LIFE CYCLE OF A START-UP

The word start-up has caught up trend from year 2014 when government announced their special program i.e. Start-up India. However, despite of over 6 years, there is lack of understanding and lack of awareness in minds of people for start-ups. What exactly qualifies for start-up? How and when funding takes place? and How a start-up grows?

 

Before understanding business and fundamentals of business building, one must understand the journey of a Startup Company. Like a human is born and grows through lifecycle of childhood, adolescent, adult age and old age, start-up also has four life cycles. However, there is a major difference between human life and life of a start-up i.e. human life has fixed pattern of growth and time associated with each cycle. In case of a start-up the growth is completely dependent on product, technology, timely funding and execution of proper business plan.

The life of start-up has four major components i.e. Ideation, Validation, Early Traction and Scaling. Each of this stage needs to be crossed with utmost care and proper planning. Let’s have a look on each stage to understand in detailed.

1] IDEATION:   This is inception point for a start-up. It’s the point where a business idea is born and a decision to become an entrepreneur is taken by the Founder. In Ideation phase the Idea is in its raw form and needs lot of fine tuning and incubation. It’s ideal phase for founder to get associated with the expert mentors in the respective field and get the idea defined. This mentoring has various aspects and involvement. Some of the major aspects of defining and fine-tuning start-up are

·        Identifying Technical feasibility

·        Identifying commercial scalability

·        Identifying possibility for recognition as innovation / patent etc

·        Identifying potential for employment generation

·        Identifying competition

·        Identifying Business plan, funding opportunities  

·        Identifying right form of business and company structure. Etc.

 

For a successful start-up its important that the idea on which stat-up is working is capable to providing solution for problems faced by either a specific sector of society or society at large. The gap analysis to identify problems is very important for any startup to have a valid idea. If we look at recent successful start-ups like Swiggy, Zomato, Ola, Oyo etc, we can see that all these start-ups are having a perfect gap analysis of demand and these startups came up with cost effective solution for that market gap.

 This is also time to meet your IPR attorney and get process of patent / Copyright / Design / Trademark registered.

2] VALIDATION: Validation phase is the stage in which the idea is validated and a concrete decision about foundation of the company is taken. It is the phase where testing of Idea happens with lots of parameters. In this stage of product or service, beta version of the product is launched and put to test. This testing can happen by multiple ways. Most common method is launch of pilot project and deploying that product to select group of people, who can use the same and identify the shortcomings while using that product. In this phase, lot of re-work happens and functional changes possible. If group of people, who are testing are meticulous in using that product, then there are very high chances that the product will undergo tremendous amount of changes and improvement.

In the validation stage it is not only the validation of the product, but it has got 2 more aspects associated with it. Firstly, validating your customer and secondly validating business processes, SOPs, human resource, finance and business plan associated with the startup. In Customer validation, Start-up fine tunes the exact category of the customer, who can buy product from him, his age group, his income group, his social status, his financial status, his buying behaviour and frequency. And in the process validation, startup identifies delivery system, service mechanism, financial aspects, credit system, HR, management decision making and hierarchy, a revised business plan based on costing and projections.  

After a successful validation of the idea, the start-up is ready for mass production and take in big leap in the lifecycle. We can say that, at this stage the Start-up has reached its maturity and now the real work and business begins.

3] Early Traction

Early traction is stage where Startup goes for building it customer base rapidly. Here starts the hunting process to acquire market share and creating presence for the brand for products or services of the startup. In order to pass this stage various factors contribute, such as quality of the product, branding, advertisement, service quality, customer feedback and satisfaction and reaching to masses.

When you think of branding, you automatically have visions of logos, voice and tone, website design and social media presence. But in my opinion "Brand is the experience that your customers feel". It is Identified that the branding is much more than only name of the product. Major components that are part of branding now days are design, graphics, color combination and graphology behind it. 

Some products purely gain success just because they have an amazing packaging. One of the leading example of this is Paper Boat, a company in organic fruit juices. Packaging in case of product and experience in case of service are most important and major component in success of the startup and its early traction in the market.  

