This is a great article by Corporate Professionals (www.indiacp.com) on Independent Directors.

With a view to add transparency, fairness and independence in decision making to safeguard the stakeholders interest, 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; however it is pertinent to analyze whether the criteria defined under this proposed law would be helpful or on the other hand, end up creating chaos for companies to choose a person who fulfils such criteria. Further, the liability created on such Independent Directors, which would be one of the prime decisive factor, for such eligible person to accept the appointment as Independent Director, is also an imperative aspect to analyse.

Salient Features of the New 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 independent directors on the board of other public limited companies.

   

• An Independent Director is required:
  • 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 be related 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.
    • 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 three financial years immediately preceding the financial year in which he is proposed to be appointed;
    • 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 firm of auditors or Company Secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
      • 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;
    • holds together with his relatives two per cent or more of the total voting power of the company; or
    • 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.
  • Must possess any other qualifications as may be prescribed
• Independent director to hold office for a term upto five consecutive years on the Board of a company, but 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 in one company, but such independent director eligible for appointment after the expiration of three 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 anybody, 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 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 Old Law

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 however, 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, its going to be a tedious task for the companies to find a person opt for their organization. Certainly from the point of view of stakeholders it is a very good move so far as the companies do not face problem in identification of such person at appropriate time.

Facts and Figures

As per the Directors Database website, an initiative of the Bombay Stock Exchange (BSE) and Prime Database, a total of 7,521 individuals occupy a total of 9,811 independent directorship positions on 2827 BSE-listed companies.

Industry Impact & Concern Factors

Though the concept of independent director is very much focused to safeguard stakeholders' interest, however, some of the issues in the concept are very much likely to create buzz in the industry and may hamper its smooth implementation. Following section throws light on such features:-

• Firstly, following issues in the eligibility criteria are likely to create havoc in industry
  • Not only the proposed incumbent, but also the relatives of such incumbent are desired not to have any pecuniary relationship, over the specified limit, with the company, its holding and subsidiary company and also with its associate companies, that too not just for the current year but also for immediately preceding two financial years. That means lots of exercise for big companies to choose such proposed incumbent.
  • The proposed candidate not to have any 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 which again means that even a small transaction makes the person ineligible to be appointed.
  • Restriction of being KMP or even employee of the company and related entities for specified time frame
  • Restriction in any relationship even with service providers

     

  More of, there is a requirement for the Board to qualify that the proposed allottee fulfils all the eligibility condition for being appointed as Independent Directors, which definitely means that the audit or concurrence system for such independent directors qualifying the eligibility criteria should be so strong that the Board is able to gain comfort of such conditions being fulfilled.

   

• Secondly, there is a limit on the number of years a person may be appointed on the Board as Secondly, there is a limit on the number of years a person may be appointed on the Board as Independent Director. A person at one time may be appointed for a term of 5 years and thereafter for 5 more years, beyond which, he would not be eligible to be appointed as such until 3 years from his cessation.

   

  The 10-year cap is likely to trigger a flux in the boardrooms of leading companies like ITC, Infosys, Tata Steel and many more that have independent directors who have exceeded this limit. For instance, Tata Steel would have to fill up three new positions on the board since independent directors like Nusli Wadia, SM Palia and Suresh Krishna have been on the company's board for 32 years, 23 years and 17 years, respectively. Many other companies are likely to face the same dilemma once the Law gets enacted.  

   

• Thirdly, the clause regarding liability of Independent Director. It has been provided that Independent directors would be responsible 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. This means on any board decision on which they have consented, even after acting complete diligence and in good faith, they would be held liable for default, if it occurs. The liability upon such Directors has always been the cause of concern and still supposed to hold so.

   

• Lastly, it is also important that the slab for sitting fee now prescribed under new law is lucrative to attract person of objectivity, repute and integrity to such position as the law itself provides that such directors may be paid just sitting fee or profit linked commission. This requirement would make it difficult for companies with long gestation period or for reviving or new companies to find a suitable candidate for their organization.

Though the concept strongly commends to create objectivity and fairness in decision making of the company and the criteria has naturally been specified to minimize chances of any nexus between the company and Independent Directors, it would however be interesting to see how much the industry is able to absorb it and more so, how strong a data base the government is able to form so that such desired Independent Directors are easily made available with the companies.