The inception of the idea of the
autonomous or an independent direcor under the current corporate law
administration a can be traced back to
the proposals of the Kumar Mangalam Birla board of trustees (1999), the
Naresh Chandra panel (2002) and the Narayana Murthy council (2003). Further to
these expert recommendations, the expression “independent directors”
seems intriguing. In India when the Securities and Exchange Board of India a
joined provision 49 in the Listing Agreement. Statement 49 gives a
comprehensive meaning of independent directors, covering under its an ambit
non-official executives who don’t have any material or monetary association
with the organization, its promoters, administration or auxiliaries, which may
influence the autonomy of their judgment. Independent Directors as per the Listing Agreement, can’t be substantial
or major shareholders of the organization (i.e. owning at least 2% of the
voting rights), however they are qualified to get remuneration in accordance with the decision of the Board
and after obtaining prior permissions and approval of the shareholders. The Company’s Act of 1956 does not mention the expression “independent directors” India’s listing standards
require the boards of listed companies to include independent
directors but neither the Listing Agreement nor the 1956 act precisely define
their roles and liabilities.. The Company’s Act of 1956 places independent directors on the same
platform or an equal footing as of other
directors with regards to purposes of decision making and does not specify any
privilege, duty or function which they ought to perform or the liabilities they
could incur for the actions of the board. This has prompted to a situation of
uncertainty regarding the roles and responsibilities of the independent directors.
This has brought the Indian law in line with the legal position in jurisdictions
such as UK, where the codified duties
and roles of an independent director exist alongside their common law duties.
Number of Independent Directors
independent director of a company is a non-executive director who:
Only receives his directors remuneration
but apart from that does not have any material pecuniary relationships or
transactions with the company or with anyone else in the management
Has no relations with
to promoters or even the a management at
the Board level, or the level below that.
Has not been an executive of the company in
the last three years;
4. Is not a partner or an executive of the
auditing firm, the internal audit firm that is associated a with the company,
and has not been a partner or an executive
of any such firm for the last three years. This will also to apply to legal
firm(s) and consulting firm(s) that have material association with the entity;
5. Is not a related to the company as some important
the supplier, vendor or a customer and also does not hold a substantial share
in the company which is 2% or more of the block of voting shares;
6. He has not been a director of the company,
independent or otherwise, for not more then three years.
general, 1/3rd of the total number of a
directors as Independent Directors should be an adequate for a company having
significant a public
interest, irrespective of a
whether the Chairman is executive or non-executive, the independent or not. In certain
cases Regulators may specify a requirement of Independent Directors a for companies falling within their
regulatory domain. Nominee the
directors appointed by the any institution or in a pursuance of any agreement
or Government appointees representing Government shareholding should not be
deemed to be Independent Directors.
The concept of
The J.J Irani Committee, a specialist
panel constituted by the Ministry of Corporate Affairs to advise the Government
on the new organization law, has in its report talked about in detail the
progressions required in the arrangements, in relation to the Board of Directors.
As for the Independent Directors, the Committee is of the view that given the
obligation an of the Board to adjust different interests, t. This is an
especially vital for open organizations or organizations, with a critical open
intrigue. While executiveat given the responsibility a of the Board to balance
various interests, the presence of a Independent a directors on the Board,s
speaking to organizations, particular interests would be a bound to the point
of view managed by such interests, Independent Directors be would have the
capacity to bring a component of objectivity, to Board prepare in the a general
interests of the organization and in this way to the event of minority
interests and littler shareholders. .
Law ought to, dependence, therefore, is
not to be, viewed merely as independence a from promoter a Interests but from
the point of view of vulnerable stakeholders, who cannot otherwise get their
voice heard, perceive the guideline of Independent theDirectors and spell out
their part, capabilities and risk. However necessity of nearness of Independent
Directors may change every now and then relying upon the size and sort of
organization. There can’t be a solitary technique that will suit all
organizations. Accordingly number of Independent directors might be recommended
through standards for various classes of organizations.
Important provisions in Law related to
A person shall not
serve as an Independent a Director
in more than seven listed companies.