4] The Big Game – Scaling up

This is the last stage for any Start-up and here starts the big game. Here starts last push to propel the shuttle of startup to leave behind gravitational force of competition and acquire global market and fly beyond infinity.

At this stage of lifecycle, startup looks for funding and raising capital by way of equity or debt fund arrangement. At this stage venture capitalists come into picture. The entry and success of this stage is largely dependant upon the founders and their team. The team here needs to be highly motivated and each department of the company needs to be led by highly competent, decision maker and dynamic leaders. Success of this stage is dependant upon how perfectly the start-up company is structured, how the board of directors are working and proper departments are in place. Each department of the company should comprise of A class employees and its should be led by a competent CEO having terrific vision and man management skills. 

Here the Company must have a valid business plan. And Business plan does not means how much revenue company will be going to earn or by what time it will hit break even point or what will be valuation of the company after 1^st, 2^nd, 3^rd, 4^th & 5^th year. It has got a deep insight which starts from vision and it ends on corporate governance and culture that the start up going to give to society.

It is my personal opinion that in order to excel at this stage and be a success, start-up needs to have a defined road map rather than a business plan. This road maps can have flexibility of adopting to en route changes.

·        There should be clear cut defined management hierarchy at each stage of growth.

·        Defined KRA & KPI of all employees

·        Cash flow management

·        Projected budget of all expenses and losses.

·        A realistic view on profitability and expenses and ratio analysis of the same.

·        A clear vision of all red flag situations.

·        All founders contracts and key employee contracts.

·        ESOPs and related schemes.

·        Territory based business development plan.

·        Hiring of the employees should be based on proper JD and Key result areas where they are expected to deliver.

·        A clear vision on department wise upgradation in terms of manpower, technology, system, ERP and targets.

·        Alignment of all departments.

·        A deep and intense study of market and competitors and most importantly it is done by a verified, professional & trusted agency.

If we see any growing startup we will find these elements present in that company. If we see Infosys, TCS, Tata Motors, Mahindra or start ups such as Swiggy, Zomato, Airbnb, Zoom etc we can see that all there companies have lived through this journey of start-up lifecycle.

As I quoted earlier this life cycle of the startup is not like human life cycle. It has got no fixed time associated with each stage. It is the vision, passion and uniqueness of the product that decides the pace at which the startup is going to go to multi- billionaire’s club or to ashes.

It’s not a 100 meter solo run but a 100*4 i.e.  400 meters relay race. Each stage has a key player. That player must perform his role perfectly and hand over the batten to next player of next 100 meter. If each player excel, the victory is your.

By CS Sushant Kulkarni

FCS, B.S.L., DADRS, DCL, LL.M. 

(International Commercial Laws)

📱 9763663156

Email: Sushant.kulkarni@arkscs.com   

https://www.linkedin.com/in/cs-sushant-kulkarni-33031274/

EASE OF DOING BUSINESS IN INDIA A PRACTICAL OVERVIEW

What is ease of doing business? Many aspiring businessmen, entrepreneurs, startups, business entities looking to invest in India wonder, what exactly mean by ease of doing business In India? What was tough earlier, which has become easier now? What is ease of doing business practically? This article is an attempt to sum up evolution of Indian Corporate governance and working methodologies that have helped make in India and ease of doing business a great success. 

Since 2014 the Government of India has under a visionary leadership of honorable Prime Minister Shri. Narendra Modiji, climbed up the ranking in ease of doing business in India from 132 in 2008 to 77 in 2018 and in year 2019 it has jumped by 14 places and now we stand at Number 63 among 190 economies. The World Bank has developed a Doing Business Index wherein it ranks 190 economies all over the world on the basis of their ease of doing business index each year. A high ranking is indicative of an ideal regulatory and business environment for starting and operating a business entity. 

