“Independent Director” is generally a non-defined term in the Companies Act, 2013. Section 149(6) provides an idea about the position of an independent director as “a director other than a managing director or a whole-time director or a nominee director”.
Position and Appointment of Independent Directors
Independent directors are appointed to guide the company in its affairs. They work as watchdogs with a motive to improve the credibility and governance standards of the company to tackle the ongoing and upcoming corporate risks. An independent director is bound vide guidelines of their professional conduct, role and functions, duties, manner of appointment, re-appointment along with resignation and removal.
The Companies Act, 2013 enshrines the provision regarding the appointment of independent director under section 149(4) as “every listed company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies”. Further, it is important to have at least two independent directors if a public company has more than or equivalent to INR 10 Cr. as share capital, or an annual turnover of more than or equivalent to INR 100 Cr., or having aggregate outstanding loans, debentures, and deposits which exceeds INR 50 Cr. These are the key features of appointment of the independent directors in India:
An independent director is generally appointed for a term of five years and their selection is done by the board at a general meeting of shareholders. They can be re-appointed for another five years term only after passing of a board special resolution at a general meeting.
The sitting fees for participation in board meetings or committee meetings and profit related commission that independent directors may receive, are decided and approved by the board. It is the responsibility of the board to decide and take approval of shareholders regarding all the fees or compensation paid that are going to be paid to the independent director.
Independent director can be removed by a company by passing an ordinary resolution at a general meeting. The Indian Institute of Corporate Affairs (IICA) is a subordinate office established by the Indian Ministry of Corporate Affairs to handle and deal with various corporate affairs including maintaining a data bank of independent directors. An independent Director shall apply online to the IICA for inclusion of his/her name in the data bank of independent directors. He/ She is required to ensure the required compliances. Further, IICA in compliance with section 150, Companies Act, 2013 along with Rule 6(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014 conducts the Online Proficiency Self-Assessment through the Independent Director’s Databank platform and every candidate is required to secure at least sixty percent marks in such test. Every independent director is required to clear this online assessment within a period of one year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the data bank of the IICA. This Online Proficiency Self-Assessment is a great initiative to ensure proper corporate governance and protection of interests of minority shareholders. Further, it ensures a deserving person on the position of independent director instead of a namesake or a person as an independent director only to fulfil the required compliances of the company. Further, it is important to note that such independent director should not carry any characteristic mentioned under section 164, Companies Act, 2013 regarding disqualifications for appointment of director.
In the contemporary Indian corporate sector, it is very common that the controlling or majority shareholders have a significant influence on the appointment along with their continuance of position on boards. Informed objectivity in corporate governance is inordinately fair and reasonable. Subsequently, it is the duty of an independent director to oversee the compliance with corporate governance norms with informed objectivity. The independent directors generally find themselves under a burden to effectively carry out duties and a sense of impartiality to boardroom decision-making process in a certain matter.
Need of Independent Director
Indian Corporate world has witnessed several famous and infamous scams in last two decades including 2009 Satyam scandal to Nirav Modi PNB Scam in 2018. Companies Act, 2013 was an attempt of the Indian Government to regulate the corporate framework in India. Since 1956, there was existence of Indian Companies Act but there was uncertainty and ambiguity regarding the role of Independent Directors. The objective of the 2013 Act was to standardize the Indian corporate sectors and for the purpose 2013 Act gave great significance to functions, liabilities and duties of independent directors in a company under Chapter XI, Section 149 of the Act. Today, independent directors are being governed under the provisions enshrined under the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Today, it is mandatory for every listed company to have at-least one-third of its total number of directors as independent directors. Further, SEBI amended regulation of 2018 introduced the requirement of at least one female one independent woman director in the Board of Directors. As per regulation the top 500 listed entities shall have at least one female one independent woman director in the Board by the beginning of financial year 2019-20 and the top 1000 listed entities shall have at least one independent woman in the Board by the beginning of financial year 2020-21.