Further, any person who
is serving as a whole time director the
in any listed company shall serve as an Independent Director for not more than
three listed companies.1
The maximum tenure of
Independent Directors shall be in the
accordance with the Companies Act, 2013 and clarifications/ circulars issued a by the Ministry of Corporate
Affairs, in this regard, from time to time.
The company shall issue
a formal letter of a
appointed to Independent Directors in the manner as mentioned in the Companies
The terms and
conditions of appointment shall also be disclosed over the website of the
Committee shall lay down the a
evaluation criteria for the performance evaluation of Independent Directors.
The company shall
disclose the criteria for performance evaluation, as laid down by the
Nomination Committee, in the annual Report.
evaluation of Independent Directors is to be done by the entire Board of
directors of the company should conduct at least one meeting in a year.
All fees/ compensation
if any paid to a non-executive
directors, including Independent Directors, shall be fixed by the Board of
Directors and shall require previous approval of shareholders in general
meeting. The shareholders’ the
resolution shall specify the limits for the maximum number of stock options
that can granted to non-executive directors, in any financial year and in
Reg. 16(5) of SEBI (Mutual Funds) Regulations, 1996
provides that two-thirds of the board of directors,the of a trustee company shall be
independent persons a
and shall not be associated with the sponsors or be associated with them in any
Under Reg 21(1)(d) at 50% of the
Board of Directors an
of an asset management company must be Independent Directors i.e. directors,
who are not i
associates of the sponsor or any of its subsidiaries.3
of Independent Director4
149(4) and (5) of the 2013 Act are also new provisions relating to
appointment of Independent Directors.
a listed company at least one third of the total number of directors
shall be Independent Directors.5
Central Government may prescribe minimum number of Independent Directors to be
appointed by other classes of public companies. Rule 4 of the Companies
(Appointment and Qualification of Directors) Rules, 2014, requires public
companies which are not listed to have at least two Independent Directors if
such companies have
(i) a paid up share
capital of rupees ten crores or more or
(ii) turnover of rupees
one hundred crores or more or
(iii) outstanding loans
or debentures or deposits which in aggregate exceed rupees fifty crores or more
an Independent Director resigns before completion of his tenure and the date of
resignation if the company does not meet the parameters prescribed in s.
149(4) of the 2013 Act then the
company will be required to appoint another Independent Director in his
place and stead (by filling the
vacancy as a casual vacancy).
per Schedule IV-Code for Independent Directors, an Independent Director
only at a meeting of the shareholders and any vacancy caused due to resignation
removal shall be filled up within 180 days.
schedule however does not specifically stipulated appointment by the
shareholders to fill up of a vacancy caused due to the conditions specified in
s. 167 of the 2013 Act getting attracted. Based on a combined reading of ss.
161,152 of the 2013 Act, Schedule IV of the
Act and Rule 4 of the Companies Rules, 2014
there appears to be no bar in the Board for
filling up such a vacancy.
per section 150(2) read with s. 152(2) of the 2013 Act, appointment of
Directors shall be approved by the
shareholders in a general meeting.
per s. 2(71) of the 2013, the term public company includes a private company
which is a subsidiary of a public company
and therefore such private companies will also be required to appoint
Independent Directors if they fall under the class of companies prescribed by
Need of independent
directors on the board
are a few particular advantages that an independent top managerial staff can
convey to an organization, the most importantly is that the interior
regulations that are can be controlled, and the fraud or mismanagement which is
being done by the organization can be conveyed to the shareholders of the
organization and to the general population at large. It has some different
advantages additionally, which includes :
the administration blemishes in an organization.
the act of legitimate and moral conduct at the organization, and in the
meantime fortifying bookkeeping and accounting controls.
the name of the organization more popular through his contacts and skill in
order to strengthen and reinforce the share capital of the organization.
a part of long haul choices which should be taken, for the welfare of the
an organization survive, develop, and flourish over time through enhanced
progression and designing a succession plan arranging through enrollment and
membership in the nomination panel.
directors and corporate administration:
The requirement for the independent
directors can be made out from the fact that they are relied upon to be
independent from the administration and go about as the trustees of
shareholders. This infers they are committed to be completely mindful of the direct
which is going ahead in the associations and furthermore to stand firm as and
when vital on pertinent issues.
