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Tuesday, February 10, 2015

INDEPENDENT DIRECTOR UNDER COMPANIES ACT, 2013


With the Introduction of New Companies Act, 2013 the makeshift of Indian Corporate world is taking place. The issues which were ignored under old law are getting emphasized. In the broader sense, if we see the change in Law, there is genuine feeling that government wants to make Companies i.e. Entities formed and governed under Companies act, a self-governing and disciplined body. One of the key element and initiative in this regard is Independent Director.

From the Surface of the Act it is understandable that the role of shareholders have increased so as role of professionals and mainly that of Company Secretaries, who are instrumental in catering corporates with their experience and Expertise.


Independent Directors are expected to play role of a torch light for development and maintenance of Corporate Governance in a Company. For listed Company, he is statutorily a very important person. He is expected to act as scrutinizer, who will ensure adequate measurements placed for proper disclosures in financial reporting of the Company and maintenance of high standards of internal auditing.   

INDEPENDENT DIRECTOR AS PER LISTING AGREEMENT

Clause 49 of listing agreement provided for the appointment of independent director, accordingly the Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors.

Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors.

Provided that where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors.   

As per listing agreement Independent Director is defined as a non-executive director of the company who:

  1. apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director;
  2. is not related to promoters or persons occupying management positions at the board level or at one level below the board;
  3. has not been an executive of the company in the immediately preceding three financial years;
  4. is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following: i. the statutory audit firm or the internal audit firm that is associated with the company, and ii. the legal firm(s) and consulting firm(s) that have a material association with the company.
  5. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director;
  6. is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares. g. is not less than 21 years of age

INDEPENDENT DIRECTOR AS PER COMPANIES ACT, 2013

Subsection (6) of Section 149 of the Companies Act, 2013 provided that  

An independent director in relation to a company, means 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 or was 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 their 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 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;
(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 he is proposed to be appointed;
(ii) 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) 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 ten per cent. or more of the gross turnover of such firm;
(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organization 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
(f)    Who possesses such other qualifications as may be prescribed.

(7) 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 as provided in sub-section (6).

APPOINTMENT OF INDEPENDENT DIRECTOR

Independent Director shall be appointed as per provisions of Section 152 of the Companies Act, 2013. Accordingly the appointment of Independent Director shall be nominated by Director of the Company in the General meeting of the Members. Along with the notice of Meeting the Directors must annex explanatory statement clarifying that the person proposed to act as Independent Director possesses all requisite skills, qualifications and fulfills requirements of Companies Act and also how the appointment of that person justifies.

According to section 150 (1) of the Act, independent directors may be selected from a data bank of eligible and willing persons maintained by the agency (Any body, institute or association as may be authorized by Central Government). Such agency shall put data bank of independent directors on the website of Ministry of Corporate Affairs or any other notified website. Company must exercise due diligence before selecting a person from the data bank referred to above, as an independent director.

Further as per rule 6 (2) data bank of the independent director must contain following information of the Director

(a)   DIN (Director Identification Number);
(b)   Name and surname in full;
(c)   Income-tax PAN;
(d)   Father’s/Mother;s/ Spouse’s name( if married) ;
(e)   Date of Birth;
(f)    Gender;
(g)   Nationality;
(h)   Occupation;
(i)     Full Address with PIN Code (present and permanent)
(j)     Phone number;
(k)   E-mail id;
(l)     Educational and professional qualifications;
(m)  Experience / expertise, if any;
(n)   Any legal proceedings initiated or pending against such person;
(o)   List of limited liability partnerships in which he is or was a designated partner along with Name of the LLP, Nature of Industry; and Duration- with dates;
(p)   List of companies in which he is or was director along with Name of the company; Nature of industry; Nature of directorship – Executive / Non-executive / Independent / Nominee Director; and Duration – with dates.
  
However the onus of checking all credentials is always placed with the Company taking Independent Director. Neither data bank nor central government are in any way responsible for correctness of data.

 CODE OF CONDUCT FOR INDEPENDENT DIRECTOR

Independent Director is entrusted with fiduciary duty of keeping a hawk eye over functioning of management of Affairs of the Company. After introduction of new Companies Act, 2013 a proper code of Conduct is designed for independent directors working as part of Board. This code of conduct is provided in Schedule IV of Companies Act, 2013. The guideline, that is stipulated for Independent Director wants the Independent Director to ensure that;

(1)   Uphold ethical standards of integrity and probity;
(2)   Act objectively and constructively while exercising his duties;
(3)   Exercise his responsibilities in a bona fide manner in the interest of the company;
(4)   Devote sufficient time and attention to his professional obligations for informed and balanced decision making;
(5)   Not allow any extraneous considerations that will vitiate his exercise of objective independent judgment 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;
(6)   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;
(7)   Refrain from any action that would lead to loss of his independence;
(8)   Where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly;
(9)   Assist the company in implementing the best corporate governance practices.

LIABILITY OF INDEPENDENT DIRECTOR

The Independent Director is not liable or rather responsible for day to day operations and business of the Company. They are expected to exercise independence while performing their role as independent director of the Company and therefore it is expected them to stay away from actual regular course or functioning of Business. 

The onus of Independent Director is that of keeping a check on Compliance aspect of the Company and ensuring that the Company is not engaged in fraudulent activities. And if Company is engaged in such activities, ensure that the respective person is duly reported and exposed.

Post Satyam fraud many independent directors have resigned as Independent Director just to avoid any kind of liability. In recent times SEBI too has taken some stringent actions against Independent Directors who have not performed their role as Independent Director and have been activly involved in mismanagement and willful false statements about affairs of the Company.