Article on independet director in a company

Role, Power and Qualifications of Independent Directors

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Independent Director (ID). What does the name itself suggest? The Companies Act 2013 (hereinafter referred to as the Act) defines “director” as a director appointed to the Board of a company[1]. “Board of Directors” has been defined in Section 2(10), as the collective body of the directors of the company. In a company, the composition of the Board of Directors is quite diverse. Starting from the Managing Director the Board comprises of a number of Whole-time Executive Directors, Non-Executiveirectors and Independent Directors. In this article, we would limit our focus to the scope of Independent Directors; their roles, power, and qualifications.

As the term suggests, “independent” means “not influenced or controlled in any way by other people, events or things[2]”. This is what one would understand in layman terms. However, the Companies Act, 2013 defines it otherwise. According to section 2(47), which is the definition clause, it redirects one to the definition of an ID to Section 149(5). Here too, there seems to be a flaw, since this particular section talks about the minimum requirement of IDs to be part of the Board of Directors (BOD) in various situations as per Provision 4 of the section[3].

The qualifications of ID have been clearly defined in Section 149(6). It gives a clearer picture, though not a definite one as to who is or can be called an ID. A director who is not a managing director or whole-time director or a nominee director is one of the qualifications as to who can occupy the post of ID, basically a form of non-executive director.

Qualifications

As discussed above, Section 149(6) lists the various qualifications required to be considered as a candidate for the post of ID in the BOD of the Company. They are as follows-

  • He must not be a managing director, a whole-time director or a nominee director of the company;
  • He, in the opinion of the Board, must be a person of integrity and possess relevant expertise and experience[4];
  • He should never have been a promoter[5], or should never have been related to a promoter[6] of the company or its holding, subsidiary or associate company;
  • He should not have a pecuniary relationship with the company, other than remuneration or transactions not exceeding ten percent of their income;[7]
  •  He should not have relatives who fulfill the requirements of Section 149(6)(d) and (e).
  •  He too should not fulfill the requirements of section 149(6)(e),
  • He shall have to fill a form of a declaration stating that he has fulfilled the conditions under sub-section 6 if he either attends the Board meeting for the first time as the director and thereafter in every first meeting of the financial year. Also if there is any change in their circumstances which may affect his or her status as director this declaration must be filled.[8]

What is interesting to note however seems to have been incorporated now what already recommended by the Kumaramangalam Birla Committee on Corporate Governance, defining the scope of ‘independence’ as can be seen now through the provisions of Sec 149 (6). The Committee in its report also mentioned the various qualities that will become the bar or standard for picking the right candidate to fill the post. Some of them include integrity, recognition of the importance of the Board’s tasks, financial literacy, experience, sense of accountability, to name a few. They must showcase commitment towards its duty towards the company and its stakeholders[9].

Roles

Schedule IV of the Companies Act, 2013 describes in detail the role of an independent director, his tasks and duties while he is occupying the position of an ID. Their tasks include-

  • helping in bringing an independent judgment and point of view with respect to the Board’s deliberations and decisions, with a specific focus on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;
  • bringing in an objective view during the evaluation of the performance of the board and management;
  • scrutinizing the performance of the  management for the purposes of meeting the agreed-upon goals and objectives of the company and monitor the reporting of its performance;
  • satisfying themselves on the integrity of financial information so received and that financial controls and the systems of risk management are robust and defensible;
  • safeguarding the interests of all stakeholders, particularly the minority shareholders and balancing the conflicting interest of the various stakeholders of the company;
  • determining the appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;
  • moderating and arbitrating in the interest of the company as a whole, in situations where the interests of the management and shareholders clash.[10]

They also have a set of duties which they must perform as long as they are functioning as the Independent Directors of the company. They too are listed under Schedule IV of the Act. To name a few, they are responsible for keeping themselves informed with respect to the external factors affecting the company, not disclosing confidential information and sensitive data of the company, reporting concerns of any unethical practices being indulged in; all in all stay updated with the regular internal matters of the company and its functions, and keeping in loop with the management and its affairs.

Responsibilities

IDs are expected to maintain a certain code of conduct that is so prescribed in the Act under Section 149(8) stating that they shall abide by the provisions so specified in Schedule IV. It provides a guide to the directors on professional conduct. The Code of Conduct is a set of guidelines containing details with regard to professional conduct, role, and functions, duties, manner of appointment, evaluation mechanisms, etc.

For the purposes of liability, IDs, similar to non- executive directors (except those of who are promoter or key managerial personnel), they shall be held liable for such acts of omission or commission by a company which had occurred with their knowledge, attributable through Board processes and with their consent or connivance or where they had not acted diligently.

But, the question arises, as to why such huge responsibilities must be shouldered by the IDs.  Independent Directors, with their conduct, are responsible for instilling confidence amongst the investment community, especially the minority shareholders, companies, regulators of the institution of the IDs.

All in all the various aspects discussed above, sum up the scope of ‘independence’ that Independent Directors enjoy. Are Independent Directors truly independent? Ajay Tyagi seems to have already taken a stand on that.

This is what the Companies Act, 2013 provides for. But what is the ground reality? According to SEBI chief Ajay Tyagi, IDs are many times appointed at the mercy of the promoters who have no prescribed qualifications and with no standard procedure to govern them they thrive in the grey area of the law. The process of selection seems to be rigged with favoritism, with people filling the post with friends and the likes, having no commitment to any cause.[11]

If it truly is so, that independent directors are merely supporting the largest shareholders, filling in vacant seats for fulfilling Act’s compliances…which if one assumes, is not that wrong. One of the major tasks of the IDs involves protecting the interest of minority shareholders. Yet, what is ironical is that IDs are appointed by the majority shareholder(s). This would then cast suspicion upon the directors ‘independence’ themselves, proving the gravity of the situation so bluntly put forward by Mr. Tyagi. However, in one such instance the independent directors who, instead of supporting the decision of the largest shareholder of Tata Sons, which was so allegedly expected, were in favor of Cyrus Mistry, is the chairman.[12] True, it is one of a kind feat, to ever happen in India. Yet, perhaps, the trend is changing. Stereotypes are breaking. Perhaps there is hope after all.


[1] Section 2(34)

[2] Dictionary

[3] The number of independent directors would depend on whether the chairman is executive or non-executive. In the case of non-executive chairman, at least one-third of the board should comprise of independent directors and in case of an executive chairman, at least half of the board should comprise of independent directors.

[4]S.149(6)(a)

[5] S.149(6)(b)(i)

[6] S.149(6)(b)(ii)

[7] S.149(6)(c)

[8] S.149(7)

[9] The Committee recommended that “the non-executive directors, i.e. those who are independent and those who are not, help bring an independent judgment to bear on board’s deliberations especially on issues of strategy, performance, management of conflicts and standards of conduct. The committee, therefore, lays emphasis on the caliber of the non-executive directors, especially of the independent directors”.

[10] Schedule IV, Ministry of Corporate Affairs

[11] PTI (2017), Independent Directors not Independent, says Sebi chief Ajay Tyagi, Economic Times

[12]Mohan. Ram, T.T.,(2016), The Mistry Affair shows why independent directors are not so independent, The Wire


Anwita Ray

Author

she is a very bright and natural writer who loves to work hard to achieve her goals. Apart from her love for writing, she is also fond of playing volleyball. She carries a very intellectual and sensible vibe and loves to write on contemporary topics. For any clarifications, feedback, and advice, you can reach her at consultanwita@gmail.com


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