INTRODUCTION:
In the Companies Act 1956 there was no provision for the appointment of Independent Directors to a company. The new Companies Act 2013 was made mandatory to assure favourable corporate governance and exaggerate the authenticity of the company. An Independent Director acts as a demonstrator, coach, and conferee to the Company. The role includes raising corporate reliability and regimen value by working as a watchdog[1] and assisting in supervisory control of risk. Independent directors are liable for indemnifying better administration by being briskly entangled in different committees embed by the company. Despite appointing independent directors but also fail to trace variant rogue in companies like IL&FS scam, PMC Bank, Enron scam, etc. After happening Satyam scam, the government of India intended to overhaul the corporate regulatory framework and made a new legislation Companies Act,2013 which protects corporate frauds. The role of independent directors was accomplished by the Parliamentary Standing Committee on the Companies Act assumed greater gravity after defeating a major corporation like Satyam Computers Limited. It is also noted, the Companies Act,1956 and SEBI Listing Agreement did not provide any guidance about the role and responsibilities of independent directors.
BACKGROUND OF INDEPENDENT DIRECTOR:
The notion of independent directors was first inaugurated through Kumar Mangalam Birla Committee constituted by the Securities Exchange Board of India (SEBI). This Committee described independent Directors as a director other than a managing director, other than remuneration as such director, do not give a guarantee or provided any security in connection with the indebtedness of any third person to the company, do not have any other pecuniary transaction or relationship with the company. After that, the Naresh Chandra Committee[2] (followed by clause 49 of the Listing Agreement) was also established in 2002 under SEBI which not only elongated the functions, obligations, and wage of Independent Directors but also advised that 50% of the total members on the committee must be Independent Directors and be relieved from criminal and civil liabilities. Then, the Narayan Murthy Committee (2003) was instituted, which refused the Naresh Chandra Committee’s proposals of making the nominee of financial establishments as Independent Directors and accentuated the necessity for assessing the non-executive directors’ function and limit on independent director fees. Finally, J. J Irani Committee[3] (2004) was instituted which be born with various proposals as regards Independent Directors such as issues relating to previous companies act,1956, the solidarity by reducing the length of the Act and erasing unwanted provisions, simple and apparent and clear interpretation reproduce the provision of law, take measure wide flexibility in the rulemaking to enable timely response regarding the business matters that created a collision with clause 49 of the Listing Agreement and the recommendations of the Narayan Murthy Committee.
After adopting the Companies Act,2013, it gives transparency to the conception of Independent Directors was delivered to a large latitude. Finally, Independent Director has been lawfully described under section 2(47) referred to in subsection (5) of section 149 of the Companies Act,2013.
DEFINITION OF INDEPENDENT DIRECTOR:
As per Section 2(47) of the Companies Act, 2013 ‘Independent Director’ means an independent director referred to in sub-section (6) of Section 149.
Sub-sections (6) to (13) of Section 149 of the Companies Act, 2013 says:
(6) An independent director about a company, means a director other than a managing director or a whole-time director, or a nominee director:
An Independent Director is or was not a promoter of the company or its holding, subsidiary, or associate company; has or had no pecuniary relationship, other than remuneration as such director; has no authority to give a guarantee or provide any security in connection with the indebtedness of any third person to the company; neither an independent director nor any of his relatives holds or has held the position of key managerial personnel or is or has been an employee of the company;
(7) Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whatever there is any change in the circumstances which may affect his status as an independent director,
(8) The company and independent directors shall abide by the provisions specified in Schedule IV,
(9) Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of this Act, but subject to the provisions of sections 197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration by way of fee provided under sub-section(5) of section 197, reimbursement of expenses for participating in the Board and other meetings and profit related commission as may be approved by the members.
(10) subject to the provisions of section 152, an independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for re-appointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.
(11) Notwithstanding anything contained in sub-section (10), no independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director.
