Independent Directors & The Companies ACT, 2013
26 Mar 2015
The Companies Act, 2013 confers greater power and responsibility on the part of independent director and its provisions from the view point of governance in a company. The Companies Act 2013 defines Independent Directors under section 2(47). Independent Directors are the directors on Board of a company who are independent individuals.Independent Director is someone who does not have any material or pecuniary relationship with the company or directors.The concept of independent Directors came in late 1980s and early 1990s due to unveiling of various corporate frauds. The criteria for independent directors were introduced mainly to ensure transparency in corporate governance and safeguard the autonomy of independent directors.
The Companies Act, 2013 imposes specific obligation on listed companies to have at least one-third of total number of directors as Independent Directors .The Companies Act, 2013 has adopted many provisions of clause 49 of Listing Agreement and has defined the term independent Director under section 2 (47)which says that Independent Director means an Independent Director as referred to in sub-section (6) of section 149. Section 149 also deals with the appointment and qualification of Independent Directors on the board of the company and their importance in good corporate governance in the company. Below mentioned are statutory criteria for being an independent director.
Statutory Criteria for Independent Director:
v Such individuals must not have any material or pecuniary relationship with the companies or its subsidiaries.
v They must possess integrity and relevant industrial expertise.
v Such person should not be related to promoters or directors of the company, its holding, subsidiary or any associate company.
v An independent director should possess skills, experience and knowledge in one or more fields of management, law, marketing, administration, corporate governance and other related disciplines of company’s business.
v They must not hold more than 2% of the voting rights in the company either by themselves or together with their relatives.
v They must not be the promoters of the company or its subsidiaries.
v Such person has to be above 21 years of age.
v Such person or his relatives should not be chief executive or director of any non-profit organization that receives 25% or more of its receipts from its holding,subsidiary or associate company.
APPLICABILITYTO COMPANIES
Following companies are required to appoint at least one-third of the total no’s of directors as independent director:
v Listed Companies.
v Public Companies having a turnover of one hundred crore or more; or
v Public companies having paid up share capital of ten crore rupees or more; or
v Public companies which have in aggregate outstanding loans or borrowings or debentures, exceeding fifty crore rupees or more.
CODE FOR INDEPENDENT DIRECTORS SCHEDULE IV [Section 149(8)]
The code is a guide to professional conduct for Independent Directors. Section 149(8) of the act has prescribed the code for independent directors in Schedule IV for every company that has independent director.
GUIDELINES OF PROFESSIONAL CONDUCT:
An independent Director Shall:
v Act objectively and constructively in exercising his duties.
v Refrain from any action that would lead to loss of his independence.
v Possess ethical standards of integrity.
v Assist the company in implementing the best corporate governance practices.
v Exercise his responsibilities in a bonafide manner in the interest of the company.
ROLE AND FUNCTION:
An Independent Director Shall:
v Evaluate the performance of the board and management.
v Balance the conflicting interest of the stakeholders.
v Safeguard the interest of all stakeholders, particularly the minority shareholders.
v Help in bringing an independent judgment to bear on the Board relating to issues of risk management,performance and standards of conduct.
INDEPENDENT DIRECTOR’s EVALUATION:
The performance evaluation of Independent Directors shall be done by the entire Board of Director, excluding him. On the basis of report of performance evaluation it shall be determined whether to extend or continue the term of appointment.
LIABILITY:
Section 149(12) limits the liability of independent Director only in respect of acts of omission or commission by a company which had occurred with his knowledge and consent where he had not acted diligently. The act cast great responsibility on the independent directors, say there is any decisions taken by the board in the absence of independent director than it must be circulated to all directors and can be final only upon receiving the ratification from at least one independent director.
MEETING AND COMMITTEES:
The act also provides that all independent directors must meet at least once annually without the presence of non-independent directors and members of management. These meetings are termed as separate meetings, where they evaluate the performance of the company’s chairperson, non-independent directors and the board as a whole. These measures would ensure proper functioning of the Board of Directors of a company.Independent Directors are also appointed as a member or chairperson in various committees. Clause VII of this schedule requires every company to call for a separate meeting of the independent directors.
REMUNERATION:
Independent Directors are disallowed from obtaining stock options. They are entitled to receive the sitting fees and reimbursement of travel expenses for attending the board and other meetings.Profit related commission may be paid to them but only with the approval ofshareholders.
APPOINTMENT:
v The process of appointment of Independent Director shall be independent of the company’s management.
v The appointment of independent Directors of the company shall be approved at the shareholders meeting.
v Board shall ensure thatthere is appropriate balance of skills, experience and knowledge in the boardso as to discharge its functions and duties.
v Appointment shall be formalized through aletter of appointment which includes, term of appointment, the fiduciary dutiesthat come with such an appointment, the remuneration, reimbursement of expensesfor participation in the Boards and other meetings and profit relatedcommission.
v The term and condition ofappointment of Independent Directors shall be open for inspection at theregistered office and will also be displayed on the company’s website.
RE-APPOINTMENT:
There-appointment will be on the basis of report of performance evaluation. Thetenure of independent directors must not exceed two consecutive periods of 5years, and can be extended for a second term only after the board passes aspecial resolution. Section 149(11) mandates that re-appointment after expiryof second term can be done only after a period of three years.
REMOVAL OR RESIGNATION:
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. Independent Directors can be removed if they fail to attend any board meeting for a period of 12 months with or without permission from the board.
The resignation or removal of an independent director shall be in same manner as it is provided in section 168 (Resignation of Director) and 169 (removal of Director) of the companies act 2013.
CONCLUSION:
The Companies Act 2013 has conferred great power upon independent directors to ensure that the affairs of the company runs smoothly and fairly. Independent Directors should enhance corporate governance and ensure that the management and the affairs of the companies are being done in the interest of stakeholders. It’s not just the independent directors but the entire board’s functioning which results in good corporate governance.
Kumar Vineet
HPACS Team