How independent can the directors be

Written by Indu Bhan | Updated: Mar 7 2014, 08:32am hrs
Come April and India Inc will have to move under a much stringent regime of appointment and conduct of independent directors, as prescribed under the new Companies Act, 2013. The corporate affairs ministry is expected to notify the rules to the relevant clauses on independent directors under the new Act, which experts say are more stringent when compared to Clause 49 of Listing Agreement.

Sample this: once notified, the independent directors will be required to meet at least once in a year, without the presence of non-independent directors and members of the management. The purpose: apart from reviewing the performance of chairperson of the company, the meeting shall review the performance of non-independent directors and the board as a whole. This is a new thing under the new company laws.

The principle of separate meetings of independent directors is already prevalent in the US and the UK.

Also, all public companies whose paid-up share capital exceeds R100 crore or which have in aggregate outstanding loans or deposits exceeding R200 crore will be required to have one-third independent directors on their boards.

Similarly, every listed company will have to appoint at least one woman director on its board within one year of commencement of the rules. And those companies whose paid-up share capital exceeds R100 crore will need to appoint at least one women director within three years from the commencement of the rules.

Independent directors, as the name suggests, are directors on board of a company who are independent individuals, not having any other relationship or transaction with the company or its management.

As per the government, the revision of the dos and donts of an independent director under the new law is to maintain a fine balance of putting in checks and balances to ensure that empowerment does not lead to unbridled power. Also, the authority is exercised with accountability.

Conflict

Though experts feel that the new concept of having independent directors is a welcome step for corporate governance in India, yet its lacks clarity on many relevant issues. For example, the new law provides limited immunity making them liable only when wrongdoings have occurred with their knowledge because of lack of due diligence. Experts say proving due diligence can be a tricky issue.

As per the 2013 Act, an independent director will not be eligible to get stock options but may get payment of fees and profit-linked commission subject to limits specified or to be specified in the rules. This again is in contradiction with Sebis requirements, whereby for the purpose of granting stock options, the term employee includes independent directors also.

While the 2013 Act distinguishes between the liability of an independent director and non-executive director from the rest of the board by providing an immunity from any civil or criminal action against the independent directors, there is hardly any defence as they would still be treated equivalent to the other directors. There are various legislations including the Securities Contract (Regulation) Act 1956, the unfair trade practices provisions and insider trading norms that can be used against independent directors.

Besides amending the listing standards to them in tune with the provisions of Companies Act 2013, the effectiveness of all the investor-centric norms will also depend on strict enforcement.

indu.bhan@expressindia.com