The significance of the part of an
Independent Director is of great significances. The rules, part and capacities
and obligations and so on are comprehensively set out in a code portrayed in
Schedule IV of the Companies Act, 2013.
The code sets out certain critical
capacities like protecting the enthusiasm of all partners, especially the
minority holders, blending the clashing enthusiasm of the partners, breaking
down the execution of administration, intervening in circumstances like the
contention amongst administration and the shareholder’s advantage, and so on.
The independent directors are
additionally anticipated that would go to the general meetings of the
organization and to keep themselves mindful of the matters which are going
ahead in the organization.
towards shareholders and Stakeholders:
Independent Directors have
different parts to satisfy in their official capacity. Following are the most
must fulfill their obligations and must attempt to acquire transparency in the working mechanism and environment of the
organization. Since shareholders, particularly the minority shareholders, are
generally not autohorised to investigate those undertakings of the
organization, and in this manner they look upto the autonomous executives as in the Independent
directors in order to give such
the administration or Board is taking any choices which would unfavorably
influence the privileges of the shareholders or creditors or workers, then the
independent direcotors must have a noteworthy part in such choices, and they
should act in the welfare of the stakeholders.
they are required to audit the related party exchanges and furthermore to
guarantee the efficiency of “Whistle Blowers”
Role in Committee Membership
Companies Act, 2013, provides for mandatory appointment of independent
directors in following committees so as to meet the corporate governance
Committee related to investor relations,
Being an individual from the Board, their part
and obligations are particularly like whatever other director of the Board. The
trustee obligations of care, industriousness and acting in accordance with some
basic honesty apply similarly to independent directors as to different
towards the Board
It is the obligation of the independent
director to guarantee that each of those issues that are essential for the
organization are appropriately tended to by the board of Directors. The goals
and obligations of the independent directors are same as that of the official
directors. However, as compared to the executive directors the time that is
needed to be devoted by the independent director and the degree of skill and
care required for the company, both are less.
Whether are there any
shortcomings with respect to the Independent director.
a times, certain independent directors are added to the board because for
prestige and lustre, therefore, these Independent Directors are themselves are
so busy, successful individuals who already hold a no. of other similar
position. There is very less time that they can bring into the company because of having so many
commitments. This problem is enhanced when the companies hare related to
technical fields, where high technical assistance is needed about which the
independent directors have very little knowledge of. In situations like these,
the Independent directors are left helpless with no choice then to rely on the
judgement of management.6
companies require different board structure to obtain maximum benefit. Same
formation of the board might not benefit as expected. Many company fail to
understand this and forms the normal stereotype structure of the board. For
example, newly established companies will require more no. of of independent
directors to control management’s tendency to reinvest the company’s cash flow
even when there are few if any reinvestment opportunities.
directors can be very beneficial for the company, but only if they are a part
of committee which suits their expertise. This will make the independent
directors perform their monitoring function. However, mostly established
companies already have such committee structures set and they are very
reluctant to make any changes in the same.7
next shortcoming is linked to above, namely not a proper placement of the
knowledge and expertise skills relative to the company and its various
businesses places a significant advantage in the hands of management. further,
management has at in its control the entire administrative machinery of the
company because of which
independent directors have depend on the
management. Quite literally, Independent
directors have limited choice in general but to take decisions on the basis of
the information given by management is not the proper use of the power of the
After critically analysing all
the provisions, advantages and shortcomings of the Independent Directors, the
concept of Independent director is a boon or bane to the companies.
leveling all the advantages and disadvantages the author have come to the final
analysis, and herein lies the paradox, with the leadership and management
functions mostly lies with the management, in the absence of an overhaul of the
system, independent directors will only be able to discharge their duties and
functions effectively if management itself is committed to the role of such
directors. This is specifically a case where companies do not have board with a
lot of Independent directors. Even where
the names of the Independent directors is added to add more value to the
company, effect of Board composition could be spurious because such performance
could be a function of the quality of management itself.
