards is simply an illustration of thebetter management of these companies. To this it should be added that highquality managers appreciate the valuable role of independent directors and willtake steps to allow them to play their role effectively. Internal managers canuse their knowledge of the organization to nominate outside Board members withrelevant complementary knowledge: for example, outsiders with expertise incapital markets, corporate law, or relevant technology who provide an importantsupport function to the top managers in dealing with specialized decisionproblems.Theimportance of this cannot be overstated. There is a tendency to think thatsimply having independent directors improves corporate governance.
The realityis sometimes the opposite. Unless there are independent directors who are trulyindependent, and have the strength of character and ability to perform aneffective monitoring function, the presence of independent directors acts as asmokescreen and a snare for the unwary investor who may pay a higher price forequity on the basis of a supposedly better corporate governance structure. Goodcorporate governance is not about having a certain number of independentdirectors, of the number of Board meetings in a year, or even about whetherthere are Board committees that have a majority of independent directors. Thesetell us only about structures and while relevant, does not provide the moreimportant information about how the independent directors or the Board reallyoperate.LiabilityOf An Independent DirectorUnderthe Company’s Act, 2013, the liabilities of Independent Directors has beenreduced and limited to: “onlyin respect of acts of omission or commission by a company which had occurredwith his knowledge, attributable through board processes, and with his consentor where he had not acted diligently.”91 Clarke, Donald C. (2007), ‘Three Concepts ofthe Independent Director’ Delaware Journal of Corporate Law, Vol.
32 No. 1, pp.106-1082 SEBI Circular No.
MFD/CIR/17/21105/2002, dt28-10-20023 SEBI Circular No. MFD/CIR/11/354/2001, dt.20-12-20014 Companies Act, 20135 Provision applicable w.
e.f. 1-4-2015 videCIR/CFD/ POLICY CELL/7/2014/ dt.
15-9-20146 S Bhagat and B Black, “The RelationshipBetween Board Composition and Firm Performance”, in KJ Hopt, et al. (eds),Comparative Corporate Governance: The State of the Art and Emerging Research(Oxford, Clarendon Press, 1998), 281-2.7 SC Vance, “Corporate Governance: AssessingCorporate Performance by Boardroom Attributes” (1978) 6 Journal ofBusiness Research 203.8 Millstein and MacAvoy,supra note 50, 1285-6.
9 S. 149(12) of the Companies act, 2013