Companies Act 2013 has made new provisions regarding Independent Directors. There was No specific mention of Independent Directors in Companies Act 1956. Their role & responsibility was not very clear defined. The Mention of Independent Directors was in SEBI under Clause 49 of Listing Agreement. The Similar Definition has now been incorporated in Companies Act 2013.
The Definition of Independent Director has been clearly defined in Companies Act 2013. Independent Director is a Director other than a Managing Director or a whole time Director or a nominee Director, who should
• Not be a PROMOTER or DIRECTOR of the company of the company or its subsidiary company
• Not be a Relative of PROMOTER OR DIRECTOR in the company, its holding, subsidiary or associate company
• Have no Pecuniary relationship with the company’s holding, subsidiary or associate company, or their promoters, or directors, during the 2 immediately preceding financial years or during the current financial year;
• 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 2 % or more of its gross turnover or total income or 50 lakh rupees or such higher amount as may be prescribed, whichever is lower, during the 2 immediately preceding financial years or during the current financial year;
• who, neither himself nor any of his relatives—
1. 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 3 financial years immediately preceding the financial year in which he is proposed to be appointed;
2. is or has been an employee or proprietor or a partner, in any of the 3 Financial years immediately preceding the financial year in which he is proposed to be appointed, of
(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 10 % or more of the gross turnover of such firm;
3. holds together with his Relatives 2 % or more of the Total Voting power of the company; or
4. is a Chief Executive or director, by whatever name called, of any Nonprofit organization that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2 % or more of the total voting power of the company; or
• who possesses such other qualifications as may be prescribed.
The Term Pecuniary Relationship has not been defined in the act so one can presume that it basically means relationship as holding voting power or relationship like a relative.
Qualifications of independent director: An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.
Number of Directors: The following class or classes of companies shall have at least 2 directors as Independent directors –
(i) the Public Companies having paid up share capital of 10 crore rupees or more; or
(ii) the Public Companies having turnover of 100 crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding 50 crore rupees:
Every Listed Public Company should have at least 1/3rd of the total number of directors as independent directors.
Independent Director once appointed shall hold office for a period of 5 consecutive years, but shall be eligible for reappointment. The Reappointment shall be on the basis of evaluation of Performance of the director
The Independent Director shall not be entitled to any Stock Options.
DATA BANK: Central Government shall maintain a data bank of persons willing & eligible to be appointed as independent directors & such bank shall be placed on the website of the Ministry of Corporate Affairs. The Corporate may select Independent Director from such Data bank. For Inclusion of name in the Independent Directors Data bank the concerned person have to apply for DIN in form DIR-1.
Meetings: The Independent Directors shall hold at least 1 meeting in a year without the Non Independent Directors & Members of Management.
Members of Different Committee: Independent Directors have a role at Corporate Social Responsibility Committee. The Committee should have at least one Independent Director out of 3 or more directors. Such provisions help in transparency & credibility.
The Audit Committee shall consist of Independent Directors as a Majority.
The Provisions relating to Rotation of Directors shall not be applicable to Independent Directors.
The Independent Director who resigns or is removed shall be replaced by a new Independent director within period of 180 days
MCA has incorporated Code for Independent Directors, which helps Independent Directors carry out their responsibility smoothly.
Conclusion: From the above we can conclude that Independent Directors have a very big role to play in Corporate in coming year. The Provisions have been made stringent & compliance to these is also becoming difficult. The Independent Director definition is also not very clear as the pecuniary relationship is not defined. The Government should give precise definition which can bring about clarity.
Rahul Chillal
Practicing Chartered Accountant
CAclubindia