Mr. Junaid Ahmad, World Bank Country Director in India praised Indian government policies by quoting that, “India’s impressive progression in the Doing Business rankings over the past few years is a tremendous achievement, especially for an economy that is as large and complex as India’s. Special focus given by the top leadership of the country, and the persistent efforts made to drive the business reforms agenda, not only at the central level but also at the state level, helped India make significant improvements,” The rankings are determined by aggregating scores received across ten indicators such as

      1.      Starting a business

2.      Obtaining construction permits

3.      Getting electricity

4.      Registering property

5.      Getting credit

6.      Protecting minority investors’ interests

7.      Paying taxes

8.      Trading across borders

9.      Enforcing contracts and

10.  Resolving insolvency.

Sustained business reforms over the past several years gas helped India jumped 14 places to move to 63rd position in this year's global ease of doing business ranking. India put in place four new business reforms during the past year and earned a place in among the worlds top ten improves for the third year in a row. 

Out of these ten indicators, three indicators i.e. starting a business, protecting minority investors and resolving insolvency fall within the ambit of the Ministry of Corporate Affairs under provisions of Companies Act, 2013. Amendments in various Companies Rules have also carried out to achieve similar objectives.

The MCA has made rapid strides towards improving the legal framework, simplifying procedures and speeding up decision-making for promoting ease of doing business and creating a healthy environment for investment and corporate growth.

Some of the major initiatives undertaken by MCA include

a)      Simplification of forms and procedures.

b)      Clarifications/elaborations have been made in the form of circulars after consultations and interactions with business chambers, corporate and accounts professionals. These have removed doubts and facilitated a smooth implementation of the Companies.  

c)      Statutory orders to ‘remove difficulties’ have been issued for smooth implementation of the Companies Act, 2013.

d)      Bringing provisions for minimum capital and company seal at par with international best practices.

e)      Simplifying approval for related party transactions without unduly diluting safeguards for minority shareholders.

f)       Discontinuation of certain forms, and substitution of a simple declaration instead of affidavits.

g)      Procedural requirements to appoint foreign nationals as Directors in Indian Companies have been drastically reduced.

h)      Arrangements have been made for integration of Name Availability, allotment of Direct Identification Number (DIN), Company Incorporation and Commencement of Business with the unified e-business portal being developed by the Ministry of Industries and Commerce.

i)       Fee payable by small companies for various services has been significantly reduced.

j)       Arrangements to enable Indian companies to follow new Accounting Standards, i.e. Ind-AS (compatible with the International Financial Reporting Standards – IFRS) completed. This will facilitate access for Indian companies to international capital markets.

k)      Amendments have been made in the Insolvency and Bankruptcy Code, 2016 to facilitate insolvency resolution process.

 While looking at the parameters for assessing the ease of doing business, we have to look at 3 factors predominantly.

 

A] SETTING UP OF BUSINESS ENTITY

While analyzing the First Aspect of ease of doing business in India, we will have to focus on types of entities and manner in which the incorporation process is followed in respect of each form of business entity. In India we have predominantly following forms of Business entities i.e. Private Limited, Public Limited, Limited liability Partnership, Section – 8 Company (Company not for profit), Farmer Producer Company and One Person Company. These are all registered at Registrar of Companies established by Ministry of Corporate Affairs.

One of the aspects which is improving year by year in India is process of registration. From a lengthy, time consuming, heavy paperwork, multiple forms and complex process, India is shifting to a one form, self-declaration and quick process.  Apart from simplification of process, another aspect is multiple registrations now are facilitated under single application. For the purpose of streamlining the process of ‘starting a business’, the MCA has undertaken numerous measures. Central Registration Centre (CRC) for name reservation and incorporation of companies & Limited Liability Partnership (LLP) has been set up which has reduced the time involved in the process to less than a week as opposed to an average of at least 15-20 days earlier. The name reservation process (RUN) has been simplified and new Web Forms ‘SPICe+ and AGILE– PRO’, have replaced the SPICe form.

