Independent Director

Deepali Nirmal, CS

22 Sep 2020

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The concept of Independent Director

is become matter of debate after corporate frauds came into light right from the universally famous Satyam fiasco to the recent Nirav Modi scam. It was found in every corporate fraud that failure of the board of directors to detect internal crisis at early stage and act in effective and timely manner to put the organisation back on track. Due to various scams it is being observed that a person having independent judgement, objectivity and rational perspective can be brought on board in a form of independent director who can ensure transparency and accountability of the board and he/she is expected to enhance the standards of corporate governance.

Post Satyam scam, the Government of India felt the need for comprehensive and strong legislation relating to Independent Director became vital and eventually leads to enactment of the Companies Act, 2013 (the Act). The Act aims to overhaul the provisions relating to Independent Director completely by conferring greater power and responsibility on them in the governance of a company. The one of the intention behind introducing the position of Independent Director was to highlight irregularities going on within the company and to ensure that such a scandal will not be repeated in future. 

Therefore, one can say that one of the salient features of the Act was that it brought clarity on the functions, liabilities and duties of independent directors. Prior thereto, there was uncertainty because the Companies Act, 1956 did not envisage the concept of Independent Director. The concept of Independent Director was introduced in India for the first time in the year 2000 as a part of Good Corporate Governance and later the said concept has been reflected in the listing agreements formulated by Securities Exchange Board of India (SEBI).

However some of the lacunae which limit Independent Directors from effectively discharging their duties as most them are having lack of financial literacy and reluctant to disturb the cordiality of collective decision-making of board. This could have been another contributory factor in the Satyam scam.

Who are the Independent Directors?

Independent Directors are those who are not charged with day to day affairs and management of the company but are usually involved in the planning, strategies and decision making activities. They are entitled to attend the Board and General Meetings and share their expertise knowledge in the benefit of the company and various stakeholders. Further, they are also entitled to evaluate the performance of other directors on the board of the Company. Independent Directors expected to play a crucial role in maintaining a transparent working environment in the corporate regime.

Basically, we can say that an Independent Director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. He/ She should not have any kind of relationship with the company that may affect the independence of his/ her judgment.

What are the qualitative requirements to become an Independent Director?

The person should be of integrity with relevant expertise and experience. He/she should possess an appropriate balance of skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations and other disciplines related to company’s business.

Broadly one who wishes to qualify as an Independent Director has to possess unwritten qualities such as Loyalty, Judgement or decision making, professional repute, impartiality etc.

Which companies must appoint an Independent Director?

At present, the role and functions of Independent Directors are primarily governed by the Act and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

In case of a listed company, where the Chairperson of the Board of Directors is a non-executive director, at least one-third of the Board of Directors shall comprise of independent directors and where the listed entity does not have a non-executive Chairperson, at least half of the Board of Directors shall comprise of independent directors. Further, through the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, SEBI has mandated that the Board of Directors of the top 500 listed entities shall have at least one independent woman director by April 01, 2019 and the Board of Directors of the top 1000 listed entities shall have at least one independent woman director by April 01, 2020.

Apart from listed companies, following class of companies are required to appoint at least two persons as Independent Directors:  

·        Public Companies having paid up share capital of ten crore rupees or more; or

·        Public Companies having turnover of one hundred crore rupees or more;

·        Public Companies which have, in aggregate, outstanding loans or borrowings or debentures or deposits, exceeding fifty crore rupees.

For further updates on this space of Independent Directors, keep reading our forthcoming blogs.

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