high quality managers are more likely to place outsiders on Boards than poor
quality managers who do not want to be monitored, a finding that shareholders
are better served by outsider-dominated Boards is simply an illustration of the
better management of these companies. To this it should be added that high
quality managers appreciate the valuable role of independent directors and will
take steps to allow them to play their role effectively. Internal managers can
use their knowledge of the organization to nominate outside Board members with
relevant complementary knowledge: for example, outsiders with expertise in
capital markets, corporate law, or relevant technology who provide an important
support function to the top managers in dealing with specialized decision
importance of this cannot be overstated. There is a tendency to think that
simply having independent directors improves corporate governance. The reality
is sometimes the opposite. Unless there are independent directors who are truly
independent, and have the strength of character and ability to perform an
effective monitoring function, the presence of independent directors acts as a
smokescreen and a snare for the unwary investor who may pay a higher price for
equity on the basis of a supposedly better corporate governance structure. Good
corporate governance is not about having a certain number of independent
directors, of the number of Board meetings in a year, or even about whether
there are Board committees that have a majority of independent directors. These
tell us only about structures and while relevant, does not provide the more
important information about how the independent directors or the Board really
Of An Independent Director
the Company’s Act, 2013, the liabilities of Independent Directors has been
reduced and limited to:
in respect of acts of omission or commission by a company which had occurred
with his knowledge, attributable through board processes, and with his consent
or where he had not acted diligently.”9
In the wake of investigating
distinctive parts of Independent directors, the author has arrived at the
conclusion that despite the fact that the inclination of the general population
is to surmise that having independent directors will demonstrate their
corporate administration. The fact of the matter is somewhat extraordinary in
the reasonable application piece of it.
The adequacy of having an
Independent director just functions admirably if the Independent directors are
really independent who have the quality and capacity to play out a compelling
observing capacity. The nearness of Independent directors goes about as a
smokescreen and a catch for the unwary financial specialist who pay a higher
cost for value on the premise of an as far as anyone knows better corporate
administration structure. Great corporate administration is not about having a
specific number of Independent directors on board, its about the smooth
elements of the organization and for the advantage of everybody.
The Independent Directors who are
really independent and take the inconvenience of comprehension and dealing with
the issues of the organization, will clearly give organizations positive
outcomes yet even after that the wanted outcomes are not met due to different
weaknesses which go along the Independent directors.
Likewise, for the correct capacity
Independent directors it is vital, that the administration ought to be avoided
the procedure of choice of Independent Directors. Since anyone can just work
appropriately in the event that it is free from pointless weight and irrational
The author feels that the whole idea
of Independent Director is an awesome stride by the legislature. It’s the
suggestion which requires a check. Likewise, certain provisos in the law, which
could be seen after the idea was executed additionally needs alterations and
supervision for a superior and effective result. In spite of the fact that it
has seen throughout the years that the idea of Independent Director has
developed and has turned out to be more perceived and known.
In this manner, the author has
arrived at the conclusion that the idea of Independent directors is without a
iota of doubt helpful for the organizations, provided its inadequacies can be
battled by filling in the escape clauses in the law.
1 Clarke, Donald C. (2007), ‘Three Concepts of
the Independent Director’ Delaware Journal of Corporate Law, Vol. 32 No. 1, pp.
2 SEBI Circular No. MFD/CIR/17/21105/2002, dt
3 SEBI Circular No. MFD/CIR/11/354/2001, dt.
4 Companies Act, 2013
5 Provision applicable w.e.f. 1-4-2015 vide
CIR/CFD/ POLICY CELL/7/2014/ dt. 15-9-2014
6 S Bhagat and B Black, “The Relationship
Between Board Composition and Firm Performance”, in KJ Hopt, et al. (eds),
Comparative Corporate Governance: The State of the Art and Emerging Research
(Oxford, Clarendon Press, 1998), 281-2.
7 SC Vance, “Corporate Governance: Assessing
Corporate Performance by Boardroom Attributes” (1978) 6 Journal of
Business Research 203.
8 Millstein and MacAvoy,
supra note 50, 1285-6.
9 S. 149(12) of the Companies act, 2013