PROVISIONS FOR INDEPENDENT DIRECTORS IN COMPANIES BILL, 2011

[Mr. M. GOVINDARAJAN]

 

INTRODUCTION:

The concept of independent directors emerged in the recent part for transparent in the affairs of the company and for better corporate governance.  The Companies Act, 1956 did not the term ‘independent director’. Clause 49 of the listing agreement made it compulsory for a listing company to appoint independent directors. The roles and responsibilities are not properly incorporated in the Company law. The recent development in Satyam case doubted the system of independent directors. Therefore the Companies Bill, 2011(‘bill’ for short) makes provisions relating to the independent directors which are to be discussed in this article.

DEFINITION:

Clause 149(5) of the bill defines the term ‘independent director’. According to this clause an independent director is a director other than a managing director or a whole time 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) (i) who is not a promoter of the company or its holding, subsidiary or associate company;

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or such promoters or directors, during the two immediately preceding financial years or during the current financial year;

(d) 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 2% or more of its gross turnover or total income or Rs.50 lakhs or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(e) who, neither himself nor any of his relatives-

(i) 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 it is proposed to be appointed;

(ii) is or has been an employee or proprietor or a person, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of-

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;

(iii) holds together with his relatives 2% or more of the total voting power of the company; or

(iv) is a chief executive or director, by whatever name called, of any non profit organization that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company; or

(v)  who possesses such other qualifications as may be prescribed.

MANDATORY PROVISION:

Clause 149 (3) provides that 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. Every company existing on or before the date of commencement of this Act shall, within one year from the date of commencement or from the date of notifications of the rules in this regard as may be applicable comply with the requirements of the appointment of independent directors.

TENURE:

The independent director shall hold office for a term up to five consecutive years on the board of a company but shall be eligible for re-appointment on passing a special resolution by the company and disclosure of such appointment in the Board’s report.  No independent director shall hold office for more than two consecutive years but such independent directors shall be eligible for reappointment after the expiration of 3 years of ceasing to become an independent director.  An independent director shall not, during the said period of 3 years be appointed in or be associated with the company in any other capacity, either directly or indirectly.

CODE:

Schedule IV of the bill provides the code for independent directors.

Guidelines of professional conduct:

An independent director shall-

• uphold ethical standards of integrity and probity;
• act objectively and constructively while exercising his duties;
• exercise his responsibilities in a bona fide manner in the interest of the company;
• devote sufficient time and attention to the professional obligations for informed and balanced decision making;
• not allow any extraneous considerations that will vitiate his exercise of objective independent judgement in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making;
• not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person;
• refrain from any action that would lead to loss of his independence;
• where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly;
• assist the company in implementing the best corporate governance practices.

Appointment:

The appointment process of independent directors shall be independent of the company management.  In selection of independent directors the Board shall ensure that there is appropriate balance of skills, experience and knowledge in the Board so as to enable the Board to discharge its functions and duties effectively. The appointment shall be approved by the members in the general meeting. The explanatory statement attached to the notice of the meeting for approving the appoint of independent director shall include a statement that in the opinion of the Board, the independent director proposed to be appointed fulfils the conditions specified in the Act and the rules made there under and that the proposed director is independent of the management.

The appointment letter of independent director shall consist-

• the term of appointment;
• the expectation of the Board from the appointed director; the Board level committee(s) in which the director is expected to serve and its tasks;
• the fiduciary duties that come with such an appointment along with accompanying liabilities;
• provision for directors and officers insurance, if any;
• the code of business ethics that the company expects its directors and employees to follow;
• the list of actions that a director should not do while functioning as such in the company; and
• the remuneration, mentioning period fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any;

The reappointment of independent director shall be on the basis of report of performance evaluation, which shall be done by the Board of Directors excluding the director being evaluated. 

Resignation and removal:

The resignation or removal of an independent director shall be in the same manner as is provided in Sections 168 and 169 of the Act.  An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within a period of not more than 180 days from the date of such resignation or removal as the case may be..

Roles and functions:

The independent director shall-

• help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;
• bring an objective view in the evaluation of the performance of Board and management;
• scrutinize the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;
• satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
• safeguard the interests of stakeholders, particularly the minority shareholders;
• balance the conflicting interests of the stakeholders;
• determine 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;
• moderate and arbitrate in the interest of the company as a whole in situations of conflict between management and shareholder’s interest.

Duties:

The independent director shall –

• undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
• seek appropriate clarification or amplification of information and where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;
• strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;
• participate constructively and actively in the committee of the Board in which they are chairperson or members;
• strive to attend the general meetings of the company;
• where they have concerns about the running of the company or a proposed action  ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;
• keep themselves well informed about the company and the external environment in which it  operates;
• not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
• pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;
• ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;
• report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
• acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
• not disclose confidential information including commercial secrets, technologies, advertising and sales promotion plans, unpublished sensitive information, unless such disclosure is expressly approved by the Board or required by law.

OBLIGATION:

Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence.

LIABILITY:

An independent director shall be held liable only in respect of such acts of omissions by a company which had occurred with his knowledge attributable through Board processes, and with his consent or connivance or where he has not acted diligently.

AUDIT COMMITTEE:

Clause 177 (2) provides that the Audit Committee shall consist of a minimum three directors with independent directors forming a majority.

The role of independent directors in transparency and better governance is quite important. The Companies Bill will pave the way for the same.