Independent directors to get 12-month transition relief

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Aug 12 2011, 02:42am hrs
The ministry of corporate affairs (MCA) is set to give a 12-month transition relief to independent directors to step down from company boards if they have served for more than 10 years. The proposal would be part of the new Companies Bill that is likely to get the Prime Ministers Office (PMO) nod by the end of this month.

The 10-year cap is likely to trigger a flux in the boardrooms of leading companies like ITC, Infosys, Tata Steel and Wipro that have independent directors who have exceeded this limit.

According to government sources, under the Bill, each independent director would have to seek re-appointment from the board after completing five years. However, on completion of a full term of 10 years the independent director would have to compulsorily step down from the board.

Once the Bill comes into effect it would have a retrospective impact on directors who have already exceeded the cap. Independent directors who have been on a company board for 10 years or more would be given one year to step down, an MCA source told FE. He said that undue familiarity with a business is likely to kill the independent character of the office.

Experts said the move would create newer opportunities for hundreds of independent directors who have been serving on company boards for years.

For instance, Tata Steel would have to fill up three new positions on the board since independent directors like Nusli Wadia, SM Palia and Suresh Krishna have been on the companys board for 32 years, 23 years and 17 years, respectively.

Other companies such as ITC, Dr Reddys Laboratories, Infosys and IDFC would also face the same dilemma once the Bill gets enacted. MCA sources, however, said the government would give independent directors the option of rejoining a company where they have earlier spent 10 years on the board on the condition that they complete five years on the board of another organisation.

Partner at Delhi-based law firm Titus & Co Diljeet Titus said that once independent directors resign it is likely that they get absorbed into the board of a subsidiary company. Since large sized listed firms have a chain of subsidiaries it is likely that the independent directors would be taken into the board of subsidiary companies, said Titus.

InGovern managing director Shriram Subramanian said the government move would impact smaller companies. It would not be an issue for the larger companies to find suitable replacements for their independent directors. However, the problem would be faced by smaller companies, he said.

Under Clause 49 of the listing agreement, at least one-third of a companys board should consist of independent directors. The code also states that independent directors should be on the board of a company for nine years. However, the criteria is not compulsory.