 Integration has been brought about between MCA21 and CBDT for PAN and TAN. Zero fee is charged for incorporation of all companies with authorized capital upto Rs.15 lakh or members upto 20 where no share capital is applicable. The Companies (Authorized to Register) Rules, 2014 provide for conversion of society, trust into a section 8 company which will help these forms of entities to gain advantages associated with a company. LLP with less than 7 members can also convert themselves into a private limited company. In order to give boost to Startups, the MCA has given a number of relaxations in various compliances under the Companies Act, 2013.

 v  CENTRAL REGISTRATION CELL AND SPEED UP PROCESS

 The MCA brought about a transformational change in processing the applications of company’s name reservation and incorporation processes by undertaking Government Process Re-engineering (GPR) and setting-up the CRC in the year 2016.The project to transform the processing of e-forms for company incorporation was undertaken with one clear objective of reducing the processing time to one day. The MCA rolled out the first phase of CRC on 25th January, 2016 for processing Name Reservation applications and second phase of CRC for processing Incorporation applications on 28th March, 2016. As per the official statement of Injeti Srinivas, Secretary, Ministry of Corporate Affairs, Govt. of India to Chartered Secretary a monthly publication of Institute of Company Secretaries of India currently, more than 90% applications are being approved within one working day. This has resulted in speed, greater transparency, uniformity and removal of discretion.  

v  SPICE AND SPICE +

SPICe was a simplified and completely digital form for company incorporation which aimed at providing speedy incorporation service in line with international best practices. SPICe has now been replaced with an upgraded integrated version, i.e., SPICe+ w.e.f. 23rd February, 2020. With the introduction of SPICe+, not only the incorporation but also majorly all the initial registrations are integrated. SPICe+ offers 10 services by 3 Central Govt. Ministries & Departments (Ministry of Corporate Affairs, Ministry of Labour& Department of Revenue in the Ministry of Finance) and One State Govt. (Maharashtra), thereby saving procedures, time and cost involved in starting a Business in India and is applicable for all new company incorporations w.e.f. 23rd February 2020.

Earlier the incorporation of companies was handled by the Registrar of Companies across India. Now, the name reservation and incorporation of companies is handled at a centralized location i.e. CRC. With the introduction of SPICe+ in last week of February 2020, this process has been further strengthened. The services offered by SPICe+ and AGILE-PRO include (i) Name reservation. (ii) Incorporation (iii) DIN allotment (iv) Mandatory issue of PAN (v) Mandatory issue of TAN (vi) Mandatory issue of EPFO registration (vii) Mandatory issue of ESIC registration (ix) Mandatory issue of Profession Tax registration (Maharashtra) (ix) Mandatory Opening of Bank Account for the Company and (x) Allotment of GSTIN (if applied for).

In India, companies are being incorporated in a half to one day’s time period. On an average, about 10,000-12,000 companies are incorporated per month and more than 1.0 Lakh -1.2 companies are incorporated per Annum in India through CRC. To give you an idea, in January, 2020, more than 12700 companies were incorporated, while in February, 2020, the figure was close to 10500. CRC processes more than 90% forms for name reservation and more than 75% forms for incorporation of the companies within thesame day. In January, 2020, average time taken to process incorporation forms was 4.19 hours, while for name reservation it was 3.02 hours. If the forms are complete in all respect, approvals do not take more than half a day or a day depending upon when they have been filed. If forms are filed, say, between 9 AM -11AM and they are complete in all respect, by afternoon or end of the day approvals are accorded. If the forms are filed beyond working hours or on a closed holiday, they would be taken on next working day.

v  REFORMS CARRIED OUT BY THE MCA FOR LLPS IN INDIA

Along with companies, LLPs too are regulated by the MCA. For us, it is important that this structure of business organization is adequately regulated while providing them equitable ease of doing business. It is with this thought that Web Service titled ‘RUN-LLP (Reserve Unique Name – Limited Liability Partnership)’ has been introduced to replace the erstwhile Form 1 (Application for reservation or change of name). Also, a new integrated Form christened FiLLiP (Form for incorporation of Limited Liability Partnership) has been replaced with the erstwhile Form 2 (Incorporation document and subscriber’s statement) combining therein 3 services i.e., (a) Name reservation (b) Allotment of Designated Partner Identification Number (DPIN/DIN) (c) Incorporation of the LLP. The centralized registration process at CRC is likely to bring down the processing time to D+1 akin to company’s incorporation forms and thus spur the growth of business in the country.

