Independent Directors Given Broader Roles And Responsibilities Under The Companies Act, 2013

IDs have been conferred greater empowerment and accountability under the Act; however, IDs, on their own, cannot be expected to be the panacea for all corporate ills. If the corporate sector complies with the law in letter and spirit, only then the overall objectives of the legislation will be met

The concept of an Independent Director (ID) emerged for the first time on the corporate landscape with the introduction of Clause 49 of the Listing Agreement. Pursuant to the recommendations of the Kumar Mangalam Birla Committee (1999), the Naresh Chandra Committee (2002) and the Narayana Murthy Committee (2003), the term "independent director" was introduced for the first time in India when the Securities and Exchange Board of India ("SEBI") incorporated clause 49 in the Listing Agreement which mandated the appointment of independent directors in the Board of listed companies.

The erstwhile Companies Act, 1956 ('erstwhile Act') did not provide for mandatory appointment of IDs. The new Companies Act, 2013 ("the Act") has brought in many provisions related to governance of corporates. Towards efficacious corporate governance, the Act has set up provisions relating to IDs. The term ID which was not defined anywhere in the erstwhile Act has now been defined in the Act. The Act also sets out the broad roles and responsibilities that need to be performed by IDs thereby conferring on them an important position on the Board of the Company.

Increased focus on good corporate governance consequent to high profile corporate scams has probably resulted in the stricter provisions under the Act.

Who is an ID?

Section 149 (6) of the new Act defines an "independent director" as a person

• who is not a managing, whole-time or nominee director
• of integrity and experience in the Board's view and
• with relation to a company, its holding, subsidiary or associate ("Entity")
• Was/is not a promoter or related to any director or promoter of any of them
• Has/had no financial transaction/relationship of any sort with any Entity or their promoters or directors for the current and previous two financial years
• Is not a CEO or director of a NGO that receives 25% funding from the company, its promoters or directors
• Holds by himself/herself or with relatives in excess of 2% shareholding/voting interest in the company
• Relatives of such director have no pecuniary transaction with any Entity for the current or two previous financial years exceeding 2% of their gross turnover or income exceeding INR 5 million
• Relative/director not a Key Managerial Person ('KMP'), employee of any entity for the preceding 3 years. Relative/director was not a partner or employee for 3 preceding years of a firm of auditors, company secretaries, cost auditors of any entity
• Relatives/director not a partner, employee for preceding 3 years of legal or consulting firm that was involved in any monetary transaction with an entity exceeding 10% gross turnover of such firm

Conceptually therefore, an ID is supposed to be free from all kinds of conflicts of interest and the areas where such conflicts could arise are identified in the meaning of the term of ID ascribed to it in Section 149(6) of the Act. An ID is thus expected to act in the best interests of the Company and balance the various conflicting interests. The legislature has endeavoured to plug all places where potential conflicts of interest could arise, but in the process, has made the definition too restrictive. From the position of 'material pecuniary' relationship as enshrined in the Listing Agreement, it has transitioned to a position of any material or pecuniary relationship in the current financial year or in the 2 immediately preceding financial years. Hence, even if a director owns/uses any products/services offered by the company, such an individual could not be considered as an ID. Subsequently, MCA has clarified that if a transaction is done at an arm's length, such transactions would not result into the director losing his ID status.

Can a Nominee Director be an ID?

Whilst under the earlier Listing Agreement regime, a nominee director of an Investor or a financial institution could be qualified as an ID. However, under the current regime, Section 149(6) of the Act clearly specifies that an ID shall be a director other than a nominee director. Thus rightly so, a nominee director who is primarily appointed to safeguard the interests of the organization which he represents cannot be classified as a Nominee Director.

Who will need an ID & how many?

Before the enactment of the Act, only listed companies were required to appoint an ID. With the enactment of the Act read with rules, the following companies will need to appoint an ID:

• Listed companies to have 1/3rd of the total number of its directors as IDs.
• 2 IDs for following companies:
• Any public company that has:
• a paid up capital of '10 Cr. or more or
• a turnover of '100 Cr. or more or
• outstanding loans, debentures or deposits exceeding '50 Cr.

Thus, the requirement of having an ID on the Board has moved from just the listed companies to all public companies listed and any other companies satisfying the above criteria. The intent of the legislature is to clearly look beyond the interests of just the shareholders and to comprehensively ensure that the interests of various stakeholders are taken care of. Consequently, the ID's roles and responsibilities have been considerably enlarged and duly enunciated in the Act.