Present scenario of Indian Independent Directors
Global corporate sectors including India is facing continuous scams which are challenging the corporate governance and as a result, the actions against directors has slightly increased to curb and discourage the corporate wrongful conducts. In recent time, despite the need for more qualified independent directors for the development of our Indian capital markets we have faced an increase in rate of resignations of independent directors. It is observed that Indian companies are mostly being controlled by the promoters who poses the responsibility to oversee the managerial behaviour which makes them less concerned with the governance issues like entrenchment and wealth misappropriation. According to data of NSE, the total number of resignation received from independent directors was 412 until 22 July 2019, while it was 606 for the whole of the year 2018. Talking about the reasons, as per the same source there was no reason of resignations of 107 independent directors while 185 resigned because of old age, preoccupation and health, 97 resigned for personal reasons, 3 by the order of NCLT, 10 because of conflict of interests, 8 resigned voluntarily because of long tenure or relocation outside India and 2 because of non-payment of dues, incidental circumstances or change in role. In India, the position of independent directors is a point of concern as we have reached such a point where we had 1393 vacated post of independent directors on 26 December 2019 as per the release of The Economic Times which was 767 in 2018 and 717 in 2017. All these data show that we need more regulations to properly regulate the corporate sectors in India and also its time to revise our policies regarding independent directors.
There are several contemporary challenges before an independent director. Some of them are as follows:
Section 149(12), Companies Act 2013: Independent directors and non-executive directors not being promoter or key managerial personnel, shall be held liable for the offences where he had not acted diligently. It means he/she will be liable even for the slightest negligence.
Lack of distinction in other statutes: There is a lack of distinction between executive and non-executive directors in their attribution of liability provisions in offences such as money laundering, tax evasion, securities frauds and environmental degradation. These statutes do not provide any safeguard or different provisions for independent and non-executive directors.
Lack of characteristic “independence” in the role of independent directors: The appointment, removal and payment of remuneration of independent directors mostly compromises with the characteristic ‘independence’ which becomes a hurdle in effective performance of duty for independent directors.
Attack on reputation of independent directors: In case of any default, summon is always being sent to all the directors without distinction. There are certain provisions under Companies Act, 2013 to provide a safeguard and limit their liabilities but they all are ineffective when summons are issued to them by enforcement/investigating agencies which keeps their terms of liability under risk and directly attacks the reputation of the independent directors.
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Recommendations and Conclusion
It is very difficult to conclude about a way which will lead to a better position of independent directors in India. Further, it is again a challenge to reach to an ultimate required solution to deal with the increasing corporate frauds and scandals. Independent directors have limited liabilities and it is not possible for them to tackle all the ongoing defaults in daily functioning of the company. This is the prime reason of non-viability of the position of independent directors. A diligent performance requires protection and independence in its real essence. These are the few recommendations for the purpose:
Appointment of an independent director should be more independent: The appointment process requires less involvement in controlling shareholders’ influence and more of the non-controlling shareholders.
Quick summons: In the present era, summon to independent and non-executive directors lacks proper examination of the material and evidence on record to conclude a prima facie case against them. It is important to include a rule/ regulation/ legislation to summon independent or non-executive directors only after authorization from a committee/ court of jurisdiction.
Introduction of specific guidelines for investigating agencies: There should be more accountability and uniformity in procedures of the investigating agencies when dealing with offences by companies as there should be more available safeguards for independent and non-executive directors. A permanent committee should be created to introduce and implement such guidelines.
Introduction of specific protection under the statute: There should be categorization of liabilities in case of any default and a special guideline and protection should be enabled for independent and non-executive directors as it has always found that in the situation of any default all the civil and criminal liabilities is being charged against all the directors without classification.
India is a country of old business organization mostly run by family members and in such a situation the independent performance of duty by independent directors is not easy. Further, the protection of independent director always remains in immense danger. This is the time for the Government to introduce a protective legal framework to identify and protect the non-defaulting independent directors to provide a balance between the interests of the company, other members and independent directors because today, they are the backbone of the corporate houses.