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Position of Independent Directors under the Companies Act, 2013

The Companies Bill, 2012 passed in both the Houses of Parliament received the Hon’ble President’s assent on 29th August, 2013 and was published in the Official Gazette on 30th August, 2013, and finally became the “Companies Act, 2013”.

Introduction

Corporate governance generally places a fair amount of emphasis on board independence, and it is no different in India. Having a minimum number of independent directors on the board is said to enhance monitoring of the management and promoters, and thereby protect the interests of the public shareholders. The Companies Act, 2013 (“Act”) takes the concept of board independence to another level altogether to deal with independent directors, the related provisions under Act are detailed here under:

Definition

As per section (47) of Act “independent director” means an independent director referred to in section 149.

As per sub-section 6 of Section 149 of Act, Independent Director means a director other than a managing director or whole-time director or a nominee director,

  1. who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

    1. who is or was not a promoter of the company or its holding, subsidiary or associate company;

    2. who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

  2. 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;

  3. 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;

  4. who, neither himself nor any of his relatives—
    1. 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;

    2. 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—

      1. a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

      2. 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;

    3. holds together with his relatives two per cent. or more of the total voting power of the company;

      or
    4. is a Chief Executive or director, by whatever name called, of any nonprofit 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

  5. who possesses such other qualifications as may be prescribed.

Independent Director in Corporate Social Responsibility Committee

Section 135(1): Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

Independent Director in Listed Companies

Section 149(4): Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

Explanation: For the purposes of this sub-section, any fraction contained in such one-third number shall be rounded off as one.

Section 177(2): The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority.

Section 178(1): The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors:

Declaration by Independent Director

Section 149(7): Every independent director shall give a declaration that he meets the criteria of independence as provided above in the definition Section 149(6), at the first board meeting in which he participates as a director and thereafter at the first board meeting in every financial year or whenever there is any change which may affect his status as an independent director

Provision with respect to Remuneration

Section 149(9): Notwithstanding anything contained in this Act, but subject to the provisions of Sections 197 and 198, an independent director shall not be entitled to participate in any stock option, 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.

Section 197: Notwithstanding anything contained in any other provision of this Act but subject to the provisions of this section, an independent director shall not be entitled to any stock option and may receive remuneration by way of fees provided under sub-section (5), reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

Term of holding office

Section 149(10): Subject to the provisions of Section 152, an independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report.

Section 149(11): Notwithstanding anything contained in sub-section (10), no independent director 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 that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Section 149(13): 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 independent directors.

Manner of selection and appointment of Independent Director

Section 150: (1) Subject to the provisions contained in sub-section (5) of Section 149, an 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, as may by notified by the Central Government, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors:

Provided that responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director shall lie with the company making such appointment.

  1. The appointment of independent director shall 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 shall indicate the justification for choosing the appointee for appointment as independent director.

  2. The data bank referred to in sub-section (1), shall create and maintain data of persons willing to act as independent director in accordance with such rules as may be prescribed.

  3. The Central Government may prescribe the manner and procedure of selection of independent directors who fulfill the qualifications and requirements specified under section 149.

Provided that in the case of appointment of an independent director in the general meeting, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfills the conditions specified in this Act for such an appointment.

Section 161: No person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act:

Provision with respect to Board Meetings

Section 173: A meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting:

Provided that in case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

Conclusion

In sum, while several concerns regarding board independence have been addressed in the Act, some areas require refining. Although the intention is noble, the implementation could give rise to difficulties. Corporate governance norms are dynamic in nature and require reconfiguration periodically to keep pace with the changing business climate.

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