INDEPENDENT DIRECTORS - PROVISIONS, REMUNERATION & ANALYSIS

Independent directors are otherwise called as Outside directors. They do not have any pecuniary relationship with the company nor are they related to the promoters of the company.

For the first time, the term Independent Director has been defined in the Companies Act, 2013. The Act gives a detailed definition on the term Independent Directors (INDEPENDENT DIRECTORS).

The essence of the provisions relating to Independent Directors is that He should not have any kind of interest in the Company, either through himself or through his relatives.

The provisions in the Companies Act, 2013 restricts the appointment of Independent Directors to 2 consecutive terms of 5 years, in total 10 years at a time. The intention behind this provision is that, "if the INDEPENDENT DIRECTORS is present in the Company for more than 10 years, he might get some interest in the business of the company."

The act is in line with the existing "Listing Agreement" with respect to the provisions of Independent Directors.

Following are the provisions relating to Independent directors as per the Companies Act, 2013.

Who is an Independent Director?

In the opinion of the board he is a person of experience, expertise and integrity.

Restrictions for an Independent director:-

• He should not be a promoter/ related to promoters or directors of the company, its holding or subsidiary, or its associate company.
• He should not have any pecuniary relationship with promoters or directors of the company, or its holding or subsidiary, or its associate company for the past 2 financial years.
• Relatives of such directors should not have any pecuniary relationship with promoters or directors of the company, or its holding or subsidiary, or its associate company amounting to 2% or more of its gross turnover or total income or fifty lac rupees whichever is lower, of the company for the past 2 financial years.
• Neither the independent director nor any of his relatives holds or has held the position of KMP or 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.
• Neither he nor any of his relative is an employee or proprietor or partner in the past 3 FY in a firm of auditors or firm of CS or firm of CWAs or any for its holding or subsidiary or associate.
• Neither he nor any of his relative is an employee or proprietor or partner in any legal or consulting firm which had any transaction with the company or its holding subsidiary company amounting to 10% or more of the gross turnover of the firm.
• Neither he nor any of his relatives holds 2% per cent or more of the total voting power of the company.
• Neither he nor any of his relatives is a CEO or director of any NPO that receives 25% or more receipts from the company any of its promoters, directors or its holding, subsidiary or associate or that NPO holds 2% or more voting rights in the company.
• Any person who fulfills the above mentioned conditions and restriction shall be appointed as an Independent director.

Where Independent Directors are needed?

• The appointment of Independent Directors is mandatory in case of Listed Companies and any other class or classes of Public Companies as may be prescribed by the Central Government.
• The board of listed companies should consist of 1/3^rd of Independent directors.

 Why do public companies need Independent Directors?

The shares of the public companies and listed companies are subscribed by the public. In order to protect their investment, the Independent directors are appointed by the shareholders in the General Meeting who ensure the proper utilization of the invested money.

Conditions to be fulfilled on appointment as Independent director:-

• The notice of the General meeting containing the appointment of Independent director should provide an explanatory statement justifying the appointee for the appointment as INDEPENDENT DIRECTORS.
• Every independent director shall at the first meeting of the Board in which he participates as a director should give a declaration that he fulfills the criteria of independence as specified in the Act.
• At the first meeting of the board in every financial year or when there is a change which affects his independence, the INDEPENDENT DIRECTORS is bound to give a declaration that he fulfills the criteria of independence.
• As mentioned earlier, Independent directors shall be appointed for a period of 5 consecutive years.
• He is eligible to be re-appointed for the next 5 year term by way of special resolution by the company and the same must be disclosed in the Board’s Report.
• The INDEPENDENT DIRECTORS should not be appointed for more than 2 consecutive terms which means not more than 10 years continuously.
• There must be a cooling period of 3 years for his appointment after ceasing to be an Independent director for 10 years. And during such period, he should not be appointed or associated with the company directly or indirectly.
• The provision of retirement by rotation is not applicable for appointment of Independent Directors.

Remuneration for Independent directors:-

• Independent directors are not entitled to any Stock option and they are entitled to receive remuneration by way of commission, reimbursement of expenses for participation in the board and other meetings.

Liability of Independent directors:-

• The INDEPENDENT DIRECTORS is responsible only in respect of such acts of omission or commission which had occurred with his knowledge through the Board process and with his consent and wherever he has not acted diligently.

Code for independent directors:-

For the professional conduct of the Independent Directors, a separate Code of Conduct has been specified in Schedule IV of the Companies Act 2013.

The code mandates a separate letter of appointment for Independent Directors setting out the terms, duties, and the terms of appointment, the Board-level committee(s) in which the director is expected to serve and its tasks; his fiduciary duties and liabilities; provision for Directors and Officers (D and O) insurance, if any; code of ethics;  the list of actions that a director should not do while functioning as such in the company; and  the remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any.

The Independent Directors are subjected to Performance evaluation. This evaluation will be done by the entire Board of directors except the one who is being evaluated.

Separate meetings of the Independent directors must be conducted once in a year. In such meeting all the Independent Directors must be present and the non – independent directors and members of management should not be there.

The meeting should review the performance of Non – independent directors and the board as well as the performance of the Chairperson of the company.

The act, has given a larger responsibility on the Independent directors in managing the affairs of the company. The role of the Independent directors have transformed into a trustworthy professional rather than being Management friendly.

The separation of Independent directors from the Management and making them a complete outsider is expected to bring about proper discipline in the Public companies. The recent corporate scams have jolted the confidence of investors in the Corporate. These ill trades can be curbed by the Independent directors by their powers & duties and blowing the whistle at the right time.

I believe that the new provisions on Independent directors will bring about more transparency and integrity in the business of public company and building the trust of investing public.