B] OPERATIONS AND COMPLIANCES

v  DECRIMINALIZATION OF COMPOUNDABLE OFFENCES UNDER THE COMPANIES ACT, 2013

The MCA has undertaken several reforms in the country for providing ease of doing business to law abiding corporates, fostering improved corporate compliance for stakeholders at large, and also to address emerging issues having impact on the working of corporates in the country.

Decriminalization of compoundable offences that are technical or procedural in nature are inherently beneficial to all stakeholders involved and promote greater compliance. Imposition of penalties by the Adjudicating Officer does not require them to establish the element of mens rea, making the process of imposition of penalties faster than a criminal prosecution. This move also helps direct the NCLT’s focus and resources only on defaults involving elements of public interest. At the same time, the company or officer in default involved is not made subject to a criminal proceeding for a technical or procedural lapse. It makes the Indian mainland more attractive to potential investors.

 v  PROTECTION TO INDEPENDENT DIRECTORS AND NON-EXECUTIVE DIRECTOR

The MCA in its notification dated 2nd March, 2020 clarified that the prosecution proceedings against the independent and non-executive directors shall not be initiated unless there is strong evidence of their complicity in frauds committed by the companies.

The communication clearly articulates the MCA’s intent to give protection to independent directors and other non-executive directors from prosecution for both civil and criminal offences unless there is a strong evidence of them being party to any fraud committed by the company, which is in consonance with section 149 (12) of the Companies Act 2013.

 v  MCA AND INITIATIVES TO PROTECT HUMAN RESOURCE

The MCA has been taking various initiatives for ensuring responsible business conduct by companies. The National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011 (NVGs) have been revised and released as National Guidelines for Responsible Business Conduct to align with United Nations Guiding Principles on Business & Human Rights (UNGPs) and Sustainable Development Goals (SDGs). The Committee on Business Responsibility Reporting (BRR) constituted by the MCA to formulate BRR formats for listed and unlisted companies is in the process of finalizing its report. Further, it is important that apart from doing ease of doing business, there should be ease of life. The MCA is steering the process of formulating a National Action Plan on Business and Human Rights (NAP).

v  MCA TOWARDS STRENGTHENING THE E-GOVERNANCE OF VARIOUS PROCESSES UNDER THE STATUTES

The MCA-21 system serves as a common platform connecting front-end stakeholders like corporates with the Regulator i.e., MCA. It is not only working as a service delivery platform but is also assisting MCA in undertaking its regulatory and enforcement functions, effectively maintaining databases, timely data dissemination and efficiently redressing stakeholders’ grievances. Currently MCA-21 system, is running in its second version i.e. v2.

MCA is working on Version 3 (v3) of MCA-21 with an objective of enhanced ease of doing business, e-adjudication, and compliance management system. Version 3 aims at comprehensive data analytics. Basically, the purpose is to boost the system with the support of emerging technologies including Artificial Intelligence and Machine Learning and to develop some more modules with additional features, provide better user experience and quicker processing.

C] EASE IN EXIT AND INSOLVENCY 

 v  The Insolvency and Bankruptcy Code, 2016 (IBC) and Ease of Doing Business

The Insolvency and Bankruptcy Code, 2016 (IBC) has resolved 167 cases amounting to Rs 3.68 lakh crore unpaid loans/dues of banks and vendors until November 2019 in its three years of existence. Out of Rs 3.68 lakh crore, the insolvency law has helped in recovering Rs 1.57 lakh crore, or 42 per cent of the total dues and nearly 200% of liquidation value.

The IBC was enacted on May 28, 2016 to replace the earlier laws and to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of the Government dues.

