The Companies Act, 2013 has ushered in a new era of self-governance as compared to government control under the Companies Act, 1956. The introduction of KMP’s, independent directors and woman directors are aimed at ushering worthy professionals at management level. Earlier, while the listing agreement mandated the board of listed companies to include independent directors, neither the Listing Agreement nor the 1956 Act precisely defined the duties, roles, and liabilities of an independent director. The Companies Act, 2013 on the other hand, attempts to crystallize the role of independent directors with an aim to ensure higher standards of independence. To be in line with the new act recently in February 2014, SEBI overhauled the corporate governance norms for listed companies to bring them in line with the Companies Act, 2013 which includes provisions related to Independent Directors.
Detailed provisions relating to Independent Directors under Companies Act 2013:
- Number of Independent Directors in a Company (Sec 149):
The Listing Agreement required at least one-third of the board where the chairman of the board is a non-executive director or half of the board to comprise of independent directors if the chairman is an executive director. But the 2013 Act relaxes this requirement by mandating only one-third of the board (of public listed companies) to comprise of independent directors.
- Definition of Independent Director (Sec 149):
The definition of Independent Director has been widened and a stricter criterion for independence has been introduced. According to the Companies Act, 2013 an Independent Director shall such a person who:
- In the opinion of the Board – is Person of integrity and possesses relevant expertise and experience
- Is not Related to – the promoters or directors, it’s holding, subsidiary or associate company
- does not have or had any pecuniary relationship with – the Co, it’s holding, subsidiary or associate Co, or their promoters, or directors, during the 2 immediately preceding FYs or during the current FY
- None of the relatives has or had pecuniary relationship or transaction with – the Co, it’s holding, subsidiary or associate co., or their promoters, or directors, amounting to
- 2% or more of its gross turnover or total income or
- 50 lac or such higher amount as may be prescribed, whichever is lower, during the 2 immediately preceding the FY or during the current FY
- Neither himself nor any of his relatives should hold or have held the position of a KMP or is or have been employee of the Co, or its holding, subsidiary or associate co. in any of the 3 FYs immediately preceding the FY
- Neither himself nor any of his relatives is or should have been an employee or proprietor or a partner, in any of the three financial years preceding the financial year, of:
- A firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate or
- Any legal or a consulting firm that has or had any transaction with the co., it’s holding, subsidiary or associate co. amounting to 10% or more of the gross turnover of such firm
- Should not hold together with his relatives 2% or more of the total voting power
- Should not be a Chief Executive or director by whatever named called, of any non-profit organization which receives 25% or more of its receipts from the company, any of its promoters, director or its holding, or subsidiary or associate co. or that holds 2% or more of the total voting power of the company.
- Code of Conduct for Independent Directors (Schedule IV):
The Companies Act, 2014 through its Schedule IV prescribes a code of conduct for the Independent Directors to promote confidence in the minds of the stakeholders. The Code describes the role and functions, duties of the Independent directors and states regulations for the manner of appointment and re-appointment, resignation and meetings of the Independent Directors.
The code also states that an independent director shall uphold ethical standards of integrity and probity; however, what would constitute ethical behavior is not defined and is open to interpretation.
- Independent Director in Corporate Social Responsibility Committee (Sec 135):
Every company having net worth of rupees 500 crores or more, or turnover of rupees 1000 crores or more or a net profit of rupees 5 crores or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of 3 or more directors, out of which at least 1 director shall be an independent director.
- Independent Director in Audit Committee, Nomination & Remuneration Committee:
Section 177(2): The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority.
Section 178(1): The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed shall constitute the Nomination and Remuneration Committee consisting of 3 or more non-executive directors out of which not less than 1/2 shall be independent directors.
- Declaration by Independent Director:
Section 149(7): Every independent director shall give a declaration that he meets the criteria of independence as provided above in the definition at the first board meeting in which he participates as a director and thereafter at the first board meeting in every financial year or whenever there is any change which may affect his status as an independent director.
- Remuneration of Independent Director:
Sec 149(9): Independent Directors under 2013 Act shall not be entitled to stock options of the Company and can receive remuneration in following ways:
- by way of the fee as provided in Sec. 197 (sitting fee)
- reimbursement of expenses for participation in Board and Other Meetings
- profit related commission after approval of shareholders of the Company
- Term of holding Office:
Sec 149(10): Independent directors can hold office for a term up to 5 consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.
Sec 149(11): Independent directors cannot hold office for more than 2 consecutive terms, but such independent directors shall be eligible for appointment after the expiration of three years of ceasing to become an independent director if, during the said period of three years, the ID is not appointed or is associated with the company in any other capacity, either directly or indirectly.
Sec 149(13): Independent Directors shall not be liable to retire by rotation.
Sec. 161: An individual cannot be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act.
- Manner of Selection (Sec 150):
The 2013 Act has made the appointment process of the independent directors, independent of the company’s management by constituting a panel or a data bank to be maintained by the MCA website, out of which companies may choose their independent directors.
Any person who desires to get his name included in the data bank of independent directors shall make an application to “the agency” in Form DIR-1.
- Liability of Independent Directors:
The 2013 Act makes an attempt to distinguish between the liability of an independent director and non-executive director from the rest of the board and has accordingly inserted a provision to provide immunity from any civil or criminal action against the independent directors. The intention and effort to limit liability of independent directors is demonstrated from the section 149(12) of the 2013 Act which inter-alia provides that liability for independent directors would be as under:
“Only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, with his consent or connivance or where he had not acted diligently.”
The Companies Act, 2013 has bestowed greater empowerment on the Independent Directors to ensure that the management & affairs of a company are being run fairly and smoothly. Now it is left to be seen how the Independent Directors actually make a difference in the corporate world for good corporate governance. To sum up, while several concerns regarding board independence have been addressed in the 2013 Act clearly, some areas still require refining. Although the intention is good, the implementation could give rise to difficulties. Corporate governance norms are dynamic in nature and require updating periodically to keep pace with the changing business scenario and public accountability.
Main Contributor : Haresh