Larger and deeper roles and responsibilities of IDs as members of / chairpersons of the following committees are envisaged under the Act:

• Audit Committee - majority of directors to be ID and ID to be the chairperson
• CSR Committee - at least one ID to be a member
• Nominations & Remuneration Committee - 50% of members should be ID
• Stakeholder Relationship Committee - majority of directors to be ID and ID to be the chairperson

It can be seen that the expectations from IDs have increased manifold. The roles and responsibilities have got extended to the above committees. These committees are expected to get into many operational matters concerning their respective areas and that too, in fair amount of detail. So, from a very broad strategic role, it is morphing into a fairly detailed one and a 'on hands' kind of a role where the ID will have to delve into a lot of areas across the corporate.

How is the position of ID strengthened under the Act?

The Act has attempted to strengthen the position of an ID in the Company in view of the onerous responsibilities cast on the IDs under the Act. It has recognised the fact that unless IDs are empowered and their position is strengthened, it will be difficult for the IDs to perform their roles and responsibilities as expected of them.

Some of the provisions inserted in the Act for strengthening the position of IDs are as follows:

• IDs are not required to retire by rotation
• Protection to IDs from liability for acts of omission / commission by company which had occurred without his knowledge, not attributable through Board processes, or without his consent or connivance or where he had acted diligently
• An alternate director of an ID should also be an ID
• For an urgent business Board Meeting can be called at a shorter notice only if one ID is present
• If ID is not present at a Board Meeting, then the decision taken at such a meeting shall be circulated to all the directors and shall be final only on ratification by at least one ID

As a Review Role aimed at an absolute objective analysis of BOD:

As per the Act, IDs shall hold at least one meeting in a year to review the performance of the Chairperson, non-independent directors and the board as a whole. This meeting must be convened without the presence of the non-independent directors and members of the management. These measures would immensely aid in ensuring the smooth and proper functioning of the Board of Directors of a company.

Compensation

IDs are not entitled ESOPs. IDs can be paid sitting fees and commission on profits subject to the permissible limits. They can also be reimbursed expenses incurred for attending the board meetings. Besides this, no other form of remuneration can be paid to the IDs.

The Act attempts to ensure that IDs remain independent and that their independence is not compromised by any sort of market / profits-linked compensations. Whilst this is appreciated, it has to be understood that to attract and retain high quality talent, adequate compensation has to be paid, more so in light of the heavy responsibilities expected to be shouldered by the IDs under the new Act. There is a limit to sitting fees and commission on profits may not always be possible, especially for growing companies not having adequate profits.

Code of Conduct

In Schedule IV of the Act, an attempt has been made for codification of the duties and responsibilities of IDs. It specifically provides guidelines for professional conduct, roles, functions and duties of IDs. For the first time, there are written guidelines for conduct of an ID. For the first time in the history of corporate laws, an attempt has been made to codify the duties and responsibilities of a director. Whilst it can be called a commendable effort, the essence of the legal position of the director as per the legal precedents under the erstwhile Act remains unchanged. The position of a director continues to be akin to a trustee however with larger responsibilities and a wider set of beneficiaries to take care of.

The Act, has sought to balance the wide nature of the responsibility, functions and duties duly imposed on an ID. The Act, restricts and limits the liability of ID's to the matters which are directly relatable to them. Section 149 (12) limits the liability of an ID "only in respect of 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".

Is ID an ultimate panacea of all ills?

The Act has conferred greater empowerment upon IDs to ensure that the management and affairs of a company are run fairly and smoothly and with objectivity. But, at the same time, greater accountability has also been placed upon them. The Act empowers the IDs to have a definite 'say' in the management of a company, which would thereby immensely strengthen corporate governance.

However, it is also important to keep in mind that good corporate governance is not just the outcome of appropriate selection and effective functioning of ID's. Every director, whether independent/non-independent, executive/non-executive has a distinct role in the functioning of the company. It is only when the entire board functions effectively which results in good corporate governance and benefits minority as well as majority shareholders in its long term which maintains a good corporate image in the market.

Thus, IDs, on their own cannot be expected to be the ultimate solution or panacea of all corporate ills. However, they could become the catalyst for improving corporate governance and accountability of a corporate towards all stakeholders. As the case is with most of the laws, there can be compliance with the letter of law and there can be compliance in letter and spirit. Tightening of procedural laws can, at best, only set the tone, however ultimately, it is entirely up to the corporate sector to comply with the law in letter and in spirit for achieving the overall objectives of the legislation.

Disclaimer-The views expressed in this article are the personal views of the author and are purely informative in nature.