(12) Notwithstanding anything contained in this Act,
i. an independent director;
ii. a non-executive director not being promoter or key managerial personnel,
shall be liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
(13) The provision of Sub-sections (6) and (7) of section 152 in respect of retirement of directors by rotation shall not apply to the appointment of independent directors.
ROLES AND RESPONSIBILITIES OF INDEPENDENT DIRECTOR:
The role and responsibilities of the independent director are apotheosized in Section 149(8) deals with Schedule IV of the Companies Act, 2013. Schedule IV and SEBI (Listing Obligations and Disclosure Requirement Regulations Act, 2015 impose extensive powers and responsibilities in the hands of Independent Directors. Roles and responsibilities are as follows-
- Independent directors have the authority to investigate the activity of non-independent directors as well as the Board of directors.
- He looks after anatomizing, controlling, observing management’s performance concerning target and purpose decided in the board meetings.
- Examining the integrity of the financial report and ensuring financial monitoring and the risk management procedure are in operation.
- On issues such as technique, execution, risk management, capital, key appointments, grade of disposition he or she must corroborate in gaining independent judgment to receive the board’s tardiness.
- Protects the interests of all stakeholders, especially the minority stakeholders.
- Always keep looking into the interest of the company if the conflict arises between management and stakeholder’s interests.
- One of the leading responsibilities of an Independent Director is to ordain adequate distribution of remuneration of executive director, key managerial personnel, and senior management, and recommend removal of such officers of the company.
- Another crucial duty of an independent director is to inform concerns about immoral behavior, real or suspected fraud or breach of the company’s code of conduct or ethics policy, and keep themselves abstain from the company and take appropriate measures from refrain doing such act.
- The responsibility of independent directors is very measurable, unlike executive directors. The independent director is only accountable regarding such acts of inaccuracy or sanction by the company which has performed with his knowledge, imputable through Board process, and with his compliance or connivance, and the independent director had not acted cordially.
- Independent directors act as auditor committees and such companies voluntarily on finances of the company such as loans taken by the company, particulars in the annual report, budget, capital structure of the company, and the whole performance of companies in the financial year, and many more.
India supposes to be the only country to have this kind of remarkable significance and preface demarcation for an independent director under the statute.
ENERGY WATCHDOG VS. UNION OF INDIA & ORS [W.P. (C) NO. 9269/2017][4]
In this case, the ‘Appointment procedure of independent directors shall be unconventional of the company governance. In the procedure of selecting directors, the board shall certify that it is suitable stability of expertise, proficiency, and experience in the board as to make secure the eminence and genuineness of the statutes and resolutions of the Board.
An independent director is working as a watchdog by helping in risk management and determination to ensure superior and prosperous governance by diligently compelling in different committees established by the company.
CONCLUSION:
After analyzing above discussed provisions we may conclude that the role of independent directors is a very crucial part of the Companies Act,2013. He serves the purpose of increasing the trustworthiness and bona fide decisions of the company which impacts upon false free compliance in the company. That’s why the board in its decisions and with regards to the interests of the stakeholders that the compulsory jurisdiction of the appointment of independent directors to the board of the company are arrogated and have no need for any mitigation to the drawback of their assignation.
[1] https://cleartax.in/s/independent-directors-applicability-roles-and-duties#:~:text=the%20company’s%20website.-,Role%20of%20an%20Independent%20Director,and%20help%20in%20managing%20risk.
[2] https://byjus.com/free-ias-prep/naresh-chandra-committee/#:~:text=The%20Naresh%20Chandra%20committee%20is,Agreement%20by%20SEBI%20in%202000.
[3]https://www.mca.gov.in/Ministry/press/press/Press_032005.html#:~:text=Later%2C%20on%20December%202%2C%202004,of%20the%20Companies%20Act%2C%201956.
[4] https://www.legalserviceindia.com/legal/article-2566-role-of-independent-board-of-directors-under-the-companies-act-2013.html
YLCC would like to thank Puja De for her valuable contributions in this article.
