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Companies Law Committee proposals: Steering the directorship

The enactment of the Companies Act 2013 ushered in a new regime of corporate governance and provided fillip to the way business is conducted in India.

The enactment of the Companies Act 2013 ushered in a new regime of corporate governance and provided fillip to the way business is conducted in India. The Companies Law Committee was set up in June 2015, with the mandate to further improve and streamline the Act. Towards this end, the committee engaged in extensive discussions with various stakeholders and undertook a critical examination of established international best practices.

The Board of Directors is the human agency through which a company asserts its corporate personality. As the Board is entrusted with overall governance, administration and management of a company, the presence of well-qualified and impartial individuals at the helm of a company’s affairs is imperative. The Companies Law Committee has made recommendations pertaining to the Board of Directors in its recent report.

Independent directors bring an element of objectivity in the Board and ensure that the interests of all stakeholders are balanced in the best possible manner. A strong presence of independent directors is all the more important in public companies or companies involving significant public interest. Under the Companies Act, at least one-third of the Board of Directors of every listed public company is required to comprise of independent directors. But a person who, by himself or through a relative, has or has had a pecuniary relationship with the company or its holding, subsidiary or associate company during the two immediately preceding financial years is barred from being appointed as an independent director.

In a significant departure from the Sebi Listing Agreement as well as the corporate governance codes of jurisdictions like the UK and Singapore, this provision fails to circumscribe the term ‘pecuniary’. Resultantly, all pecuniary relationships, however minor and inconsequential, end up barring a potentially deserving candidate from being appointed as an independent director. A strong need was felt for some kind of threshold to restrict the application of this provision and further to remove the discrepancy with Sebi regulations. Taking note of globally accepted positions and the view of the JJ Irani report on the issue, the committee has recommended the inclusion of a materiality test in determining the types of pecuniary relationships to be considered whilst determining the independence of a director.

Appointing and retaining talented individuals as independent directors is a crucial issue and the committee has made several recommendations in this regard. The Companies Act requires the approval of the central government for director remuneration in some specific situations. Corporate India was strongly disposed against these requirements and several representations were made to eliminate them. Giving due regard to these concerns and the fact that such government intervention is not a norm internationally, the committee has recommended the elimination of any need of government approval and has suggested additional safeguards like enhanced disclosures, higher penalties, etc, to ensure that transparency and fairness is maintained. The committee has also suggested significant enhancement of the maximum yearly remuneration which can be paid to directors.

The committee received several representations against provisions which were felt to be tedious in nature. For instance, reappointment of independent directors can be a daunting task under the Companies Act. To ensure that individual directors can serve longer terms, the Companies Law Committee has recommended dispensing with the rigorous reappointment procedures in instances where a director is appointed by the Nomination and Remuneration Committee of a company. The committee has also recommended the dilution of a provision which disqualifies a person who is or has been the director of a defaulting company for a period of five years, and suggested it should be applicable to a person who was the director at the time of default.

In the wake of high profile financial scams such as Satyam and Ketan Parekh, the Act imposes a complete embargo on advancing of loans by a company to its subsidiaries with common directors. Partial leeway has, however, been provided under a notification issued by the government in June 2015 for private companies. It was felt that while the goal of the provision was justified, its application was too arduous and ended up affecting even legitimate inter-corporate loans. Recognising this, the committee has recommended allowing advancing loans in some instances, subject to prior approval of the company by a special resolution. A similar approach is followed by countries like the UK.

The current Act prescribes that a managing director or a whole-time director has to be a resident in India for one year prior to appointment. It was felt that this requirement unduly hinders the appointment of foreign nationals to these positions, and the committee has responded positively by recommending its scrapping. In similar vein, on the condition that every company should have at least one director who has stayed in India for at least 182 days in the previous year, the committee has recommended that the ‘year’ should be taken to mean financial year and not calendar year. It has also done away with the requirement of Director Identification Number (DIN) and allowed participation of directors in meetings through video-conferencing, albeit such attendance not being counted for the purpose of quorum.

These amendments are geared towards steering the Companies Act away from an atmosphere of excessive regulatory control towards a regime which is in sync with the best global standards and facilitates ease of doing business. Once implemented, these are expected to have a far-reaching and positive effect on the Indian business milieu.

The author is a research fellow, Vidhi Centre for Legal Policy

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