As per the RBI Annual Report 2019, the gross NPA declined to 9.1% in March, 2019, from 11.2% in the previous year. In terms of recovery of dues, on an average 42.5% of the claims filed through IBC in the financial year 2018-19 were recovered against 14.5% under SARFAESI Act, 2002.

To further strengthen the framework of insolvency, there have been four sets of amendments till date to ensure strict and quick timely recovery from defaulters. The amendments have also helped improved ranking in the World Bank Ease of Doing Business Report 2021. These inter alia include allowing for initiation of liquidation proceedings at any time during the CIRP process, provision which expressly requires that the dissenting financial creditors shall be paid not less than the amount to be paid to such creditors in accordance with Section 53(1) in the event of liquidation and provisions which provides for continuation of supply of goods and services “critical” to protect and preserve the value of the corporate debtor and manage the operations of such CD as a going concern.

IBC has provided with quick, time bound and simplified process for voluntary closure of the Company. This has collectively resulted into overall sooth exit of any company either due to voluntary closure of operations or due to bankruptcy or insolvency.

HOW YOU CAN KEEP YOUR EMPLOYEES COMMITTED EVEN AFTER LOWER SALARY DUE TO COVID-19?

During this Covid-19 crisis many Companies are struggling with regular payment of salary. Almost 95% Companies are facing the impact of COVID-19. Almost 75% MSME don’t have work as they are dependent on OEMs for order. Some of them have work but don’t have labour force to get the work done.

All in all, due to this situation, one major organ of the Company is feeling depressed i.e. Employees. Employees are struggling due to deducted salary and uncertainty about their future. Because of this majority of the people are suffering from reduced concentration and work efficiency. The Core zeal of work is lost and they are unsure of their commitment and future of the Company.

On contrary employers don’t want to lose good employees and the energy of entire team, support and commitment is highly needed in this stressful time. Unless company manage to keep its employees stick with it and ensure strong bond, there are huge chances that the company will find it difficult to b ounce back once things start getting normal.

So, what can be solution for this issue?  One thing is for sure that the company will not be able to bounce back unless it is strongly supported by all its pillars and one of the things that can achieve this is ESOP.

 

 

 “USING OF ESOP AS TOOL FOR EMPLOYEE ENGAGEMENT AFTER LOWER SALARY DUE TO COVID-19”

 ESOP is a system under which the employees of a company are generally given the right to acquire the shares of the company for which they are working. In some of the cases, the foreign holding/subsidiary company also grants such options to the employees of the Indian subsidiary/ holding company. Under such a scheme, the employees are granted some rights, called as stock options, to get the shares of the company for free or at a concessional rate, at a predetermined price or the price to be determined on the prefixed method, as compared to the potential market rate.

There are various reasons for which the employees of a company are given such stock options. The phenomena of stock options are more prevalent in start-up companies which cannot afford to pay huge salaries to its employees but are willing to share the future prosperity of the company. In such cases the employees are given the stock options as part of the compensation package. Moreover, in some cases, the employee is given such stock options which he can exercise in future date/s, in order to ensure long-term commitment of the employee. So apart from rewarding the employees with monetary gains, ESOP also help create a sense of belonging and ownership amongst the employees.

In present situation of COVID – 19 ESOP can be used for convey the feeling from Company to employees that, “we care for you. We are here to stay together and grow together. The Company is strong to core and this situation too will pass and we will emerge as stronger, wise and rich.”

ESOP will boost the engagement and sense of belongingness among employees and they will have feeling to being more pro-active rather being reactive. They will build the sense of ownership and will work in more innovative way which otherwise was not thought of. Secondly, the benefit of encashing ESOP will be much more high in coming time, as most of the Companies are having struggled cash flows in last 2 years and due to make in India or Vocal for Local many of this domestic Companies have opportunity to rise from ashes and make become a strong replacement for Chinese products / companies.

 

CS SUSHANT KULKARNI

FCS, DADRS, DCL, LL.M. (International Commercial Laws)

Mobile No: 9763663156

Email ID: Sushant.kulkarni@arkscs.com  

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.  

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